Second Quarter GDP Revised From A 1.7% Increase To A 1.3% Increase!

My students know how sad and disappointing this news is. See GDP report: Economic growth revised lower. Why is this disappointing? Let's suppose that per gapita GDP is $50,000 (it is a little less than that right now). Now what if over the next 20 years GDP (actually real GDP) rises every year by 1.3% instead of just 1.7%? How much difference will this make?

First, we need to say what the annual per capita GDP increase will be. Per capital GDP is GDP divided by population. What if we assume that population grows 1% per year. Then instead of an increase in per capita GDP of 1.7%, it would be about 0.7% (and instead of 1.3%, it will be about 0.3%).

Compounding an annual increase of 0.7% over 20 years would leave us with a per capita GDP of $57,407. That is more than $4,000 above what it would be if we grow only 0.7% per year ($53,056). $4,000 less in everyone's pocket is bad news.

One technical note. When you see numbers like this reported in the media, real GDP did not increase 1.3% in the second quarter. It means that if it increased at the rate it actually did for that quarter for a whole year, then the yearly increase would be 1.3%. It would have increased about 0.325% for the quarter. If it does that for 4 straight quarters, the GDP will end up being about 1.3% higher than it was before.

The Supply And Demand Game

I play it in each class I teach. A former colleague taught it to me many years ago. As far as I know, I use the game invented by Edward Chamberlin and refined by Vernon Smith. Click here to see the Lessons From the Supply and Demand Game (a couple of people have emailed me about it recently).

How Much Do Environmental Regulations Cost?

See the interesting post at Freakonomics. It mentions a paper by Michael Greenstone, John List, and Chad Syverson. Here is the abstract:

"The economic costs of environmental regulations have been widely debated since the U.S. began to restrict pollution emissions more than four decades ago. Using detailed production data from nearly 1.2 million plant observations drawn from the 1972-1993 Annual Survey of Manufactures, we estimate the effects of air quality regulations on manufacturing plants’ total factor productivity (TFP) levels. We find that among surviving polluting plants, stricter air quality regulations are associated with a roughly 2.6 percent decline in TFP. The regulations governing ozone have particularly large negative effects on productivity, though effects are also evident among particulates and sulfur dioxide emitters. Carbon monoxide regulations, on the other hand, appear to increase measured TFP, especially among refineries. The application of corrections for the confounding of price increases and output declines and sample selection on survival produce a 4.8 percent estimated decline in TFP for polluting plants in regulated areas. This corresponds to an annual economic cost from the regulation of manufacturing plants of roughly $21 billion, about 8.8 percent of manufacturing sector profits in this period."

Here is something I report in my microeconomics class:

"Thomas Hopkins at the Rochester Institute of Technology determined that the cost of all regulations over each year is about 8% of national income. The total cost from compliance and administration of both Economic and Social regulation, including state, local and federal levels, is more than $1 trillion annually (From the book Economics Today by Roger LeRoy Miller, 15e)"

Are "Soft" Skills Related To Unemployment?

See Hard Unemployment Truths About 'Soft' Skills by NICK SCHULZ in the WSJ. Excerpts:

"One of the [manufacturing] representatives looked sheepishly around the room and responded: "To be perfectly honest . . . we have a hard time finding people [workers] who can pass the drug test."

"... simply finding someone who could properly answer the telephone was sometimes a challenge."

"More than 600,000 jobs in manufacturing went unfilled in 2011 due to a skills shortage,..."

"...evidence suggests that many employers would be happy just to find job applicants who have the sort of "soft" skills that used to be almost taken for granted."

"...nearly 20% of employers cited a lack of soft skills as a key reason they couldn't hire needed employees. "Interpersonal skills and enthusiasm/motivation" were among the most commonly identified soft skills that employers found lacking. Employers also mention a lack of elementary command of the English language."

"More than half of the organizations surveyed reported that simple grammar and spelling were the top "basic" skills among older workers that are not readily present among younger workers. The SHRM/AARP survey also found that "professionalism" or "work ethic" is the top "applied" skill that younger workers lack."

"...manufacturers were finding it harder to find punctual, reliable workers today than in 2007..."

"Many people lack what the writer R.R. Reno has called "forms of social discipline" that are indispensable components of a person's human capital and that are needed for economic success."

How Did Astronauts Of The 60s "Purchase" Life Insurance?

See Neil Armstrong Couldn't Afford Life Insurance, So He Used a Creative Way to Provide for His Family If He Died. Excerpts:

"Back then astronaut captains made about $17,000 a year, NPR reports and a life insurance policy for Neil Armstrong would have run about $50,000 a year, or more than $300,000 in 2012 dollars."

So how did they "buy" insruance?

"It happened like this:

Because some guys from the prior Apollo missions had gotten colds and mild bouts of queasiness on their trips, NASA had implemented a quarantine procedure before liftoffs.

So about a month before they were set to go to the moon, Neil Armstrong, Michael Collins, and Buzz Aldrin were locked into a Plexiglas room together and got busy providing for their families the only way they could — they signed hundreds of autographs.

In what would become a common practice, the guys signed their names on envelopes emblazoned with various space-related images. The 'covers' would, of course, become intensely valuable should the trio perish on the mission. They're now often referred to as " Apollo Insurance Covers."

And to ensure the covers would hold maximum value, the crew put stamps on them, and sent them in a package to a friend, who dumped them all in the mail so they would be postmarked July 16, 1969 — the day of the mission's success — or its failure."

Has enough time passed so that everyone has forgotten that the economy ever had a problem?

It still doesn't seem like it. See Lehman Brothers, We Heard You Were Dead by ADAM DAVIDSON in Sunday's New York Times. He has a great quote from economist

"Kenneth Rogoff, who co-wrote the pre-eminent history of financial crises, “This Time Is Different,” told me that crises don’t end because new laws are enacted and politicians can be trusted again. In 1945, “the financial markets were devastated,” he said. “State and local governments had defaulted on everything. Lending had shrunk.” Somehow, though, the economy recovered and experienced nearly 30 years of robust growth. Confidence comes, he said, when “enough time passes so everyone forgets there was ever a problem.”"

I have quoted Rogoff before. See The Government Bailout: Are We Replacing Market Failure With Government Failure? and Gross public debt exceeding about 90% of annual economic output can slow growth.

Don't click on this link because it might be X-rated

Will Moving To NCAA Division I Status Pay Off For The University of the Incarnate Word?

See UIW looking to score more than points with football from The San Antonio Express-News.

"To understand why the University of the Incarnate Word is making the financially burdensome move to NCAA Division I status in coming months, University of Texas Professor Bob Heere suggests a quick trip downtown. There sits the Alamodome, which operates at an annual loss of more than $1 million. “The city of San Antonio uses the Alamodome to profile itself, to brand itself, to actually give their own citizens and residents a sense of community and something they can be proud of,” said Heere, a professor of kinesiology and health education who recently helped UTSA study the effect of adding Division I football to its athletic lineup. “College sports are exactly the same. You run at a loss, but in return, you hope it increases the sense of community.”"

"Like most of more than 340 Division I programs nationwide, UIW will extract millions from its general operating budget to subsidize athletics, counting on the intrinsic value of sports programs to counter the literal costs. Last season in Division II, UIW says it spent almost $9 million on athletics, including $4.9 million on scholarships. Of that, $1.6 million was committed to football operations and scholarships. In a buildup of expenses during the next four years, athletic director Mark Papich is targeting an eventual athletic budget of about $14 million, including almost $7.6 million for an additional 75 available scholarships for all sports."

"A recent study of NCAA data by Fulks showed virtually no Football Championship Subdivision program turns a profit in athletics. While the most successful Football Bowl Championship operations, such as Texas and Ohio State, can clear $35 million or more in a year, the typical FCS school spends about $9 million above what it generates in revenues annually."

“We do know that having a successful football team might have a positive effect on enrollment, but that's only temporary,” Heere said. “An unsuccessful team can have the opposite effect.” Added Michigan sports economics Professor Rod Fort: “The usual response is that it helps with student attraction and the quality of the undergrad and faculty pool. And there is a bit of evidence that is true — but in a very small amount.”"

Rod Fort has a sports/economics blog called Sports and Monsters. There is some evidence that a winning sports team can help a college. See The Flutie Effect: When The Teams Win, More Students Apply To The College.

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

Lobster Wars: U.S. vs. Canada

Update 9-19: The Washington Post reports US seafood catch reaches 17-year high, all regions show increases in catch numbers.

It looks like supply and demand are the main weapons. See Cheap Maine lobsters spark protests in Canada. Excerpt:

"Maine-caught lobster, whose abundance this summer has driven prices here to the lowest levels in a generation, has sparked angry protests among lobstermen in New Brunswick.

Fishermen in Cap-Pele, New Brunswick, blocked access to several processing plants Thursday to protest an influx of Maine lobster after being told they would be expected to provide fewer lobsters when their season opens next week.

Maine truck driver Leonard Garnett of Steuben talks with police at a Shediac, New Brunswick, processing plant after fishermen blocked his truck with the intention of leaving his load of lobsters to rot.

On Thursday morning, emergency tactical police teams responded to calls for help from two lobster processing companies in Cap-Pele, a small French-speaking town on the Northumberland Strait, 200 miles east of Calais.

The police encountered about 200 lobstermen and followed them as they moved from one plant to the other, demanding that the owners stop processing U.S. lobster, the CBC reported.

Both plants were reportedly closed, with workers sent home.

At midday, lobstermen in nearby Shediac spotted a tractor-trailer truck with Maine plates carrying a load of lobsters, according to the CBC, and blocked it in a driveway with the intention of leaving the lobsters to rot.

The blockades followed a meeting Wednesday night called by the Maritime Fishermen's Union, at which 400 lobstermen commiserated about cheap soft-shell lobsters from Maine that are flooding local processing plants before the opening of their summer fishing season.

Reports say they expressed concern that Maine lobster -- for which lobstermen are getting well under $3 a pound -- will undermine demand and prices for locally caught lobster."

Did a Nobel prize winning economist mathematically prove that character matters?

See Opting Out of the 'Rug Rat Race': For success in the long run, brain power helps, but what our kids really need to learn is grit. It is from the WSJ last week. Heckman found that students who don't graduate from high school but who later go on to get their GED have the same cognitive ability as those who did graduate. But they are way behind in things like graduating from college. Exerpt:

"What matters most in a child's development, they (psychologists) say, is not how much information we can stuff into her brain in the first few years of life. What matters, instead, is whether we are able to help her develop a very different set of qualities, a list that includes persistence, self-control, curiosity, conscientiousness, grit and self-confidence. Economists refer to these as noncognitive skills, psychologists call them personality traits, and the rest of us often think of them as character.

If there is one person at the hub of this new interdisciplinary network, it is James Heckman, an economist at the University of Chicago who in 2000 won the Nobel Prize in economics. In recent years, Mr. Heckman has been convening regular invitation-only conferences of economists and psychologists, all engaged in one form or another with the same questions: Which skills and traits lead to success? How do they develop in childhood? And what kind of interventions might help children do better?

The transformation of Mr. Heckman's career has its roots in a study he undertook in the late 1990s on the General Educational Development program, better known as the GED, which was at the time becoming an increasingly popular way for high-school dropouts to earn the equivalent of high-school diplomas. The GED's growth was founded on a version of the cognitive hypothesis, on the belief that what schools develop, and what a high-school diploma certifies, is cognitive skill. If a teenager already has the knowledge and the smarts to graduate from high school, according to this logic, he doesn't need to waste his time actually finishing high school. He can just take a test that measures that knowledge and those skills, and the state will certify that he is, legally, a high-school graduate, as well-prepared as any other high-school graduate to go on to college or other postsecondary pursuits.

Mr. Heckman wanted to examine this idea more closely, so he analyzed a few large national databases of student performance. He found that in many important ways, the premise behind the GED was entirely valid. According to their scores on achievement tests, GED recipients were every bit as smart as high-school graduates. But when Mr. Heckman looked at their path through higher education, he found that GED recipients weren't anything like high-school graduates. At age 22, Mr. Heckman found, just 3% of GED recipients were either enrolled in a four-year university or had completed some kind of postsecondary degree, compared with 46% of high-school graduates. In fact, Heckman discovered that when you consider all kinds of important future outcomes—annual income, unemployment rate, divorce rate, use of illegal drugs—GED recipients look exactly like high-school dropouts, despite the fact that they have earned this supposedly valuable extra credential, and despite the fact that they are, on average, considerably more intelligent than high-school dropouts.

These results posed, for Mr. Heckman, a confounding intellectual puzzle. Like most economists, he had always believed that cognitive ability was the single most reliable determinant of how a person's life would turn out. Now he had discovered a group—GED holders—whose good test scores didn't seem to have any positive effect on their eventual outcomes. What was missing from the equation, Mr. Heckman concluded, were the psychological traits, or noncognitive skills, that had allowed the high-school graduates to make it through school."

Captain Morgan's spiced rum at $47.52 a half gallon?

That is in Longview, Wash. See Liquor Buyers Cross State Line: Prices Went Up—Not Down—After Washington State Ended Control of Booze Sales, from the WSJ earlier this week. The state of Washington just recently privatized all of its liquor stores. Before that, privately owned stores could only sell beer and wine. Anyone wanting hard liquor had to go to a state owned store. Prices did not fall as expected because the state added some required fees.:

"Even before privatization, Washington had some of the nation's highest liquor taxes and fees, at $26.70 a gallon. The national average is $7.02 a gallon, said the Tax Foundation, a research group. Washington state's levies included government stores' 52% markup, a 21% liquor sales tax and a $3.77-per-liter excise tax.

And while those sales and excise taxes remain under privatization, new fees further raised prices: Liquor distributors must pay an additional 10% levy, and retailers another 17%. Distributors also are on the hook for any shortfall to the state if they don't generate $150 million from the 10% fee by April."

So Washington residents are crossing the border.

"In Rainier, the Oregon liquor commission said sales jumped 60%, compared with the same period last summer. Ms. Brumbles, of Rainier Liquor, added staff and store hours to meet demand from Washington shoppers. "You know how the week is before Christmas? It's like that every single day," she said."

The new, higher fees are helping to drive up the price in Washington. Part of those fees are passed along to the consumers in the form of higher prices. Businesses are not usually able to pass all of a tax like this along to the buyers. See If You Lower The Excise Tax On A Good By $1.00, Does A Firm Save $1.00 On Each Unit Sold?

Why Would A Weak College Football Team Agree To Play A Vastly Superior Team That Everyone Knows Will Win Easily?

Money. See Thrash-for-cash not such a bad thing for a financially strapped Savannah State. Yes, there is a Savannah State University and it needs money. So they agreed to play powerhouse Oklahoma State last week for a $385,000 payday. Oklahoma St. won 84-0. This week Savannah State University plays Florida State University and will recieve $475,000. Last week 6th ranked Florida State University beat Murray State University 69-3. Savannah St. must be getting a share of the ticket revenue and TV revenue when the go to play these other schools on the road.

Maker Of Thalidomide Apologizes

Thalidomide was sold to pregnant women in the 1950s and early 1960s to cure morning sickness. It was made by the German company Grunenthal. It caused serious birth defects before being taken off the market. See Thalidomide victims reject 'insulting' apology from drug company.

Thalidomide came up in my micro classes this week since we read a chapter from the book The Economics of Public Issues that discussed the dilemma the FDA faces in approving drugs.

There is a danger that the FDA will make a Type I error, meaning an unsafe drug is allowed onto the market. To try to avoid that, they can test a new drug for a long time to make sure it is safe. But in the mean time people might be dying because they cannot get the drug. When that happens, it is called a Type II error. This happened with Septra, an antibiotic. 

The book reports that "in 2006, the FDA gave physicians the OK to use it (thalidomide) in treating bone marrow cancer."