Another Semester Has Started

Welcome to any new students. The entries usually have something to do with a basic economic principle that is related to a recent news story.

Here is something I wrote for The Ranger (the school paper) back in 2011 titled "Why is college so hard?"

Students might wonder why college, and SAC in particular, is hard. This might sound trite, but I think the faculty at SAC want students to achieve success in life and that means that classes have to be hard if you are going to learn and understand the concepts which provide a foundation for that success.

I think my own experience as a community college student over 30 years ago helps me understand this. My teachers took their subjects seriously and maintained high academic standards. They got me excited because of the expertise they brought to their teaching. Now that I have been a teacher for over 20 years, I can see how important that was.

After finishing my A.S. degree at Moraine Valley Community College (MVCC) in Palos Hills, Ill., I transferred to and graduated from the University of Chicago with a degree in economics. But it was my community college teachers prepared me to handle the rigors of the U. of C.

Later, I got a Ph. D. in economics from Washington State University. But I've accomplished some other things I never could have dreamed of when I began taking classes at MVCC and I think my teachers there paved the way for me.

In 2005, I had a letter to the editor published in The Wall Street Journal (I have now had five published there, three in The New York Times and three op-eds in the Express-News). This one was several paragraphs long, nearly as long as some of their op-ed pieces. It was the first letter in the letters section that day, and I got the top headline. It dealt with NAFTA and trade agreements.

As nice as that was, I got a big shock a few days later when I got a letter in the mail, on official stationery, from Richard Fisher, the president of the Federal Reserve Bank of Dallas. He complimented me on my letter and said it was superb. I had never even met him or ever tried to contact him before.

Wow. I graduated from high school with a 2.7 GPA, and when I started at MVCC, I had no idea what I would do with my life. If you had told me then that someday I would have a letter in the WSJ and get that kind of compliment, I doubt I would have believed you.

Then an adjunct professor at the business school at the University of Chicago contacted me a few years ago and wanted to know if it was OK for her to assign a paper I wrote on entrepreneurs for a class she was teaching on innovation. (Of course, I said yes).

That professor was Nancy Tennant Snyder. She has a Ph. D. from George Washington University and is a vice president at Whirlpool. Business Week magazine has called her one of the leading innovators in the world. She also cited two of my papers in one of her books.

Then I got an email from John Joseph, a professor at the University of Edinburgh. He is an expert on language and politics. He wanted to know if he could include an essay I wrote in a four-volume work he was planning. I again said yes and it was published last year (and it is called Language and Politics).

It is a collection of essays. Mine is titled "The Intersection of Economic Signals and Mythic Symbols." Other contributors include Jeremy Bentham and George Orwell. When I was a community college student, I never imagined being included along with the likes of those great thinkers.

The co-authors of the book The Economics of Public Issues have thanked me in each of the last three editions for my helpful suggestions. Almost all of the people they thank are from big universities. One of the co-authors of this book, Douglass North, is a Nobel Prize winner. Never imagined someone like that would value my input when I started out as a community college student.

Getting such recognition in cases like this gives me a sense of achievement. I know I have made a scholarly contribution to the world. And I want all SAC students to have a chance for this same kind of success (as an academic or any in line of work). I think all SAC faculty do. That is why school is hard, and that is why I'm thankful that my community college teachers were experts who maintained high academic standards.

Do income and happiness tend to go together? Yes, both within and across countries

See Happiness and Life Satisfaction by Esteban Ortiz-Ospina and Max Roser.

"Do income and happiness tend to go together? The visualization below shows that the answer to this question is yes, both within and across countries.

It may take a minute to wrap your head around this visualization, but once you do, you can see that it handily condenses the key information from the previous three charts into one.

To show the income-happiness correlation across countries, the chart below plots the relationship between self-reported life satisfaction on the vertical axis and GDP per capita on the horizontal axis. Each country is an arrow on the grid, and the location of the arrow tells us the corresponding combination of average income and average happiness.

To show the income-happiness correlation within countries, each arrow has a slope corresponding to the correlation between household incomes and self-reported life satisfaction within that country. In other words: the slope of the arrow shows how strong the relationship between income and life satisfaction is within that country. (This chart gives you a visual example of how the arrows were constructed for each country). ¹⁰
 
If an arrow points northeast, that means richer people tend to report higher life satisfaction than poorer people in the same country. If an arrow is flat (i.e. points east), that means rich people are on average just as happy as poorer people in the same country. 

As we can see, there is a very clear pattern: richer countries tend to be happier than poorer countries (observations are lined up around an upward-sloping trend), and richer people within countries tend to be happier than poorer people in the same countries (arrows are consistently pointing northeast).




It’s important to note that the horizontal axis is measured in a logarithmic scale. The cross-country relationship we would observe in a linear scale would be different, since at high national income levels, slightly higher national incomes are associated with a smaller increase in average happiness than at low levels of national incomes. In other words, the cross-country relationship between income and happiness is not linear on income (it is ‘log-linear’). We use the logarithmic scale to highlight two key facts: (i) at no point in the global income distribution is the relationship flat; and (ii) a doubling of the average income is associated with roughly the same increase in the reported life-satisfaction, irrespective of the position in the global distribution.

These findings have been explored in more detail in a number of recent academic studies. Importantly, the much-cited paper by Stevenson and Wolfers (2008)¹¹ shows that these correlations hold even after controlling for various country characteristics such as demographic composition of the population, and are robust to different sources of data and types of subjective well-being measures.

Economic growth and happiness

In the charts above we show that there is robust evidence of a strong correlation between income and happiness across and within countries at fixed points in time. Here we want to show that, while less strong, there is also a correlation between income and happiness across time. Or, put differently, as countries get richer, the population tends to report higher average life satisfaction.

The following chart uses data from the World Value Survey to plot the evolution of national average incomes and national average happiness over time. To be specific, this chart shows the share of people who say they are ‘very happy’ or ‘rather happy’ in the World Value Survey (vertical axis), against GDP per head (horizontal axis). Each country is drawn as a line joining first and last available observations across all survey waves.¹²

As we can see, countries that experience economic growth also tend to experience happiness growth across waves in the World Value Survey. And this is a correlation that holds after controlling for other factors that also change over time (in this chart from Stevenson and Wolfers (2008) you can see how changes in GDP per capita compare to changes in life satisfaction after accounting for changes in demographic composition and other variables).

An important point to note here is that economic growth and happiness growth tend to go together on average. Some countries in some periods experience economic growth without increasing happiness. The experience of the US in recent decades is a case in point. These instances may seem paradoxical given the evidence—we explore this question in the following section.

The Easterlin Paradox

The observation that economic growth does not always go together with increasing life satisfaction was first made by Richard Easterlin in the 1970s. Since then, there has been much discussion over what came to be known as the ‘Easterlin Paradox’.

At the heart of the paradox was the fact that richer countries tend to have higher self-reported happiness, yet in some countries for which repeated surveys were available over the course of the 1970s, happiness was not increasing with rising national incomes. This combination of empirical findings was paradoxical because the cross-country evidence (countries with higher incomes tended to have higher self-reported happiness) did not, in some cases, fit the evidence over time (countries seemed not to get happier as national incomes increased).

Notably, Easterlin and other researchers relied on data from the US and Japan to support this seemingly perplexing observation. If we look closely at the data underpinning the trends in these two countries, however, these cases are not in fact paradoxical.

Let us begin with the case of Japan. There, the earliest available data on self-reported life satisfaction came from the so-called ‘Life in Nation surveys’, which date back to 1958. At first glance, this source suggests that mean life satisfaction remained flat over a period of spectacular economic growth (see for example this chart from Easterlin and Angelescu 2011).¹³ Digging a bit deeper, however, we find that things are more complex.

Stevenson and Wolfers (2008)¹⁴ show that the life satisfaction questions in the ‘Life in Nation surveys’ changed over time, making it difficult—if not impossible—to track changes in happiness over the full period. The visualization below splits the life satisfaction data from the surveys into sub-periods where the questions remained constant. As we can see, the data is not supportive of a paradox: the correlation between GDP and happiness growth in Japan is positive within comparable survey periods. The reason for the alleged paradox is in fact mismeasurement of how happiness changed over time.

In the US, the explanation is different, but can once again be traced to the underlying data. Specifically, if we look more closely at economic growth in the US over the recent decades, one fact looms large: growth has not benefitted the majority of people. Income inequality in the US is exceptionally high and has been on the rise in the last four decades, with incomes for the median household growing much more slowly than incomes for the top 10%. As a result, trends in aggregate life satisfaction should not be seen as paradoxical: the income and standard of living of the typical US citizen has not grown much in the last couple of decades. (You can read more about this in our entry on inequality and incomes across the distribution.)

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Solar Eclipse Will Cost America Almost $700 Million in Lost Productivity

From Reuters. But they say it is much less than what is lost due to March Madness, The Super Bowl and Cyber Monday. Smaller companies are most affected.

"Add next week's total eclipse of the sun to the list of worker distractions that cost U.S. companies hundreds of millions of dollars in lost productivity.

American employers will see at least $694 million in missing output for the roughly 20 minutes that outplacement firm Challenger, Gray & Christmas estimates workers will take out of their workday on Monday to stretch their legs, head outside the office and gaze at the nearly two-and-a-half minute eclipse.

And 20 minutes is a conservative estimate, said Andy Challenger, vice president at the Chicago-based firm. Many people may take even longer to set up their telescopes or special viewing glasses, or simply take off for the day.

"There's very few people who are not going to walk outside when there's a celestial wonder happening above their heads to go out and view it," Challenger said, estimating that 87 million employees will be at work during the eclipse.

To get the overall figure of nearly $700 million, Challenger multiplied that by the Bureau of Labor Statistics' latest estimate for average hourly wages for all workers 16 and over. Just as the Earth is a mere speck in the universe, however, Challenger said this is still a small sum.

"Compared to the amount of wages being paid to an employee over a course of a year, it is very small," Challenger said. "It's not going to show up in any type of macroeconomic data.""

How The Economics Of College Sports Might Be Distorted

See Stop Giving College Athletes Million-Dollar Locker Rooms: Start Paying Them Big-time college sports programs pour money into absurdly luxurious amenities because compensating players is off the table by Jason Gay of The WSJ.

The part about schools competing to get the best players by having things like the best locker rooms because you can't pay player sounds like what happened with health care during WWII. There were wage and price controls so firms offered to pay for health insurance to get the best workers. The government allowed this to be tax exempt, causing more employer funded health insurance to exist and maybe distorting health care markets as people spent less and less of their own money on it.

Excerpts:

"Colleges “spend money on everything but what a normal market would have to spend money on, which is the players,” says Andrew Zimbalist, a professor of economics at Smith College and the author, along with Gurney and Donna Lopiano, of “Unwinding Madness: What Went Wrong With College Sports and How to Fix It.” “It just seems like a no-brainer that [this is] what’s going on.”

Let me beat you to it: College athletes can get scholarships, and that isn’t a small thing when a full ride at a four-year school can be worth well over $200,000.
But in an era in which networks pay close to $1 billion a year to televise March Madness, college football is expanding into lucrative playoffs, and coaches with shoe deals scoot through the clouds in private jets, the notion of scholarships as fair trade starts to feel quaint. It’s comical to watch the NCAA and its membership try to justify this arrangement in the legal system and the court of public opinion. Schools that tout their futuristic performance complexes and celebrity coaches suddenly sound like they’re back on a crab grass field in the late 19th century, rhapsodizing about gentlemen amateurs and the flying wedge.

Because make no mistake: These luxe locker rooms and performance centers are a form of compensation, directly correlated to the nonpayment of athletes. With no obligation to share revenue with talented players but eager to attract them to campus, schools simply channel money into other forms of seduction.

Rodney Fort, a professor of sports management at the University of Michigan, calls the current environment a “wonderful example of what happens when a market is restricted from doing its job and people still need to move things economically to their highest-valued use.”

“You can’t pay the players directly, at least not aboveboard,” says Allen Sanderson, an economist at the University of Chicago. “So you overdose in complementary recruiting devices, and that includes building the biggest, most luxurious facilities.”"

Consider the reaction earlier this summer when Josh Rosen, a quarterback at UCLA and an economics major, deigned to suggest in an interview that playing a major college sport today isn’t wildly compatible with a well-rounded academic life.

“Football and school don’t go together,” Rosen told Bleacher Report’s Matt Hayes. “They just don’t. Trying to do both is like doing two full-time jobs. There are guys who have no business being in school, but they’re here because this is the path to the NFL.”

“Any time [a] player puts into school will take away from the time they could put into football,” Rosen continued. “They don’t realize that they’re getting screwed until it’s too late. You have a bunch of people at the universities who are supposed to help you out, and they’re more interested in helping you stay eligible. At some point, universities have to do more to prepare players for university life and help them succeed beyond football.”"

"Rosen was pilloried by the college sports establishment—as lazy, as an ingrate, as a spoiled brat unable to balance his academics and the carefree life of a major college quarterback. Never mind that, as CNBC’s Jake Novak pointed out, the National Labor Relations Board has found that current college players are spending between 40 and 50 hours a week on football in season—a full-time job by any standard. Never mind that college athletic departments have been criticized for steering student-athletes to easy course loads—or, terrifyingly, nonexistent, fabricated ones. Never mind the invisible hand of the NFL and NBA in perpetuating the system—fat and happy pro leagues, waiting to cherry pick what is effectively an unpaid minor league."

"the University of Chicago’s Sanderson says it may be simpler than I think: “The right solution is to simply pay the kids. Let the market work. If it results in ‘only’ 50 Division I football schools, because the other schools can’t afford a quarterback, that’s fine; the rest can be programs where the ‘student-athlete’ is actually a student.”"

Do Recessions Really Help People Live Longer, Healthier Lives?

Debate continues with new research looking at migration effects in historical case studies

See By Ben Leubsdorf of The WSJ.

"A new round has opened in the debate over whether recessions are good or bad for public health.
Some researchers have found that death rates fall during recessions. But a new study argues such findings may be distorted by migration, as people move away from places that have fallen on hard times and flock to places with booming economies.

Data from two historical case studies, the 1860s downturn in British textile-producing areas and the 1970s boom in Appalachia’s coal country, “illustrate that certainly there could be an issue, and that we need to take migration more seriously in this kind of analysis,” said University of Essex economist Vellore Arthi, who authored the paper with College of William and Mary economist Brian Beach and New York University economist W. Walker Hanlon.

It’s the latest chapter in an ongoing debate among economists about whether recessions are good or bad in terms of health outcomes. On the one hand, job loss can mean stress and depression, increased substance abuse and the loss of health insurance. On the other hand, unemployed people may benefit from having more time to exercise; less money to spend on alcohol, cigarettes and other vices; and no need to drive to work, reducing the number of fatal car crashes.

“There is considerable evidence that harmful behaviors – like heavy drinking and smoking – decrease in bad economic times, whereas health-enhancing activities such as exercise and social interactions increase,” University of Virginia economist Christopher Ruhm wrote in a 2015 study. The study described a procyclical relationship between business cycles and death rates: U.S. mortality rises during expansions and falls during recessions.

But the new working paper, distributed in June by the National Bureau of Economic Research, argued that migration can distort the picture. For instance, when people move away from regions experiencing an economic downturn, annual population estimates may not fully capture that movement, skewing mortality-rate data. Economic booms could also attract an influx of young, healthy workers, affecting regional mortality rates by changing the local population’s demographics.

Adjusting for those factors, the three economists said mortality appeared to increase rather than decline during the British textile-region downturn, and there was “little evidence…that the Appalachian coal boom had any real effect on underlying population mortality.”

Mr. Ruhm, in an interview, said economists do “need to be thinking about migration flows” in their research, but indicated he was skeptical that such movements explain away earlier findings that mortality moves with the business cycle. He said modern population estimates likely do a better job capturing movement, and that it could be difficult to generalize from the specific circumstances of the two case studies.

“I think they’re on to something, but I don’t think it changes the main story,” he said."

The preference for partners of the same education has significantly increased for white individuals

See New results on assortative mating by education Tyler Cowen. It seems like well educated whites want partners that will share their values in developing the human capital of their children (like sending them to college). So you get more households with two high income earners and they try very hard to make sure their kids grow up to be well educated and marry someone else well educated (that they might meet in college).

"Partner Choice, Investment in Children, and the Marital College Premium, by Pierre-André Chiappori, Bernard Salanié and Yoram Weiss

We construct a model of household decision-making in which agents consume a private and a public good, interpreted as children’s welfare. Children’s utility depends on their human capital, which depends on the time their parents spend with them and on the parents’ human capital. We first show that as returns to human capital increase, couples at the top of the income distribution should spend more time with their children. This in turn should reinforce assortative matching, in a sense that we precisely define. We then embed the model into a transferable utility matching framework with random preferences, a la Choo and Siow (2006), which we estimate using US marriage data for individuals born between 1943 and 1972. We find that the preference for partners of the same education has significantly increased for white individuals, particularly for the highly educated. We find no evidence of such an increase for black individuals. Moreover, in line with theoretical predictions, we find that the “marital college-plus premium” has increased for women but not for men."

See also On Assortative Mating from Greg Mankiw.As mentioned above, we are getting these very high income households. When the government measures how equal or unequal the distribution of income is, it is often by household. So this process is increasing the difference in incomes between the poorest and richest households. The gini coefficient mentioned below goes from 0 to 1 and higher means less equal.

"A new working paper concludes:

"Data from the United States Census Bureau suggests there has been a rise in assortative mating....[I]f matching in 2005 between husbands and wives had been random, instead of the pattern observed in the data, then the Gini coefficient would have fallen from the observed 0.43 to 0.34, so that income inequality would be smaller""

See also Higher Education Attainment by Family Income: Current Data Show Persistent Gaps by the Association of American Colleges & Universities. Excerpt:

"Among students in the bottom socioeconomic quartile, 15 percent had earned a bachelor’s degree within eight years of their expected high school graduation, compared with 22 percent in the second quartile, 37 percent in the third quartile, and 60 percent in the top quartile."

So if you are at the bottom, you are much less likely to get a college degree than people at the top. If you were born into the top quartile, you are 4 times more likely to get a degree than someone from the bottom.

The table below (from Mark Perry) shows that the top quintile has 2 income earners while the bottom has 0.42. 78.1% of the top quintile are married households. For the bottom it is 16.9%.  62.2% of the people 25 or older in the top quintile have bachelor's degrees but it is only 13.7% for the bottom. So the top quintile tends to be married couples where both spouses work and have college degrees.