Lose the Fat to Lower Your Insurance Rates

Want to lower your life insurance rates? Cut your BMI or Body Mass Index. Read the short article here or here or here.

The basic idea is that if you are healthier, you live longer and life insurance companies like that. Some of my students might recall one of the lessons from the supply and demand game. That was that one condition for markets to work optimally is that buyers and sellers have equal access to information. When they don't, markets won't work as well as they should.

For instance, in used car markets, the sellers know alot more about the product than the buyers. Economists have studied the problems this causes in the "market for lemons" research. But in insurance markets, buyers know more than the sellers. You know how risky you are but the insurance companies don't. Insurance companies want your premiums to reflect your risk. The riskier people need to pay higher premiums. Now, with the lower rates for people with lower BMIs, they are getting closer to matching risk with premium levels for individual customers.

Is Howard Stern Worth $100 Million a Year?

Sounds too hard to believe, but maybe he is worth that much. Read this story to see why.

Here are some basic details:

He signed a 5-year, $500 million dollar deal in October 2004. Sirius now has 6 million subscribers yet they were only projected to have 3.5 million. So after Sirius signed Stern, they ended up with 2.5 million more subscribers than expected. That may not all be due to Stern. But Sirius charges subscribers $12.95 per month. That is $155 per year. Times 2.5 million extra subscribers, that makes $388 million more per year in revenue than expected. So Stern is only getting about 25% of that. Even if you throw in the $82.9 million bonus and spread it out over 5 years, he is still only getting about 30% of the increased revenue. Is it possible he is underpaid?

RUBEN NAVARRETTE Says Envy, Class Jealousy Are Wrong

Click here to read the article

He says some people earn more than others because:

"Much of it is tied to individuals' decisions about how much education they're going to pursue, and how hard they're going to pursue it. Most obstacles people face are self-imposed and self-designed. We can't say that enough, especially at a time when too many Americans blame others for their troubles, failings and shortcomings."

and

"Whether movie stars, professional athletes or television and radio personalities, a simple formula decides someone's worth: It's what someone else is willing to pay them. I bet that makes sense to most people. But for others, there is an emotion that always seems to get in the way. It's class envy - the sense that it's simply not fair that some earn in an hour what it takes others to earn in a month. It doesn't help that plenty of politicians and pundits shamelessly try to cultivate that resentment and use it for their own purposes."
Is Navarrette right?

Colleges punish illegal downloaders

Are these students getting what they deserve? You can leave comments anonymously. Here are some excerpts from the article

"For students who are caught, punishments can vary from e-mail warnings to semester-long suspensions from classes."

Students caught twice are forced "to watch an eight-minute anti-piracy DVD produced by the RIAA."

"Under federal law, universities that receive complaints about students illegally distributing copyrighted songs generally must act to stop repeat offenders or else the schools can be sued."

You can read more about this here and here and here and here

Does Money Make You Mean?

Go to Does Money Make You Mean? to see the article. Here is the intro:

"We all know that money can't buy love or happiness. But could just thinking about money actually make you mean?

A new behavioral study finds that folks with money on their minds are less helpful, less considerate and less willing to ask for assistance or engage with others than those who have not been preconditioned to money. On the bright side, the money-minded tend to be more independent and focused and they tend to work longer on a task before asking for help."

If any of my students get a chance, let me know what you think of this issue.

HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL

The first annual HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL will be held on March 31 at Pepperdine University. It has been organized by Dr. Elliot McGucken. Here is a description of the day-long event:

"The Hero's Journey Entrepreneurship Festival seeks to give students, artists, and entrepreneurs the tools to make their passions their professions--to protect and profit from their ideas--to take ownership in their careers and creations. For Adam Smith's invisible hand enriches all when happiness is pursued by artists and innovators--society's natural founts of wealth."

There will be several talks and panel discussions. I might be there and give a talk (but that is still being worked on). This festival gets at Why this blog is called The Dangerous Economist. For more information go to The Relationship Between Economics and Mythology

John Foster Kane? HA HA HA!

The CBS news just had a story about snow globes and they referred to Orson Welles' character in the movie "Citizen Kane" as John Foster Kane. The caption even read John Foster Kane. I thought everyone knew it was Charles Foster Kane. What a joke that the supposed intelligentsia of the media does not know the right name. This movie is a very important part of American culture.

Semester Ends

Since we are in finals week and then will be on break, I might not blog very much over the next month.

If Prices Are Not Used, Other Allocation Methods Emerge: Police Officers Get PS3's First

An entry from a couple of weeks ago showed how we could end the violence and chaos surrounding the Play Station 3. There didn't seem to be enough to go around at the price the stores had set. I suggested raising the price to end the problems. Now we find out that cops have been getting preferential treatment in buying this rare commodity. This is further proof that if market prices are not allowed to determine allocation, some other way will be found, one which we may not like. Here is the opening of the AP story.

"PROVIDENCE, R.I. --Two police officers are under investigation for allegedly using their influence to skip a long line of shoppers waiting to buy the PlayStation 3 video game system the day it went on sale, authorities said."

You can read more here or here.

Want to Get Rich? Improve Your Health

One thing individuals can do for themselves is to stay healthy.

"A new study published in the British Medical Journal finds the healthier you are, the richer you will be. Researchers examined the link between health and wealth in rich countries and found that healthier people are more productive at work, earn more and spend more days in the work force because they don't take as much sick leave."

You can read this study at Lean Times

Another Way the Internet Increases Efficiency

It makes shopping more efficient. From an article in the Nov. 29 issue of The Wall Street called The Internet Allows Consumers to Trim Wasteful Purchases. It was by By WILLIAM M. BULKELEY. My San Antonio College students might be able to read this through our library's website.

Here is an exerpt:

"Photo companies made customers pay for 24 shots in a roll of film to get a handful of good pictures. Music publishers made customers buy full CDs to get a single hit song. Encyclopedia publishers made parents spend thousands of dollars on multiple volumes when all they wanted was to help their kid do one homework paper. The business models required customers to pay for detritus to get the good stuff."

So now we take digital pictures and can save only the ones we want. We don't pay for ones we don't want. We can download songs and only pay for the ones we want.

Symbols and the Minimum Wage

There is talk coming out of Washington about rasing the minimum wage. I am one of those economists who thinks this is a bad idea. The law of demand says that as the price of something goes up, its quantity demanded goes down. So fewer low-skilled workers will be hired.

"... research shows that in the long run the adverse effects of a higher minimum wage are quite substantial." (page 84, The Economics of Public Issues, 13e, by Roger LeRoy Miller, Daniel K. Benjamin, and Douglass C. North).

"In a new report, economists David Neumark of the University of California at Irvine and William Wascher of the Federal Reserve Board say a review of more than 90 studies in more than 15 countries since the early 1990s shows nearly two-thirds of the studies find a "consistent" though not always statistically significant negative impact on employment. Fewer than 10 found a consistently positive impact. While there's "no consensus," they say, "the weight of empirical evidence" supports the traditional view." (The Wall Street Journal, p. A4, Nov. 3, 2006)

From Greg Mankiw's blog:

"Economists Richard Burkhauser (Cornell University) and Joseph Sabia (University of Georgia) report:

a beneficiary from a proposed federal minimum wage hike to $7.25 an hour is far more likely to be in a family earning more than three times the poverty line than in a poor family. In total, only 12.7 percent of the benefits from a federal minimum wage increase to $7.25 an hour would go to poor families. In contrast, 63 percent of benefits would go to families earning more than twice the poverty line and 42 percent would go to families earning more than three times the poverty line."

Gary Becker and Richard Posner at their blog discussed how the minimum wage is a symbol and not a substantive way to fight poverty. But this brings me to my point: that symbols are very important in politics. Symbols express emotions and that is often what wins over voters. It makes it look like the government cares about the poor. I have written about the role of symbols at

The Inter

More Free Give Aways Lead to Trouble

A shopping mall in California gave away free gift certificates. They were in balloons that were dropped. The only problem is that 2,000 people showed up for 500 gift certificates. Nine people received minor wounds and an elderly woman went to the hospital as result of the stampede to get the balloons once they were dropped.

Any time the price of a good is 0, you won't have enough to go around and some other way of allocating the good will take place. In this case, people who could move the fastest and knock other people down got the goods.

You can read about this at this site

Stephon Marbury: Entrepreneur and Social Activist

NBA star Stephon Marbury has a new shoe that sells for just $14.98. You can read about it here.

He says that kids pay too much for basketball shoes endorsed by big stars (some over $100). He also says that they actually don't cost much to make (under $15). So he wants to make things easier for low-income parents to afford shoes for their kids.

So is this shoe any good? Are kids going for it? Although Stephon Marbury is trying to help people, it is also good old-fashioned capitalism at work. He spotted an opportunity for profit and is under cutting the competition.

If Prices Are Signals, Are Taxes Noise?

Economists often say that prices are signals. A high price signals to the market that something is relatively scarce. Consumers should minimize their use of it or producers should try to produce more of it. If that happens, the signal has done its job. But what if some "noise" distorts the signal? It won't do its job very well.

In analog and digital communications, signal-to-noise ratio, often written S/N or SNR, is a measure of signal strength relative to background noise. If it is too low, communication is difficult.

What if we called the price-to-tax ratio the signal-to-noise ratio of the economy? It would be a measure of how much a market has been distorted and how poorly the market will perform as a result. A high ratio means the market will work well. As it falls, the market performs more poorly.

Harvard Professor Greg Mankiw issued a challenge to economists to explain the damage done by taxes. It is something that we can show using supply and demand curves, calculating something called deadweight loss triangles. This loss actually grows at a faster rate than the tax grows (impyling that the tax does disproportionate damage). The loss stems from the fact that a tax raises the price, thereby reducing profits for producers since consumers buy less (who are also hurt, obviously paying more and getting less). Sellers and buyers each pay part of the tax, depending on the supply and demand conditions. But that kind of analysis does not work in newspaper columns. He wondered if there was some other way to explain this disproportionate damage without having to explain supply and demand curves and calculating the area of trianlges. Below is what I posted:

"Suppose that the income tax rate is 0%. Then the ratio of taxes paid to disposable income (tax/DI) is 0 since you pay no taxes and 0 divided by anything is zero.

If a tax of 10% is then enacted, the ratio becomes 10/90, since you keep 90% of what you make and pay 10%. This is about .111. So the tax went up 10 percentage points, while the tax/DI went up .111. So they rose about the same amount.

But as the tax rate goes up, very quickly the tax/DI starts rising alot more than the tax rate. If the tax rate goes from 10% to 20%, the tax/DI goes from .111 to .25. If the tax rate then goes from 20% to 30%, the tax/DI goes from .25 to .429. From 30% to 40%, tax/DI goes to .667.

So the tax/DI ratio keeps rising at a faster and faster rate than the increases in the tax rate. Think of this as a noise-to-signal ratio. It can be applied more directly to Mankiw's original question. The more we tax a product, the faster the noise-to-signal ratio increases.

Since economists always say that prices are signals that steer resources to their most efficient use, the greater this noise-to-signal ratio, the less efficient the market will become and this damage accelerates with each incremental increase in price."

What I have below is technical and probably only economists will be interested. But it shows that my noise-to-signal ratio tracks the rise in deadweight loss very well.

Suppose we have a demand line with a slope of -1. Intercept is 11. Supply starts at the origin and has a slope of 1. So equilibrium price is 5.5 and equilibrium quantity is 5.5. An excise tax of 1 raises price to 6 and creates a deadweight loss of .25. My noise-to-signal ratio would be .5 over 5 since the seller pays .5 of the tax and actually receives 5. That ratio is .1. If the tax is 2, the price is 6.5. DWL is 1 (so the tax doubled yet DWL quadrupled). My noise-to-signal ratio would be 1/4.5 = .222. So the tax doubled yet my noise-to-signal ratio more than doubled. In the numbers below, the first column is the tax level, the 2nd is the noise-to-signal ratio and the 3rd is the DWL

0-0.0-0
1-0.1-0.25
2-0.222-1
3-0.375-2.25
4-0.571-4
5-0.833-6.25
6-1.2-9
7-1.75-12.25
8-2.67-16
9-4.5-20.25
10-10-25


If you graph this, up to a tax of 8, the line is almost straight. Beyond that, DWL rises much more slowly as the tax rises. But for the most part, as my noise-to-signal ratio rises the DWL rises at a steady rate.

Did Forbes Magazine Intentionally Snub the Grand Negus?

I AM CALLING ON ALL STAR TREK FANS TO BOYCOTT FORBES MAGAZINE!

Forbes magazine released its annual list of the richest fictional characters (you may have to get past an ad page). Here is their list:

Oliver "Daddy" Warbucks
Montgomery Burns
Scrooge McDuck
Richie Rich
Jed Clampett
Mr. Monopoly
Bruce Wayne
Tony Stark
Prince Abakaliki of Nigeria
Thurston Howell III
Willy Wonka
Lucius Malfoy
Tony Montana
Lara Croft
Mario

Where is the Grand Negus, leader of the Ferengi people (from the planet Ferenginar). These are the most succesful entrepreneurs in the galaxy. Surely the Grand Negus has more wealth than Daddy Warbucks. This is an inter planetary incident of galactic proportions.

You can read more about the richest fictional characters here

Milton Friedman vs. John F. Kennedy

Below are the first two paragraphs from the introduction to Friedman's 1962 book Capitalism and Freedom. Friedman died last week at the age of 94 (see an earlier entry).

"IN A MUCH QUOTED PASSAGE in his inaugural address, President Kennedy said, "Ask not what your country can do for you - ask what you can do for your country." It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your 'country" implies tht government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather "What can I and my compatriots do through government" to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect? Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp."

How to Stop the PlayStation Violence

Just in case you have not heard about the mobs and the shooting associated with PS3 going on sale read PS3 Debuts to Long Lines, Conn. Shooting

People wait in line a long time when these video games go on sale. In effect, the price is too low. So there is a shortage. The number of the PS3 video game consoles that people want to buy at the going price ($500) is much greater than the amount available. Riots and stampedes sometimes break out when things are given away for free. The only difference here is that a price is being paid, but it is still far below the intersection of supply and demand.

To stop people from waiting in line (and encouraging muggers to come by), a much higher price would reduce the quantity demanded. Other products sell every day for more than $500 a pop and there are no problems. The stores should start out selling them at $1,000 and reduce it by $50 or $100 a day to gradually bring them into the market. A few people will buy them the first day at the higher price. But you won't have the lines or the mobs. The stores could even publicize that they will give some of the excess profits to charity. As the price comes down, more people will buy them. But it will be fewer than the mobs we see on the first day now since a few customers will already have theirs and won't need to show up.

How do I know a few people will buy them at such a high price on the first day? The long lines now prove how much people want it. Some will be willing to pay more not to have to stand in line.

Remembering Milton Friedman, 1912-2006

A great and important economist died today, Milton Friedman (he won the Nobel Prize in 1976). Among his many books are Capitalism and Freedom and the best seller Free to Choose. He was an advocate for free market policies. His ideas on macro polciy have been influential, helping convince central banks and monetary authorities (like the Federal Reserve) to do more to fight inflation. By keeping inflation in check, we all prosper since it makes long-term investing and saving more viable. Many Americans probably don't realize how much we owe to Friedman. It seems like no one recalls that from 1975-1983 both inflation and unemployment averaged 7.7% (inflation has averaged just about 3% since 1983-unemployment averaged 5.75% in the 1990s and 5.11% since 2000).

Here is a brief biographical exerpt of his contributions found at The Conscise Encyclopedia of Economics

"Although much of his trail-blazing work was done on price theory—the theory that explains how prices are determined in individual markets—Friedman is popularly recognized for monetarism. Defying Keynes and most of the academic establishment of the time, Friedman presented evidence to resurrect the quantity theory of money—the idea that the price level is dependent upon the money supply. In Studies in the Quantity Theory of Money, published in 1956, Friedman stated that in the long run, increased monetary growth increases prices but has little or no effect on output. In the short run, he argued, increases in the money supply cause employment and output to increase, and decreases in the money supply have the opposite effect.

Friedman's solution to the problems of inflation and short-run fluctuations in employment and real GNP was a so-called money supply rule. If the Federal Reserve board were required to increase the money supply at the same rate as real GNP increased, he argued, inflation would disappear. Friedman's monetarism came to the forefront when, in 1963, he and Anna Schwartz coauthored Monetary History of the United States, 1867-1960. In it they contend that the Great Depression was the result of ill-conceived monetary policies by the Federal Reserve."

But there is more. This year's winner of the Nobel Prize in Economics, Edmund Phelps, got the award for a contribution that both he and Friedman made (so Friedman could have won two Nobel Prizes). Here is the explanation for Phelps getting the award from The New York Sun

"Mr. Phelps demonstrated in a series of articles published in the late 1960s and 1970 that unemployment could not be reduced or held down by inflating prices. He introduced the concept of "expectations" into the conversation about inflation, arguing that the expected rates of inflation and unemployment play an important role in determining what future inflation and unemployment rates will be: that is, high expected rates of inflation contribute to high inflation. Milton Friedman, a 1976 Nobel recipient and renowned capitalist theorist, advanced a similar theory."

Good News on Wages, Income and Wealth

My last entry showed how we were doing well on jobs.

Median family income rose in 2005. The real or inflation-adjusted hourly wage is higher for all income levels than in 1973, according to Janet Yellen, President of the Federal Reserve Bank of San Francisco (she actually used data from Economic Policy Institute). Even the poorest 10% of the workers are 5% higher. That may seem low, especially compared to the 30% jump the top 10% had. But from 1973-95, the bottom 10% actually saw their real hourly wage fall 5%. So things have picked up since then. Go to Yellen Speech and Larger view of graph of wage changes

Real per capita GDP has more than doubled since 1970.

Median real family net worth rose about 31% from 1995-2004 (but only up 1.5% 2001-04). The median removes the bias of the mean or simple average, which could rise simply if those at the very top had large gains. The simple average of real family net worth rose for all income brackets. Go to FED Study

Consumption is up, too. From 1970-2000, real per capita consumption (not counting health care) rose about 85% (and up 8% just since 2000). It is not only the upper income groups who are consuming more. In 1960, the top 20% of income earners spent a little under 6 times more on consumption than the poorest 20%. In 2005 this ratio was just a little above 6. This means both the rich and poor increased their consumption by about the same rate since 1960. Consuming more goods and services contributes to our well being. Got that from the micro principles book by Miller