End of Semester

Since this is finals week and the semester is just about over, I won't be blogging until around Jan 10.

Is The Environment Sacred?

Last week in the San Antonio Express-News, Michael E. Kraft, professor of environmental sciences at the Unviersity of Wisconsin-Green Bay, said that "in writing the Clean Air Act, Congress explicitly instructed the agency (EPA) to base its decisions on public health and not economic costs." Then in yesterday's Express-News, the environmental watchdog Germanwatch said the U. S. was the 2nd worst "climate sinner" behind Saudi Arabia. So we are at the point where air should be cleaned no matter what the cost and those who don't go along with this are sinners. It seems that this has now become a religious crusade. Environmental policy should be made both scientifically and cost-effectively. If it isn't we will all pay a very high price in the long run.

Also, here is an exerpt from an article in the International Herald Tribune

"James Lovelock, a British scientist whose 2006 book, "The Revenge of Gaia," argued that most of humankind is doomed, does not think much of renewable energy. At a panel on climate change at the University of Cambridge this summer, Lovelock was asked what would be the most effective action people could take. Because humans and their pets and livestock produce about a quarter of the carbon dioxide in the atmosphere, he said, "just stop breathing.""

Gaia is an earth goddess, so again, we see the extremism that results when religion is brought in: die (stop breathing) to save mother earth.

An Economic Analysis of Toll Roads in San Antonio

This is a big issue here. There was an op-ed article on this in the San Antonio Express-News yesterday by John Merrifield, economics professor at UTSA. You can read it here. One of the big points is that if you build special lanes for toll payers, they will only be used when the rest of the lanes are very congested. Why pay to use the toll lanes when the free lanes are moving pretty fast? So you end up building lanes that don't get used much. But things still move slowly during rush hour and that may be the time to have tolls. That would cut down on the congestion and speed things up.

Some Good Economic News: Alot of New Jobs Added and Productivity is Up

You probably hear alot of bad economic news: the dollar is down, the housing crisis, high oil prices, etc. But there was some good economic news today. Worker productivity was up 6.3% (adjusted to an annual rate) in the third quarter. That is a very high rate. In the long run, the only way to raise our standard of living is through productivity growth. You can read about this here. The economy also added 189,000 new jobs in November, many more than predicted. You can read about that here.

Tattoos: Symbols of Rebellion or Signs of Selling Out to the Man?

It seems that tattoos are now being used for advertising. That means they are furthering the aims of the capitalist, for profit making system. So how can getting a tattoo be a rebellious act when it merely helps preserve the status quo? You can read all about it at Tattoos: a new favorite of advertisers

Historical Tax Rates

Ever wonder how much people paid in income taxes in the past? Some of my students have asked about this. Our current federal income tax began in 1913. If you made under $20,000 then, your tax rate was 1%. In 1963, every dollar you made above $400,000 your rate was 91%. In 1980, your rate between $45,800 and $60,000 was 49%. In today's terms, those incomes would be between $100,000 and $120,000. That 49% is higher than even the highest bracket now (35%). The Tax Foundation has all of the historical income tax rates. Click here to go to that site.

The Misery Index

The misery index is simply the inflation rate plus the unemployment rate. The graph below shows how it has changed since 1970. Notice it used to be alot higher. From 1975-83 the average unemployment rate and the average inflation rate were both 7.7% for an average misery index of 15.4. This year it will probably be about 8.7.

Want Kids Immunized? Threaten the Parents With Jail

Student are supposed to get vaccinated against certain diseases. But what if the parents don't take care of it? Make it costly for them not to, like sending them to jail. Here is the intro to one of the articles:

"UPPER MARLBORO, MD. — The threat of jail time injected a little motivation into scores of parents who lined up around the courthouse Saturday to get their children vaccinated on the spot or prove they've already had the shots.

It was one of the strongest efforts yet by a U.S. school system to ensure that youngsters are immunized, upsetting some parents who grumbled that Prince George's County officials went too far and irking opponents of mass vaccinations, who demonstrated outside.

Two months into the school year, county officials realized more than 2,000 students didn't have the vaccinations required to attend class. So Circuit Court Judge C. Philip Nichols ordered parents in a letter to appear at the courthouse Saturday or risk 10 days in jail."

You can read about it here and here and here

Is Barry Bonds Guilty?

He has been charged with four counts of perjury and one of obstruction of justice following a four-year investigation into steroids. But what evidence is there that he used steroids? I can't comment on the chemical and biologicial issues, but I have analyzed his stats. What comes out is that probably no other player has had such a dramatic and sustained improvement in his late thirties. Players normally have their best performances in their late 20s but Bonds had his best years in his late 30s. Some players have done better in their late 30s than they did before, but no one has improved as much as Bonds. Why would a player do so much better in his 30s, an age when many players' careers are actually over? A special training program? Better nutrition? Some new batting technique? It raises the questions that steroids were involved, so Bonds may have had something to hide. You can read my analysis on this here and here and here

Did the Clear Air Act Reduce Crime?

I talk about the Clean Air Act of 1990 in class and how, like any other regulation, it decreases supply. Any regulation raises costs to producers, so that is why supply is reduced. The price of the good increases and the amount produced falls. But we also hope that regulations have benefits. The first Clean Air Act from the 1970s called for a reduction in lead in gasoline. It turns out that this may have had other benefits by reducing crime. Below is an exerpt from the New York Times article Criminal Element

"The answer, according to Jessica Wolpaw Reyes, an economist at Amherst College, lies in the cleanup of a toxic chemical that affected nearly everyone in the United States for most of the last century. After moving out of an old townhouse in Boston when her first child was born in 2000, Reyes started looking into the effects of lead poisoning. She learned that even low levels of lead can cause brain damage that makes children less intelligent and, in some cases, more impulsive and aggressive. She also discovered that the main source of lead in the air and water had not been paint but rather leaded gasoline — until it was phased out in the 1970s and ’80s by the Clean Air Act, which took blood levels of lead for all Americans down to a fraction of what they had been. “Putting the two together,” she says, “it seemed that this big change in people’s exposure to lead might have led to some big changes in behavior.”"

The economist, Jessica Wolpaw Reyes, of course, did attempt to hold all other factors constant. But only more research will show if she is right.

Another Book Relates Religion to Economics

The book is Shopping for God: How Christianity Went From in Your Heart to in Your Face by James Twitchell. You can read reviews of it here and here. There is an interview with the author here. About a year ago, I had an entry about a similar book. You can read that entry here.

One of Twitchell's main points is that competition in the religion market is fueling the rise in mega churches. If a church wants more members, it has to offer a better deal and more benefits than other churches

Employers Want To Know: Which Job Applicants Will Fit In?

If a prospective employer asks you if you're nice, if you get along with others, are you a team player, etc, you will, of course, say yes. Who wouldn't? Since no one says "I don't get along with co-workers," how will employers figure out who will and won't fit in? It is the age old search for information and indicators (or signals as economists call them) of who people truly are. So employers are devising all kinds of new ways to figure out who will be right for them. Below is an exerpt from the article Employers study applicants' personalities to give you an idea

"At KaBoom, a nonprofit that builds playgrounds, the board was hammering co-founder and CEO Darell Hammond four years ago over the organization's high employee turnover. "I rationalized that they were on the road too much, when in reality, it was the wrong fit in the wrong role," he said. He started thinking about who left and why, then focused on the characteristics of workers who stayed. The list of traits: Can do, will do, team fit, damn quick and damn smart. His team kept a closer eye on job applicants in the reception area, which is set up as a playground, to see how they acted around playground equipment. "If you're early, you may have to sit on a swing or the bottom of a slide," Hammond said. People who stand with a tight grip on their briefcases instead of sitting on the playground equipment aren't asked back.""

Has the Minimum Wage Kept Pace with Inflation?

The first federal minimum wage was set in 1938 at $0.25 per hour. As of this past July, it went up to $5.85. It will go up to $6.55 next July and $7.25 in July of 2009. To see the history of changes in the minimum wage CLICK HERE. The numbers below show by what percentage the wage increased each time it was raised, followed by the change in the CPI in that year relative to 1938. For example, the increase in 1939 raised the minimum wage 20% while prices actually fell 1.42%. The 1967 increase raised the minimum wage 12% while prices in that time (since 1963, the time of the previous increase) went up 9.15%. There have been times when the increase in the minimum wage was less than the increase in prices. In 1990, the minimum wage increase was 13.43% over the 1981 level while prices since 1981 were up 43.78%. Since 1938, the minimum wage has increased 2240% while the Consumer Price Index is up 1371%. To make a long story short, this amounts to an increase in the minimum wage of 63%, adjusted for inflation.

1939 ** 20.00% ** -1.42%
1945 ** 33.33% ** 29.50%
1950 ** 87.50% ** 33.89%
1956 ** 33.33% ** 12.86%
1961 ** 15.00% ** 9.93%
1963 ** 8.70% ** 2.34%
1967 ** 12.00% ** 9.15%
1968 ** 14.29% ** 4.19%
1974 ** 25.00% ** 41.67%
1975 ** 5.00% ** 9.13%
1976 ** 9.52% ** 5.76%
1978 ** 15.22% ** 14.59%
1979 ** 9.43% ** 11.35%
1980 ** 6.90% ** 13.50%
1981 ** 8.06% ** 10.32%
1990 ** 13.43% ** 43.78%
1991 ** 11.84% ** 4.21%
1996 ** 11.76% ** 15.20%
1997 ** 8.42% ** 2.29%
2007 ** 13.59% ** 29.22%

What is the Inflation Rate?

It may not be as obvious as you would think. The CPI was 207.917 in August and 208.490 in September. The 208.49 means that what cost $100 in 1983 now costs $208.49. Since 208.49/207.917 = 1.00276, prices were up .276%. If that happens for 12 months, the inflation rate would end up being 3.36%.

But that is based on just one month. In September 2006, the CPI was 202.9. That means that prices went up 2.76% in the last 12 months. In all of 2006, they were up 2.5%. So far in 2007, they are up 3.3%. The CPI was 201.8 in December of 2006. Since 208.49 (the Sept 2007 CPI) divided by 201.8 =1.033, we get a 3.3% increase. That works out to .364% per month. If we get that increase over 12 months, the inflation rate would be 4.4%.

How could they have gone up 2.76% over the last 12 months while they might go up 4.4% for all of this year? Prices fell in the last few months of 2006. The same thing happened in 2005. Both of those years we were headed to 4-5% inflation but prices fell the last few months to give us a decent rate for the year. The CPI was up only 3.4% in 2005. Will we get lucky the last few months this year?

Click here to see inflation statistics

Millionaires Are Regular Folks

It seems like they work hard and don't want to show off too much. Here are the first two paragrahps from an article titled More U.S. millionaires are middle-class

"Sitting on a million but still middle-class? New research has found that more and more Americans worth at least $1 million want luxury goods such as yachts but otherwise lead family-focused, work-oriented lives.

Private wealth specialists Lewis Schiff and Russ Alan Prince found the number of Americans with $1 million to $10 million had risen to 8.4 million households -- or 7.6 percent of U.S. households -- and was growing at 15 percent a year."

At that rate, about half of American households will be millionaire households in 13 or 14 years. Maybe a little longer, since if inflation averages 3% a year, after 13-14 years $1 million will only be worth about $600,000 or $700,000. But since the number of millionaires is growing 15% a year while inflation has averaged just about 3% a year for the last 24 years, it is not just rising prices that is causing the number of millionaires to grow. So if we subtract 3% from 15%, and use a growth rate of 12% a year, it will take 16 or 17 years before half the households are millionaires.

Taco Bell Gives Away "Free" Tacos, Problems Arise

Maybe you heard that if a player stole a base in the World Series, Taco Bell would give away a free taco to anyone who wanted one on Tuesday from 2-5 pm. There was a stolen base, so they gave them away yesterday. At one Taco Bell, there were so many cars in the drive up lane that they went out into the street. It got so bad that the there was a traffic jam and the police had Taco Bell close their drive up window. Tempers also flared. But the tacos were not really free if you had to wait that long. This all shows that when something is given away for free, it causes problems. You can read about it in Promise of free taco brings on the fans: Tempers flare in Norwell; crowds jam Quincy restaurant

Are Rock Stars "Selling Out?"

With revenue from the sales of recordings down in recent years, rock stars are looking for other ways to make money. Sales of CDs are down because of downloading and file sharing. So some of them have gone back to school to take business classes, sold their songs to be used in TV commercials and have formed partnerships with corporations. Some say they should stay pure, caring only about their music and not "go commercial." The New York Times today had an article on this called If It’s Retail, Is It Still Rock?.

Are Chimps More Rational Than Humans?

Seems hard to believe. But an experiment suggests it. The article is Chimps choose more rationally than humans. My student BRUNO MEJIA sent me this.

It reminds me of research that was done at Texas A & M some years ago. They found that rats and pigeons act rationally. If they had to press a lever so many times to get a drop something to drink or a pellet of food, they "bought" less of either one if the scientists raised the number lever pushes it took to get one. This was like raising the price. More lever pushes to get either food or drink, the less they tried to get of it. So they followed the law of demand. This was reported in Steven Landsburg's book The Armchair Economist.

Moral Hazard and the Housing Crisis

When economists use the term "moral hazard" they mean the fact that when people buy insurance, they might not be as careful as they were before. For example, if you don't have fire insurance for your house, you will be very careful not to create fire hazards. But once you buy insurance, you might not go to as much effort to make sure everything is safe. But that increases the chance that fires will happen.

Reuter's has an article called Popular mortgage "mods" fuel moral hazard by By Al Yoon and Walden Siew. See if you can spot the moral hazard in the excerpt below.

"NEW YORK (Reuters) - Mortgage companies scrambling to ease the terms on thousands of loans destined for default may be doing more harm than good by rewarding investors and homeowners who took on excessive risk.

Efforts to help Americans pay their mortgages have forced companies such as Countrywide Financial Corp (CFC.N: Quote, Profile, Research), the largest U.S. mortgage lender, to expand their practice of loan modifications, which lower payments for borrowers vulnerable to foreclosure. Countrywide on Tuesday said it would refinance or modify $16 billion of loans.

While such concessions are largely a win-win situation for the parties involved, since homeowners keep their homes and the bank reduces losses, the practice may exacerbate a credit crisis that began in July and is leading to growing cries of foul in the $7.2 trillion mortgage bond market.

To some, the loan adjustments are little more than a bailout of bond buyers who were paid to take greater risks. The practice of lowering interest rates or forgiving a portion of the principal could even encourage more of the bad lending that helped create the U.S. housing bubble and subsequent credit crunch."

Want to make $60 an hour? Stand in line for a lobbyist, while its still legal

Lobbyists in Washington are very busy and their time is valuable. So they don't want to wait in line to get a good seat at a Congressional hearing. So they pay people to stand in line for them. Companies exist to find waiters and the internet is used. You can make up to $60 an hour. Seems okay to me. Lobbyists can use their time wisely and low income people can earn alot. But a senator wants to outlaw the practice. It was in today's San Antonio Express-News. The article is
Waiting for dollars won't hurt America and was by Maria Anglin.

When Women Earn More Than Men, Is Dating Affected?

The New York Times had an articled titled Putting
Money on the Table on Sept. 23. It seems that problems arise when a women makes alot more than her boy friend. Sometimes the men don't like it when the women pay for things. Other times women try to hide how much money they make. One woman said that it is "easier to date someone in the same economic bracket." Some women think if the man does not make alot of money that he is not ambitious enough.

With many women making more than men, it is hard to share common interests. If you make alot of money and want to go to the opera and fine restaurants, it helps if the other person can also afford to do so. This raises another issue: Can you have any kind of friend, not just the dating type of friend, who has an income that is not much different than yours? Suppose you like bike riding and you want to join a bike riding club. But if everyone in the club owns expensive bikes that are very light and fast, you can only keep up with them if you also buy an expensive bike. So you have to spend money to keep up. If you don't, there is no point in being in the club since you will just end up being way behind everyone else and the others won't want to go real slow so you can keep pace. My guess is that most people have friends who make a similar amount of money.

But getting back to men, women, incomes and dating, if women have trouble dating men who make less, but it is okay for men to date women who make less, then men have a larger group of potential dates: the women who make as much as they do and the women who make less whereas women who make alot can only date men who make as much. That narrows their field and total number of potential dates, maybe even husbands.

The Worst Jobs for the 21st Century

That's the title of an article from Forbes, which you can read here.

It tells us which jobs are expected grow faster in number than average, which will grow slower and which will actually decline. But what if people make career decisions based on these projections? Say alot of people go into a career that is expected to grow. Will this be a good decision for those people? Maybe not. If you go into a career that alot of other people are entering, the wages might be low or not as high as you expect. It's like when you hear about the best places to live. If they are so great, alot of people move there. Then the cost of living goes up there and although it might be a place with many benefits, you are now paying for them and living there is not such a great deal.

What has happened to wages and employment since NAFTA went into effect?

The San Antonio Express-News had an article on this in today's paper called More jobs, higher pay in years after NAFTA. I highly recommend it, probably because I wrote it. My comments were in response to two articles by Carlos Guerra. The links to his articles are in the article. My basic point is that wages and employment have done well since January, 1994 when NAFTA went into effect.

Is It Too Easy For Students To Get Credit Cards?

It seems that college students are inundated with credit card offers. Some of these cards have fine print which show, for example, that if you miss a minimum monthly payment, it gets raised dramatically. Students also "face peer pressure to live a flashy lifestyle when they're on their own for the first time."

So consumer groups are trying to limit and regulate the offers for credit cards that appear on college campuses. I wonder how much pressure there is for students to live a flashy lifestyle and therefore spend alot of money (which they may not have and need to put on a credit card).

You can read about this in the article Project targets credit cards on campus

More Proof That Tradeoffs Are Everywhere: Blind People Don't Like The New, Quiet Hybrid Cars

How could anyone not like hybrid cars? They use less gas so there is less pollution and we conserve on a scarce resource. But they are so quiet that they may pose a threat to blind people who cannot hear them. The blind often use audio or noise cues to know if there are cars nearby. So the National Federation of the Blind wants regulations mandating that hybrid cars make some kind of easily identifiable noise. The article on this is called Blind people: Hybrid cars pose hazard. Here is the intro:

"Gas-electric hybrid vehicles, the status symbol for the environmentally conscientious, are coming under attack from a constituency that doesn't drive: the blind.

Because hybrids make virtually no noise at slower speeds when they run solely on electric power, blind people say they pose a hazard to those who rely on their ears to determine whether it's safe to cross the street or walk through a parking lot."

Will the Rising Use of Student Loans Hurt the Economy?

There is an interesting article by Marcy Gordon of the Associated Press called Student loans sow seeds of economic ills. The amount of money students are borrowing to pay ever rising tuition costs is also growing rapidly. For some the monthly payment is more than a mortgage.

But I think the part where they think the economy will be hurt is:

"Many in the next generation of workers will be so debt-burdened they will have to delay home purchases, limit vacations, even eat out less to pay loans off on time."

Maybe we should not be too concerned about this. They will pay the money back to someone, who in turn will spend it. It will just mean that the former students will be consuming fewer goods and others, the ones doing the lending right now, will consume more (right now they are consuming less than they could since they are lending money to students). This does not seem to be hurting the economy right now. We have not had a recession since 2001 and the unemployment rate is 4.7%.

Is the Stock Market a Good Investment?

The market closed over 14,000 today. If you had invested in the market about 5 years ago, you would have earned a compound annual rate of return of 10.75%. The market was at 8,397 about 5 years ago and 14,000 is about 66.67% higher than 8,397. If you raise 1.1075 to the 5th power, you get about 1.667. Below are the rates of return if you go back 5, 10, 15, 20, and 25 years.

5-0.1075
10-0.0654
15-0.1028
20-0.1023
25-0.1117

But we are at high point this year. We are up about 10% in just about 9 months. So what if we had started from the beginning of the year? Below are the returns.

5-0.0494
10-0.0635
15-0.0953
20-0.0923
25-0.1128

Radiohead Lets You Name Your Price

The band Radiohead is trying an experiment to let you pay whatever you want for the digital version of their latest album. Will this work? Or will most people just take it for free? My guess is that a few loyal fans will pay something but most people will pay only a little. Thanks to one of my students for letting me know about this.

Click here to read a brief summary of the story

Click here to read the long version of the story. But you may have to register to read this New York Times article.

Can it be Fair to Cheat?

A September 23 article in the Boston Globe by Drake Bennett called Bad sports: Why people cheat when they don't have to. He mentions some research by economists and psychologists. One thing that kept coming up is that people will cheat if they think others are cheating and that if they don't cheat, they will be at a competitive disadvantage. Like if players on other teams are taking steroids, if you don't, you will have a harder time winning. So you are just trying to level the playing field.

Other issues that come up in the article include the possibility that favored teams in NCAA basketball win by less than expected, implying that the winning players hold down the score and take payoffs from gamblers, vote trading among figure skating judges, that people will cheat less if they know others are not cheating, sometimes people cheat even if they know there is a chance they will get caught and that if people have to write down as many of the Ten Commandments as they could remember before taking a test, it virtually eliminated cheating.

The Economics of Leaving a Low Carbon Footprint

An article called A Green Revolution for Your Budget, gives the thoughts of Colin Beavan on how to save money and help the environment at the same time.

He lives in New York with his wife and his 2 year old daughter. They use no electricity. The article does not say how they stay warm in the winter. Gas? I guess they don't use air conditioning in the summer either. I suppose if you get hotter with no AC, you need to drink more water. Is that good for the environment?

They do eat expensive cheese. But I guess their daughter does not drink much milk if they don't have a fridge. Unless they go buy a bottle of milk and drink it right away. But then that means grocery stores would have to use more power to keep more milk cool if we did not all have fridges. The milk has to be kept cool some place. So this does not seem to help the environment.

The don't buy anything new except socks and underwear. They buy alot of stuff at flea markets. Do they brush their teeth? But not many people can do this since there is a small amount of used stuff available. If we all went to flea markets, most of us would come up with nothing and then have to go buy new stuff.

They used to eat out or order out all the time. They figured out that cost alot of money (STOP THE PRESSES!). So now they don't eat out at all and save.

They ride bikes and scooters to work. I hope that is not dangerous in New York. They once road two and a half hours to get to the beach. I guess that built up their appetites, meaning they needed to eat more. Whoops, that leaves a carbon footprint.

Appliances use energy even when turned off. So you should unplug them. You can save 6 to 26 percent of your bill. So if your bill is $100 a month, you could save $26. That is less than a dollar a day and you have to go around and unplug everthing. Then plug it back in when you want to use it. And constantly reset the time on your alarm clocks.

They say buy food that is grown close to home (within 250 miles). So I guess people in Alaska can't eat bananas or drink orange juice. What if the stuff grown in your area is just not that good?

What Does John "Cougar" Mellencamp Mean in that Chevy Commercial?

Maybe you have seen the Chevy commercial with John "Cougar" Mellencamp singing. One of the lines in the song is "the dream is still alive, some day it will come true."

First of all what is "the" dream? Is it the American dream? And what is that exactly? Is it the same for everyone? Does it mean a zero percent unemployemnt rate? We have never had that. In fact, as my students will learn later in the semester, the umeployment rate that is considered "full employment" is at least 4%, maybe even 5%. We have rarely been below 4%. There is always some unemployment because workers are switching jobs, some industries are in decline while others are on the rise, etc.

Is the dream a zero percent poverty rate? The first year the federal government calculated an official poverty rate was 1960. It was 22%. The lowest ever was around 11% in 1973. Right now it is around 12%. So going for a zero percent poverty rate is probably not a realistic goal, either.

Then there is the line where he sings "This country, it belongs to folks like me and you." Which folks is he talking about? 300 million people live in the USA. Does it belong to all of us? Or are there some people not included on the owners list? What does it mean for a country to belong to a group of people? If I am in that group can I just walk into anyone's house and say "hey, I am one of the owners of American, I can go wherever I want?"

How can a country belong to anyone? Is there a deed of ownership? I know what it means if a car belongs to me. I pay for it and get a title. What do I get if I "own" America? How do I know if I am one of the people who the country belongs to according to John "Cougar" Mellencamp?

But I guess I should not be surprised if a commercial with a rock star makes no sense.

When it Comes to the Economy, It looks Like Politics as Usual

There is a theory called "the political business cycle" that posits that the party in the White House will try to get a little extra growth out of the economy in the year before the election to improve their re-election chances. Whatever they do policy wise about a year ahead of time might not be good in the longer run, after the election. But that is okay, the theory also says that voters have short memories.

So last week, when the Federal Reserve Board cut a key interest rate (the Federal Funds Rate) by half a percentage point and the stock market soared, my cynical self said, "hey, that sounds like the political business cycle I always talk about near the end of the semester in macro." The cut in interest rates will help stimulate demand. It could lead to higher inflation, but that increase could come after the election.

In the 24 years including 1981-2004, there were 6 election years. In those six election years, the average increase in real GDP (adjusted for inflation) was 4.41%. In the 18 non-election years, it was 2.74%. That may not seem like alot, but the 4.41 is actual 61% higher than 2.74 (since 4.41/2.74 = 1.61). Also notice that 4.41 - 2.74 = 1.67. So that means that if the per capita GDP were going to be, say, $40,000, it will be 1.67% more than that. And that means an extra $668. Would you sell your vote for that much?

Statistical detectives, including economists, are changing the world

The New York Times had a review of the book Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart by Ian Ayres. The basic idea is that if you do it right, it is better to make decisions based on using numbers than your feelings or expertise or experience.

Here is a brief exerpt:

"What is it about math that can make people so angry? In the late 1980s, a wine lover named Orley Ashenfelter began publishing a newsletter called Liquid Assets that predicted how good each Bordeaux vintage would turn out to be. Instead of basing his judgments on the taste or smell of the wine in its early stages, Ashenfelter, an economist at Princeton, preferred data. He had come to believe that the weather during a growing season in Bordeaux was a remarkably accurate predictor of the eventual price of the wine. A hot, dry year seemed to make for great Bordeaux.

As you might expect, wine critics didn’t take very kindly to the professor’s ideas. A British wine magazine denounced their “self-evident silliness.” Robert Parker called Ashenfelter “an absolute total sham.” Eventually, Wine Spectator stopped accepting advertisements for newsletters, apparently because of Liquid Assets.

Ayres’s point is that human beings put far too much faith in their intuition and would often be better off listening to the numbers. Ashenfelter, using data, predicted that the 1986 Bordeaux vintage would be ordinary, while Parker, relying on expertise, said it would be exceptional. Ashenfelter was right."

Click here to read the reivew. You might have to register and allow cookies to read it.

Should the Government Pay People to Have Sex?

Sounds crazy, but a Russian Governor thinks that it is a good idea. To fight a dwindling population married couples are given time off from work to have sex. On the officially named "Day of Conception" in Ulyanovsk, people are allowed to stay home. Any couples that have a baby nine months later will be rewarded with gifts ranging from money, to refrigerators and cars. They have done this for three years and it has increased the birth rate. As we say in economics, incentives matter. You can read all about it at Residents Of Ulyanovsk Russia Get Day Off Work To Have Sex.

Environmentalists vs. . . . other environmentalists? Or, are birds more important than clean, cheap energy?

The San Antonio Express News had an article on the front page yesterday called It's down to the wire for bird lovers to make a bid to halt wind farms.

It seems that although wind power is clean and if not now, someday might be cheaper someday than other power sources, migrating birds can be killed by wind turbines. This is another example of there being no free lunch. There are always tradeoffs. Want less dependence of fossil fuels (especially the imported kind) and a cleaner environment? There may be fewer birds. Here is one passage from the article:

"The debate has become nasty at times, with local Audubon societies and the famous King Ranch facing off against the John G. and Marie Stella Kenedy Memorial Foundation and the John G. Kenedy Jr. Charitable Trust, which own the land where the turbines would be built."

Pickup trucks are legal again in Coral Gables, Florida. Will property values fall?

The town of Coral Gables, FL has had an ordinance that bars people from parking pickup trucks on the street between 7 am and 7 pm. It seems that pick up trucks are not aesthetically pleasing. So this ban had been in effect for 4 decades and a man challenged a fine in court and won. The court ruled the ordinance was unenforceable. But now those ugly vehicles will be on the streets. I guess they will cause a negative externality, making the town less appealing. People will be less interested in moving there. With a fall in demand for housing, the property values fall. The town also regulates what color you can paint your house and how high your grass can be. Some believe the pickup truck law was in effect to keep out certain elements. Below is a link to the story

Pickup Trucks Now Allowed To Park On Coral Gable Streets

A Possible Invisible Hand "Sighting"

This was posted at The Internet Movie Database:

"Sales Boom for HDTV Sets, But Where's the Profit?

Consumer electronics stores may be doing a booming business in big-screen, high-definition TV sets these days, but they are seeing profit margins drop as a result of a supply glut and intense competition from mass merchants like Wal-Mart and Costco, the New York Times reported today (Tuesday). The newspaper cited research by iSuppli indicating that the price of 42-inch HDTVs has declined 23 percent to $1,655 from $2,140 last Christmas. The newspaper noted that Best Buy recently attributed a 6-percent drop in its gross profit rate in large part to "promotional environment in home video." Still, the price of big-screen HDTV sets remains beyond the means of many consumers, and, the Times observed, there are signs that sales are slowing. Morgan Stanley analyst Greg Melich told the Times: "For the past few months, growth in the total TV market has been zero or negative, because demand is not there at these price points.""

So I would like to hear from my students. Any experience with the HDTV market? Anyone getting good deals? Are they worth it? This little piece implies that the desire to profit from selling HDTVs is leading firms to lower the price.

The Magic Words in Economics

My students know this means "holding all other factors constant." This is part of what makes economics so powerful. For example, we know many factors influence how much of a product you will buy (like income, tastes, ect.) But if we assume that all of those are held constant, we can say that when price falls, ceteris paribus, that the quantity consumers wish to purchase rises. This is known as the Law of Demand. It allows us to describe how markets behave (along with the Law of Supply).

We also know how a market will be affected by a tax or a regulation since we will hold all other factors constant. We can make a reasonable prediction using supply and demand. For example, if sellers have to collect a dollar every time they sell one unit and give it to the government (an excise tax), we can easily show that price will rise and the quantity bought and sold in the market will fall. We can also determine how much of the tax the buyer will pay and how much the seller will pay (and it is not always an even split). Now that's magic.

Students: Make a mistake on purpose, its good for you!

This may sound surprising, but counselors advocate making a mistake on your college applications like an intentional typo. This makes you seem more "authentic." Too often all students look slick and identical. They got good grades, test scores, were on teams, did volunteer work, etc., all with the idea of getting into college. But is that who you really are if you do it just to impress the college? That is why counselors suggest making mistakes. Then your application makes you seem like a more real person, not too good to be true. Of course, colleges project an image, too with their pictures of the nicest parts of the campus and groups of smiling students in their catalogues to make you want to go their. Seems like everyone is trying to impress everyone else with an image. There is a very good article on all of this called
Colleges seek 'authenticity' in hopefuls.

I also recommend a BusinessWeek article called
The Myth of Authenticity. Here is a brief description of it:

"What do brands like Häagen Dazs, Baileys Original Irish Cream, Bombay Sapphire and Kerrygold all have in common? Each stretches the myth behind the brand to promote heritage and authenticity"

Moscow is world's most expensive city to live in

You can read about it

here

here

here

One article says "In Moscow, a luxury two-bedroom apartment will cost an expat $4,000 a month; a CD rings up at $24.83; one copy of an international daily newspaper is $6.30; and a fast-food hamburger meal totals $4.80." Only two U.S. cities made the top 50, NY and LA (probably no surprise). The cost of living is 35% higher in Moscow than it is in NY. Another article says "rents in central Moscow can range from $10,000 to $20,000 per month."

Sell Your Genes! Make Big Money!

A recent column by David Brooks discusses how people can sell their sperm or eggs for big bucks if they have the right characteristics. Smart, tall, healthy, athletic, well educated people can get the highest prices at sperm banks and egg banks. Apparently, the buyers want to make sure that their off spring will have the best genes. According to the article "An ad in The Harvard Crimson offered $50,000 for an egg from a Harvard woman." There seems to be a market (supply and demand) for just about everything. The article is America's new pastime: gene shopping.

Interesting Book: Stumbling on Happiness

Harvard Professor Daniel Gilbert has written a book called Stumbling on Happiness. Here are some exerpts from the article:

"our decisions about what will make us happy -- or unhappy -- almost always are clouded by inaccurate memories and over-reliance on present feelings."

"you can't rely on your past or present to predict your future because brains file away only a few cues to memory, mainly the highs and lows of an experience."

"Ignorance about the brain's defenses against unhappiness also distorts judgment"

"people of every age and every walk of life seem to regret NOT having done things much more than they regret things they did."

Since we assume in economics that people try to maximize their utility or happiness, this seems like an important book. Although he may be right that we don't always know what will make us happy, if we make mistakes, it does not mean we are not rational. Remember, to be irrational means we intentionally make ourselves worse off. So if you don't do the right thing to make yourself happier because you didn't know what it was, you are not necessarily irrational.

Want a gas well in your backyard?

Its happening in the Dallas-Fort Worth area. Oil and gas wells are being drilled in urban areas not too far from houses. But there is big money and some people and communities are getting royalty payments. According to a recent article "150-foot drilling rigs are rising over golf courses, churchyards, even tree-lined neighborhoods." Drilling causes "noise, vibrations and odors"." (not to mention environmental concerns) So is it worth it to have your neighborhood tranquility diminished? The article is called "Tapping wells of resentment."

Eating Healthy is Cheap

In my face-to-face class, we read a chapter from the book The Economics of Public Issues on how Americans have been gaining weight. It mentioned that food has gotten relatively cheaper over time and we lead more sedentary lives. But there was an interesting article in The Washington Post recently. The author, Tom Wolfe, says you don't have to spend much to eat healthy. Here is part of what he said:

"I began adhering to a $25 weekly food budget in early April specifically to test the economic feasibility of living on organic whole grains, dried beans and fresh vegetables. On that $3.57 a day, I have been able, through careful planning, to feed myself well -- with enough left over to prepare lunch four days a week for the five people on the staff of my store. Virtually my entire diet since April has been grains and beans grown certified-organic and a mix of organic and cheaper non-organic vegetables."

The entire article is here.

Is College Just an Expensive IQ test?

My school is on break and I usually only post entries when classes are in session. But there was a great article by JAMES TARANTO in The Wall Street Journal on Friday called "Disparate but Not Serious: College is an expensive way of taking an IQ test."

The idea seems to be that since employers are forbidden (since the 1970s) from using intelligence tests for hiring, there is more importance attached to getting a college degree and colleges can use tests likeSATs for admission. The author also thinks it is related to civil rights issues. A college degree has always been a signalling device to show employers that you are smart and hard working. But it is even more so now for legal reasons. A free version is at

Disparate but Not Serious: College is an expensive way of taking an IQ test

End of Semester

This is finals week at San Antonio College. I may not post anything until early June when the summer semester starts.

My Tax Idea Made the Wall Street Journal

Below is a letter I wrote to the Wall Street Journal that was printed in the April 30 edition:

"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 ("Those April Blues," page A12, April 13). 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 mis-allocation 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."

I had blogged about this last November. To read more about why this makes sense and what the theoretical foundation is go to If Prices Are Signals, Are Taxes Noise?.

Women and the Pay Gap

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:

"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.

Game Theory and the Prisoner's Dilemma on the TV Show "Numb3rs"

The show mentioned this along with the scholar Anatol Rapoport who used the "tit for tat" strategy to win a prisoner's dilemma tournament. This game has applications in economics. I play it in my class then talk about how it relates to oligopoly in microecomics. Oligopoly is a market structure where a small number of firms dominate, like the auto industry. The idea in the prisoner's dilemma is that two criminals are being interrogated in separate rooms. It turns out that they would both be better off (in terms of how much jail time they will get) if they don't confess to a crime. But if one confesses while the other does not, the confessor gets alot less jail time while the one who did not gets alot more. So they each have a temptation to confess even though they would both be better off if they did not confess. How exactly this works is explained here and here. How things worked in the tournament that Rapoport won is described here. His method of playing turned out to be the best even though it was simple. How all of this works for the oligopoly and how those firms set prices is explained here.

In the tournament, players can choose two possible moves on each play: cooperate or defect. Cooperate means playing nice and not getting too greedy. Each player makes a move and gets points depending not only on what move they made but on what move the other player made. The "tit for tat" strategy means being nice (cooperating) but punishing (defecting) if the other player defects. If both players cooperate, they get more points than if they defect. But the temptation to defect is strong because if you defect when the other person is trying to cooperate, you get even more points (and the cooperator gets less). With the firms in oligopoly, cooperate is charge a high price. But the temptation is to defect, charge a lower price, and make more profit than your competitor. But then they start lowering the price, too, and you both make less profit than if you both charged a high price.

Why Do Intellectuals Oppose Capitalism?

This is the title of an essay by the famous philosopher Robert Nozick. You can read it here. I had a blog entry on how college professors are liberal, so this essay by Nozick might explain that. My blog entry from last year can be read here.

Here are two key paragraphs from Nozick's essay:

"Intellectuals now expect to be the most highly valued people in a society, those with the most prestige and power, those with the greatest rewards. Intellectuals feel entitled to this. But, by and large, a capitalist society does not honor its intellectuals. Ludwig von Mises explains the special resentment of intellectuals, in contrast to workers, by saying they mix socially with successful capitalists and so have them as a salient comparison group and are humiliated by their lesser status. However, even those intellectuals who do not mix socially are similarly resentful, while merely mixing is not enough--the sports and dancing instructors who cater to the rich and have affairs with them are not noticeably anti-capitalist.

Why then do contemporary intellectuals feel entitled to the highest rewards their society has to offer and resentful when they do not receive this? Intellectuals feel they are the most valuable people, the ones with the highest merit, and that society should reward people in accordance with their value and merit. But a capitalist society does not satisfy the principle of distribution "to each according to his merit or value." Apart from the gifts, inheritances, and gambling winnings that occur in a free society, the market distributes to those who satisfy the perceived market-expressed demands of others, and how much it so distributes depends on how much is demanded and how great the alternative supply is. Unsuccessful businessmen and workers do not have the same animus against the capitalist system as do the wordsmith intellectuals. Only the sense of unrecognized superiority, of entitlement betrayed, produces that animus."

Update on April 26: More info on political affiliations in higher education can be found here. Scholars who claim that social science and humanities professors tend to be Democrats defend their views.

Our Standard of Living Continues to Grow

A report from the Census Bureau shows that even more so than in 1992, our material needs are being met. You can read about it here in an article by Cox News Service reporter Bob Dart.

The percentage of Americans who have an air conditioner and other appliances has gone up since 1992. We are generally getting our basic needs met like food, shelter, medicine and safety. Alot more of us have things like microwave ovens and VCRs.

Former Communist Countries Benefit From Economic Freedom

In my macro class, we read a book called "The Economics of Macroissues." In the first chapter they show how countries with common law systems (as opposed to civil law systems) that tend to respect property rights have higher rates of economic growth. The difference does not have to be big. Over time, even an extra half of one percentage point in economic growth can add up. If your economy grows 2.5% a year for 100 years, it will increase 11.81 times. That means if your country's per capita income was $1,000 to begin with, 100 years later it will be $11,810. But if your economy grows 3% a year, after 100 years your per capita income would be $19,219. More than $7,000 higher than the other country and about 62% higher.

A recent study by the Dallas Federal Reserve Bank shows that the country's that had the most economic freedom among the former communist nations or Soviet republics have had the highest growth rates. You can read this study here. I think this result is important because someone could always claim that the countries around the world with higher growth rates had them not because of more economic freedom but for some other reason. But this study has alot of countries that began with alot in common, having been former communist states. Yet again, more economic freedom means more growth.

What Rules Pop Culture?

There was an interesting article in the Sunday New York Times Magazine. You can read it here. The article raises the question of why do some bands or movies become so popular. Were they just good or was there some kind of luck involved? According to the article, "reliable hit prediction is impossible." Maybe if the world had been only slightly different, the Beatles might not have been as popular as they were. The author of the article, Duncan Watts, used the internet to run some experiments (described in the article). To make a long story short, it seems that what we end up liking is based largely on knowing that someone else likes it. But in some experiments a song became very popular and in others it did not. If, in the beginning, people saw that other people just happened to like a song, then they liked it and vice-versa. All of this is clearly described in the article, which is relatively short and well written.

A Real Estate Double Whammy?

The housing market is always in the news. Prices soar. Then prices fall because there is a glut on the market. But within a couple of blocks of where I live, there are two apartment buildings that both have a for sale sign and a for rent sign on the front lawn. It seems like the for sale sign would scare away renters since you won't know who your landlord will be. The for rent sign would scare away potential buyers since they might wonder if they could actually make money on the building. It would also make you think that is why the building is being sold-not enough renters.

Maybe this is sign of where the housing market is. There are so many houses out there that not too many people need apartments anymore. So being a landlord is not attractive. But owning a house is not always better than renting an apartment. When my wife and I looked at houses a few years ago, anything that would have given us a comparable amount of square footage as our apartment would have been $200-$300 more a month when you consider the mortgage and property taxes. Then if anything needs fixing, we would have to pay. And take care of the lawn.

Now some would say we would build up equity in the house. But we can also save more money and that builds up over time. The only good the equity in the house would be is if we borrowed against it later in life, like with a reverse mortgage. But that is only if the value of the house appreciates. There is no guarantee that the value of the house would rise fast enough to match how much our savings account would increase.

Interesting Theory on Stock Market Fluctuations

Nicholas Barberis of the University of Chicago Business School has an interesting article called Search for the Holy Grail: Demystifying the Stock Market. This is clearly written for a general audience. The basic idea seems to be that when the market is up, people feel like they are good investors and that they are playing with the "house's money." So they will keep buying, making the market go up even more. But when things are down, people get pessimistic and want to sell (also because of "loss aversion," the idea that people have a bigger drop in utility from losing a dollar than the gain from finding a dollar). So people sell more quickly since they don't want to lose anything. Then the market goes down even more. So the ups and downs are bigger than you might expect.

Life in the Pits: Anthropology Meets Economics

There is a new book out called Out of the Pits: Traders and Technology From Chicago to London. It is by Caitlin Zaloom, an assistant professor of social and cultural analysis at New York University. Below are some exerpts from an article she wrote in The Chronicle of Higher Education. Maybe you have heard of or seen the trading pits of commodities exchanges (like in the Eddie Murray/Dan Ackroyd movie "Trading Places"). The traders are buying and selling commodities like gold and wheat by yelling out their orders and offers to the other traders. But things are changing and becoming more computerized. Here are the exerpts from Zaloom's article:

"At work on the trading floor, I soon learned that a fundamental transformation was, indeed, taking place. The trading pits of Chicago were quickly being dismantled by the electronic technologies that connected traders at computer terminals around the world to a central server, swapping the raucous action of the pits for the quiet hum of online circuits. Geertz's example (Clifford Geertz was a famous anthropologist who looked at economic life) inspired me to assess what social changes facilitated such an important shift in the way money circulated around the globe, even as advocates championed the power of network connectivity and low costs of electronic trading.

The most significant transformations concerned the kind of people and the types of skills that do well in online markets. For generations, Chicago's trading fathers helped their sons into the business, and neighbors who shared fences provided entry-level jobs, like clerking, to each others' kids. (In fact, such family connections eased my own way onto the Chicago floor, providing the kind of object lesson in the culture of the trading pits that only fieldwork could offer.) Once in the pit, traders proved their mettle by being quick, loud, and brash. Each trader had to wrest his living from his competitors on the steps of the trading pit, reading a market in the voices, hands, and faces of his rivals.

The shriveling of the pits, once muscled by erstwhile Big Ten linebackers, had opened a niche for Ivy League engineers, M.B.A.'s, and math geeks, who quickly found a place in the Chicago futures markets. On a recent visit to Chicago, I met with the director of a trading firm — one located far up in a tower away from the trading floor — who gave me a blunt assessment of the social foundation of derivatives markets. "It's getting really Revenge of the Nerds around here," he reported. The unmediated physical competition that had created famously efficient markets for 150 years no longer seemed sufficient.

The talents of the traders must match the kinds of technologies with which they work. Instead of bodies, voices, and well-known personalities, traders now confront changing numbers on a "dealing" screen. This simple display creates an image of the market seemingly separate from the people who make it up, and which appears to exist beyond the cities in which they work. Training on the football field is less important now than hours and days spent in front of video games. Stamina is no longer displayed in a crowded pit but in the ability to resist the eye-glazing glare of the computer screen. In the shift from the trading pit to the computer, a new kind of trader emerges, one who can shape complex mathematical models, observe the market, make cool judgments, and take dispassionate action; in other words, a trader who can embody the value of efficiency that we associate with the market itself."

The Free Market: Friend to Third World, Less Developed Countries

Three recent articles illustrate this:

Writing in the San Antonio Express-News, Jeanie Wyatt writes about Ireland. It is one of the fastest growing economies in the world and is now 4th in the world in per capita GDP. How did they do it? Several factors bu among them are low taxes " The corporate tax rate was 10 percent to 12.5 percent throughout the late 1990s" and "limited government intervention."

New York Times columnist Thomas Friedman had an article about Kenya. The government is getting out of the way to let entrepreneurs set up call centers that are helping the economy. It even did away with the government phone monopoly.

The Wall Street Journal had an editorial called The Mozambique Miracle. You have to be a subscriber to read that one. But here are some exerpts:

""We opened our markets and dropped the centralized economy," says Miquelina Menezes, who chairs the country's association of economists and runs a fund devoted to bringing electricity to rural areas."

"But hyperinflation and a stagnant economy forced leaders of the neo-Marxist liberation movement, Frelimo, to shift their approach. Starting in the early 1990s, the ruling party cut subsidies, opened to outside investment, privatized firms nationalized after independence in 1975 and got a grip on borrowing and the budget. An independent central bank brought inflation into single digits. According to the World Economic Forum's competitiveness index, Mozambique has reformed more than any sub-Saharan African country."

"The payoff is the highest average growth rate, at 8% over the last decade, among the continent's non-oil exporters. GDP per capita is a still tiny $320, but that's compared with $178 in 1992. Since 1997, poverty rates decreased more in rural areas (from 71% to 55%) than in urban (62% to 52%), according to the World Bank. Child mortality has declined to 152 per 1,000 live births from 235. And primary-school enrollment has risen to 71% from 43%. Once a leading recipient of food aid, Mozambique now exports maize, with 5.6% average yearly growth in farming in the last 15 years. Banks, telecom and tourist firms, many from neighboring South Africa, have come in."

"But neighbors in similar straits haven't put in place Mozambique's fixes. Inflation in Zimbabwe is 1,700%; nearby Malawi and Zambia, their economies distorted by subsidies on commodities, are growing haphazardly."

Interesting Looking Movie: The Call of the Entrepreneur

The Acton Institute for the Study of Religion & Liberty has produced a documentary titled The Call of the Entrepreneur. If you go to the link you can view the trailer. It looks good. Nice to see someone promoting the good side of capitalism and entrepreneurship.

San Antonio College Math Professor Reforms Texas State Lottery

His name is Gerald Busald and over the years he has found inaccuracies in the odds that the lottery states as well as other misleading aspects. Becaue of him (and his students), the lottery has had to institute reforms. Great to see a professor from my college getting such richly deserved recognition. You can read all about it here for the full article. Below are some key excerpts.

"Until recently, the Texas Lottery did not disclose cash values — the amount won if players chose to collect a top prize in one lump sum payment. The lottery only disclosed the amount that would be collected in 25 annual installments. Players have always known that a winning cash-value ticket contained a lesser prize than the jackpot listed. But now, thanks to the intervention of local lottery critic Gerald Busald, millions can actually know what they're playing for.

In June, Busald recommended eight changes in the lottery. In December, the Texas Lottery Commission implemented one of them — disclosing cash-value amounts on its Web site. By Aug. 31, cash-value amounts will appear on tickets. More remarkably, TLC has agreed to implement all of Busald's recommendations.

On the back of a ticket are the overall odds of winning Lotto Texas: 1 in 71. What a ticket doesn't reveal are the odds of winning the top prize: One in 25.8 million.
Thanks to Busald, jackpot odds will soon be posted on tickets, and the print will be larger.

Thanks to Busald, lottery billboards across the state have been changed to include "annuitized" beside the word jackpot. Most players, Busald says, know the advertised jackpot will be paid in annual installments. But inclusion of "annuitized," he insisted, is proper disclosure.

Persuading TLC to make minor changes is one thing. But Busald's fingerprints appear on a major one. In a January TLC meeting, Busald chided the lottery for continuing to sell scratch-off tickets after all top prizes had been claimed. Commissioners refused to halt the practice. Last week, TLC capitulated. Gerald Busald wields clout because he helped TLC in its search for a new executive director."

Crime and Punishment: Required Reading in My Economics Class

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

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

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

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

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

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

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

More online versions of the book.

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)

Friday's Wall Street Journal had an article titled "Conspicuous Virtue and the Sustainable Sofa." You have to be a subscriber to read it online. But here is the intro:

"Lance Armstrong's ubiquitous yellow "Live Strong" wristbands have become a world-wide phenomenon: More than 60 million have sold since 2004, one of the greatest successes in nonprofit fund-raising history, with the proceeds going to cancer-related causes. No doubt some wear the bands in solidarity, or for inspiration -- but, that said, the wristband conceit was simply ingenious. It allowed people to make a show of their virtue. They could give to a good cause, and they could advertise their caring to everyone else. Not for nothing did John Kerry flaunt a Live Strong."

The author, Joseph Rago, calls this "conspicuous virtue." It is inspired by the term "conspicuous consumption" coined by Thorstein Veblen in his book The Theory of the Leisure Class. (the whole book is online there)

This site which has a short bio for Veblen, an economist who lived from 1857-1929, states:

"Veblen is best known for his book The Theory of the Leisure Class. In it he introduced the term "conspicuous consumption." Conspicuous consumption was consumption undertaken to make a statement to others about one's class or accomplishments. This term, more than any other, is what Veblen is known for."

But The Wall Street Journal article argues that now people are buying certain items to show how virtuous they are, like a Toyota Prius to show that you care about the environment even though "fuel savings do not justify the price premium of a gasoline-electric power train."

Adam Smith may have beaten Veblen to the punch. In The Wealth of Nations, he wrote:

"With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. In their eyes the merit of an object which is in any degree either useful or beautiful, is greatly enhanced by its scarcity, or by the great labour which it requires to collect any considerable quantity of it, a labour which nobody can afford to pay but themselves. Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common." (the entire book is online)

In Veblen's chapter on "Conspicuous Consumption," there is no mention of Adam Smith. There is statistical or empircal evidence that supports Veblen's theory. A Ph. D. student found that rich families do spend more on "Conspicuous Consumption." Click here to read about it. See also Doctoral Thesis Says Rich People Spend More on Conspicuous Things

Economic Growth: A Little Goes Very Far in the Long Run

We all like economic growth, ceteris paribus. It means more for everyone. In chapter 1 of the book The Economics of Macroissues, they discuss how economies with common law systems have grown faster than those with civil law systems. Common law systems do a better job of enforcing property rights and usually grow faster. The difference does not have to be much. In the macro textbook by Krugman and Wells that I use for my video course, they report that Japan has grown at a rate of 1.7% while Mexico has had a rate of 1.1% (those numbers are approximations-I left that book at the office). That does not seem like a big difference. But in the long run, it adds up. If you grow 1.1% per year, after 150 years your income is is about 5.16 times what it started at (so, for example, you go from $1,000 to $5,160). The formula for this is 1.011 raised to the 150th power

But if you grow 1.7% per year. After 150 years, your income is about 12.54 times what you started at (1.017 raised to the 150th power is 12.54). So your income would go from $1,000 to 12,540. But your income is more than double the other country since 12.54 is more than twice 5.16. So that .6% difference each year matters alot in the long run. It might seem trivial or insignificant, but it adds up.

Crime and Rationality

There was an article on "neurolaw" in the March 11 Sunday New York Times magazine. Nerolaw studies brain patterns to learn more about crime. One of the experts they quoted "wrote a widely circulated affidavit arguing that adolescents are not as capable of controlling their impulses as adults because the development of neurons in the prefrontal cortex isn’t complete until the early 20s."

This reminds me of something at the bottom of page 152 in the book The Economics of Public Issues. It discusses work by Steven Levitt on crime and mention that teenagers respond to incentives.

"In states tough on youth but easy on adults, violent crime rates rise 23% at age 18, but in states that are easy on juveniles and tough on adults such crime drops 4% at age 18."

I don't know if this accurately portrays Levitt's research, but it shows the opposite of what the expert said might be true. Teenagers might be able to control their impulses. In fact, economists have found that even people in mental hospitals can act rationally. For example, if doctors paid agoraphobics tokens to walk outside, very often they did (tokens that could be used to buy things in the hospital store). Patients also got paid for doing jobs or performing tasks. If no one would mop the floor, the pay for mopping the floor was raised and several patients came forward to do the mopping. That is completely consistent with economic theory. Offer a higher pay, more people will do the job (law of supply).

They aslo changed the prices of items in the store. If the price of an item was dropped, the amount purchased went up (and vice-versa). This means that even patients in mental hospitals follow the law of demand. When patients got paid for doing jobs, they did them. But when the hospital tried to get them to do the jobs without pay, the patients stopped working. In another case, if their pay in one job was taken away, they took a job that they liked less if the pay was still there.

The discussion of patients in mental hospitals comes from the book The Best of the New Worlds of Economics.

Do We Always Behave Honestly?

In a recent post (called "Is It Rational To Be A Little Crazy?"-see below), I discussed how seeming irrational behavior might make sense if it reveals our emotional state. That means the information we are trying to send out could be more believable since emotions are costly to fake.

But one commentor said that we fake things all the time. Like at work, we act like we like the job (or at least don't hate it). Related to this, there is an interesting looking book (I have not read it) called Private Truths, Public Lies: The Social Consequences of Preference Falsification by Timur Kuran. Here is what one reviewer wrote:

"... people's choices, and even their desires, are not given and fixed, but are a function of social and psychological conditions, above all pressures imposed by other people...Kuran's book is a terrific success."

Spring Break, The Great Depression and Entrepreneurship Festival

I will post something new on Sunday. We are on spring break here at San Antonio College. Last week in my macro class we watched a video about the Great Depression. The highly respected economist and monetary expert Christina Romer has written an excellent overview of the depression. It is online here. It is written for a general audience yet it provides alot of insights. It is about 10 pages or the length of a short chapter in a textbook. For any student studying this period, it is a great place to start and it has a good bibliography so you can learn more.

Another reminder that I will be speaking at the Entrepreneurship Festival. It is on March 31 at Pepperdine U. So anyone who will be in Southern Calif. then might check it out. You may need to register, so go to the website.

Starbucks's, India Style

A woman in India wants to start a chain of coffee shops called Starstruck's. Starbucks is trying to stop it. This is similar to an issue that came up in my macroeconomics class. We read a chapter in the book The Economics of Macroissues that stated that China often does not enforce patent and copyright laws. If a country does not enforce such laws it might reduce investment by foreign companies. You can read the story here.

Is It Rational To Be A Little Crazy?

On the first day of the semester, I tell the students that we assume people are rational in economics. That means that no one intentionally makes themselves worse off. People only engage in actions if the benefits outweght the costs. What should we think when we see people do things that might seem crazy or at least look very much like they are hurting themselves? Consider the following from an article in Sunday's New York Times Magazine called "Darwin's God"

"Rituals are a way of signaling a sincere commitment to the religion’s core beliefs, thereby earning loyalty from others in the group. “By donning several layers of clothing and standing out in the midday sun,” Richard Sosis wrote, “ultraorthodox Jewish men are signaling to others: ‘Hey! Look, I’m a haredi’ — or extremely pious — ‘Jew. If you are also a member of this group, you can trust me because why else would I be dressed like this?’ ” These “signaling” rituals can grant the individual a sense of belonging and grant the group some freedom from constant and costly monitoring to ensure that their members are loyal and committed. The rituals are harsh enough to weed out the infidels, and both the group and the individual believers benefit."

Here is another example. In his book Passions Within Reasons, economist Robert Frank demonstrates how emotions communicate ability and intentions more effectively than rational signals. In one example from a novel, he explains why a private investigator (PI), would smash the window on the car of gangster boss. The PI wanted the gangster's help in finding his girlfriend's murderer. The gangster needs a reason to help. The PI's only option is to make the gangster think he is crazy enough to try to hurt the gangster. The PI cannot simply say "I am crazy." He must communicate that his emotional state is at least somewhat unbalanced or abnormal. A crazy person is much more likely to smash the window than a normal person. This action successfully demonstrates the PI's possible emotional state better than any normal, rational signal. It works partly because emotions are costly to fake and therefore emotional demonstrations are more believable.

Lose the Fat to Lower Your Insurance Rates

Want to lower your life insurance rates? Cut your BMI or Body Mass Index. Read the short article here or here or here.

The basic idea is that if you are healthier, you live longer and life insurance companies like that. Some of my students might recall one of the lessons from the supply and demand game. That was that one condition for markets to work optimally is that buyers and sellers have equal access to information. When they don't, markets won't work as well as they should.

For instance, in used car markets, the sellers know alot more about the product than the buyers. Economists have studied the problems this causes in the "market for lemons" research. But in insurance markets, buyers know more than the sellers. You know how risky you are but the insurance companies don't. Insurance companies want your premiums to reflect your risk. The riskier people need to pay higher premiums. Now, with the lower rates for people with lower BMIs, they are getting closer to matching risk with premium levels for individual customers.

Is Howard Stern Worth $100 Million a Year?

Sounds too hard to believe, but maybe he is worth that much. Read this story to see why.

Here are some basic details:

He signed a 5-year, $500 million dollar deal in October 2004. Sirius now has 6 million subscribers yet they were only projected to have 3.5 million. So after Sirius signed Stern, they ended up with 2.5 million more subscribers than expected. That may not all be due to Stern. But Sirius charges subscribers $12.95 per month. That is $155 per year. Times 2.5 million extra subscribers, that makes $388 million more per year in revenue than expected. So Stern is only getting about 25% of that. Even if you throw in the $82.9 million bonus and spread it out over 5 years, he is still only getting about 30% of the increased revenue. Is it possible he is underpaid?

RUBEN NAVARRETTE Says Envy, Class Jealousy Are Wrong

Click here to read the article

He says some people earn more than others because:

"Much of it is tied to individuals' decisions about how much education they're going to pursue, and how hard they're going to pursue it. Most obstacles people face are self-imposed and self-designed. We can't say that enough, especially at a time when too many Americans blame others for their troubles, failings and shortcomings."

and

"Whether movie stars, professional athletes or television and radio personalities, a simple formula decides someone's worth: It's what someone else is willing to pay them. I bet that makes sense to most people. But for others, there is an emotion that always seems to get in the way. It's class envy - the sense that it's simply not fair that some earn in an hour what it takes others to earn in a month. It doesn't help that plenty of politicians and pundits shamelessly try to cultivate that resentment and use it for their own purposes."
Is Navarrette right?

Colleges punish illegal downloaders

Are these students getting what they deserve? You can leave comments anonymously. Here are some excerpts from the article

"For students who are caught, punishments can vary from e-mail warnings to semester-long suspensions from classes."

Students caught twice are forced "to watch an eight-minute anti-piracy DVD produced by the RIAA."

"Under federal law, universities that receive complaints about students illegally distributing copyrighted songs generally must act to stop repeat offenders or else the schools can be sued."

You can read more about this here and here and here and here

Does Money Make You Mean?

Go to Does Money Make You Mean? to see the article. Here is the intro:

"We all know that money can't buy love or happiness. But could just thinking about money actually make you mean?

A new behavioral study finds that folks with money on their minds are less helpful, less considerate and less willing to ask for assistance or engage with others than those who have not been preconditioned to money. On the bright side, the money-minded tend to be more independent and focused and they tend to work longer on a task before asking for help."

If any of my students get a chance, let me know what you think of this issue.

HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL

The first annual HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL will be held on March 31 at Pepperdine University. It has been organized by Dr. Elliot McGucken. Here is a description of the day-long event:

"The Hero's Journey Entrepreneurship Festival seeks to give students, artists, and entrepreneurs the tools to make their passions their professions--to protect and profit from their ideas--to take ownership in their careers and creations. For Adam Smith's invisible hand enriches all when happiness is pursued by artists and innovators--society's natural founts of wealth."

There will be several talks and panel discussions. I might be there and give a talk (but that is still being worked on). This festival gets at Why this blog is called The Dangerous Economist. For more information go to The Relationship Between Economics and Mythology