Are College Costs Actually Falling?

They might be. Report: Net cost of college has dropped from the Washington Post. The basic idea is that although the stated price (tuition) has been rising, so has financial aid. Here are some exerpts:

"The average yearly net price of public four-year universities in tuition and fees, after discounting grant aid and tax benefits, declined from $2,080 to $1,540 in inflation-adjusted dollars between 2005-06 and 2010-11, according to data from the national College Board survey.

The net price for private colleges declined in those years from $12,750 to $11,320. Add the cost of room and board, and public university students pay an average of about $10,000 a year, a few hundred dollars more than five years ago. Private university students pay a little over $20,000, a bit less than in 2005-06."

I wrote about this earlier in the year. See As college costs rise, sticker shock eased by student aid. It mentions how financial aid is really just a form of price discrimination.

The Myth Of The Ring Of Gyges And Insider Trading By Congressional Staffers

This week in one of my macro classes we read a chapter about investing in the stock market in the book The Economics Of Macroissues. Part of it was about insider trading. It turns out that congressional staffers can buy stock and they can do so based on their knowledge of what bills will pass and won't pass.

See What Conflict of Interest? How Power Blinds Us to Our Flaws from The Wall Street Journal. As the article says "...prohibitions on insider trading generally don't apply to Congress." And they only have to report their trades once a year. They can make trades based on information most people don't have. Here are some exerpts from the article:

""Power makes people feel both psychologically invincible and psychologically invisible," adds Adam Galinsky, a professor of organizational behavior at Northwestern University's business school.

Power, explains Prof. Galinsky, focuses people on their own internal goals—blinding them, in the process, to how others may view them. In Plato's "Republic," Socrates invokes the myth of the ring of Gyges, which conferred upon its wearer the power of being invisible to others. If we wear such a ring at will, Socrates says, "No man would keep his hands off what was not his own when he could safely take what he liked."

Being in a position of power also may make people feel that they can do no wrong. In recent experiments, Dana Carney, a psychologist at Columbia University's business school, has found that acquiring power makes people more comfortable committing acts they might otherwise be reluctant to commit, like lying or cheating. As people rise to a position of power, she has shown, their bodies generate more testosterone, a hormone associated with aggression and risk-taking, and less cortisol, a chemical that the body generates in response to stress.

"Having power changes you physiologically, reducing your body's internal feedback that tells you which actions are good or bad," says Prof. Carney. "Power temporarily intoxicates you.""

The Drug War In Mexico Is Not Working

In my micro class this week, we read a chapter from The Economics of Public Issues about drugs.

Read Saving Mexico: To weaken the cartels, some argue the U.S. should legalize marijuana, let cocaine pass through the Caribbean and take the profit motive out of the drug trade. It was by DAVID LUHNOW and appeared in the 12-26/27-09 WSJ, page W3.

"In the 40 years since U.S. President Richard Nixon declared a "war on drugs," the supply and use of drugs has not changed in any fundamental way. The only difference: a taxpayer bill of more than $1 trillion."

"...the horrific drug-related violence in Mexico that has claimed around 15,000 lives in the past three years."

"In the late 1980s and early 1990s, the U.S. government cracked down on the transport of cocaine from Colombia to U.S. shores through the Caribbean, the lowest-cost supply route. But that simply diverted the flow to the next lowest-cost route: through Mexico. In 1991, 50% of the U.S.-bound cocaine came through Mexico. By 2004, 90% did."

"...Colombia waged a successful war to break up the country's Cali and Medellin cartels into dozens of smaller suppliers. Both moves helped the Mexican gangs,..."

"...Mexican drug gangs are a one-stop shop for four big-time illicit drugs: marijuana, cocaine, methamphetamines and heroin."

"...illegal drugs are the most successful Mexican multinational enterprise, employing some 450,000 Mexicans and generating about $20 billion in sales, second only behind the country's oil industry and automotive industry exports."

"One drug lord's accountant who was arrested in 2006 had a mid-level job at Mexico's central bank for 15 years."

"Mexican customs has stumbled upon a long list of ingenious methods to transport cocaine, including one shipment of liquefied cocaine smuggled in red wine bottles. Another recent bust yielded 800 kilos of cocaine—worth an estimated $40 million—stuffed inside a batch of frozen sharks.

After Mexico restricted the importation of pseudoephedrine to slow the manufacture of methamphetamines, drug gangs found another way to make the drug using different, unrestricted chemicals widely used in the perfume industry."

Will Economies Of Scale Bring Down The Cost Of Producing Electric Cars?

See High Battery Cost Curbs Electric Cars: Unlike Other Devices, Power Packs May Not Enjoy Major Economies of Scale from The Wall Street Journal. Experts don't all agree.

Economies of Scale (Increasing Returns to Scale) = A situation in which long-run average total cost declines as the firm increases its level of output. The percentage increase in Q is greater than the percentage increase in TC.

Suppose a company like GM makes and sells only 1 car a year. Then the average cost of making a car will be very high. But if they make thousands of cars a year, the high cost of building and maintaining the plant or factory is spread over all those cars and they can sell the car at a reasonably low price. This is what the government is hoping for with the batteries that run these new electric cars. The batteries account for about half the cost of the car.

According to the article "The U.S. Department of Energy has set a goal of bringing down car-battery costs by 70% from last year's price by 2014." If you buy an electric car, you can get a tax credit of $7,500. Perhpaps the government is trying to help the market achieve economies of scale. But there is a problem:

"Unlike with tires or toasters, battery packs aren't likely to enjoy traditional economies of scale as their makers ramp up production, the scientists and engineers say. These experts say increased production of batteries means the price of the key metals used in their manufacture will remain steady—or maybe even rise—at least in the short term."

The article discusses various other parts and inputs into the batteries and why their costs are not likely to fall. Some experts think a there will be a big fall in cost but others are doubtful.

Germany, Muslims, Christian Values And Technical Expertise: How Economics Is Connected To Everything

See Merkel says German multi-cultural society has failed. Here is the intro:

"Germany's attempt to create a multi-cultural society has failed completely, Chancellor Angela Merkel said at the weekend, calling on the country's immigrants to learn German and adopt Christian values.

Merkel weighed in for the first time in a blistering debate sparked by a central bank board member saying the country was being made "more stupid" by poorly educated and unproductive Muslim migrants."

Merkel also said: "the concept that "we are now living side by side and are happy about it," does not work" and "that immigrants should integrate and adopt Germany's culture and values" and "Those who don't accept [Christian values] don't have a place here."

The article mentions that Germany does not have enough engineers to achieve the maximum growth in its GDP. So they rely partly on immigrants, many of who are Muslims. But that is causing tensions now and many Germans think that, on balance, they are hurting the economy. So they want the immigrants to try harder to integrate into society and learn more about the German language and culture. Immigrants also receive subsidies and some feel that weighs down society.

What Are The Best And Worst College Majors?

See College Degree Winners and Losers. The criteria included "...what's hot and what's not with with HR recruiters...salary data, job security, and employment projections for different college degrees and careers."

The top 5 were:

1. Finance
2. Business
3. Medical Assisting (Associate's Degree)
4. Information Technology
5. Nursing

The bottom 5 were:

1. Social Work
2. Horticulture
3. Art
4. Athletic Training
5. Music

Economists assume that people maximize their utiltiy. It is possible that you might end up with more utility if you major in art if you enjoy being an artist. Also, in the future, the supply of the top 5 might increase if many beginning students decide to major in those fields. That increased supply will lower the salaries and those degrees will become less desirable.

Do any of my students know if SAC has a Medical Assisting degree and how well those graduates do with it?

What The 2010 Nobel Prize Winners Studied

The winners were Peter Diamond, Dale Mortensen, and Christopher Pissarides. See Markets with search costs. That is the announcement from the Nobel Prize committee. The very short reason why they won was "for their analysis of markets with search frictions." My macro students should recall discussing "frictional" unemployment a few weeks ago. There is more information at Markets with search costs (yes, it is the same title as above but it provides different information). Here is an exerpt:

"Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year’s Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.

According to a classical view of the market, buyers and sellers find one another immediately, without cost, and have perfect information about the prices of all goods and services. Prices are determined so that supply equals demand; there are no supply or demand surpluses and all resources are fully utilized.

But this is not what happens in the real world. High costs are often associated with buyers’ difficulties in finding sellers, and vice versa. Even after they have located one another, the goods in question might not correspond to the buyers’ requirements. A buyer might regard a seller’s price as too high, or a seller might consider a buyer’s bid to be too low. Then no transaction will take place and both parties will continue to search elsewhere. In other words, the process of finding the right outcome is not without frictions. Such is the case, for example, on the labor market and the housing market, where searching and finding are essential features and where trade is characterized by pairwise matching of buyers and sellers.

This year’s Laureates have enhanced our understanding of search markets. Peter Diamond has made significant contributions to the fundamental theory of such markets, while Dale Mortensen and Christopher Pissarides have further developed search theory and made it applicable to analysis of the labor market. The three laureates’ achievements help us to comprehend a number of important economic questions in general, and the determinants and development of unemployment in particular.

The basic idea in search theory is that participants in a market look for cooperative partners in order to implement joint projects. This may involve simple cases of a buyer and a seller of a product, as well as more complex relations between employers and job seekers or between firms and their suppliers.

As usual in the case of basic research, there are many conceivable areas of application. The housing market, for instance, is a clear-cut parallel to the labor market in that both the number of vacancies and the time it takes to sell a home vary over time. Search theory has also been used to study issues in monetary theory, public economics, regional economics and family economics."

Finding The Right Price Is Not Always Easy, Even For Wal-Mart

See Walmart Rolls Back Rollbacks: Food Prices at Two-Year High.

One thing I usually say when I lecture on supply and demand is that firms can set the wrong price, at least temporarily. If running a business were easy, we would all be millionaires running our own business. Many decisions have to be made, including deciding what price to charge.

As the article discusses, Wal-Mart recently cut prices quite a bit on some items yet same store sales fell. This sounds like their total revenue (TR) fell. In microeconomics, we show that when a firm is in the inelastic portion of its demand line, cutting price will actually reduce TR. Maybe that is what happened to Wal-Mart. Prices have to be raised to increase TR. If you are on the elastic part of the demand curve, you need to lower price to increase TR.

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.

Genetically Engineered Corn Has Positive Externalities

See Study: High-tech corn cuts pest damage far afield. Here is an excerpt:

"Corn that's been genetically engineered to resist attacking borers (insects) produces a "halo effect" that provides huge benefits to other corn planted nearby, a new study finds. Since the borers that attack the genetically modified crops die, there are fewer of them to go after the non-modified version.

Given that the corn borer has cost U.S. farmers $1 billion a year, the economic benefits are dramatic, according to the report in Friday's edition of the journal Science."

This is what economists call a "positive externality." Here is the definition I use in class:

Positive Externalities-Benefits received by third parties due to other’s actions.

For example, if you get vaccinated against a contagious disease, other people benefit because you will not infect them. A scientist who discovers that eating vegetables helps prevent cancer aids others.

In this case, farmers who did not use the modified corn are benefiting from those who did since their are fewer pests. In fact, the other farmers received 62% of the net benefit, which was $6.9 billion.

This excerpt might be my favorite:

"David Onstad of the University of Illinois said a strength of the study is that the large team of researchers involved included not just entomologists but people from other disciplines such as economics."

How About $57,556 For A Year Of College?

That is what it would cost at Sarah Lawrence College and it includes tuition, room and board, and fees. See
America's Most Expensive Colleges and Universities. Last week in my micro class we read a chapter about college costs in the book The Economics Of Public Issues. It mentioned that colleges compete over, among other things, their amenities like the quality of dorms, dining halls and rec centers.

Sarah Lawrence does offer alot of seminar type classes where students get one-on-one attention. Many of these schools offer financial aid but the article actually did not say how big the typical discount was. Surprisingly, costs at private schools are still rising and their enrollments are up. Could be the demand curve shifting to the right.

The financial aid amounts to basically charging different students different prices based on their ability and willingess to pay (a discount). Economists call this price discrimination.

Why price discrimination raises profits

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

Necessary Conditions for Price Discrimination

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

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

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

The article also said that "The University of Chicago estimates that a year's study will cost $56,640." Luckily it was not that high when I went there nearly 30 years ago. I might not be able to afford it now. But it was also one of the 25 best colleges besides being one of the top 25 most expensive.

A Reminder To My Students To Copy Your Notes (Besides The Extra Credit, It Makes You Smarter)

See the Wall Street Journal article How Handwriting Trains the Brain: Forming Letters Is Key to Learning, Memory, Ideas. Besides the notes, I also encourage my students to write down complete answers to all the study questions. Doing all this will help you remember and learn better. Here are exerpts from the article:

"writing by hand is more than just a way to communicate. The practice helps with learning letters and shapes, can improve idea composition and expression, and may aid fine motor-skill development"

"could be a good cognitive exercise for baby boomers working to keep their minds sharp as they age."

"there's real value in learning and maintaining this ancient skill, even as we increasingly communicate electronically via keyboards big and small."

"Recent research illustrates how writing by hand engages the brain in learning. During one study at Indiana University published this year, researchers invited children to man a "spaceship," actually an MRI machine using a specialized scan called "functional" MRI that spots neural activity in the brain. The kids were shown letters before and after receiving different letter-learning instruction. In children who had practiced printing by hand, the neural activity was far more enhanced and "adult-like" than in those who had simply looked at letters."

"Adults may benefit similarly when learning a new graphically different language, such as Mandarin, or symbol systems for mathematics, music and chemistry, Dr. James says. For instance, in a 2008 study in the Journal of Cognitive Neuroscience, adults were asked to distinguish between new characters and a mirror image of them after producing the characters using pen-and-paper writing and a computer keyboard. The result: For those writing by hand, there was stronger and longer-lasting recognition of the characters' proper orientation, suggesting that the specific movements memorized when learning how to write aided the visual identification of graphic shapes."

"Other research highlights the hand's unique relationship with the brain when it comes to composing thoughts and ideas. Virginia Berninger, a professor of educational psychology at the University of Washington, says handwriting differs from typing because it requires executing sequential strokes to form a letter, whereas keyboarding involves selecting a whole letter by touching a key."

"She says pictures of the brain have illustrated that sequential finger movements activated massive regions involved in thinking, language and working memory—the system for temporarily storing and managing information."

New Biography Of Adam Smith

Nothing gets an econ prof more excited (that is, if we could get excited). It is called Adam Smith: An Enlightened Life by Nicholas Phillipson. It is reviewed in today's New York Times business section. Go to The Wealth of an Intellect by NANCY F. KOEHN. Here are some exerpts:

"According to Mr. Phillipson, Smith was, first and foremost, concerned with developing “a genuine Science of Man” — an effort that began when Smith was a student at Glasgow University. There he studied the classics, jurisprudence, logic and metaphysics; he also met the philosopher Frances Hutcheson and the mathematician Robert Simson. These experiences helped Smith cultivate a respect for placing philosophy on a scientific basis and a compelling interest in thinking systematically."

"The two fruits of this effort were “The Theory of Moral Sentiments,” published in 1759, and “The Wealth of Nations.” In the earlier book, Smith set out to understand the motivations of human behavior and the development of moral principles within individuals. At the heart of Smith’s analysis lies the concept of sympathy (what we know today as empathy), which he saw as the bedrock of all forms of human communication, including commercial exchange. It is sympathy, he writes, that ultimately accounts for “that great purpose of human life which we call bettering our condition.”"

"...he married man’s ineluctable drive for improvement with the concept of self-interest to set forth the primary driver of all economic activity..."

" Smith regarded restraints on imports and other trade restrictions as a function of “the wretched spirit of monopoly” that had afflicted economic activity throughout history."

"The best evidence for Smith’s argument, Mr. Phillipson demonstrates, was the rapid progress of the American colonies, where cheap land and the absence of high taxes and other restraints had helped create a thriving society and a robust domestic market."

I'm glad that the article mentioned Adam Smith's first book The Theory of Moral Sentiments. That was mainly a work of philosophy. But it may be just as important as The Wealth of Nations. I have posted a two entries before about this. Go to:

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

Adam Smith vs. Bart Simpson

The Percent Of The Civilian Noninstitutional Population Employed Since 1970

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.