Professors Donate More Money To Obama 8.33 to 1

This is from an article in the Chronicle of Higher Education called
Donors From Academe Favor Obama by a Wide Margin. You will probably need a subscription to read this but SAC students might be able to read it by going through our library page. Here are some excerpts:

"Through the end of last month, donors from academe had contributed just over $12.2-million to Mr. Obama, compared with just over $1.5-million to Mr. McCain..." (12.2/1.5 = 8.33)

"...studies and polls have shown that faculty members and college presidents are more likely to be registered Democrats."

"In 2000, donors from academe actually gave slightly more to George W. Bush, than they gave to Al Gore. That had changed by 2004, when educators contributed close to four times as much to John Kerry, the Democratic nominee, as to Mr. Bush. And the spread has continued to widen."

"Many donors and political scholars say Mr. Obama has become the heavy favorite among academe for two key reasons. First, many college employees are disenchanted with President Bush and the Republican administration's record on such issues as the war in Iraq, international relations, and government surveillance of private citizens. Their dissatisfaction contributes to a desire among many educators to put a new political party in the White House."

I had a similar post two years ago called Are College Professors Liberal?

A Good Summary Of The Financial Crisis

It was an article in the San Antonio Express-News this past week by financial expert Scott Burns. The title was How History Is Likely To See Our Financial Crisis. Here are the main causes of the crisis which are elaborated on in the article:

1. The institutional reduction of lending standards forced by the Community Reinvestment Act.

2. The Taxpayer Relief Act of 1997, which made homeownership the best tax-free investment in America.

3. The 9/11 terrorist attack, which resulted in artificially low interest rates.

4. "Innovation" in mortgages to comply with the CRA -- innovation that also happened to be immensely profitable to everyone in the home finance food chain.

Study: Half of American Doctors Give Patients Placebos Without Telling Them

That is the name of an article which you can read by clicking here. This is the intro:

"About half of American doctors in a new study regularly give their patients placebo pills without telling them. That contradicts advice from the American Medical Association, which recommends doctors only use treatments to which patients have given their informed consent.

"It seems like doctors are doing things they shouldn't be doing," said Irving Kirsch, a professor of psychology at the University of Hull, who has studied the use of placebos. Kirsch was not linked to the research, published Friday in the British Medical Journal."

Another part of the article says "Studies have shown that patients given a fake treatment can often improve, despite the pill having no known impact on their condition."

This reminds me of some research an economist did on placebos that I blogged about last April. That post was called Placebos: The More You Think They Cost, The Better They Work .

This also reminds me of what economists call "asymmetric information." This is a situation in which the seller knows more about a product than the buyer (sometimes the buyer knows more about something important like how healthy or risky they are as it relates to insurance). These markets do not operate optimally. My student might recall I discussed this after we played the supply and demand game in class. A good example is the used car market. Sellers usually know alot more about the product than the buyers.

Hot, Flat, and Crowded

That is the name of a book by Thomas Friedman, a New York Times columnist. I will get to it below.

But first, if any students are interested, Clemson University has an Institute for the Study the of Capitalism. They have a seminar in the summer for students. For more information click here (Hat tip to Ann Zerkle from the Heroes of Capitalism blog.

Back to Friedman's book. A few weeks ago a student mentioned that she saw him on TV. His new book seems like some sort of sequel to his earlier book The World is Flat. He is concerned about global warming, energy and population and how to keep a disaster from happening. It was well reviewed in the New York Times but it god a bad review in the Wall Street Journal. That is not surprising. So you can click on the links to see the reviews.

Here are the first and last paragraphs from the Times review followed by the last 3 paragraphs from the WSJ review:

"The environmental movement reserves a hallowed place for those books or films that have stirred people from their slumber and awoken them to the fragility of the planet: Rachel Carson’s “Silent Spring,” Bill McKibben’s “End of Nature” and, most recently, Al Gore’s Oscar-winning documentary, “An Inconvenient Truth.” Thomas L. Friedman’s new book, “Hot, Flat, and Crowded” may lack the soaring, elegiac qualities of those others. But it conceivably just might goad America’s wealthiest to face the threat of climate change and do something about it.

But these are minor infelicities when set against a book that will be accessible outside the eco-converted, is grounded in detailed research and repeatedly hits its target. It contains some killer facts — the American pet food industry spends more on research and development than the country’s power companies; Ronald Reagan stripped from the White House the solar panels that Jimmy Carter had installed as a symbolic step toward energy independence. Above all, it is fundamentally right on the biggest question of our age. If Friedman’s profile and verve take his message where it needs to be heard, into the boardrooms of America and beyond, that can only be good — for all our sakes."
Now from the WSJ:

"Toward the end of "Hot, Flat, and Crowded," Mr. Friedman wonders why we can't just implement the sort of policies he prefers. "What is our problem? If the right things to do are so obvious to the people who know the most about the energy business, why can't we put them in place?" Maybe the reason is that most people recognize a bad deal when they see one.

He cynically seems to suggest that it would help "if a few more Hurricane Katrinas hit a few more cities." Incredibly, he even flirts with the need for a dictatorship: "If only America could be China for a day," where we could cut through special interests, bureaucratic obstacles and worries of a voter backlash and simply "order top-down, the sweeping changes" needed.

I'm sure that such longing is testimony to his deep frustration with the debate. But, more important, it points to the failure of his book to make a well-reasoned case for his proposals. While occasionally interesting, "Hot, Flat, and Crowded" remains a one-sided plea for an incorrect analysis."

Want A Car That Gets 64 Miles Per Gallon?

The price of gas is coming down, but it would be foolish to think it will stay low for very long. So who makes this car and when can you get it?

"Next month in Britain, Ford Motor Co. will begin selling a diesel hatchback that gets 64 miles per gallon. Across the channel, Parisians can buy a new gas-powered compact made by General Motors Corp. that gets a nifty 47 mpg.

On these shores, neither carmaker sells anything that thrifty. Yet with Americans clamoring for fuel-efficient cars and Detroit automakers on the ropes thanks to crashing sales of gas-guzzling trucks, the question is, why aren't these vehicles here now?"

To find out why go to U.S. carmakers' renewal means vast retooling.

Japan Has A Banana Shortage And Guess What Happened?

You can read all about it here Japan Goes Bananas For New Diet. It seems that there is a new fad diet where you eat bananas in the morning. Something about increasing your metabolism. So banana imports are up 25%. It is hard to buy bananas after 12 noon since they sell out so fast. But this increase in demand (caused by an increase in tastes) has also lead to a 20% increase in the price (maybe that means that the price elasticity of supply is 25/20 = 1.25, so supply is somewhat flat and then quantity supplied is fairly responsive to changes in price). But why don't the sellers raise the price even more if they are running out so fast? It seems like price might still have room to increase and end up at a higher equilibrium. Maybe the sellers are just always playing catch up and this fad caught them by surpise.

Why Simple Models Work, According To Nobel Prize Winner Paul Krugman

This entry is basically a repeat of one from about 2 years ago but with one excerpt added in. For any of my students, here is a link that talks about why Krugman won the Nobel prize: Krugman. One of his great skills is to take complex issues and break them down to their essence with simple models that add alot to our understanding.

So here is the original post followed by an additional excerpt. Keep in mind that even supply and demand is a model. It is simple, but it can tells us alot about what happens in markets.

"I was at a symposium about a month ago and one thing we talked about was how the abstract thinking in economics can be hard for our students. Then some teachers said they tell stories. I think that a good abstraction will be a good story and vice-versa (maybe not a perfect correlation there but pretty strong). As Steven Landsburg put it one of his books, "there never was a hare and an tortoise who raced, but the story tells an important lesson that slow and steady wins the race." A great example of this is an article Paul Krugman wrote in Slate. I think he presents an abstract idea very well by telling a good story. He shows how increased productivity can reduce employment in one sector of the economy but increase it elsewhere while everyone gains. As Krugman says "A simple story is not the same as a simplistic one." (from 10-29-2006)

Now an additional quote from the Slate article. I think it summarizes how good economic analysis can be done:

"Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings."

How Did The Financial Bailout Bill Pass? Votes Were Bought

Shocking? Maybe not. Maybe it was appropriate since the bill was all about money to begin with. You can read all about in Tax breaks big and small sweeten financial bailout. The basic idea is that some representatives who voted against the bill since they were taking heat from their constituents were convinced to vote for it the second time if tax breaks were attached to the bill. In many cases, tax breaks or deductions that were set to expire soon were extended. Texans can keep deducting their sales taxes on their federal tax returns (people from states with income taxes can deduct those taxes). Here are the first two paragraphs:

"Millions of taxpayers, thousands of businesses and groups as diverse as solar power developers and natural disaster victims will see tax relief with the House vote Friday to approve and send to the president a $700 billion financial rescue plan.

The tax relief package attached to the rescue bill promotes renewable energy development and extends dozens of tax breaks from the critical research and development tax credit to breaks for such narrowly focused groups as motor sports racetrack owners, film producers and bicycle commuters."

My students might recall something like this that I talk about on the first day of the semester. Congressmen in the early 1790s voted on the "Funding and Assumpton Act" based on how much money they would receive if that bill passed. The bill paid back all of the debts from the Revolutionary War at full value (they were not getting paid back before the Constitution was passed because under the Articles of Confederation all states had to agree to a tax increase-this did not happen much so taxes were never raised to pay back the money the government borrowed to finance the war). But under the Constitution if both the House and the Senate passed a tax increase and the president signed it, it became law.

The debts were securities or bonds. Some congressman owned them. I found how much about half the congressmen owned in these bonds from a book. The ones who voted yes on the bill had an average of about $6,000 while the ones who voted no had about $700. So it is possible that money influenced the vote.

There's No Such Thing As A Free Lunch (Or A Free Concert)

A couple of weeks ago jazz legend Dave Brubeck and his quartet were the headline act for "Jazz Alive" here in San Antonio. It took place in Travis Park. But it was free. So was it worth it to go? My wife and I went and since it was free it was very crowded. So we were not able to sit to close to the stage. Then the speakers were not on very loud, either. So we had to walk around to the side and we did get a good look at Dave Brubeck playing the piano and could hear the speakers better. But lots of people were talking and moving around. For them, the jazz fest was just an excuse to hang out downtown and party. They may not even have been that interested in jazz. So the bottom line is that we did not hear the music that well and the noise and the congestion from the crowd raised the cost of the "free" concert. The benefit of going to the concert was marginal at best.

This also illustrates what economist Steven Landsburg calls the "Indifference Principle." "Except when people have unusual tastes or unusual talents, all activities must be equally desirable."

Going to the concert was no more desirable than staying at home (for most people). I am glad I went since I am a Brubeck fan, so my tastes are unusual. But even so, we did not stay very long. So what sounds like a great deal, a free Brubeck concert, really wasn't.

There Is A Great New Blog Called "Heroes of capitalism"

Here is the link:

Heroes of capitalism

Here is their description of the blog:

"The Heroes: What is a hero of capitalism? Someone who used private property to produce wealth. Everyday there will be a featured hero. Though many of the heroes had far more than one accomplishment, only one will be highlighted at a time. Private property includes the tangible (like land) and intangible (like ideas).

Capitalism is a social system based on the recognition of individual rights, including property rights, in which all property is privately owned."

I have done some research on entrepreneurs as heroes. Here is one of the interesting thing I came across while writing a paper called "Who Says Entrepreneurs Are Heroes?". (It was presented at the first HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL, March 31st, 2007 at Pepperdine University).

One thing I mention is work by Candace Allen and Dwight Lee. Their 1996 Journal of Private Enterprise article called “The Entrepreneur as Hero” won the best paper award. Perhaps the main point of their article was: “Just as the society that doesn't venerate winners of races will produce fewer champion runners than the society that does, the society that does not honor entrepreneurial accomplishment will find fewer people of ability engaged in wealth creation than the society that does.” Ms. Allen was also invited to give a speech on this at the Federal Reserve Bank in Dallas. Her speech was published in Economic Insights (from the Dallas FED). It was then reprinted in both the Independent Review and The Freeman.

Can A Product Work Just Because It's Expensive?

"brands can not only reflect who we are but also affect how we behave." That comes from today's "consumed" column in the New York Times titled Subconscious Warm-Up. It discusses whether or not wearing an expensive warmup parka like the one Michael Phelps wears will make you swim faster.

This reminds me of research done by economist Dan Ariely. He recently won an "Ig Nobel" prize for "demonstrating that expensive fake medicine is more effective than cheap fake medicine." That is from 2008 Ig Nobel Prizes honor research on stripper fertility and Coca-Cola as spermicide. Here is more on Ariely's research from "Solved: scientific riddles of flea hops, armadillo digs and lap dancers' tips:

"The Ig Nobel prize for medicine was awarded to Dan Ariely at Duke University in North Carolina for a landmark study proving that costly placebos are more effective than cheap ones. Ariely's team told volunteers they were being given a new kind of painkiller, with some receiving an expensive one and others a much cheaper version.

Even though all of them received the same sugar pills, those who thought their pills were more expensive reported less pain when they were given small electric shocks.

"This is the proudest day of my life," said Ariely. "The Ig Nobels are humorous, but the work often examines things in real life, like why buttered toast is more likely to land face down."

Ariely said his work has serious implications for the medical industry, because many patients are told they can only have cheaper drugs, or have inexpensive-looking medication, which could undermine how effective the drugs are. While the active ingredients of the drug will help treat symptoms, often they work in tandem with the placebo effect, which triggers the body's own healing mechanisms."

The Government Bailout: Are We Replacing Market Failure With Government Failure?

President Bush has signed the bailout bill. So the government will start buying assets from the banks. These assets are hard to value. They include mortgages that may or may not be good (they might not be paid back). How likely they are to be paid back is not clear, so we don't know how risky they are and therefore what price to pay for them. Will the governmnet pay too much for them, costing the taxpayers too much money or will the government pay too little in which case the banks will still be in trouble?

The plan is to get the banks into better financial shape so they can resume lending again, which is very important to the economy. Some say not acting will be worse than what is being done. But how will the government figure out the right price to pay for the assets? That will be the big question.

We could say that we have or are having market failure. That is when the market allocates too many or too few resources to some good, service or activity. Then we get too much or too little of a certain good or service. Pollution (a negative externality in economic jargon) means that too much of some good is produced, like steel. We have too little lending right now. Banks don't want to lend to businesses or other banks because they can't be sure how risky the lenders are or the value of assets they might put up for collateral.

It might be instructive to recall that the lack of this kind of information led Nobel Prize winning economist Milton Friedman to warn us that a government program might simply replace market failure with government failure. So we might be no better off or even worse off as a result of the government program. If lack of information is what caused the problem in the first place, the government can't necessarily find the right solution.

I think an article by Harvard economist Kenneth Rogoff called Significant reasons to doubt wisdom of bail-out expresses this market failure/government failure issue. Here is an exerpt:

"This brings us back to the US treasury’s plan to spend hundreds of billions of dollars to unclog the subprime mortgage market. The idea is that the US government will serve as buyer of last resort for the junk debt that the private sector has not been able to price. Who, exactly, does the treasury plan to employ to figure all this out? Why, unemployed investment bankers, of course!

Let’s ponder this. Investment bankers have been losing their cushy jobs because they could not figure out any convincing way to price distressed mortgage debt. Otherwise, their firms would have been able to tap the trillions of dollars now sitting on the sidelines, held by sovereign wealth funds, private equity groups, hedge funds, and others. Now, working for the taxpayer, these same investment bankers will suddenly come up with the magic pricing formula that has eluded them until now."

Did Economist Hyman Minsky Predict The Financial Crisis?

You can read about it at

Financial meltdown: Hyman Minsky warned us this would happen

Here is a key exerpt:

"At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they've taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. 'This is likely to lead to a collapse of asset values,' Mr. Minsky wrote.

"When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived."

According to one expert:

""We are in the midst of a Minsky moment, bordering on a Minsky meltdown," says Paul McCulley, an economist and fund manager at Pacific Investment Management Co., the world's largest bond-fund manager, in an email exchange."

I don't think that the economics profession has taken much interest in this over the years. The book Modern Macroeconomics: Its Origins, Development And Current State does not even mention his name. An earlier edition of the book from 1995 did list three of Minsky's works in the bibliography. But apparently the authors no longer thought he was worth mentioning.

One more thing, I had a post last year about another theory on why we see such great volatility in the market. It reminds me of Minksy's theories. The post was Interesting Theory on Stock Market Fluctuations. Here is the post:

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

Is The Economy A Bathtub? Are The Patient's Arteries Clogged? Welcome To The World Of Economic Metaphors

The Wall Street Journal had an article recently called In Financial Crisis, Metaphors Fly Like Bad Analogies. I guess that when times are uncertain and situations are complex, people turn to methaphors (you know instead of saying someone is fast you say "he's a deer"). Maybe this comforts us. The invisible hand is a metaphor. But if you read this article judge for yourself if these new ones work as well as the one that Adam Smith used.

Here is an exerpt from the article, a quote from the famous investor, Warren Buffett

""Unfortunately, the economy, it's a little like a bathtub," billionaire investor Warren Buffett, the Oracle of Omaha, told CNBC this week, explaining why the average American suffers when investment banks collapse. "You can't have cold water in the front and hot water in the back.""

Other metaphors invoked in the article include meltdowns, hurricanes and even Little Orphan Annie!

Is Barack Obama "Too University Of Chicago?"

That was a question asked on MSNBC’s Hardball by Chris Matthews earlier this year. I guess that since Obama taught law at the University Of Chicago and he liked talking to all the other professors there (including economists), that makes him some kind of egghead. Since I got my BA at U of C, there may be some truth to this.

So the University Of Chicago alumni magazine had an article about this. You can read it at

Elemental Obama

Here are a couple of exerpts:

"One thing is unmistakable, though: the University of Chicago is where he has drawn many crucial members of his political team. Graduate School of Business professor Austan Goolsbee is a key economic strategist."

"Many of Obama’s economic ideas, however, can be traced to Chicago. Cass Sunstein, who’s starting a new job at Harvard University this fall (he’ll maintain a visiting position at Chicago), makes the case: “Though he’s not a dogmatic follower of Milton Friedman, Obama is someone who is fully appreciative of the virtues of markets and how regulation can be counterproductive.” Sunstein points to specific proposals that originated with Chicago thinkers, including resonances from Nudge, the 2008 book on “libertarian paternalism” that Sunstein coauthored with GSB economist Richard Thaler. On health care: “It’s noteworthy,” Sunstein says, “that his approach is not a mandate; he didn’t want to coerce any adult to buy health insurance.” On the housing mortgage crisis: “His policies are oriented toward transparency and disclosure—measures that are market-improving rather than market-eliminating.” Climate change: “His solution is a market system that allows trading in greenhouse-gas emissions rights, and an auction to buy those rights.” Many Chicago economists, however, find more merit in McCain’s economic plan."

More On The Financial Crisis

Normally I would have waited until Thursday or Friday to post, but there is alot going on.

This link at Yahoo Finance has a good basic set of questions and answers about what is going on and is pretty clear.

The Wall Street Bailout Plan, Explained.

There is also more at Freakonomics (links below). The first one is about a letter to Congress signed by over 100 economists, urging Congress to be careful and deliberate on whatever they do. Then Steven Levitt questions how the government can make a profit buying these assets if the private sector does not want them. The only thing I can guess is that by buying these mortgage assets and restoring things to normal and restoring confidence, their prices will go back up and the government will make a profit. The alternative is not doing anything and see the financial system shut down (at least that is what Fed chair Bernanke and Treasury secretary Paulson say). But no one has stated how much doing nothing will cost while we know the cost of the bailout is $700 billion.

Economists on the Bailout

Bargain Prices?

It Pays To Be A Male Chauvinist Pig

Here is a link to the news article

Sexist Men Earn More Money: Study

The full study is at

Click here for the full study.

Below are exerpts from the news story.

"According to a new study, published by the Journal of Applied Psychology, men who hold traditional views of women earn more than men with more egalitarian views — a lot more.

Researchers looked at this data as a predictor of earnings and found that men who said they had more traditional gender role attitudes made on average $11,930 more annually than men in comparable jobs who had less traditional attitudes.

If the data controls for variables such as occupation, location, education, religion and hours worked, how can the gap be explained? The study did not research this specifically, but Judge says one possible explanation is salary negotiation.

"Men who see themselves as the primary wage earner, who tend to identify themselves as the wage earner in the family, they may be particularly aggressive in how they negotiate," said Judge. He added the reverse may be true for women with traditional views on gender."

Moral Hazard, More News Links On The Financial Situation

These are all from the Wall Street Journal and give a good overview of what is happening.

Shock Forced Paulson's Hand

Stopping the Panic

Government Bailouts: A U.S. Tradition Dating to Hamilton

But watch out for Moral Hazard and the Housing Crisis

Moral Hazard might be the culprit in all of this.

Freakonomics Has A Good Explanation Of The Financial Crisis

I usually don't just pass on what I saw at other blogs, especially since I have links to some goods ones. But this is such a big story that I thought it makes sense now. University of Chicago professors Doug Diamond and Anil Kashyap were the guest bloggers. The post was called

Diamond and Kashyap on the Recent Financial Upheavals.

Here some exerptss:

"The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt."

Robert Samuelson of Newsweek argues that this is all the result of what he calls
The Homeownership Obsession.

Here is an exerpt from his article:

"The real lessons of the housing crisis have gotten lost. It's routinely portrayed as the financial system run amok; the housing market became a casino. The remedy, we're told, is to enact rules that prevent a repetition. All this is partly true. But it ignores a larger truth: Our infatuation with homeownership, embedded in dozens of government policies, has turned housing -- once a justifiable symbol of the American dream -- into something of a national nightmare.

As a society, we're overinvesting in real estate. We build too many McMansions. They use too much energy, and their carrying costs, including mortgage payments, absorb too much of Americans' incomes. We think everyone should become a homeowner, when many families can't or shouldn't. The result is to encourage lending to weak borrowers who are likely to default. "

Fewer Want To Become U.S. Citizens Due To Higher Price

This may be a good example of the law of demand. Both of my macro (ECON 2301) sections recently read the chapter on immigration in the book The Economics of Macroissues. One of the things that chapter deals with are the costs and benefits immigrants face. My guess is that only one cost or benefit has changed significantly recently, the citizenship fees.

"Following a 69 percent increase last summer in citizenship fees, about 281,000 immigrants have applied to become U.S. citizens in the first half of 2008 — less than half the number of applicants in the same period last year, according to the U.S. Citizenship and Immigration Services."

To read more, go to:

Citizenship filings decline after fee hike

What if we legalized all drugs?

That is the title of an article from MSN. Here is the link: What if we legalized all drugs?. (Hat Tip: Cliff Perez, a student in one of my classes).

The article does a good job of presenting different views. The research of some economists is mentioned. We discussed issues like this in my ECON 1301 class this past week. One objection I do have to the article is that it suggests that if we legalized drugs the tax revenue the government would collect would be a benefit. No, a tax is just a transfer. Citizens have less money and the government has more. Now if the benefits from the programs those taxes fund outweigh the costs, that is good. But that may not be true for everything government does.

I was interviewed last year for the Ranger (the San Antonio College newspaper) on this issue. Here is the link: Legalization needs analysis, economics professor says. Kinky Friedman, a candidate for Governor, had suggested legalizing marijuana. I talked about the issues that needed to be addressed on that. WARNING: when you click on this link, you may see a picture of me!

Government Employees Trade Favors To The Oil Industry For Sex (and they got an ethics award from the government)

"the Interior Department agency that collects oil and gas royalties has been caught up in a wide-ranging ethics scandal - including allegations of financial self-dealing, accepting gifts from energy companies, cocaine use and sexual misconduct.

In three reports delivered to Congress on Wednesday, the department's inspector general, Earl Devaney, found wrongdoing by a dozen current and former employees of the Minerals Management Service, which collects about $10 billion in royalties annually and is one of the government's largest sources of revenue other than taxes."

That is from: Sex, drug use and graft alleged in U.S. Interior Department

(see below for the link about their ethics award)

The article also says:

"The report alleges that eight officials in the royalty program accepted gifts from energy companies whose value exceeded limits set by ethics rules. These included golf and ski outings; meals and drinks; and tickets to a Toby Keith concert, a Houston Texans football game and a Colorado Rockies baseball game.

The investigation also concluded that several of the officials "frequently consumed alcohol at industry functions, had used cocaine and marijuana, and had sexual relationships with oil and gas company representatives.""

Here is another article on this: Federal oil lease employees had sex with industry reps

In my 1301 class, we just read a chapter called "Sex, Booze and Drugs" (from the book The Economics of Public Issues), so this is a timely story!

But this story points out two important economic concepts. One is The capture theory of regulation. The idea is that although the government agencies are supposed to make sure companies follow the rules to benefit society, those companies can influence or control the regulators. They do this by lobbying (and giving perks like in these artilces). Also, the industry has the interest and incentive to influence these agencies while the rest of us are too busy to keep tabs on it. And sometimes the regulators are former industry employees.

The other concept it illustrates is The law of unintended consequences. We may have well-meaning laws that should benefit society but people react to those laws and change their behavior sometimes in unexpected and undesirable ways. We see this here in these articles. Another example would be rent controls. If you legally keep down the price of rent, landlords have less incentive to keep their buildings or construct new apartments. So the rental market (and renters) suffer even though that was not the intended result.

Days Before Scandal, Interior Got Ethics Award

America's Most Affordable Places to Retire

Are they kidding? As soon as more people start moving to these places, costs go up and they won't be so affordable any more. I posted something like this recently and discussed an economic concept called "the indifference principle." That was about affordable housing markets in general. Now these places for retirees might specialize in goods and services that retirees like, so maybe the older folks should move there. But this is like saying that if you like to surf, move to California and then saying "here are the cheapest places for surfers." They won't stay cheap for long.

I was not planning to post today but this came up. My next planned post was tomorrow and it will be something sexy.

America's Most Affordable Places to Retire

Economists Discover That Watching Television Is Not All Bad

This was recently reported in the Wall Street Journal. Here is the link:

A New View On TV

One of the big issues is what you stop doing or what you do less of when you watch TV. If it replaces something "bad," then TV can have benefits. For example:

"The economists found that television was especially positive for children in households where English wasn't the primary language and parents' education level was lower. "We don't exactly know why that is, but a plausible interpretation is that the effect of television on cognitive development depends on what other kinds of activity television is substituting for," says Mr. Shapiro, 28.

Growing up in the 1950s, Sonia Manzano, who plays Maria on "Sesame Street," was part of the first generation of children who watched television. Born in the South Bronx to Spanish-speaking Puerto Rican parents, she says that television "gave me a view of the world -- it gave me sort of a sense of what it was to be an American and what that was about.""

This describes the methods:

"The variation Mr. Gentzkow and Mr. Shapiro exploited was the timing of the introduction of TV into different cities. Television began taking off in the U.S. in 1946, after a wartime ban on TV production was lifted. But the Federal Communications Commission stopped granting new commercial television licenses from September 1948 to April 1952 while it made changes in allocating broadcast spectrum. There was a long lag between when some cities got television and when others did.

The economists then looked at results of a survey of 800 U.S. schools that administered tests to 346,662 sixth-grade, ninth-grade and 12th-grade students in 1965. Their finding: Adjusting for differences in household income, parents' educational background and other factors, children who lived in cities that gave them more exposure to television in early childhood performed better on the tests than those with less exposure."

The 10 Most Affordable Housing Markets

You can find out where they are by reading the following article:

The 10 Most Affordable Housing Markets

But if more people move to these cities, prices in those cities will rise and they won't be very affordable anymore. This illustrates what economist Steven Landsburg calls the "Indifference Principle."

"Except when people have unusual tastes or unusual talents, all activities must be equally desirable."

So unless you really like where you live or you have no interest in moving to these "affordable places," they will not stay very affordable for long. All the people who don't care about where they live and only want to minimize cost will start moving there. But that will drive up costs. If people don't move there because they don't want to move to those cities (like Youngstown, OH or Indianapolis, IN), finding out that they are "affordable" won't have any effect on them.

Texas economy stronger than most

That is what a current government report says. It does not say, but most likely Texas is doing better than the rest of the country because of higher oil prices. Here is the article:

Fed survey shows Texas economy stronger than most

High Gas Prices Spur Sales Of Electric Bikes

This is what economic theory predicts. With higher gas prices, people will seek a better deal somewhere. Here is the link to the article. Electric bikes selling briskly as gas prices climb. Here is a brief exerpt:

"Official sales figures are hard to pin down, but the Gluskin-Townley Group, which does market research for the National Bicycle Dealers Association, estimates 10,000 electric bikes were sold in the U.S. in 2007, up from 6,000 in 2006. Bert Cebular, who owns the electric bike and scooter dealership NYCeWheels in New York, said his sales are up about 50 percent so far this year over last. Amazon.com Inc. says sales of electric bikes surged more than 6,000 percent in July from a year earlier, in part because of its expanded offerings."

How Much Money Does It Take To Be Rich?

This was the topic of a recent article in the Houston Chronicle called Got $5 million? Consider yourself rich, experts say. Here is a brief exerpt of the article:

"most people in finance use the $5 million mark, and apparently others agree. In a January telephone survey of 253 people with at least $500,000, 45 percent said it takes at least $5 million to qualify as rich.

Another 25 percent said $25 million, and 8 percent picked $100 million, according to the Spectrem Group, a consulting firm that specializes on research about wealth. For the Internal Revenue Service, earning $349,700 qualified for the top-tier 35 percent tax bracket in 2007.

The Securities and Exchange Commission, meanwhile, requires individuals to earn $200,000, couples $300,000 or households to show they have $1 million in the bank before they're considered wealthy enough to safely invest in lightly regulated instruments like hedge funds.

The U.S. Census Bureau, which in its most recent annual Current Population Survey in 2006, estimated that 2.3 million households — or 1.9 percent — brought in at least $250,000, the highest figure it measures."

Colbert bump' benefits Democrats

It seems that when Democrats appear on the Colbert Report, they get an increase in campaign contributions. But this does not happen to Republicans who appear on the show. Here is the link:

Colbert bump' benefits Democrats

Should We Pay Students To Study?

I am curious to see what my students think of this. But before I get to it, here are links to stories about "Obamanomics" (which also have some info on McCainonomics, I guess).

New York Times

Barrons

Here is the link to the Wall Street Journal article on the studying issue and its intro. I also have a link to another story about this in case anyone can't get into the WSJ link.

When Schools Offer Money As a Motivator

"More and more school districts are banking on improving student performance using cash incentives -- a $1,000 payout for high test scores, for example. But whether they work is hard to say.

In the latest study of student-incentive programs, researchers examining a 12-year-old program in Texas found that rewarding pupils for achieving high scores on tough tests can work. A handful of earlier studies of programs in Ohio, Israel and Canada have had mixed conclusions; results of a New York City initiative are expected in October. Comparing results is further complicated by the fact that districts across the country have implemented the programs differently."

Pay for grades — does it work?

Is tax 'rebate' doomed to fail?

That is the title of an article that you can read here. People need to spend the money if the rebate is going to help the economy (so AD can increase, if we are below the full-employment GDP). They might not. And how much they spend might depend on what you call it. Calling it something else and not a rebate might make a difference.

Higher Food Prices May Be Here to Stay

That was the title of an article in the Wall Street Journal on April 14. You can read it here. The wages farmers have to pay are rising, land prices are rising, energy prices are up, chemical prices are up. Here is an excerpt:

""Diesel, fertilizer, insecticide, grass-killing chemicals, they're all going up -- just like a shadow," says Samear Ruengrit, a 57-year-old farmer who grows rice about 45 minutes north of Bangkok. His average costs are now about 50% higher than last season, he says.

Farming costs are climbing for several reasons. Higher fuel prices make it more expensive to run tractors and other equipment, while pricier natural gas -- needed to make some fertilizers -- has also played a role. Equipment prices are rising because of strong demand for farm machinery in China and other developing countries, along with rising costs for raw materials like steel.

Wages are up in some parts of the world because many farms are expanding to meet higher demand, putting pressure on labor supplies, especially in countries like Australia where many workers are already occupied in commodity-based trades like mining."

Male sex hormone may affect stock trades

That is the name of an article you can read here. Here is an excerpt:

"Coates and Joe Herbert studied male financial traders in London, taking saliva samples in the morning and evening. They found that levels of two hormones, testosterone and cortisol, affected traders.

Those with higher levels of testosterone in the morning were more likely to make an unusually big profit that day, the researchers found. Testosterone, best known as the male sex hormone, affects aggression, confidence and risk-taking. Cortisol is tied to uncertainty, novelty and unpredictability, "which pretty much describes a trader's life," Coates said in a telephone interview.

Coates and Herbert's study comes less than two weeks after U.S. researchers reported that young men shown erotic pictures were more likely to make a larger financial gamble than if they were shown a picture of something scary, such as a snake, or something neutral, such as a stapler."

Does Or Can Money Buy Happiness?

You might think I am kidding. But some research says yes and some no. The article is Maybe Money Does Buy Happiness After All from the NY Times. Post World War II opinion polls seemed to show that Japanese people were not getting any happier even though their economy grew. Here is an exerpt from the article:

"This contrast became the most famous example of a theory known as the Easterlin paradox. In 1974, Richard Easterlin, then an economist at the University of Pennsylvania, published a study in which he argued that economic growth didn’t necessarily lead to more satisfaction.

People in poor countries, not surprisingly, did become happier once they could afford basic necessities. But beyond that, further gains simply seemed to reset the bar. To put it in today’s terms, owning an iPod doesn’t make you happier, because you then want an iPod Touch. Relative income — how much you make compared with others around you — mattered far more than absolute income, Mr. Easterlin wrote."

Anthropology, Cell Phones, Economics and World Poverty

Yes, they do all go together. The NY Times Magazine today had an article about an anthropologist who works for Nokia who visits lots of poor countries trying to find out the kind of cell phones that they would like and could afford. But cell phones can be vital to people in these countries, improving their well being in lots of surprising ways by helping them find jobs and customers and creating an informal banking network. This fascinating article is titled Can the Cellphone Help End Global Poverty?.

The World's Oldest Profession Uses The Latest Technology

Prostitution is sometimes called the world's oldest profession. I don't know if that is true, but they are certainly innovative when it comes to technology. They use cell phones for text messaging, website allow you to rate the prostitutes and they use anti-bugging devices. It makes me wonder what kind of industry it is. It could be competitive if there are no barriers to entry and the competition would force all the suppliers in the industry to keep up with by innovating and adopting the latest technology. But it could be monopolistic competition since not all suppliers are the same-there could be product differentiation. Anyway, the article is Prostitution Advances in a Wired World. Here is an excerpt:

"There are a host of online message boards where clients or potential clients can discuss, rate and exchange information about individual women. Technology also eases the business-end of things, Weitzer says. While clients are surveying potential companions, escort-service managers can look into clients with a background check or even a simple Google search. Payment is easier, too. "It's often convenient to have an account established with a balance, so if you have the last-minute urge, you don't have to worry about getting money into the account," says Norma Jean Almodovar, executive director of the sex workers' rights organization COYOTE ("Call Off Your Old Tired Ethics") in Southern California."

and

"Not only can prostitutes and escort services now run more efficient businesses, but they can leverage word-of-mouth advertising in new ways to build their brands and troll for clients. Online social communities built around the escort and sex worker industries can solidify customer loyalty."

Placebos: The More You Think They Cost, The Better They Work

It is the miracle cure of the ages. Read all about it at Placebo Nation: Just Believe. You might see an ad first, but just close it. Here is an exerpt:

"Ariely's curiosity about the power of expectation—which he explores in his new book, "Predictably Irrational"—inspired a study of what affects those expectations. He and colleagues gave 82 volunteers a brochure explaining that they would be testing a new pain drug called Validone that worked like codeine, but faster. (It was actually a placebo.) Each then received a series of electrical shocks on their wrists, rating them from "no pain at all" to "the worst pain imaginable." Each then took a "Validone." Half were told it cost $2.50, the other half that it cost a dime. They then received shocks again. Of those who got the $2.50 pill, 85 percent felt less pain from the same voltage than before taking it; 61 percent of those taking the cheap pill felt less pain, the scientists reported last week in The Journal of the American Medical Association. The pricier the drug, the higher the expectation of efficacy, and the stronger the placebo effect."

The Flutie Effect: When The Teams Win, More Students Apply To The College

The article is called ‘Flutie Effect’ study shows success on fields and courts really does mean more applications. Back in 1984, Boston College quarterback (and Heisman Trophy winner) threw a miraculous pass to win a college football game against Miami. This caused more students to apply to Boston College. A couple of economists have studied this for both college basketball and football. Here are some of their findings:

— Schools that make it to the Sweet 16 in the men’s basketball tournament see an average 3 percent boost in applications the following year. The champion is likely to see a 7 to 8 percent increase, but just making the 65-team field will net schools an average 1 percent bump.

— Similarly, applications go up 7 to 8 percent at schools that win the national football championship, and schools that finish in the top 20 have a 2.5 percent gain

It was even better for George Mason last year when they made the final four.

Lighthouses Are Not Always Public Goods

This is really intersting. It comes from the Public Goods and Externalities entry at the Concise Encycopedia of Economics. It is by Tyler Cowen. It should also be mentioned that Nobel Prize winner Ronald Coase wrote an article about this that appeared in the Journal of Law and Economics in 1974. So here is the quote from the Tyler Cowen article:

"Lighthouses are one of the most famous examples that economists give of public goods that cannot be privately provided. Economists have argued that if private lighthouse owners attempted to charge ship-owners for lighthouse services, a free-rider problem would result. Yet lighthouses off the coast of nineteenth-century England were privately owned. Lighthouse owners realized that they could not charge shipowners for their services. So they didn't try to. Instead, they sold their service to the owners and merchants of the nearby port. Port merchants who did not pay the lighthouse owners to turn on the lights had trouble attracting ships to their port. As it turns out, one of the economics instructors' most commonly used examples of a public good that cannot be privately provided is not a good example at all."

Save 54 Cents A Gallon On Gas

How? Read Slow Down a Little, Save a Lot of Gas. Your car gets less efficient as you start going faster than 60:

"Traveling faster makes the job even harder. More air builds up in front of the vehicle, and the low pressure "hole" trailing behind gets bigger, too. Together, these create an increasing suction that tends to pull back harder and harder the faster you drive. The increase is actually exponential, meaning wind resistance rises much more steeply between 70 and 80 mph than it does between 50 and 60."

"Engineers at Consumer Reports magazine tested this theory by driving a Toyota Camry sedan and a Mercury Mountaineer SUV at various set cruising speeds on a stretch of flat highway. Driving the Camry at 75 mph instead of 65 dropped fuel economy from 35 mpg to 30."

That is about a 14% drop in efficiency. If you pay $3 per gallon, it costs you about 42 cents a gallon. The faster you go above 60 and/or the more you pay for gas, the bigger the decline in fuel economy. Truck drivers are now slowing down to save money. Read Drivers slow down their tractor-trailer rigs to save fuel.

Farmers In Argentina Protest In Favor (not against) Free Trade

Argentina is taxing the export of food. That makes it harder for farmers to sell their goods overseas. They will, on net, get less for what they sell. So they are blocking traffic as a protest. Maybe the government wants to keep food in the country to make sure everyone has enough to eat. But if farmers make a lower profit due to the tax, then they will have less incentive to grow food. That is the opposite of what the government probably intended. The article is called Argentine Farmers Restore Roadblocks After Talks With Officials .

Don't Like The Price Tag At The Store? Try Haggling

There was an interesting article on this in The New York Times last Sunday. It was titled Even at Megastores, Hagglers Find No Price Is Set in Stone. Here is the intro:

"Shoppers are discovering an upside to the down economy. They are getting price breaks by reviving an age-old retail strategy: haggling. A bargaining culture once confined largely to car showrooms and jewelry stores is taking root in major stores like Best Buy, Circuit City and Home Depot, as well as mom-and-pop operations. Savvy consumers, empowered by the Internet and encouraged by a slowing economy, are finding that they can dicker on prices, not just on clearance items or big-ticket products like televisions but also on lower-cost goods like cameras, audio speakers, couches, rugs and even clothing. The change is not particularly overt, and most store policies on bargaining are informal. Some major retailers, however, are quietly telling their salespeople that negotiating is acceptable."

Basketball on Office Monitors Madness for Business

Here was a brief item at the Internet Movie Database. The NCAA basketball tournament will cause lost productivity since people will be watching at work. Also, with so many people watching on their computers at work, servers might crash.

"A leading business consultant has predicted that CBS's online "March Madness On-Demand," in which it is streaming all 63 final college basketball games free, will cost American businesses about $1.7 billion in lost productivity. Rick Cobb, a vice president at business consultants Challenger, Gray & Christmas, told Newsweek magazine that the estimate is based on the number of workers known to participate in office pools and CBS's figures showing that 1.4 million unique online viewers watched on average 1.9 hours of its coverage last year. Predicting that that number will rise substantially this year, Cobb said another source of lost productivity could be office servers unable to deal with demands for the webcasts -- and crashing. "When servers go down, most people want to head home," he observed."

Capitalism Has Entrepreneurs And The Soviet Union Had "Expediters"

In capitalism, alot of market activity is driven by entrepreneurs who start new businesses, create new products and innovative technologies. They see an unmet need and try to fill it. This makes the whole system work better.

But what if you have a planned or command economy? The government decides what needs to be produced and how much. The government also had to make sure the factories got all the resources they needed to produce the quantity of goods they had been told to produce. But having a plan that worked, so that each factory got exactly the resources it needed, no more no less, was practically impossible.

So how would a factory manager get what he needed? He would send an expediter. They would bribe or bargain the producers of needed resources to get what the factory needed. This article has a good description.

"Suppressing a market is a bit like squeezing a balloon—the trade will usually pop up somewhere else. The Soviet Union was full of markets. The factory in north Vladivostok would be allocated too much sheet metal but not enough coal. The factory in south Vladivostok had the reverse problem. Both factory managers would ask for extra resources, but in the command-and-control system the incentive was to ask for more of everything, with little hope of success. So, the managers would quietly, and illegally, do a deal with each other. Professional expediters would be sent out to barter for scarce inputs, and the informal market reached a high level of sophistication."

Economist Robert Heilbroner also has a good explanation of this. It is from his article Socialism.

"Through the sixties the Soviet economy continued to report strong overall growth—roughly twice that of the United States—but observers began to spot signs of impending trouble. One was the difficulty of specifying outputs in terms that would maximize the well-being of everyone in the economy, not merely the bonuses earned by individual factory managers for "overfulfilling" their assigned objectives. The problem was that the plan specified outputs in physical terms. One consequence was that managers maximized yardages or tonnages of output, not its quality. A famous cartoon in the satirical magazine Krokodil showed a factory manager proudly displaying his record output, a single gigantic nail suspended from a crane.

As the economic flow became increasingly clogged and clotted, production took the form of "stormings" at the end of each quarter or year, when every resource was pressed into use to meet preassigned targets. The same rigid system soon produced expediters, or tolkachi, to arrange shipments to harassed managers who needed unplanned—and therefore unobtainable—inputs to achieve their production goals. Worse, in the absence of the right to buy their own supplies or to hire or fire their own workers, factories set up fabricating shops, then commissaries, and finally their own worker housing to maintain control over their own small bailiwicks."

Report Says We Won't Have A Recession This Year

The article is Economy weak but not enough for recession: report. A recession means that we have two straight quarters of falling real GDP (a quarter is 3 months). But this forecast says that real GDP will grow 1.5% this year (even though it is projected to fall for one quarter). Unemployment is projected to be 5.3% this year and 5.6% next year. This not good news, but 5.6% is well below the average unemployment rate of the 1970s as well as the 1980s (6.21% & 7.27%, respectively). But if oil keeps going up (now $108 per barrell), we could have stagflation, meaning rising inflation at the same time we high have unemployment.

Get Around A Ban On Smoking In Bars By Turning Your Patrons Into Actors

Not kidding. This is going on in Minnesota. Read Theater of the absurd: Minnesota bars thwart smoking ban by declaring everyone an actor. Here is an exerpt:

"A new state ban on smoking in restaurants and other nightspots contains an exception for performers in theatrical productions. So some bars are getting around the ban by printing up playbills, encouraging customers to come in costume, and pronouncing them “actors.”"

This reminds me of the law of Unintended Consequences. It says

"The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or "unintended." Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it."

"For instance, the United States has imposed quotas on imports of steel in order to protect steel companies and steelworkers from lower-priced competition. The quotas do help steel companies. But they also make less of the cheap steel available to U.S. automakers. As a result the automakers have to pay more for steel than their foreign competitors do. So policy that protects one industry from foreign competition makes it harder for another industry to compete with imports."

What An Economist Said About The Movie "A Beautiful Mind"

In one of my classes this week we played "The Prisoner's Dilemma" game. The subject of the movie "A Beautiful Mind," the mathemetician John Nash, was an expert in game theory. To see what this game is about click here. It is another blog entry which has links to sites which explain a little about game theory. The economist Steven Landsburg reviewed the movie in the Wall Street Journal. That review was title "Mindless". Landsburg explains that the bar scene really does not disprove Adam Smith's idea of the Invisible Hand.

In Poland, It Is Death OR Taxes

To see the original story, click here. Here is the story from the Washington Post:

"Once you've been declared dead in Poland, it's not easy to convince officials that you're alive and well.

Piotr Kucy, 38, was listed as having drowned last summer. When he learned of the mistake, Kucy notified government officials. But he is still listed as dead in government files, which prevents him from working and having health insurance.

"This citizen does not exist," a Polish official said of Kucy.

On the bright side, he doesn't have to pay taxes."

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

To get a handle on this, you can read Money and Politics in the Land of Oz By Quentin P. Taylor. Below is an exerpt:

"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?"

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."

A Solution To The Health Care Problem? Change In Behavior

We all know about rising health care costs. The health care industry is now about 17% of GDP. How behavior changes can help are in this article Gentlemen, 5 Easy Steps to Living Long and Well.

Here is an exerpt:

"Living past 90, and living well, may be more than a matter of good genes and good luck. Five behaviors in elderly men are associated not only with living into extreme old age, a new study has found, but also with good health and independent functioning.

The behaviors are abstaining from smoking, weight management, blood pressure control, regular exercise and avoiding diabetes. The study reports that all are significantly correlated with healthy survival after 90."

More Bad Economic News

Here are exerpts from an article:

"...factories get squeezed by rising prices for energy, materials and labor" and

"stricter enforcement of labor and environmental standards, are causing some manufacturers to leave for lower-cost markets" and

"Costs have climbed so much that three-quarters of businesses surveyed...believe [the country] is losing its competitive edge."

The country? Is it the USA? No, it is China. You can read about it in As business costs rise in China, some firms exit for cheaper markets.

Trees vs. Solar Power?

What is more important, having trees or using renewable energy like solar power? It seems that if your trees block the sun from getting through to your neighbor's solar cells, you have to cut them down. But if your trees were already there and then your neighbor put in the cells, you don't have to cut them down. This is a California law which says:

"The law requires homeowners to keep their trees or shrubs from shading more than 10 percent of a neighbor's solar panels between 10 a.m. and 2 p.m., when the sun is strongest. Existing trees that cast shadows when the panels are installed are exempt, but new growth is subject to the law."

You can read about this at Neighbors Clash Over Trees, Solar Power. My understanding of this case is that these Redwoods kept growing and are now casting a shadow over the solar cells that were installed after the Redwoods were there, but not as tall. This case reminds me of a blog entry I made last year called Environmentalists vs. . . . other environmentalists? Or, are birds more important than clean, cheap energy?. The idea there is that wind turbines might harm birds.

This all reminds me of The "COASE THEOREM" . It is an economic idea from the Nobel Prize winning economist Ronald Coase. It should not matter who has the property right in determining the most efficient outcome. In this case, the Redwoods owners could pay money to their neighbors so they would not have to cut them down. But the Redwood neighbors would have to care more about their trees than the neighbors care about renewable energy. If the court had ruled for the Redwood owners, and the solar neighbors cared more about their cause, they could pay the neighbors into cutting them down. So it does not matter who owns what. Whether the trees get cut down or not depends on who values their good or cause the most.

Unemployment Has Been Good Recently

The time chart below shows the U.S. unemployment rates since 1970. We are at 4.9% right now. That is low, but not as low as the 4% we had in 2000. But if you look back at the 1970s and 1980s, we are still doing well.



But, as my students know, unemployment could be low if there are alot of discouraged workers out there, people who are not looking for jobs (they have given up). They are not part of the calculation of the UE rate. But, in the graph below, the blue line is the labor force participation rate (the % of adults who are working or trying to find work). The pink line represents the % of the adult population that have a job. Although not as high as around 2000, both of these numbers are higher than for the 1970s and most of the 1980s. So alot of people are trying to find jobs and alot of them do have jobs, by historical standards.

Poverty Might Affect The Brain

Here is brief idea of what is going on:

"a deprived childhood may affect the physical development of the brain and render its owner less intellectually capable." That comes from The London Times article It’s just as you might think: being poor can damage your brain. Another article, Study shows stress affects brain growth, says "CHILDREN who suffer deprivation in early life show altered patterns of brain growth by the time they are teenagers." This article also said "the change in brain development might be a consequence of high blood levels of stress" and that "children who lived in poverty were likely to suffer more adverse consequences of stress." Another article, from the Financial Times, Poverty mars formation of infant brains, also discusses the issue.

But here is a quote from the Chronicle of Higher Education which tells a different story:

"While many of the researchers at the session supported the hypothesis that socioeconomic status plays a strong role in affecting brain development in children, Mabel L. Rice, director of the doctoral program in child language at the University of Kansas, described a new study that goes against the hypothesis, at least in the case of early verbal abilities. In tests of 1,766 children in Australia, Ms. Rice and her colleagues found no correlation between a child's verbal abilities at 24 months old and the parents' socioeconomic status or their education levels.
"The conclusion is that we don't want to assume too strongly that children of poverty are unable to acquire early vocabulary," she told The Chronicle."

That is not available online unless you subscribe to the Chronicle.

What the stimulus package means for you

I wanted my students to have some idea of how the economic stimulus plan might work and effect them. President Bush has signed the bill. So people will be getting rebate checks in a few months. How much you might get depends on your income, marital status and number of children. To read all about it go to What the stimulus package means for you. As I have explained in class, the hope is that people will spend this money, causing an increase in aggregate demand in the flat or relatively flat part of short run aggregate supply. This will increase Q or GDP in the economy, which will cause firms to hire more workers without causing might inflation (inflation could always occurr if SRAS shifted left if, for example, oil prices shoot up again). Also, lower interest rates will encourage people to borrow and spend, shifting AD to the right.

A Special Valentine's Message On Romantic Love

Abstract: "Romantic love is characterized by a preoccupation with a deliberately restricted set of perceived characteristics in the love object which are viewed as means to some ideal ends. In the process of selecting the set of perceived characteristics and the process of determining the ideal ends, there is also a systematic failure to assess the accuracy of the perceived characteristics and the feasibility of achieving the ideal ends given the selected set of means and other pre-existing ends.
The study of romantic love can provide insight into the general process of introducing novelty into a system of interacting variables. Novelty, however, is functional only in an open system characterized by uncertainty where the variables have not all been functionally looped and system slacks are readily available to accommodate new things. In a closed system where all the objective functions and variables must be compatible to achieve stability and viability, adjustments in the value of some variables through romantic idealization may be dysfunctional if they represent merely residual responses to the creative combination of the variables in the open sub-system."

The author was K. K. Fung of the Department of Economics, Memphis State University, Memphis. It was from a journal article in 1979. More info on it is at this link. The entire article, which is not too long, can be found at this link. I originally became aware of this back in the early 1980s when another student at the University of Chicago showed it to me. It was in a magazine. The student was David Brooks, who now writes for the New York Times.

When Self-Interest Isn’t Everything

It might seem surprising to see an economist write an article with this title, but it was in the New York Times a few days ago by Robert Frank which you can read here. One thing he says is

"Self-interest is surely an important human motive, perhaps even the most important motive much of the time. But it is never the only important motive."

Another famous economist, Frank Knight, wrote in 1934:

"Life is at bottom an exploration in the field of values, an attempt to discover values, rather than on the basis of knowledge of them to produce and enjoy them to the greatest possible extent. We strive to 'know ourselves,' to find our real wants, more than to get what we want."

You Are What You Spend

That is the title of a very interesting New York Times article which you can read here. It is by two economists who work at the Federal Reserve bank in Dallas. They show that the level of consumption between rich and poor in this country is not as big as the difference between income. The poor often have resources that the government does not count, like capital gains. Here is one really interesting quote:

"At the average wage, a VCR fell from 365 hours in 1972 to a mere two hours today. A cellphone dropped from 456 hours in 1984 to four hours. A personal computer, jazzed up with thousands of times the computing power of the 1984 I.B.M., declined from 435 hours to 25 hours. Even cars are taking a smaller toll on our bank accounts: in the past decade, the work-time price of a mid-size Ford sedan declined by 6 percent."

Studies Warn Biofuel Crops Could Accentuate Global Warming

That is the title of an article you can read here. In one of my classes this week, we read about ethanol in the book The Economics of Public Issues. This article talks about the environmental problems that biofuel crops might cause. Here is the first paragraph:

"Just one month ago, a study conducted by a team of American researchers concluded that there was nothing more environmental-friendly than the biofuel crops, that could reduce the greenhouse gas emissions by 94% and produce five times more energy. New studies however warn that by transforming the various ecosystems into biofuel crop fields would only accentuate the global warming phenomenon rather than reducing it. According to the latest estimations, converting natural ecosystems into biofuel crop fields is likely to release up to 420 times more carbon."

United Air to Charge Some Fliers for 2nd Checked Bag

That is the title of an article you can read here. Doing this will encourage people to bring fewer suitcases or pack their suitcases more efficiently. It could mean less weight on the plane, which is important with higher fuel costs. It makes sense that those with more bags pay more since they use more fuel. But people might just get a bigger suitcase. That one suitcase could carry all that they want and would mean no extra charge. You say the airlines should weigh everyone and charge people partly based on their weight. But that would mean weighing everyone. That would mean buying scales and taking the time to weigh everyone. So the suitcase policy is easier to carry out. It will work as long as people just don't go out and buy one big suitcase.

Amazon.com Sells Book For Less Than The Publisher

I got an email from Amazon.com the other day offering to sell me a book for abut $14. It is a baseball book by Bill James, the well known stat guru. The book is published by ACTA Sports. A couple of hours later I get an email from ACTA sports wanting to sell it to me for $21.95 and they charge more for shipping than Amazon.com. So, of course, I ordered it from Amazon. It made me wonder, does ACTA sports know that I could by it for alot less at Amazon? Maybe not everyone gets that offer from Amazon. Maybe I got it because I have ordered other books from them and people who have not ordered much from Amazon before would not get the offer.

One way this might make sense for ACTA is that their email might simply alert me and others that a book is available. They might even know that some of us will head over to Amazon to buy it, but some won't and they will get a few extra bucks from them. In any event, the email might be a pretty cheap way to advertise.

Community Colleges Central to Nation's Welfare

The College Board released a report that suggests that strengthening community colleges is a key to maintaining economic growth in the future. You can read a news article about this article here. As the world economy grows more competitive, community colleges will play a significant role in training and re-training workers in new skills as well as exanding educational opporunties for all Americans.

Some Good Insights On Immigration

In one of my macro sections we read a chapter in The Economics of Macroissues on immigration. Of course, it is a big issue in this election year. The Sunday New York Times magazine had an in-depth article on immigration a couple of years ago. The author, Roger Lowenstein, talked to two of the top economists who study immigration, David Card and George Borjas. The article was called The Immigration Equation. The article paints a generally favorable view of immigration, although Borjas finds a downside.

Venezuela's Chavez threatens to seize properties, citing price speculation

That is the title of an Associated Press article that you can read here. This relates to the first chapter of the book The Economics of Macroissues. It discusses how societies where he government can take away your property easily don't grow as fast in terms of per capita income. This could be a problem for Venezuela if Chavez starts doing this (or more of it).

The article also mentions that there are shortages of products like sugar whose prices are controlled. This is basic chapter 3 material in all of the textbooks I am using this semester. Chavez blames inflation on those hording goods. But we expect supply to decrease (that is, the supply line shifts to the left) when sellers expect higher prices in the future.

Government has no business meddling in the normal business cycle

That is the title of David Hendrick's business page column in the San Antonio Express-News the other day. You can read it here. Here is an exerpt:

"The "stimulus" being sought is too late. The recession already has started. By the time taxpayers find "more money in their pockets," to quote the Bush administration, the downturn will be easing."

This is similar to something we call "the policy lag" problem in economics. We can't always get a policy to work at the time we want it to. In fact, there has been some good news lately. The Wall Street Journal reported

"The number of U.S. workers filing new claims for unemployment benefits fell unexpectedly last week for a fourth-straight week, suggesting that a resilient labor market at the start of the year might keep the U.S. economy from sliding into recession." You can read that story here.

Should Movie Downloaders Who Clog The Internet Pay More?

The San Antonio-Express News had an article titled In a test, Time Warner Net hogs will pay for bytes. The basic idea is that people downloading movies use up lots of bandwidth and that slows down things for the rest of us that use the internet for more basic purposes. Since they are slowing things down, maybe they should pay more. So if they do this less (which would follow the law of demand), then things would go faster for the rest of us. Some experts say that more broadband infrastructure could take care of the problem.

But these big downloaders might be creating what we call negative externalities. Some people impose costs on others like drivers who create pollution. One solution to that is to tax the polluting activity. This higher price on the movie downloaders is like a tax.

This is also like paying a toll on highways. When few people are on the highways, you don't need tolls. But if things get congested, one way to unclog them is to charge a toll. I had a blog entry on this a couple of months ago. You can read that here.

Best Cities For Jobs In 2008

That is the name of an article that you can read here. Texas cities and Salt Lake City are high on the list. But it is never clear what anyone should do with this info. Should you move to one of these places? Maybe not, if lots of other people are. In that case the number of applicants might grow to more than the number of job openings. This kind of thing happens all the time. If we designate certain cities as the best to live in, more people might move there, driving up real estate prices and housing prices (and possibly creating other problems, like more air pollution). Then those places are not so great anymore.

Kidnapping: An Occupational Hazard Faced by Drug and Immigrant Smugglers

Every occupation has its drawbacks. You probably think that they need to worry about shooting it out with rival gangs in turf wars. But there has been a rash of kidnappings in Phoenix. You can read about it in Kidnappings cross the border. Here is an exerpt:

"The kidnap victims are typically drug- or immigrant-smugglers, who are seen as inviting targets because they have a lot of money, they can raise large sums of cash on short notice, and they are unlikely to go to the police, for fear their own shady dealings will come to light."

I guess this is the high price of success. Many cases go unreported. Apparently the victims' families don't want to call the police. So they are more of a target and they can't go the authorities.

Do Monkeys Pay for Sex?

That is the title of a Time Magazine article which you can read here. The male monkeys pay for sex by grooming the female monkeys. The article discusses how this behavior conforms to our ideas about supply & demand and scarcity. "The study also showed that the number of minutes that males spent grooming hinged on the number of females available at the time: The better a male's odds of getting lucky, the less nit-picking time the females received."

Adam Smith, in The Wealth of Nations, talked about the human race's "propensity to truck, barter, and exchange one thing for another." Maybe evolution has built this into us. For more on how our attitudes, especially in relation to economics, might come from other primates, read Why people believe weird things about money. (I saw this latter link at the Freakonomics blog)

Update: To any of my new students checking this out for the first time, I hope to generate some discussion on these issues so feel free to leave comments. You can do so anonymously if you want. I usually post something about 3 times a week, like Sunday, Tuesday and Thursday. Sometimes I am a day late.

Is An Electronic "Helicopter Drop" Feasible?

Economist Mark Thoma wrote about something called a "helicopter drop" on his blog last Sept. It was called "The Repo Man" The idea is that the FED (Federal Reserve Board), simply drops money out of helicopters so that people would spend it. We might do this if there is not enough aggregate demand (AD) in the economy. The FED might have lowered interest rates to stimulate spending, but businesses and consumers might be afraid to spend more even at these lower interest rates. So the argument is that if we are all just given cash, we would spend it.

But what if people don't spend it, the cash they recieve? Mark Thoma said that even the money they just stuff into cookie jars might make them take more risks, which could increase AD. But supposing that even that does not happen and there is no effect on AD, that everyone just holds it? Then I guess the drop does not work.

But suppose that everyone has an account with the FED and we are all given debit cards that initially have a zero balance. If the FED saw the need for a quick stimulus that they know would be spent, they could simply announce that everyone citizen now has $100 (or whatever amount is appropriate) in their account and they have some fixed, finite time period to spend it, say 1-3 months. If you don't spend that money, use the debit card, then after the deadline your account reverts back to zero. Maybe it would not be all citizens, just those who earned below a certain amount the previous year. Maybe the FED debit card could only be used in department stores and grocery stores if people are worried about what it gets spent on. People could not get cash back or withdraw the value in cash from the FED.

All consumers would have an incentive to spend it fairly quickly and we could get a quick stimulus to the economy with no time lag issues (other than the time it takes for the FED to realize the policy is needed). Once people started spending money, the FED would have to pay the stores the money that we spent in some similar fashion to the way current debit cards work. The FED would simply use a computer to put the money in everyone's account. They would have to create new money to pay the stores.

I know this might seem like a crazy idea and there could be all kinds of technical and logistical issues. Fraud and theft could be problems. There would be a cost of creating the debit cards and running the program.

Update: My department chair here at San Antonio College, Bruce Norton, said that people who get money put into their debit card accounts might spend less out of their paycheck than they normally do if they can spend the money in these accounts. They would put $100 from their paycheck into the bank (something they would not normally do) and can spend the money from the debit card. So it is possible that this increase in the money supply will not lead to an increase in AD. But it would be no worse than any other money supply increase. And if people in lower income groups get this money, their MPCs (marginal propensity to consume) may be higher than it is for other people, so they might be likely so spend it. Also, if we don't have enough AD, some of the people getting this money will be unemployed, so they are likely to spend it (I am not suggesting getting rid of unemployment insurance or other programs like this).