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

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

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

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

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

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

What Are The Best And Worst College Majors?

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

The top 5 were:

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

The bottom 5 were:

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

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

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

What The 2010 Nobel Prize Winners Studied

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

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

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

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

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

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

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

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

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

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

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

Crime and Punishment: Required Reading in My Economics Class

Okay, it is not the book Crime and Punishment by Fyodor Dostoevsky (this is a link to the entire book online). I will come back to this book. My students are required to read a chapter by this name from the book The Economics of Public Issues. It is only 5 pages long while the famous book is over 500.

One of the interesting things mentioned in this chapter is research by Steven Levitt. It deals with the question of whether or not more police officers means less crime, everything else being held constant. The problem is that cities with high crime rates will have to hire more police officers (it is the opposite for low crime cities). So it is hard to find a meaningful correlation. But this paragraph from the book shows how he got around that problem:

"In the case of police, Levitt has found that election cycles tend to have a strong independent effect on the size of police forces, enabling him to identify the impact of police on crime rates. Because crime is such a hot political issue, both mayors and governors have strong incentives (and the ability) to push for more police funding in election years. The result is that even though police forces in major cities tend to remain constant in nonelection years, they grow by about 2 percent in an average election year. Although this may sound small, it is (1) large enough to have a significant impact over several election cycles, and thus (2) large enough to detect clearly in the data."

So we can see that crime goes down when more police get hired in election years. Each city gets compared to itself, so the problem mentioned above is avoided.

Now back to the Dostoevsky book. Below are two passages that relate to economics and one sounds like the invisible hand.

"But Mr. Lebeziatnikov who keeps up with modern ideas explained the other day that compassion is forbidden nowadays by science itself, and that that's what is done now in England, where there is political economy." (economics used to be called political economy)

"if I were told, 'love thy neighbour,' what came of it?" Pyotr Petrovitch went on, perhaps with excessive haste. "It came to my tearing my coat in half to share with my neighbour and we both were left half naked. As a Russian proverb has it, 'Catch several hares and you won't catch one.' Science now tells us, love yourself before all men, for everything in the world rests on self-interest. You love yourself and manage your own affairs properly and your coat remains whole. Economic truth adds that the better private affairs are organised in society--the more whole coats, so to say—the firmer are its foundations and the better is the common welfare organised too. Therefore, in acquiring wealth solely and exclusively for myself, I am acquiring, so to speak, for all, and helping to bring to pass my neighbour's getting a little more than a torn coat; and that not from private, personal liberality, but as a consequence of the general advance."

More online versions of the book.

Genetically Engineered Corn Has Positive Externalities

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

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

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

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

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

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

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

This excerpt might be my favorite:

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

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

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

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

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

Why price discrimination raises profits

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

Necessary Conditions for Price Discrimination

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

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

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

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

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

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

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

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

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

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

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

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

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

New Biography Of Adam Smith

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

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

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

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

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

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

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

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

Adam Smith vs. Bart Simpson

The Percent Of The Civilian Noninstitutional Population Employed Since 1970

I talked about unemployment in my macro classes yesterday. If you go to this site by the Bureau of Labor Statistics called Employment status of the civilian noninstitutional population 16 years and over, 1970 to date, you can see unemployment rates going back to 1970. It also shows the percent of the civilian noninstitutional population that is employed. The graph below shows how that has changed over time.


The general trend since 1975 has been up, although it has flutctuated. Unfortunately, it has been going down for a couple of years and we are well below the high of 64.4% in the year 2000. It was 59.3% in 2009.

But the average for the years 1970-84 was 58%. So we are still above that. That does not mean what we have is good. But it just puts what is currently going on in perspective.

Some will say that we have a large prison population, so they are not part of the figures and that prison population has been growing. In 2008, the U. S. prison population was 1,610,446. See Prisoners in 2008. Suppose we increase the number of people in the civilian noninstitutional population by that amount. Right now it is 235,801,000. The new figure will be 237,411,446. Now let's keep the number employed the same, at 139,877,000. That would 58.9% employed, still higher than the average from 1970-1984.

Now there were some tough economic times in that earlier period. But we survived and we weren't exactly destitute. So although the economy is not doing well right now, maybe things are not so bad.

An Idea For A New Kind Of College: Where All The Professors Have Two Master's Degrees Instead of Ph. D.'s To Foster Interdisciplinary Learning

At this new college, professors would not have Ph. D.'s but two master'sdegrees. For example, in the economics department, everyone would, of course, have a Master's degee in that field. But one professor would also have a master's in history, another psychology, another anthropology, another sociology, etc. Then everyone in sociology would have a master's in that field but each professor would also have a master's in another field like in economics. Every academic department at the school would be like this.

Obviously not all schools can be like this. But if we had just a few schools like this, they could attract some unique and curious students. They could be a whole new type of idea incubator. Just imagine if some wealthy person like Bill Gates were to fund a college like this. Then he would announce it would open in a few years. It would give current professors all a chance to get that second master's degree. People still in graduate school could go for that 2nd master's instead of getting a Ph. D.

The new faculty would have an incredible sense of mission. Maybe alot of young graduate students would want to teach at the new school and they would bring enthusiasm and the latest thinking in their fields.

Teachers would teach regular classes but they would would contsantly enrich their lectures with what they know from other fields. Students would get interested in inter-disciplinary research early on and if they wrote a senior thesis, it would be inter-disciplinary. Guest lecturers and public speakers would be experts doing cutting edge inter-disciplinary research. Think of the clubs students could form. It would be a whole new way of learning and a whole new educational experience. It could revolutionize education.

Cuba to cut 500,000 gov't workers, reform salaries

Click here to read the story. Here is the first paragraph:

"Cuba announced Monday it will cast off at least half a million state workers by early next year and reduce restrictions on private enterprise to help them find new jobs — the most dramatic step yet in President Raul Castro's push to radically remake employment on the communist-run island."

This is about 10% of the labor force and currently, 95% of the labor force works for the government. I had a post about a month ago called Cuba Allows Some Market Reforms. It will be interesting to see how this all works out and how much freedom the government actually allows. Cuba is usually one of the examples I site when I talk about command economies on the first day of the semester.

An Entertaining Economics Music Video

That may sound hard to believe, but it is fun. Go to "Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem. It shows the opposing views of two economists, John Maynard Keynes, who tended to think that the government needed to guide the economy, and FA Hayek, who tended to think that the government should just let markets work. That may be too simplfied, but I just want to give the general idea. (Hat Tip: Ryan Castro).

Here are links to good articles about each economist:

Keynes

Hayek

NBER Says The Recession Is Over!

It ended in June 2009, according to the National Bureau of Economic Research. See Recession Over in June 2009 from the Wall Street Journal.

Click here to see a video of the announcement that the recession is over. You need to see this to get the full story.

Click here for more important and essential information on this issue. You also need to read this to get the full story.

Another Cost Of A Cleaner Environment: Dirtier Dishes

Economics tends to stress that life is full of tradeoffs. If you want to go to more Spurs games, you might have to go to fewer movies. If you want to eat more hamburgers, you might have to eat less pizza.

Now, an attempt to clean the water might mean dishes that aren't as clean as we would like. See the New York Times article Cleaner for the Environment, Not for the Dishes. Here is what happened:

"Responding to laws that went into effect in 17 states in July, the nation’s detergent makers reformulated their products to reduce what had been the crucial ingredient, phosphates, to just a trace."

So when people put their dishes in their dishwashers, they don't get as clean as they used to. The phosphates "...have long ended up in lakes and reservoirs, stimulating algae growth that deprives other plants and fish of oxygen." Other problems include "...chemicals and fragrances can pose respiratory and allergy problems as well as pollute waterways."

But consumers are starting to notice dirtier dishes coming out of their dishwashers and one of them remarked:

"“Low-phosphate dish detergents are a waste of my money,” said Thena Reynolds, a 55-year-old homemaker from Van Zandt County, Tex., who said she ran her dishwasher twice a day for a family of five. Now she has to do a quick wash of the dishes before she puts them in the dishwasher to make sure they come out clean, she said. “If I’m using more water and detergent, is that saving anything?” Ms. Reynolds said. “There has to be a happy medium somewhere.”" (See The Law Of Unintended Consequences)

But one expert said that you can get dishes clean with "vinegar, baking soda or the newer cleansers." At a hospital in New York, "Reports of burns, rashes, dizziness and scratchy throats among housekeeping employees have plummeted" as a result of the newer cleaning products.

I will leave the final word to Consumer Reports:

"But in its September issue, Consumer Reports reported that of 24 low- or phosphate-free dishwasher detergents it tested, including those from environmentally friendly product lines that have been on the market for years, none matched the performance of products with phosphates.

The magazine did note that the formulas were improving, and it rated seven detergents “very good,” including two of six Cascade products it tested. Susan Baba, a spokeswoman for Cascade, said that while most Cascade customers had not noticed any change, Procter & Gamble was modifying the formulas of some products in response to complaints."

If You Lower The Excise Tax On A Good By $1.00, Does A Firm Save $1.00 On Each Unit Sold?

Probably not. This issue came up in an article that I linked on Wed. One of the things it said was:

"Crapo's bill would cut the federal excise tax on brewers' first 60,000 barrels of beer in half to $3.50, saving brewers up to $210,000 a year."

One thing we know in economics is that if we enact a tax in the first place, most likely some of the tax is paid by the seller and some is paid by the buyer. We can see this by looking at the following graph. Suppose an excise tax of $1.00 is imposed on this good. The immediate effect is to shift up the supply curve by $1.00. As you can see, the new price is now $6.00 where as before the tax it was $5.50. That means the buyer is paying $0.50 more than before. Then the seller gets $0.50 less.

Before the tax, when a consumer bought the good, they paid $5.50. Now they pay $6.00. But the seller has to give the government $1.00 of that, leaving them with $5.00 or $0.50 less than they got before. Now how this relates to the barley tax is explained below the graph.


Suppose, initially, for the sake of simplicity, that in the market represented by the graph above, the government now eliminates the $1.00 tax on the first 20 units sold. That basically means that we are back to S1 and a price of $5.50. The sellers collectively save $5.00. Why? Because they lost $0.50 per unit before the tax was eliminated and they sold 10 units. Now they sell 11 units and pay no tax. So they are $5.00 better off. But, if we went along with the way the article reads, we would say that the sellers save $10. That is impossible, since they did not lose $10 to begin with. So it would be impossible for the barley growers to save $3.50 per unit sold if that is how much the tax was reduced.

But let's try eliminating the tax on the first 5 units sold, kind of like the proposed change to the barley tax. So there will only be a $1.00 tax on units 6-10. It think that part of the supply curve shifts down by $1.00, but only up to a Q of 5. Then the rest of the supply line is still S2. The graph below shows this. The equilibrium price is still $6.00 and the equilibrium quantity is still 10. Businesses pay $0.50 per unit from the tax on the last 5 units sold so their total cost from the tax is $2.50. So cutting the tax only saves them $2.50 since before this change of not taxing the first 5 units, they paid $5.00. Now they pay $2.50 or $2.50 less than before.

This means that the barley growers cannot save $3.50 per unit over 60,000 units for a total savings of $210,000. It will be less than that.

Does Economics Trump Religion?

See Abstinent Mormon farmers grow barley for beer. It seems like maybe some of these farmers care more about economics than their religious beliefs. They don't seem to want to acknowledge any conflict and they will say whatever it takes to justify what they do. Maybe that just shows they are human like everyone else. Here is the intro:

"Idaho Sen. Mike Crapo might seem like an unlikely person to be pushing a bill to cut federal taxes on small beer-makers: A member of The Church of Jesus Christ of Latter-day Saints, he abstains from alcohol.

But Crapo's effort, with senators from Oregon, Massachusetts and Maine, illustrates the deep bond between Idaho Mormons and the beer industry.

Mormon farmers raise barley for Budweiser and Negra Modelo beers, and last year, Mormons in the Idaho Legislature helped kill a plan to raise beer and wine taxes to fund drug treatment, fearing it could hurt farmers."

The article also says:

"Idaho's Mormon barley farmers acknowledge an ambiguity in what they grow.

"I've often wondered about the correctness of doing it," said Scott Brown, president of the Idaho Grain Producers Association and a Mormon who grows barley on 5,000 acres near Soda Springs. "But somebody is going to grow it, whether members of the LDS church do.""

You could say the same thing about selling cocaine. The article also says:

"Coors has bought barley from Idaho's Mormon growers for going on four decades."

and

"With the brewers offering good prices, the crop just makes sense, said Kelly Olson, Idaho Barley Commission administrator.

"I know of some LDS growers who won't raise malt barley, because they know it's ultimately destined for malt brewers," she said. "But by and large, most farmers make planting decisions based on economics.""

and

"Clark Hamilton, a Mormon farmer originally from Utah, was harvesting 3,000 acres of barley near Ririe last week. The golden, rice-sized cereal grain was destined for companies that make Natural Light and Corona beers. He's heard the question before.

"People will look at me and say, 'You're a Mormon, why do you grow barley?' " he said. "I just don't have a problem with it. I don't think people who drink beer are bad.""

Should You Break Up With Your Fiancé If They Have Too Much Debt?

See How Debt Can Destroy a Budding Relationship from the New York Times. Here is an exerpt:

"Nobody likes unpleasant surprises, but when Allison Brooke Eastman's fiancé found out four months ago just how high her student loan debt was, he had a particularly strong reaction: he broke off the engagement within three days.

Ms. Eastman said she had told him early on in their relationship that she had over $100,000 of debt. But, she said, even she didn't know what the true balance was; like a car buyer who focuses on only the monthly payment, she wrote 12 checks a year for about $1,100 each, the minimum possible. She didn't focus on the bottom line, she said, because it was so profoundly depressing.

But as the couple got closer to their wedding day, she took out all the paperwork and it became clear that her total debt was actually about $170,000. "He accused me of lying," said Ms. Eastman, 31, a San Francisco X-ray technician and part-time photographer who had run up much of the balance studying for a bachelor's degree in photography. "But if I was lying, I was lying to myself, not to him. I didn't really want to know the full amount.""

The article then discusses the types of issues couples should discuss before they get married, like pre-nuptial agreements. They may not seem romantic, but it forces people to start thinking about what their future lives might be like and how they both handle money. Money is often one of the biggest problems in marriages.

Austan Goolsbee Once Laughed At Me

Austan Goolsbee was just named the new chairman of the President's Council of Economic Advisers. See Who Is Austan Goolsbee? How many people can say the President's top economic advisor laughed at them?

Here is what happened: I was at a book symposium in 2006. Steven Levitt (who, like Goolsbee, is a University of Chicago economist) was about to autograph my copy of his best selling book Freakonomics when I told him that I had emailed him a few months earlier with some analysis that I did about the viewer ratings for the movie Snakes On A Plane at the Internet Movie Data Base. There seemed to be something funny about the numbers, as if someone was gaming the system to get the movie a higher numerical rating.

When Levitt got my email with my analysis, he asked if he could post it on his blog. I said yes. So he posted it and here is the link: Snakes on the internet, too? So while Levitt is autographing the book, I said I couldn't think of anyone else in the world who would have been interested in what I had to say about Snakes On A Plane accept maybe the Freakonomics guys. That is when Mr. Goolsbee, who was sitting next to Levitt, laughed.

Levitt wrote: "Long live the snakes" in my copy of his book.

Can You Beat Unemployment With A College Degree?

People with college degrees or more had a 4.4% unemployment rate as of June 2010. It was 10.8 percent for those with only a high school education. See Want To Avoid Unemployment?: Statistics show a clear link between education level and employment.

Now it may not be that simple. People who graduate from college may be smarter and harder working than others (being smart and hard working helps you get through college). And people who are smart and hard working will probably get better jobs and have lower unemployment rates. That would be true of a world that had no college degrees.

But most likely, ceteris paribus, education helps. The article also mentions some high paying careers.

The Federal Government Favors Some States Over Others

The Federal government spends $10,548 on each person in the United States. See Federal spending up record 16% amid recession. "The biggest chunk of funds went to Medicare, Medicaid and Social Security, entitlement programs that are projected to consume ever larger portions of the federal budget as the population ages."

But the rate per person varies quite a bit across the states. Here are the highest and lowest:

Alaska $20,351
Virginia $19,734
Hawaii $19,001

Nevada $7,148
Utah $7,435
Georgia $8,538

The article did not explain or discuss why there are such big differences. But this other article from the Washington Post does, at least a little. It says:

"Virginia was pushed to the forefront of federal spending by the high number of defense contractors and service members living in the state. It saw $67 billion in military spending, a large chunk of the $155 billion the federal government spent in the state in 2009. Only California, New York and Florida got more money overall.

Much of the federal money went to private contractors. In Fairfax County, for instance, almost $40 billion of the $46 billion the federal government spent in the county went to contractors.

In Maryland, federal spending in fiscal 2009 rose 15 percent, to $92 billion. Maryland's ranking reflects in part a large number of residents who are federal employees. Montgomery County, for example, got $28 billion in federal funds, including $4.6 billion in salaries, almost $3 billion in retirement checks and $17.5 billion in government contracts for various vendors."

But I don't think that explains all of it.

Would You Go To A College That Gets A Grade Of D+?

And that is a grade that they gave themself! Their new ad has a big "D+" in it. See Great moments in collegiate marketing: Drake University’s ‘D+’ campaign. Here is an exerpt:

"If you were going to spend tens of thousands of dollars on a higher education, would you want the end result to be known as a "D+" education?

Probably not.

And therein lies the problem some have with Drake University's new marketing campaign.

Touting the ways it can help students "be transformed by an experience that puts opportunity into action and gives purpose to your passion," the Des Moines, Iowa-based school has elected to dub its added pedagogic value the "D+ Advantage" campaign. The tagline for the promo campaign: "Your passion + our experience."

The administration tried to justify it by saying:

"...the ad blitz [was] "edgy and intriguing" and the campaign "was designed to catch the attention of high school students who are bombarded with college and university materials to the point that they are often in information overload and unable to differentiate among the many institutions that have contacted them.""

There may be something to that. Information is costly to obtain and maybe many of the brochures and webstites that students look at end up looking pretty much the same. So how does a school get your attention? By having a very different kind of ad. But this might not have been the best way to go about it.

Decoding Airline Ticket Costs

Airline prices vary alot. The price if you fly from Boston to Long Beach, California is 6 cents per mile. If you fly from Boston to Philadelphia, it is $1.22 per mile. That seems incredible. But The Wall Street Journal article You Paid What for That Flight? It Can Cost More to Fly to Hartford Than Barcelona. What Airlines Consider in Setting Prices has an explanation. Here are some reasons:

"The price you pay for a ticket is driven by a number of variables: competition, types of passengers, the route and operating costs. But the biggest factor, by far, is whether discount airlines fly in a market. Low-cost carriers often set the price in markets because competitors feel compelled to match that price or risk losing customers and flying empty seats. And when they aren't there, big airlines behave radically differently when setting prices.

"It's the number of competitors and the quality of the competition," said airfare analyst and consultant Bob Harrell.

The kinds of travelers in a market heavily influence what prices airlines charge as well. If the route has lots of business travelers—like Hartford to Washington—then airlines set prices high knowing customers will be less sensitive to higher prices. If the route is populated by price-sensitive travelers —think Florida cities and Las Vegas—then airlines set prices low in order to fill up planes."

And

"And when there's not low-fare competition, prices soar. The most-expensive average domestic ticket in the first quarter was $786 for round-trip flights between San Francisco and Philadelphia, according to the DOT. That 2,521-mile route is dominated by United and US Airways, who are competitors but also partners in the Star Alliance. Fly to Boston from San Francisco—183 miles farther by air than Philadelphia—and you paid an average $296 less round-trip in the first quarter, according to DOT. The difference: JetBlue Airways has 17% of the San Francisco-Boston market, but none of the San Francisco-Philadelphia market.

High fixed costs do make short routes more expensive, per mile. But airport costs like terminal rents and landing fees and even the expense of buying or leasing jets, pale in comparison to the two biggest expenses at airlines: labor and fuel. Both go higher as flights get longer."

And

"High prices do catch the attention of low-priced competitors. In the first quarter this year, the most expensive market in the country, per mile, was Boston to Philadelphia, a US Airways-dominated route, where the average fare was a whopping $684. Southwest began serving that route in June.

And now? US Airways' highest coach fare is $281 round-trip—$400 less than its first-quarter average fare."

I like the part about high fixed costs. Suppose a plane costs $500 million. If it flys a 100 mile route, say 1,000 times, that is $5,000 per mile. If it flies a 1,000 mile route 1,000 times, that is $500 per mile. Of course, that is not the only cost. But it does make a difference.

Costs, Benefits And Environmentally Friendly Energy

In my first lecture, I usually define what we mean by "rational" in economics. It means "no one intentionally makes themself worse off." Or, a rational act is one where "the benefit is greater than the cost." Of course, the benefit is in the eye of the beholder. If you go to a Radiohead concert, it might bring you alot more benefit than it would bring me. And costs and benefits are not always known. But this is more or less what rational means.

So we should be rational in our energy use. That is where the article Green Energy: Why We're Still Not Using It comes in. Here is an exerpt:

"The total cost to research, build and operate new green energy plants combined with storage and transmission expenses is significantly higher than traditional coal burning plants. According to the U.S. Energy Information Administration, the average cost of solar power is almost four times as much as traditional coal burning electric generation. The costs are difficult to compare due to the widely disparate nature of individual technologies but the net result is that startup costs are steep."

[wind power]"...is still 50% more expensive than coal-powered electrical plants. Offshore turbines are almost twice as expensive."

There could be some environmental benefits that would change the accounting. Those were not esitmated in the article. But those would have to be very high to tilt the balance toward some of these alternative fuels.

Cuba Allows Some Market Reforms

See Cuba eases property laws, could open door to golf. In my classes this week, I went over some basics of economics, like the different economic systems, tradition, command and market. I said that there were not very many examples left of countries that used the command economy. North Korea and Cuba are two possibilities.

But now Cuba's government is loosening its grip on economic behavior. Here are the changes:

"Cuba has begun allowing foreign investors to lease government land for up to 99 years, a step toward a future that could be filled with golf courses ringed by luxury villas, beachfront timeshares and vacation homes for well-heeled tourists."

and

"A measure appearing the following day expanded self-employment, letting Cubans grow and sell small amounts of farm products out of their homes or special kiosks."

These are only small steps, of course. But they are in the right direction.

The article also mentions:

"The law marks the first major expansion of self-employment since Castro said in an address to parliament Aug. 1 that his government would reduce state controls on small businesses and private enterprise — a big deal in a country where about 95 percent of people work for the state.

Cubans already sell fruit, pork, cheese and other items on the sides of highways across the country, fleeing whenever the police happen past. The new measure legalizes such practices by letting Cubans grow whatever they wish and sell it, while bolstering state coffers with new taxes on their earnings."

Update 8-29: Cuba is also no longer going to subsize cigarettes. See No Smoking: Cuba drops cigarettes from ration book. It says:

"A program that provided state-subsidized smokes to Cuban seniors is headed for the ash heap.

The communist government announced Wednesday it is cutting cigarettes from its monthly ration books effective Sept. 1, the latest in a series of small steps toward fully eliminating subsidies for food and other basic items that impoverished islanders depend on.

Cubans 55 and older had been eligible to receive three packs of "strong" cigarettes and a pack of milds -- 80 cigarettes altogether per month -- for 6.50 pesos, or the equivalent of about 30 cents, using their ration books at state-run distribution centers.

The island's lowest-quality cigarettes, the only kinds subsidized, normally cost 7 pesos, or about 33 cents, per pack, while imported or topflight domestic brands can go for $3 or more apiece.

Until the 1990s, all Cubans 18 and older received a monthly allotment of cigarettes, but the loss of billions of dollars in annual subsidies from the collapsed Soviet Union forced officials to scale back subsidized smoking. Now even older smokers are out of luck."

Frugal Is The New Sexy

Well, okay, maybe it isn't. But how do you make being careful and responsible with your money into an exciting, if not sexy, personality trait? The article How to Be Frugal and Still Be Asked on Dates discusses the issue. The article opens with:

"Saving may be making a comeback, but it still hasn’t gotten its sexy back, particularly if you’re a man.

Earlier this month, the Commerce Department reported that the personal savings rate in June was a much-improved 6.4 percent and that the number had risen as high as 8.2 percent in the depths of the stock market doldrums in the spring of 2009.

Those who are single may not have been rewarded for their parsimony, though. Now comes some survey data from ING Direct, the people who would like you to save more money in their online savings accounts. In June, the company asked 1,000 people which words would come to mind if someone was fixing them up on a blind date with someone described as frugal.

Just 3.7 percent answered “sexy,” while 15 percent picked “boring” and 27 percent chose “stingy.”"

So the cheapskates among us have their work cut out. But the most interesting thing to me was what went into newspaper personal ads way back in 1860. Here is what one ad says:

"“A young lady, rather good looking, and of good address, desires the acquaintance of a gentleman of wealth (none other need apply), with a view to matrimony.”"

Here is an ad from a man in 1860:

"“The advertiser, a successful young business man of good education, polite manners and agreeable address, having recently amassed a fortune and safely invested the same, wishes to meet with a young lady or widow.""

Do men still need to be wealthy today to meet that special woman? Does more money help? If you are not willing to spend alot on your girl friend hurt a guy?

There is actually a blog about how to save money shopping called Frugal Is The New Sexy!

Then there was this funny cartoon from the Wall Street Journal. It was originally at Pepper...and Salt.

Interesting New Journal: Religion, Brain & Behavior

It looks like it will start next year. You can read about it at Religion, Brain & Behavior. It will be very interdisciplinary. Here are the aims and scope:

"The aim of Religion, Brain & Behavior (RBB) is to provide a vehicle for the advancement of current biological approaches to understanding religion at every level from brain to behavior. RBB unites multiple disciplinary perspectives that share these interests. The journal seeks empirical and theoretical studies that reflect rigorous scientific standards and a sophisticated appreciation of the academic study of religion. RBB welcomes contributions from a wide array of biological and related disciplines, including cognitive science, cognitive neuroscience, evolutionary psychology, social psychology, evolutionary anthropology, social neuroscience, neurology, genetics, demography, bioeconomics, neuroeconomics, physiology, developmental psychology, psychology of religion, moral psychology, archaeology, mimetics, behavioral ecology, epidemiology, public health, cultural evolution, and religious studies. In summary, RBB considers high quality papers in any aspect of the brain-behavior nexus related to religion.

RBB publishes high quality research articles and target articles with about ten solicited commentaries and an author response. Issues are published three times during 2011, and four times annually from 2012 onwards."

It will be published by Institute for the Biocultural Study of Religion. There vision is:

"The leadership of the Institute for the Biocultural Study of Religion (IBCSR) has an immodest vision for transforming current and future religion-science interactions, a transformation powered by the clarity of its ideas and the quality of its research. Our ultimate aim is to contribute to a revolution in the cultural understanding of religion through rigorous research-based knowledge of its nature and functions in individuals and groups."

I heard about this from anthropoligist Richard Sosis. You can read about some of his incredible research in the fascinating NY Times article called Darwin’s God.

Adam Smith vs. Muhammad Yunus

In 2006, economist Muhammad Yunus won the Nobel peace prize (not the economics prize). What did he do? "He invented microcredit, the practice of lending tiny amounts of money to the poor." That is from a NY Times review of a new book by Yunus. To read the review, go to Microcredit? To Him, It’s Only a Start. In this book, Yunus proposes some ideas that seem to conflict with Adam Smith. I post some exerpts on this below, but first something about microcredit from the article:

"It was a revolutionary idea. Until then, bankers figured that such borrowers were worthy of neither credit nor trust. Along came Dr. Yunus, who demonstrated that lending to the needy could be a profitable business and transform their lives. Indeed, many of Grameen’s clients used these small sums to start small businesses and to escape the clutches of poverty."

The people who get the loans work together and make sure that they all work hard and pay back their loans. The loans are often very small, like just enough for a woman to buy a sewing machine so she can make clothes or become a seamstress.

But what does he say that might conflict with Adam Smith?

"...he calls for creation of an alternative economy of businesses devoted to helping the underprivileged."

"...they would invest leftover money in expanding their humanitarian efforts rather than paying dividends to shareholders."

"People “will be delighted to create businesses for selfless purposes,” Dr. Yunus predicts. “The only thing we’ll have to do is to free them from the mind-set that puts profit-making at the heart of every business, an idea that we imposed on them through our flawed economic theory.”"

"“You don’t need to know ‘how to do business,’ ” he writes a bit too facilely. “Much more important is your desire to solve a social problem."

In his book The Wealth of Nations, Adam Smith wrote about how self-interested people were led by the "invisible hand" to make society better off:

"But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestick industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it. By preferring the support of domestick to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the publick good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it."

From the Online Library of Liberty.

So Yunus is suggesting that people start businesses to intentionally try to help society while Adam Smith thought society benefited more if people pursued their own self-interest.

Of course, Smith is more complex than this. Adam Smith's "other" book was called The Theory of Moral Sentiments. One point he made there was that we are able to sympathize with other people by trying imagine what they are going through. I wrote about that in a post last year called Science Proves That Adam Smith Was Right Over 200 Years Ago (sort of)

The Economy Affects The Birth Rate

Our discipline assumes that economic factors influence behavior. Here is a good example. Read Older Moms' Births Still Up in U.S. Here is an exerpt:

"The new report on births was issued Tuesday by the Centers for Disease Control and Prevention. It's based on a review of more than 99 percent of birth certificates for the year 2008 — the first full year of the recession. Overall, about 4.2 million babies were born that year, a 2 percent drop from 2007. It's the first annual decline in births since the start of the decade.

Experts say the most likely explanations are the recession and a decline in immigration to the United States, which has been blamed on the weak job market.

Some early birth information for the first six months of 2009 indicates a continuing decline of about 3 percent in total births, CDC officials said."

But

"The one exception to the trend was the birth rate among women in their 40s, who perhaps felt they didn't have the luxury of waiting for better economic times.

The birth rate for women in their early 40s rose a surprising 4 percent over the previous year, reaching its highest mark since 1967. The rate for women in their late 40s also rose, slightly."

Are Speculators Heroes?

Maybe. This past week in my macro courses I talked about the money demand motives. One of them is the speculative motive, so I explained what a speculator is. Very often speculators are maligned. But sometimes they perform a valuable service by figuring out a resource will be more scarce in the future and then bidding up the price of that resource today. That sends a signal to markets that we all need to economize on that resource or try to provide more of it. That doesn't mean that everyhting speculators do has a good result, just that it can.

It was said that speculators are heroes in the NY Times article titled Those Wall Street Gamblers Might Not Be Bad After All. From the 3-21-10 edition, p. WK 5. It was by NELSON D. SCHWARTZ. Exerpts:

"“If there are heroes in the financial system, these are the heroes,” said Frank Partnoy, a professor of law and finance at the University of San Diego. “They’re the people who bet against Enron, who bet against Lehman and warned it was insolvent.”

It’s not just academics who are coming to the defense of speculators. Earlier this month, BaFin, the regulatory agency that oversees financial markets in Germany, concluded that speculators weren’t behind Greece’s problems. A more likely cause was that investors were simply wary of lending the Greek government any more money following years of heavy borrowing and widening budget deficits."

"“Every time the market goes down, they blame short-sellers and speculators,” said Jim Chanos, a famous short-seller who manages more than $6 billion and was among the earliest voices to warn about Enron as well as the credit crisis. But his trades aren’t gambles at all. “We do as much fundamental research as anybody,” he said.

If that’s the case, speculators are far from being a plague on the markets. Instead, they help reduce risk by taking on the other side of popular trades, resisting the herd mentality that creates bubbles in the first place."

"The speculator “loves freedom, detests cant and abhors restrictions,” Edward Chancellor wrote in his 1999 book, “Devil Take the Hindmost: A History of Financial Speculation.”

According to Mr. Chancellor, a financial strategist in Boston, speculators aren’t motivated by greed, after all. Instead, idealism fuels their trades.

“The essence of speculation remains a utopian yearning for freedom and equality which counterbalances the drab rationalistic materialism of the modern economic system with its inevitable inequalities of wealth,” he argued in his book."

"Victor Niederhoffer, a legendary hedge fund manager and self-described speculator..." said “But when my daughters ask me if my job is as important as the butcher’s, the doctor’s or the scientist’s, I answer that the speculator is a hero, and has been throughout history.”"

My New York Times Letter

You can read it at A Consumption Tax, Revisited. It also contains a link to the article that my letter addressed. What got printed in the paper on Sunday was cut down from what I actually sent. Here is my originla letter:

"On balance, Robert Frank’s proposal for a consumption tax on high income families may be a good idea (“Hey, Big Spender: You Need a Surtax,” March 21). But there may be some potential downsides that we should keep in mind. He suggests that reduced future consumption spending (as a result of the tax) won’t cause a fall in total spending in the economy because investment spending will rise to pick up the slack. But if businesses know that consumers will be cutting back, they have less of an incentive to build new plant and equipment. There will also be reduced incentives for people to earn, since, if they cross the threshold, they will start paying these consumption taxes (which are also progressive, exacerbating the problem). The rich might turn, as they often do, to smart lawyers and accountants to help them hide their income. This would waste talent in our economy. Finally, a luxury surtax in the early 1990s failed to generate the expected revenue while at the same time causing layoffs for workers."

Why Are Some Private Colleges And Universities So Expensive?

It seems that they have something everyone wants: prestige. Who wouldn't want to go to Harvard or Yale, for example? And then these schools seem to know what everyone is willing to pay and then they charge it. This is all explained in the WSJ article Why Top Colleges Squeeze You Dry by ANDREW MANSHEL. Here is an exerpt:

"I learned that the most prestigious and desirable institutions have a good deal of information about the shape of the demand curve for the families seeking to obtain elite higher education for their offspring. These schools have the capacity to estimate with some precision how many applicants will go elsewhere for each additional dollar they charge in tuition and fees. Each sets its tuition so as to produce a targeted "yield"—the percentage of accepted students who actually enroll there. If in any year we over- or under-estimated the price changes made by the other schools, and we had moved up or down in rank, we corrected the following year by raising or lowering tuition by more or less to compensate. We essentially followed the price leadership of the wealthiest, most prestigious institutions."

There is some financial aid. But that amounts to basically charging different students different prices based on their ability and willingess to pay. Economists call this price discrimination.

Why price discrimination raises profits

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

Necessary Conditions for Price Discrimination

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

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

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

What do the schools do with all the money they get? It mainly goes to the faculty and administrators. 60%-75% goes to salaries and benefits. Schools also spend alot of money on "...the "arms race," the constant effort to refurbish and build new physical facilities."

Does Everyone Pay Taxes?

No, not exactly. Everyone pays some kind of taxes, but many people don't pay any federal income taxes. See Nearly half of US households escape fed income tax: Recession, new tax credits have nearly half of US households paying no federal income tax. It is possible that "...a family of four making as much as $50,000 will owe no federal income tax for 2009..." Also, "...the top 10 percent of earners -- households making an average of $366,400 in 2006 -- paid about 73 percent of the income taxes collected by the federal government."

And

"The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment."

How does the family of four making $50,000 eliminate their income tax liability?

"The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15."

Economy's Excess Capacity Keeps Inflation Low

See the WSJ article titled Economy's Excess Capacity Reins In Prices: Latest Data Give Fed Room to Maintain Rock-Bottom Interest Rates; Initial Jobless Claims Decline for Third Straight Week. Here are the first three paragraphs:

"The vast economic slack left over from the recession continues to keep inflation in check, leaving companies and workers with little leeway to ask for price or wage increases.

Consumer prices were flat in February—and even with volatile food and energy removed from the equation, the needle barely moved: Prices ticked up a scant 0.1%, the Labor Department said Thursday. Over the past year, prices have increased 2.1%, or 1.3% omitting food and energy, the smallest rise in six years.

Behind these numbers stands a huge excess—of workers, factory space and homes. Until more of the nation's productive capacity comes into use and starts pulling workers off the unemployment line, the sellers of everything from golf clubs to paving machines have little ability to raise prices. The problem is exacerbated by continued tightness in credit, which makes it harder to rev up economic growth through bank lending to soak up the economy's lingering slack."

We can see how this works in the following graph:



A GDP of $9 trillion is the "full-employment" GDP (QF). That gives us the lowest rate of unemployment compatible with "price stability" (price stability is an an annual inflation rate of 3% or less). As GDP increases, more workers are hired, so unemployment falls. But if GDP is below QF, firms cannot raise prices, as the article states. There is slack or "excess capacity" in the economy. That means that there will be very little pressure on prices. Resources are not very scarce and product prices don't have to be increased (or increased very much) to call them back into service.

But as GDP increases, resources become more scarce as more bidders want them. The more GDP increases, the faster prices increase. Also, less efficient resources get called into service and less efficiency means greater cost. The higher costs get passed along to the consumer in higher prices. But the graph and the article suggest that as GDP increases and the unemployment rate falls, we will not see much inflation soon.

Also, interest rates won't have to be increased since there is little danger of AD going past QF. Sometimes the FED will raise interest rates to slow down private spending (both consumption and investment) to keep AD from moving too far to the right. But the article suggests that this will not happen.

Has The Recession Been Hard On College Graduates?

Yes. But it has been hard on many people. This issue came up in a recent WSJ article titled College Grads' Outlook Grim: Students Begin the Search Early, Look to 'Plan-B' as Campus Recruitment Falls. Here some key exerpts:

"Companies have cut back hiring and when they do have jobs, they have plenty of experienced applicants to pick from. College graduates typically need further training and seasoning, so many employers are skipping college career fairs this year or tapping former interns if they need fresh talent."

"But there are some bright spots: The unemployment rate for people ages 20 to 24 with a bachelor's degree was 7.2% in March, down from 7.6% a year earlier and below the 21.9% jobless rate for those in the same age group with high-school degrees only.

Preliminary data from a spring poll of employers by the National Association of Colleges and Employers show college-graduate hiring could rise 3% to 5% this year after falling 22% last year."

"... business and technical majors are likely to see the most demand, particularly as Wall Street resumes hiring."

So it looks like things will be better this year than last year. Also, things are much worse for people without college degrees, as the above figures indicate. High-school only people had an unemployment rate nearly 3 times that of those with college degrees from ages 20-24. I looked at something similar a few months ago with How Recessions Affect Young People. One thing that post mentioned is that those who graduate during recessions see their lifetime incomes cut quite a bit.

Obama To Pitch For The White Sox

April first 2010 will go down in history. Click White Sox Sign Obama For Left-handed Bullpen Support to read all about it.

Women Make Trade-offs When Looking For A Man

There is no perfect man, a woman has to give up one quality if she wants more of another, just the kind of thing that economics would predict. That is one thing mentioned in the Wall Street Journal article Why Women Don't Want Macho Men: New research suggests that women from countries with healthier populations prefer more feminine-looking men. Here are some interesting exerpts:

"In countries where poor health is particularly a threat to survival, women leaned toward "manlier" men. That is, they preferred their males to have shorter, broader faces and stronger eyebrows, cheekbones and jaw lines."

"To a person unfamiliar with the field of evolutionary psychology, this may sound a little far-fetched. How is it even possible to link a woman's masculinity preferences to the health of her nation? The answer begins with the theory of sexual selection. It goes that women are the choosier sex because they take on most of the risk and burden of reproduction and child rearing."

"But what does health have to do with masculinity? The link is testosterone, the hormone behind manly muscles, strong jaws, prominent eyebrow ridges, facial hair and deep voices. Testosterone is immunosuppressive. This means a man must be healthy and in good condition to withstand its effects on his development. Testosterone is also linked to other traits related to strength: fitness, fertility and dominance."

"Masculinity, however, can come at a high price. Women often think of high-testosterone types as uncooperative, unsympathetic, philandering, aggressive and disinterested in parenting. In fact, there is evidence that they really do have more relationship problems than other men."

"...men with testosterone levels one standard deviation above the mean were 43% more likely to get divorced than men with normal levels, 31% more likely to leave home because of marital problems, 38% more likely to cheat on their wives, and 13% more likely to admit that they hit or hurled things at them."

"But if health comes at the expense of fidelity and good parenting, how much does masculinity really matter?

The apparent answer is not so much—if you're a woman living in a country with a decent health-care system and few harmful pathogens. While a masculine father's "good genes" may confer health advantages to children, so do good medical attention and a clean environment. In the Face Lab study, women with the weakest masculinity preferences tended to live in some of the healthiest countries."

"Women with the weakest masculinity preferences of all lived in Belgium, a country considered to have one of the best publicly funded health-care systems in Europe..."

"...women with the strongest masculinity preferences tended to hail from the countries with higher disease and mortality rates and some of the poorest scores on the health-care index..."

"...researchers found that a nation's health index explained more of the variation in women's masculinity preferences than did many culture-specific female norms..."

"Is it possible that modern medicine—and by extension modern life—inadvertently devalues masculinity?"

"As the social environment shifts, so may women's mate preferences. While Stone Age forces once wired women to associate strong cues of masculinity with their children's chance of survival, times are changing. The promise of improved health care in America could be one example of a shift.

Another is women's financial freedom. In 1970, women represented only 43.3% of women of the labor force, compared to 55.8% today. Moreover, the recession in America has been a tremendous blow to men in traditionally masculine jobs such as construction and manufacturing; 82% of job losses affect men."

" No longer as reliant on men's genes or jobs to ensure the health and wealth of their children, women may come to value other qualities in a mate. It may become evolutionarily adaptive to prefer men who are cooperative, communicative, caring and better parents over traditional "manly men.""

"...beautiful women (as determined by averaged ratings of eight teams of male and female interviewers) want it all in a partner: masculine, physically fit, loving, educated, desirous of home and children, a few years older than themselves and with a high income potential.

While exceptionally attractive (or wealthy) women may indeed capture this ideal male, most are forced by circumstance to settle for the best combination of traits. Some husband-seekers trade off masculinity for companionship and good parenting. Others forfeit compassion in exchange for wealth."

"To secretly have it all, some women adopt a "dual mating" strategy—marrying a solid, faithful guy and enjoying trysts with hunks. As a result, up to 10% of babies born in some populations have fathers who are presumed to be their biological dads but aren't."

"...as women's level of "resource control" increases—that is, they become more financially independent—their preference for good-looking men increases. So will it be considered progress if women start pursuing "metrosexuals"..."

Should We Pay People To Adopt A Healthy Lifestyle?

That is what a New York Times article called Carrots, Sticks and Lower Premiums suggests. The article says:

"...the one thing that could really reform health care is you, collectively speaking: People living healthier lives."

"The statistical evidence has been clear for years, but it bears repeating. Studies show that 50 percent to 70 percent of the nation’s health care costs are preventable. Much of that expense goes to treat a few chronic conditions that are closely linked to behavior, including cardiovascular disease, diabetes, obesity and cancer. Bad genes and bad luck matter, of course. But behavior — exercise and choice of diet — matters most.

So why not pay people to live healthier lives? In fact, a fledgling “pay for prevention” industry is beginning to emerge, offering employers ways to reward workers with cash or reduced insurance premiums for exercising more and eating wisely."

So companies are paying their employees not to smoke or charging them less for health insurance if they are in good health.

Are Women Better At Investing Than Men?

That was the idea in How Men’s Overconfidence Hurts Them as Investors, from the New York Times, 3-14-10. Here are some interesing exerpts:

"All else being equal, men traded stocks nearly 50 percent more often than women. This added trading drove up the men’s costs and lowered their returns. The economists found that while both sexes reduced net returns through trading, men did so by 0.94 percentage points more per year."

"Selling volatile stocks in a down market — as male I.R.A. investors did more often than women, according to the Vanguard data — might seem to protect a portfolio. But that isn’t necessarily so. Selling before the market falls and buying after it falls is the smart move. For long-term investors, though, the best strategy may be to ignore short-term market movements (perhaps rebalancing a diversified portfolio every so often)."

"Gender differences appear to extend to other financial behavior. For example, women who are C.E.O.’s and company directors tend to pay a lower premium in corporate takeovers, saving their shareholders a bundle..."

"Researchers have found that activating the nucleus accumbens — a brain region that is stimulated when you eat delicious food or look at an attractive person — can affect financial risk-taking. When young Stanford men were shown pictures of partially clothed men and women kissing, he said, that region of their brains was activated. And when they were then given financial tests, the men became more likely to “make high-risk gambles.” Women didn’t respond much to the same pictures..."

"Others studying the effects of hormones on financial behavior have found correlations between testosterone and risk-taking."

"It’s also possible...that evolutionary psychology accounts for some of them. Before the dawn of history, aggressive risk-taking might have given men an advantage in finding mates, she said, while women might have become more risk-averse to protect their offspring."

I have had posts on related topics before. They were:

Can Testosterone Help Women Earn More Money?

Male sex hormone may affect stock trades

I also had a post on how genes can affect the way you invest. See

Is Your Investing Personality in Your DNA?

Crime and Punishment: Required Reading in My Economics Class

Okay, it is not the book Crime and Punishment by Fyodor Dostoevsky (this is a link to the entire book online). I will come back to this book. My students are required to read a chapter by this name from the book The Economics of Public Issues. It is only 5 pages long while the famous book is over 500.

One of the interesting things mentioned in this chapter is research by Steven Levitt. It deals with the question of whether or not more police officers means less crime, everything else being held constant. The problem is that cities with high crime rates will have to hire more police officers (it is the opposite for low crime cities). So it is hard to find a meaningful correlation. But this paragraph from the book shows how he got around that problem:

"In the case of police, Levitt has found that election cycles tend to have a strong independent effect on the size of police forces, enabling him to identify the impact of police on crime rates. Because crime is such a hot political issue, both mayors and governors have strong incentives (and the ability) to push for more police funding in election years. The result is that even though police forces in major cities tend to remain constant in nonelection years, they grow by about 2 percent in an average election year. Although this may sound small, it is (1) large enough to have a significant impact over several election cycles, and thus (2) large enough to detect clearly in the data."

So we can see that crime goes down when more police get hired in election years. Each city gets compared to itself, so the problem mentioned above is avoided.

Now back to the Dostoevsky book. Below are two passages that relate to economics and one sounds like the invisible hand.

"But Mr. Lebeziatnikov who keeps up with modern ideas explained the other day that compassion is forbidden nowadays by science itself, and that that's what is done now in England, where there is political economy." (economics used to be called political economy)

"if I were told, 'love thy neighbour,' what came of it?" Pyotr Petrovitch went on, perhaps with excessive haste. "It came to my tearing my coat in half to share with my neighbour and we both were left half naked. As a Russian proverb has it, 'Catch several hares and you won't catch one.' Science now tells us, love yourself before all men, for everything in the world rests on self-interest. You love yourself and manage your own affairs properly and your coat remains whole. Economic truth adds that the better private affairs are organised in society--the more whole coats, so to say—the firmer are its foundations and the better is the common welfare organised too. Therefore, in acquiring wealth solely and exclusively for myself, I am acquiring, so to speak, for all, and helping to bring to pass my neighbour's getting a little more than a torn coat; and that not from private, personal liberality, but as a consequence of the general advance."

More online versions of the book.

Adam Smith vs. Bart Simpson

Last week I attended a lecture by Paul Zak, a neuro-economist from Claremont Graduate University, at the the Mind Science Foundation. He has studied how our behaviors are affected by the presence in our brains of a chemical called oxytocin, which can affect how generous we are. The more oxytocin you have have, the more generous and empathic (or sympathetic) you are. So he calls oxytocin "the moral molecule." It helps us identify with others and understand their feelings and situatons. Oxytocin can also increase when people trust you or are generous to you.

What does this have to do with Adam Smith? He wrote a book called The Theory of Moral Sentiments. One point he made there was that we are able to sympathize with other people by trying imagine what they are going through. This is directly related to oxytocin. Last September I had a post on this called Science Proves That Adam Smith Was Right Over 200 Years Ago (sort of). That will provide you with more details.

Where does Bart Simpson come in? Professor Zak showed a video clip from the "The Simpsons" that illustrated sympathy, a concept that Adam Smith wrote about in the above mentioned book. To watch a lecture by professor Zak (very similar to the one he did here in San Antonio), go to The Moral Molecule. The Bart Simpson clip starts at the 7:40 mark. Bart's mom tells him to look at his sister and try to feel what she feels. Exactly the kind of thing Adam Smith talked about.

Oxytocin also facilitates trust. Economies need trust because not everything can be put into a law, a contract or be monitored. Your boss can't watch you every second to make sure you don't slack off on the job. We trust banks and our pension funds not to take the money and blow it all in Vegas. We trust our government officials not to accept bribes. Yes, we have rules and regulations against these things. But if we had to have a rule for everything and if everyone was being watched constantly, it would be too costly to our economy. Trust helps quite a bit.

Here are two articles about professor Zak's lecture from the San Antonio Express-News:

Emerging field offers insight into human virtues

Humans release ‘niceness' chemical

More information about neuroeconomics can be found at:

Neuroeconomics Explained, Part One

Neuroeconomics Explained, Part Two

As college costs rise, sticker shock eased by student aid

That is the title of an article that you can read by clicking here. The idea is that the listed price is very high by grants and scholarships actually lower the cost. The thing is, is that collegs don't give aid. They just charge students different prices and this is called price disicrimination.

Here are some notes on it:

Price Discrimination = Selling a given product at more than one price, with the price difference being unrelated to differences in marginal cost.

Examples include when senior citizens get discounts at restaurants or students get discounts at theaters. Firms do this because it increases their profits.


Why price discrimination raises profits

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

Necessary Conditions for Price Discrimination

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

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

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

Free Can Be Deadly

On the first day of each semester, I define a scarce good as one for which there is not enough to go around when it is given away for free. A tragedy occurred in India this week when free food and clothes were given away at a religious compound. The event was publicized more this year than in the past and many more people showed up than expected. People started gathering a few hours before the event and a stampede ensued. 63 people died, mostly women and children. Here is an article about it:

Dozens killed in India temple stampede for free clothes and food.

This kind of tragedy has happened before:

Freebies led to stampede in '04 too

The Depression Is Over!

So said an enthusiastic character in the 1934 movie Stand Up and Cheer!. We watched a video about the Great Depression in my macro classes. Here is the video clip of the man getting worked up about how everything has turned around. The text is below the clip in case the sound is not good enough.



Here is a link to the video file: We're out of the red!

Mr. Cromwell, I've got great news for you.
The depression is over.
Over, do you realize that.
Factories are opening up.
Men are going back to work by the thousands.
Our farm products are being sold the world over.
Savings accounts are heaping up.
The banks are pouring out new loans.
There is no unemployment.
Fear has been banished.
Confidence reborn.
Poverty has been wiped out.
Laughter resounds throughout the nation.
The people are happy again.
We're out of the red.

Here is the movie's IMBD synopsis: "President Franklin Roosevelt appoints a theatrical producer as the new Secretary of Amusement in order to cheer up an American public still suffering through the Depression. The new secretary soon runs afoul of political lobbyists out to destroy his department." I guess they were trying to make people feel better. Unemployment was 25% in 1933. This was one of the first big roles for Shirley Temple.

Deadweight Loss & Who Won The Olympics

After the last post, my students might wonder what "deadweight loss" is. It is the loss of social welfare caused by that dreaded demon, inefficiency. Examples are monopoly and externalities. It can also be caused by taxes. To learn more, go to the following links (which are all different)

Deadweight_loss
Deadweight_loss
Deadweight_loss

Who won the Olympics? Go to

Canada Wins The Olympics! (based on the market value of the medals