An article I wrote is at mysa.com

Streetcars on road to government overreach. It could also get printed tomorrow in the San Antonio Express-News. They cut it down just a bit, so here is the slightly longer version that I sent them.

"Bill Barker claims that some have hijacked the term “American dream” to block projects like the San Antonio streetcar project for their own selfish reasons ("Opposition co-opting the American Dream," April 24).

But it looks like he attempts to hijack economist Adam Smith and Pope Francis in support of street cars.

He quotes Adam Smith with private interests in "some respects" being the opposite of public interest. "Some respects" is not always and Smith actually mentions this in the context of businesses trying to get taxes or regulations imposed on the public.

Smith says when a merchant pursues his self-interest it  "leads him to prefer that employment which is most advantageous to society."

It is well known that he was suspicious of business but he also worried about government going too far with "There is no art which one government sooner learns of another than that of draining money from the pockets of the people."

Smith listed three major functions of government: national defense, crime prevention and beneficial public works that could not be profitable for private firms to undertake. The latter had two ends, facilitating commerce and education.

Barker does not explain how streetcars will facilitate commerce. Maybe they will. But for a project like this, we need cost-benefit analysis and Barker provides none. Adam Smith suggested such public works need this.

It is also strange that Barker quotes Pope Francis on how we should not rely on the invisible hand so much. Pope Francis has no special expertise on economics and he certainly cannot tell us if streetcars here in San Antonio will be cost effective.

It is not even clear that we have been relying on the invisible hand of self-interest in this country. Yes, some industry have been de-regulated in the past 35 years.

But, regulatory spending by federal agencies is about nine times higher today than it was in 1970, adjusted for inflation. We add thousands of pages of new regulations each year. That is not an invisible hand at work.

In the 1950s, about five percent of jobs required a license. Now it is about thirty percent. Female African immigrants come to this country and get told they need to spend much time and money just to get a license to braid hair. That is the government blocking the American Dream.

Now some people in the U.S. today face marginal tax rates of fifty percent or higher when both federal and state income tax rates are considered. Again, it does not look like the invisible hand in action.

Pope Francis doesn't even understand the economy of his home country, Argentina. It has been hurt over the years by turning away from the invisible hand.

According to the book "The Economics of Macro Issues," Argentina fell from being one of the ten richest countries in the world to seventieth over the last hundred years. Why?

"Government spending (and taxes) in Argentina has been growing relative to the overall size of the economy."

Barker also mentions that the Koch brothers at least partially fund the opposition to streetcars. But it looks like the firefighters union in San Antonio are also skeptical of streetcars.

The reason is "the city should focus on public safety and other “core services.”" That sounds like Adam Smith and his three main functions of government.

Sometimes we ask government to do too much and then it can't do anything well. So let's take a good look at streetcars before we give the okay."

Nobel Prize Winning Economist Gary Becker Has Died

Click here to read his obituary in The New York Times. Becker was known for using economic analysis to study discrimination and decision making within the family.

Fed Chair Janet Yellen: "there remains considerable slack in the economy"

See Yellen: Economy Still Needs Extraordinary Support. The  Fed thinks that we are still below the full-employment GDP (Q_F in the graph below). They basically think that we are still at a point like AD1 and need to have policies that will move us to AD2 (AD stands for aggregate demand and SRAS stands for short-run aggregate supply). If we move from AD1 to AD2, we will still have very small price increases while having a big increase in GDP which will help lower the unemployment rate. The Fed discussed similar issues in 2009. See Fed Officials Disagree On Threat Of Inflation.

Now excerpts from this latest article:

"Low interest rates, she said, make buying a home more affordable and make it easier for businesses to expand and hire.

“We are trying to lower the costs of buying a car that can carry a worker to a new job and kids to school, and our policies are also spurring the revival of the auto industry. We are trying to help families afford things they need so that greater spending can drive job creation and even more spending, thereby strengthening the recovery,” Yellen said.

Yellen said she and “most” of her Fed colleagues believe the unemployment rate must fall to between 5.2% and 5.6% before fulfilling the Fed’s mandate of maximum sustainable unemployment. At that point, inflation becomes more of a risk because wages rise as demand for workers sharpens.

Yellen noted inflation is still not a concern because the inflation rate is about half the Fed’s target rate of 2%.

However, simply by mentioning the 5.2%-5.6% range for maximum sustainable employment, it's certain market analysts will speculate interest rates, which have hovered at near-zero for more than five years, will start to move higher when the unemployment rate falls into that range. It currently stands at 6.7%.

“The Federal Reserve takes its inflation goal very seriously,” Yellen said. “One reason why I believe it is appropriate for the Federal Reserve to continue to provide substantial help to the labor market, without adding to the risks of inflation, is because of the evidence I see that there remains considerable slack in the economy and the labor market.”

Slack, she explained, is when there are significantly more people looking for work than there are jobs available.

Yellen suggested the primary issues holding back the job market are ‘cyclical,’ in other words there are simply not enough jobs to employ all those who are looking for work. Accommodative monetary policy – low interest rates, for example – can help create conditions conducive to creating jobs, Yellen explained."

U.S. pump prices seen extending gains

See U.S. pump prices seen extending gains by Barbara Powell and Mario Parker of Bloomberg. It appeared in the print version of the San Antonio Express-News on April 2. So why are gas prices going up? Exerpts:

"... because of declining supplies and rising costs for the ethanol added to the fuel"

"Gas, averaging $3.56 a gallon at the pump nationwide, already costs the most since September, according to AAA. Prices for ethanol, the fuel additive mandated by the government, are the highest in more than seven years after freezing weather and a shortage of rail cars slowed distribution and reduced inventories."

"“We expect that the peak for gasoline prices will be in April, with the most likely outcome about $3.65,” said Michael Green, a spokesman for AAA in Washington. “

Ethanol climbed a record 81 percent in the quarter, surpassing a 65 percent gain during the third quarter of 2005..."

"...as distillers take plants offline for routine spring maintenance..."

"Ethanol's premium to May gasoline reached 64.7 cents Tuesday. The additive has averaged a 17.39-cent discount to gas since 2005."

"Congestion on the nation's rail lines delayed shipments from the Midwest, where 89 percent of ethanol plants are located, to terminals in the Northeast where it's blended with gas..."

"Replenishing that supply is going to be difficult as companies wrestle with when to perform seasonal maintenance and a lack of availability of rail cars, said Julie Ward, an assistant vice president at R.J. O'Brien & Associates, a brokerage in Des Moines, Iowa."

Is There Economic And Political Meaning In "The Wizard of Oz?"

I will start on international trade in my micro class tomorrow and the text book has something about this in that chapter.

To get a handle on this, you can read Money and Politics in the Land of Oz By Quentin P. Taylor. Also, for my students, there is an article in chapter 15 of the micro book by Tucker and in chapter 18 in the macro book.Below is an excerpt from the Taylor paper:

"Dorothy, the protagonist of the story, represents an individualized ideal of the American people. She is each of us at our best-kind but self-respecting, guileless but levelheaded, wholesome but plucky. She is akin to Everyman, or, in modern parlance, “the girl next door.” Dorothy lives in Kansas, where virtually everything-the treeless prairie, the sun-beaten grass, the paint-stripped house, even Aunt Em and Uncle Henry-is a dull, drab, lifeless gray. This grim depiction reflects the forlorn condition of Kansas in the late 1880s and early 1890s, when a combination of scorching droughts, severe winters, and an invasion of grasshoppers reduced the prairie to an uninhabitable wasteland. The result for farmers and all who depended on agriculture for their livelihood was devastating. Many ascribed their misfortune to the natural elements, called it quits, and moved on. Others blamed the hard times on bankers, the railroads, and various middlemen who seemed to profit at the farmers’ expense. Angry victims of the Kansas calamity also took aim at the politicians, who often appeared indifferent to their plight. Around these economic and political grievances, the Populist movement coalesced.

In the late 1880s and early 1890s, Populism spread rapidly throughout the Midwest and into the South, but Kansas was always the site of its most popular and radical elements. In 1890, Populist candidates began winning seats in state legislatures and Congress, and two years later Populists in Kansas gained control of the lower house of the state assembly, elected a Populist governor, and sent a Populist to the U.S. Senate. The twister that carries Dorothy to Oz symbolizes the Populist cyclone that swept across Kansas in the early 1890s. Baum was not the first to use the metaphor. Mary E. Lease, a fire-breathing Populist orator, was often referred to as the “Kansas Cyclone,” and the free-silver movement was often likened to a political whirlwind that had taken the nation by storm. Although Dorothy does not stand for Lease, Baum did give her (in the stage version) the last name “Gale”-a further pun on the cyclone metaphor.

The name of Dorothy’s canine companion, Toto, is also a pun, a play on teetotaler. Prohibitionists were among the Populists’ most faithful allies, and the Populist hope William Jennings Bryan was himself a “dry.” As Dorothy embarks on the Yellow Brick Road, Toto trots “soberly” behind her, just as the Prohibitionists soberly followed the Populists.

When Dorothy’s twister-tossed house comes to rest in Oz, it lands squarely on the wicked Witch of the East, killing her instantly. The startled girl emerges from the abode to find herself in a strange land of remarkable beauty, whose inhabitants, the diminutive Munchkins, rejoice at the death of the Witch. The Witch represents eastern financial-industrial interests and their gold-standard political allies, the main targets of Populist venom. Midwestern farmers often blamed their woes on the nefarious practices of Wall Street bankers and the captains of industry, whom they believed were engaged in a conspiracy to “enslave” the “little people,” just as the Witch of the East had enslaved the Munchkins. Populists viewed establishment politicians, including presidents, as helpless pawns or willing accomplices. Had not President Cleveland bowed to eastern bankers by repealing the Silver Purchase Act in 1893, thus further restricting much-needed credit? Had not McKinley (prompted by the wealthy industrialist Mark Hanna) made the gold standard the centerpiece of his campaign against Bryan and free silver?"

Now an excerpt from Tucker:

"Gold is always a fascinating story: The Wonderful Wizard of Oz was first published in 1900 and this children's tale has been interpreted as an allegory for political and economic events of the 1890s. For example, the Yellow Brick Road represents the gold standard, Oz in the title is an abbreviation for ounce, Dorothy is the naive public, Emerald City symbolizes Washington, D.C., the Tin Woodman represents the industrial worker, the Scarecrow is the farmer, and the Cyclone is a metaphor for a political revolution. In the end, Dorothy discovers magical powers in her silver shoes (changed to ruby in the 1939 film) to find her way home and not the fallacy of the Yellow Brick Road. Although the author of the story, L. Frank Baum, never stated it was his intention, it can be argued that the issue of the story concerns the election of 1896. Democratic presidential nominee William Jennings Bryan (the Cowardly Lion) supported fixing the value of the dollar to both gold and silver (bimetallism), but Republican William McKinley (the Wicked Witch) advocated using only the gold standard. Since McKinley won, the United States remained on the Yellow Brick Road."

But not everyone agrees with this. Economist Bradley Hansen wrote an article titled The Fable of the Allegory: The Wizard of Oz in Economics in the Journal of Economic Education in 2002. Here is his conclusion:

"Rockoff noted that the empirical evidence that Baum wrote The Wonderful Wizard of Oz as an allegory was slim, but he compared an allegorical interpretation to a model and suggested that “economists should not have any difficulty accepting, at least provisionally, an elegant but controversial model” (Rockoff 1990, 757). He was right—we did not have any difficulty accepting it. Despite Rockoff’s warning, we appear to have accepted the story wholeheartedly rather than provisionally, simply because of its elegance. It is as difficult to prove that The Wonderful Wizard of Oz was not a monetary allegory as it is to prove that it was. In the end, we will never know for certain what Baum was thinking when he wrote the book. I suggest that the vast majority of the evidence weighs heavily against the allegorical interpretation. It should be remembered that no record exists that Baum ever acknowledged any political meanings in the story and that no one even suggested such an interpretation until the 1960s. There certainly does not seem to be sufficient evidence to overwhelm Baum’s explicit statement in the introduction of The Wonderful Wizard of Oz that his sole purpose was to entertain children and not to impress upon them some moral. The Wonderful Wizard of Oz is a great story. Telling students that the Populist movement was like The Wonderful Wizard of Oz does seem to catch their attention. It may be a useful pedagogical tool to illuminate the debate on bimetallism, but we should stop telling our students that it was written for that purpose."

I found a review of the book in the NY Times from 1900 and it does not mention anything about OZ having political or economic meaning. The book was also made into a musical a few years later and none of the reviews of the musical mention any political or economic meaning.

Do Movies About Women Make A Higher Rate Of Return?

See The Dollar-And-Cents Case Against Hollywood’s Exclusion of Women by Walt Hickey of fivethirtyeight.com. Excerpts:

 "One of the most enduring tools to measure Hollywood’s gender bias is a test originally promoted by cartoonist Alison Bechdel in a 1985 strip from her “Dykes To Watch Out For” series. Bechdel said that if a movie can satisfy three criteria — there are at least two named women in the picture, they have a conversation with each other at some point, and that conversation isn’t about a male character — then it passes “The Rule,” whereby female characters are allocated a bare minimum of depth. You can see a copy of that strip here."

"The median budget of a film that failed the test was $48.4 million. The median budget of a film that passed was $31.7 million, or 35 percent less."

"The total median gross return on investment for a film that passed the Bechdel test was $2.68 for each dollar spent. The total median gross return on investment for films that failed was only $2.45 for each dollar spent."

 Using the numbers from above, this implies that "male" movies grossed about $118 million on average (2.45*48.4). If we subtract that $48.4 cost from the $118 million, we get about a $70 million profit.

Using the numbers from above, this implies that "female" movies grossed about $85 million on average (2.68*31.7). If we subtract that $31.7 cost from the $85 million, we get about a $53 million profit.

How long does it take to shoot a movie, six months? If you are the head of a studio, would you rather make $70 million over those six months or $53 million?

Now if it takes less time to make "female" movies then things might be different. For example, if takes 75.7% as long to make a "female" movie as it takes to make a "male" movie, then the returns are the same because 53/70 =.757. And maybe it does take less time since the "female" movies cost less to make (the less time everyone works, the less they get paid).

But if they take the same length of time to make, "male" movies make 32% more money (70/53 =1.32).

There is also a marginal/average issue. The Hobbit: The Desolation of Smaug grossed $950 million and cost $250 million to make. So it got $3.8 in revenue for every $1 of cost. If they had spent another $100, would that have generated $380 million in revenue? Probably not. If so, they left alot of money on the table.

Only so many people can see a movie. At some point, the rate of return has to fall off. With "female" movies, maybe the next $1 million spent on making it might only return, say $2.67 million in revenue. Then the next $1 million, only $2.66 million. A similar drop off would occur for "male" movies.

But if alot more money is spent on any given "female" movie, then the average rate of return would be alot lower than 2.68. We just don't know how much it would fall. And making more "female" movies has the same problem. People will be less excited with each new movie of any genre and revenue will tail off.

It is a little like a grocery store that only makes a 1% profit on, say, cans of soup. But soup might have a high turnover rate. So they sell lots of them each day for a given space on the shelves. So they make a big profit.

They might make a 100% profit in caviar but sell very little each day. So it occupies very little shelf space. We don't tell the store to carry more caviar and less soup. The store already knows the right balance of each one to maximize profits. Maybe the studios know something similar about "male" and "female" movies.

Firms want to maximize profits. So they produce a quantity (Q) that makes marginal revenue (MR) = marginal cost (MC). "Male" and "female" movies could have different MR & MC lines, like in the graph below (blue for male, red for female). In this example, more "male" movies get made, they have a higher total profit and a higher profit per movie, yet "female" movies have a higher return on investment or rate of return. And since MR = MC for both types of movies, studios have no reason to produce more "female" movies or fewer "male" movies.

The first thing to notice is that the MC is 9 for "male" movies and 6 for "female" movies. That is about the cost ratio mentioned in the 538 piece.

Male movies: Q = 11, total revenue (TR, the area under the MR curve up to a Q of 11) is 159.5. Total cost is 11*9 = 99. Profit = 159.5 - 99 = 60.5. Profit per movie is 60.5/11 = 5.5. Return on investment is 159.5/99 = 1.61 (that is TR/TC). So $1 spent making a "male" movie, leads to $1.61 in revenue.

Female movies: Q = 8, total revenue (TR, the area under the MR curve up to a Q of 8) is 80. Total cost is 8*6 = 48. Profit = 80 - 48 = 32. Profit per movie is 32/8 = 4. Return on investment is 80/48 = 1.67 (that is TR/TC). So $1 spent making a "female" movie, leads to $1.67 in revenue.

Who Really Benefits From The Mortgage Tax Break?

See Mortgage Tax Break Said to Trickle Up by Nick Timiraos of the WSJ.Excerpts:

"Federal tax benefits for homeowners primarily help wealthier people borrow more money to buy larger houses rather than boost homeownership, according to a new study."

"...tax preferences, particularly the mortgage-interest deduction, have helped drive up the size of houses by as much as 18% in the nation's most affluent areas while not broadly encouraging people to buy homes."

"...a growing body of economic research that suggests Americans don't benefit broadly from the tax preferences, which the study estimates cost the government $175 billion annually in forgone revenue."

"... tax subsidies for housing "don't encourage homeownership in any meaningful way. People just end up buying larger homes," said Andrew Hanson, an associate professor of economics at Marquette University who conducted the study along with two other economists."

"...tax benefits have contributed to the average home size being about 1,400 square feet larger than if the benefits didn't exist."

"... owners benefit from capital-gains avoidance when realizing a $250,000 gain from a home sale, a provision that benefits households in coastal markets with greater home-price appreciation."

" Robert Dietz, an economist at the National Association of Home Builders, said tax filings also show larger families tend to take larger deductions, and larger families need more space."

"... tax benefits for owner-occupied homes generally accrue to a minority of households. Homeowners with incomes above $100,000 were between three and four times as likely to claim the tax benefit as those earning less than $100,000."

"The average annual savings for households claiming housing tax benefits are $12,300 in San Francisco and $10,700 in Los Angeles, compared with $1,600 in Detroit and $2,900 in Dallas, the study found.

Meantime, residents in San Francisco who earn more than $100,000 save $8,000 annually from the mortgage-interest deduction, compared with savings of $3,700 for residents who earn less than $100,000. In Detroit, higher earners save more than $4,000, while those earning less than $100,000 save $1,600."

Better Looking Real Estate Agents Make More Money

In Real Estate, Looks Can Sell: Attractive agents both list and sell homes for more money than average-looking agents, say researchers studying the effect of beauty on sales. From the WSJ, 5-31-2013. By Sanette Tanaka. Excerpts:

"When selling real estate, beauty pays off, says Sean Salter, associate professor of finance at Middle Tennessee State University and co-author of a study on how an agent's looks affect property sales. Attractive real-estate agents list homes for $20,275 more and sell for $15,622 more than average-looking agents, researchers found.

"When you see a more attractive person, you think 'Superman.' They're going to be good at whatever they do. You think they're attractive, they're smarter, they're funnier—they're probably a better real-estate agent," Prof. Salter says."

"The findings: Every one-point increase in a listing agent's attractiveness score added $10,989, on average, to the home's list price. Every one-point increase in a selling agent's score added $8,467 to the home's sale price.

"All else being equal, we give attractive people a little bump," Prof. Salter says."

"Over time, though, the price differences evened out. Although they made more money per transaction, attractive agents carried 17 fewer listings and made 11 fewer sales, on average, during the seven-year period. It also takes attractive agents longer to sell a property. That means that agents who are considered beautiful "actually are using their beauty to supplement other productive characteristics," Prof. Salter says."

Obesity And The Benefit Of Losing Weight

See The Magic Number That Could Fix America’s Weight Problem by Dan Kloeffler of ABC/Yahoo News.

"First, the average American male weighs a little more than 195 pounds, the average American female, weighs about 166 pounds. Based on these averages, and the CDC’s table for Body Mass Index if average American Joe’s and Jane’s dropped 20 pounds, they would no longer border obesity, but rather border what is considered normal weight.

Ever tried dropping a few pounds? Then you know that 20 can seem like a ton. It’s not, actually. It’s about the weight of a spare tire or a case of beer; interesting to note that one is the namesake for a belly, while the other is often the cause of its existence.

If we did lose 20, white women might find themselves with a little extra cash, according to Dr. John Cawley, economics professor at Cornell University. He examined 30 years of data, collected on a cross-section of the U.S. population. About 70,000 people were observed from different economic situations, educational levels, and races. As the subjects were monitored over three decades, Cawley noticed a pattern among white women; those that were heavier, tended to earn less money. In most cases, the wage difference was between 2.8 percent and 5.6 percent.

Keep in mind, this study did not come to the conclusion that weight gain automatically causes a drop in wages, or that lower wages causes weight gain. However, the observation is worth attention, considering that changing your figure, could change some figures.

But even without pay raise, if we lost 20 pounds, we’d have more money to spend, thanks to saving billions on healthcare costs. According the Cawley’s number crunching, those Americans considered obese spend about $2,700 a year on healthcare, over someone classified as normal weight. If we eliminated these bills by losing 20 pounds, the country as a whole, would save about $190 Billion dollars in healthcare costs associated with obesity."

100 Years Of Inflation

The Bureau of Labor Statistics has records going back to 1913. See CPI Detailed Report: Data for January 2014. It is a PDF file and you need to find Table 24.

It might be easier to see all the data at this site.

The base year is 1982-84. The Consumer Price Index was closest to 100 in 1983 when it was 99.6. In 1913 it was 9.9 and in 2013 it was 232.957. That means it took $232.957 to buy what cost $100 in 1983.

The compound annual inflation rate from 1913-2013 is about 3.21%. But some years were much higher and we had years that were negative. The CPI was 9.9 in 1913. So what cost $1.00 back then would cost over $23.00 now.

The compound annual inflation rate from 1983-2013 is about 2.873%.

Prices fell about 20% from 1929-1932 with a fall of  9.9% in 1932. The table below shows how much prices changed in each 10 year period.

Period	CPI Change
1913-1923	72.73%
1923-1933	-23.98%
1933-1943	33.08%
1943-1953	54.34%
1953-1963	14.61%
1963-1973	45.10%
1973-1983	124.32%
1983-1993	45.08%
1993-2003	27.34%
2003-2013	26.61%

The chart below shows the annual inflation rate for each year since 1914. There are two methods. One that only looks at the CPI in December of each year and finds the percentage change (blue line). The other method averages the CPI for all 12 months in each year and then finds the percentage change. Notice that they tend to be pretty close. But not always. See a post from 2010 called What Was The Rate Of Inflation Last Year? Was It Positive Or Negative?