When it Comes to the Economy, It looks Like Politics as Usual

There is a theory called "the political business cycle" that posits that the party in the White House will try to get a little extra growth out of the economy in the year before the election to improve their re-election chances. Whatever they do policy wise about a year ahead of time might not be good in the longer run, after the election. But that is okay, the theory also says that voters have short memories.

So last week, when the Federal Reserve Board cut a key interest rate (the Federal Funds Rate) by half a percentage point and the stock market soared, my cynical self said, "hey, that sounds like the political business cycle I always talk about near the end of the semester in macro." The cut in interest rates will help stimulate demand. It could lead to higher inflation, but that increase could come after the election.

In the 24 years including 1981-2004, there were 6 election years. In those six election years, the average increase in real GDP (adjusted for inflation) was 4.41%. In the 18 non-election years, it was 2.74%. That may not seem like alot, but the 4.41 is actual 61% higher than 2.74 (since 4.41/2.74 = 1.61). Also notice that 4.41 - 2.74 = 1.67. So that means that if the per capita GDP were going to be, say, $40,000, it will be 1.67% more than that. And that means an extra $668. Would you sell your vote for that much?

Statistical detectives, including economists, are changing the world

The New York Times had a review of the book Super Crunchers: Why Thinking-by-Numbers Is the New Way to Be Smart by Ian Ayres. The basic idea is that if you do it right, it is better to make decisions based on using numbers than your feelings or expertise or experience.

Here is a brief exerpt:

"What is it about math that can make people so angry? In the late 1980s, a wine lover named Orley Ashenfelter began publishing a newsletter called Liquid Assets that predicted how good each Bordeaux vintage would turn out to be. Instead of basing his judgments on the taste or smell of the wine in its early stages, Ashenfelter, an economist at Princeton, preferred data. He had come to believe that the weather during a growing season in Bordeaux was a remarkably accurate predictor of the eventual price of the wine. A hot, dry year seemed to make for great Bordeaux.

As you might expect, wine critics didn’t take very kindly to the professor’s ideas. A British wine magazine denounced their “self-evident silliness.” Robert Parker called Ashenfelter “an absolute total sham.” Eventually, Wine Spectator stopped accepting advertisements for newsletters, apparently because of Liquid Assets.

Ayres’s point is that human beings put far too much faith in their intuition and would often be better off listening to the numbers. Ashenfelter, using data, predicted that the 1986 Bordeaux vintage would be ordinary, while Parker, relying on expertise, said it would be exceptional. Ashenfelter was right."

Click here to read the reivew. You might have to register and allow cookies to read it.

Should the Government Pay People to Have Sex?

Sounds crazy, but a Russian Governor thinks that it is a good idea. To fight a dwindling population married couples are given time off from work to have sex. On the officially named "Day of Conception" in Ulyanovsk, people are allowed to stay home. Any couples that have a baby nine months later will be rewarded with gifts ranging from money, to refrigerators and cars. They have done this for three years and it has increased the birth rate. As we say in economics, incentives matter. You can read all about it at Residents Of Ulyanovsk Russia Get Day Off Work To Have Sex.

Environmentalists vs. . . . other environmentalists? Or, are birds more important than clean, cheap energy?

The San Antonio Express News had an article on the front page yesterday called It's down to the wire for bird lovers to make a bid to halt wind farms.

It seems that although wind power is clean and if not now, someday might be cheaper someday than other power sources, migrating birds can be killed by wind turbines. This is another example of there being no free lunch. There are always tradeoffs. Want less dependence of fossil fuels (especially the imported kind) and a cleaner environment? There may be fewer birds. Here is one passage from the article:

"The debate has become nasty at times, with local Audubon societies and the famous King Ranch facing off against the John G. and Marie Stella Kenedy Memorial Foundation and the John G. Kenedy Jr. Charitable Trust, which own the land where the turbines would be built."

Pickup trucks are legal again in Coral Gables, Florida. Will property values fall?

The town of Coral Gables, FL has had an ordinance that bars people from parking pickup trucks on the street between 7 am and 7 pm. It seems that pick up trucks are not aesthetically pleasing. So this ban had been in effect for 4 decades and a man challenged a fine in court and won. The court ruled the ordinance was unenforceable. But now those ugly vehicles will be on the streets. I guess they will cause a negative externality, making the town less appealing. People will be less interested in moving there. With a fall in demand for housing, the property values fall. The town also regulates what color you can paint your house and how high your grass can be. Some believe the pickup truck law was in effect to keep out certain elements. Below is a link to the story

Pickup Trucks Now Allowed To Park On Coral Gable Streets

A Possible Invisible Hand "Sighting"

This was posted at The Internet Movie Database:

"Sales Boom for HDTV Sets, But Where's the Profit?

Consumer electronics stores may be doing a booming business in big-screen, high-definition TV sets these days, but they are seeing profit margins drop as a result of a supply glut and intense competition from mass merchants like Wal-Mart and Costco, the New York Times reported today (Tuesday). The newspaper cited research by iSuppli indicating that the price of 42-inch HDTVs has declined 23 percent to $1,655 from $2,140 last Christmas. The newspaper noted that Best Buy recently attributed a 6-percent drop in its gross profit rate in large part to "promotional environment in home video." Still, the price of big-screen HDTV sets remains beyond the means of many consumers, and, the Times observed, there are signs that sales are slowing. Morgan Stanley analyst Greg Melich told the Times: "For the past few months, growth in the total TV market has been zero or negative, because demand is not there at these price points.""

So I would like to hear from my students. Any experience with the HDTV market? Anyone getting good deals? Are they worth it? This little piece implies that the desire to profit from selling HDTVs is leading firms to lower the price.

The Magic Words in Economics

My students know this means "holding all other factors constant." This is part of what makes economics so powerful. For example, we know many factors influence how much of a product you will buy (like income, tastes, ect.) But if we assume that all of those are held constant, we can say that when price falls, ceteris paribus, that the quantity consumers wish to purchase rises. This is known as the Law of Demand. It allows us to describe how markets behave (along with the Law of Supply).

We also know how a market will be affected by a tax or a regulation since we will hold all other factors constant. We can make a reasonable prediction using supply and demand. For example, if sellers have to collect a dollar every time they sell one unit and give it to the government (an excise tax), we can easily show that price will rise and the quantity bought and sold in the market will fall. We can also determine how much of the tax the buyer will pay and how much the seller will pay (and it is not always an even split). Now that's magic.

Students: Make a mistake on purpose, its good for you!

This may sound surprising, but counselors advocate making a mistake on your college applications like an intentional typo. This makes you seem more "authentic." Too often all students look slick and identical. They got good grades, test scores, were on teams, did volunteer work, etc., all with the idea of getting into college. But is that who you really are if you do it just to impress the college? That is why counselors suggest making mistakes. Then your application makes you seem like a more real person, not too good to be true. Of course, colleges project an image, too with their pictures of the nicest parts of the campus and groups of smiling students in their catalogues to make you want to go their. Seems like everyone is trying to impress everyone else with an image. There is a very good article on all of this called
Colleges seek 'authenticity' in hopefuls.

I also recommend a BusinessWeek article called
The Myth of Authenticity. Here is a brief description of it:

"What do brands like Häagen Dazs, Baileys Original Irish Cream, Bombay Sapphire and Kerrygold all have in common? Each stretches the myth behind the brand to promote heritage and authenticity"

Moscow is world's most expensive city to live in

You can read about it

here

here

here

One article says "In Moscow, a luxury two-bedroom apartment will cost an expat $4,000 a month; a CD rings up at $24.83; one copy of an international daily newspaper is $6.30; and a fast-food hamburger meal totals $4.80." Only two U.S. cities made the top 50, NY and LA (probably no surprise). The cost of living is 35% higher in Moscow than it is in NY. Another article says "rents in central Moscow can range from $10,000 to $20,000 per month."

Sell Your Genes! Make Big Money!

A recent column by David Brooks discusses how people can sell their sperm or eggs for big bucks if they have the right characteristics. Smart, tall, healthy, athletic, well educated people can get the highest prices at sperm banks and egg banks. Apparently, the buyers want to make sure that their off spring will have the best genes. According to the article "An ad in The Harvard Crimson offered $50,000 for an egg from a Harvard woman." There seems to be a market (supply and demand) for just about everything. The article is America's new pastime: gene shopping.

Interesting Book: Stumbling on Happiness

Harvard Professor Daniel Gilbert has written a book called Stumbling on Happiness. Here are some exerpts from the article:

"our decisions about what will make us happy -- or unhappy -- almost always are clouded by inaccurate memories and over-reliance on present feelings."

"you can't rely on your past or present to predict your future because brains file away only a few cues to memory, mainly the highs and lows of an experience."

"Ignorance about the brain's defenses against unhappiness also distorts judgment"

"people of every age and every walk of life seem to regret NOT having done things much more than they regret things they did."

Since we assume in economics that people try to maximize their utility or happiness, this seems like an important book. Although he may be right that we don't always know what will make us happy, if we make mistakes, it does not mean we are not rational. Remember, to be irrational means we intentionally make ourselves worse off. So if you don't do the right thing to make yourself happier because you didn't know what it was, you are not necessarily irrational.

Want a gas well in your backyard?

Its happening in the Dallas-Fort Worth area. Oil and gas wells are being drilled in urban areas not too far from houses. But there is big money and some people and communities are getting royalty payments. According to a recent article "150-foot drilling rigs are rising over golf courses, churchyards, even tree-lined neighborhoods." Drilling causes "noise, vibrations and odors"." (not to mention environmental concerns) So is it worth it to have your neighborhood tranquility diminished? The article is called "Tapping wells of resentment."

Eating Healthy is Cheap

In my face-to-face class, we read a chapter from the book The Economics of Public Issues on how Americans have been gaining weight. It mentioned that food has gotten relatively cheaper over time and we lead more sedentary lives. But there was an interesting article in The Washington Post recently. The author, Tom Wolfe, says you don't have to spend much to eat healthy. Here is part of what he said:

"I began adhering to a $25 weekly food budget in early April specifically to test the economic feasibility of living on organic whole grains, dried beans and fresh vegetables. On that $3.57 a day, I have been able, through careful planning, to feed myself well -- with enough left over to prepare lunch four days a week for the five people on the staff of my store. Virtually my entire diet since April has been grains and beans grown certified-organic and a mix of organic and cheaper non-organic vegetables."

The entire article is here.

Is College Just an Expensive IQ test?

My school is on break and I usually only post entries when classes are in session. But there was a great article by JAMES TARANTO in The Wall Street Journal on Friday called "Disparate but Not Serious: College is an expensive way of taking an IQ test."

The idea seems to be that since employers are forbidden (since the 1970s) from using intelligence tests for hiring, there is more importance attached to getting a college degree and colleges can use tests likeSATs for admission. The author also thinks it is related to civil rights issues. A college degree has always been a signalling device to show employers that you are smart and hard working. But it is even more so now for legal reasons. A free version is at

Disparate but Not Serious: College is an expensive way of taking an IQ test

End of Semester

This is finals week at San Antonio College. I may not post anything until early June when the summer semester starts.

My Tax Idea Made the Wall Street Journal

Below is a letter I wrote to the Wall Street Journal that was printed in the April 30 edition:

"Stephen Moore did a great job explaining how complicated our tax code is and how high taxes have gotten relative to what was originally promised in 1913 ("Those April Blues," page A12, April 13). One other way to see the insidiousness of taxes is to realize that they are just as much the "noise" in the economy as prices are the "signals." The income you get paid is the price for your services and therefore signals the value of those services. But taxes reduce the clarity of that signal (hence, they are noise) by reducing how much of your pay you actually get to keep. As taxes increase, the noise-to-signal ratio in the economy increases even more, meaning distortions, and the mis-allocation of resources they cause, increases disproportionately. For example, if the income tax rate is 10%, you keep 90% of your income. The noise-to-signal ratio is .111 (or .1/. 9). But if the tax rate goes up by .10 or to 20%, the noise-to-signal ratio goes up even more, by .15 to .25 since you keep 80% of your income. The .25 comes from .20/.80 equaling .25. Another .10 increase in the tax rate increases the noise-to-signal ratio by .179 from .25 to .429. Then going from a 30% tax rate to a 40% tax rate makes it go up by .238, from .429 to .667. Every tax increase causes increasing damage to the economy's ability to efficiently allocate resources."

I had blogged about this last November. To read more about why this makes sense and what the theoretical foundation is go to If Prices Are Signals, Are Taxes Noise?.

Women and the Pay Gap

The American Association of University Women issued a report. One of the things it says is:

"Ten years after graduation, women fall further behind, earning only 69 percent of what men earn. Even after controlling for hours, occupation, parenthood, and other factors known to affect earnings, the research indicates that one-quarter of the pay gap remains unexplained and is likely due to sex discrimination."

I emailed them the following question but have not heard back:

"So the 69 percent means that women earn 69 cents for every dollar that men make ten years after college. That makes the gap 31 cents. But when these other factors are accounted for, one-quarter of the gap remains. Since one-quarter of 31 is 7.75, that means when all other factors are held constant, women earn 92.25 cents for every dollar that men make. Is my interpretation correct? How does this compare to what other studies have found? Is this gap changing over time? Were any other causes for the remaining 7.75 cents examined besides sexual discrimination?"

An article by Steve Chapman gives a different view than the American Association of University Women on this issue.

Game Theory and the Prisoner's Dilemma on the TV Show "Numb3rs"

The show mentioned this along with the scholar Anatol Rapoport who used the "tit for tat" strategy to win a prisoner's dilemma tournament. This game has applications in economics. I play it in my class then talk about how it relates to oligopoly in microecomics. Oligopoly is a market structure where a small number of firms dominate, like the auto industry. The idea in the prisoner's dilemma is that two criminals are being interrogated in separate rooms. It turns out that they would both be better off (in terms of how much jail time they will get) if they don't confess to a crime. But if one confesses while the other does not, the confessor gets alot less jail time while the one who did not gets alot more. So they each have a temptation to confess even though they would both be better off if they did not confess. How exactly this works is explained here and here. How things worked in the tournament that Rapoport won is described here. His method of playing turned out to be the best even though it was simple. How all of this works for the oligopoly and how those firms set prices is explained here.

In the tournament, players can choose two possible moves on each play: cooperate or defect. Cooperate means playing nice and not getting too greedy. Each player makes a move and gets points depending not only on what move they made but on what move the other player made. The "tit for tat" strategy means being nice (cooperating) but punishing (defecting) if the other player defects. If both players cooperate, they get more points than if they defect. But the temptation to defect is strong because if you defect when the other person is trying to cooperate, you get even more points (and the cooperator gets less). With the firms in oligopoly, cooperate is charge a high price. But the temptation is to defect, charge a lower price, and make more profit than your competitor. But then they start lowering the price, too, and you both make less profit than if you both charged a high price.

Why Do Intellectuals Oppose Capitalism?

This is the title of an essay by the famous philosopher Robert Nozick. You can read it here. I had a blog entry on how college professors are liberal, so this essay by Nozick might explain that. My blog entry from last year can be read here.

Here are two key paragraphs from Nozick's essay:

"Intellectuals now expect to be the most highly valued people in a society, those with the most prestige and power, those with the greatest rewards. Intellectuals feel entitled to this. But, by and large, a capitalist society does not honor its intellectuals. Ludwig von Mises explains the special resentment of intellectuals, in contrast to workers, by saying they mix socially with successful capitalists and so have them as a salient comparison group and are humiliated by their lesser status. However, even those intellectuals who do not mix socially are similarly resentful, while merely mixing is not enough--the sports and dancing instructors who cater to the rich and have affairs with them are not noticeably anti-capitalist.

Why then do contemporary intellectuals feel entitled to the highest rewards their society has to offer and resentful when they do not receive this? Intellectuals feel they are the most valuable people, the ones with the highest merit, and that society should reward people in accordance with their value and merit. But a capitalist society does not satisfy the principle of distribution "to each according to his merit or value." Apart from the gifts, inheritances, and gambling winnings that occur in a free society, the market distributes to those who satisfy the perceived market-expressed demands of others, and how much it so distributes depends on how much is demanded and how great the alternative supply is. Unsuccessful businessmen and workers do not have the same animus against the capitalist system as do the wordsmith intellectuals. Only the sense of unrecognized superiority, of entitlement betrayed, produces that animus."

Update on April 26: More info on political affiliations in higher education can be found here. Scholars who claim that social science and humanities professors tend to be Democrats defend their views.

Our Standard of Living Continues to Grow

A report from the Census Bureau shows that even more so than in 1992, our material needs are being met. You can read about it here in an article by Cox News Service reporter Bob Dart.

The percentage of Americans who have an air conditioner and other appliances has gone up since 1992. We are generally getting our basic needs met like food, shelter, medicine and safety. Alot more of us have things like microwave ovens and VCRs.

Former Communist Countries Benefit From Economic Freedom

In my macro class, we read a book called "The Economics of Macroissues." In the first chapter they show how countries with common law systems (as opposed to civil law systems) that tend to respect property rights have higher rates of economic growth. The difference does not have to be big. Over time, even an extra half of one percentage point in economic growth can add up. If your economy grows 2.5% a year for 100 years, it will increase 11.81 times. That means if your country's per capita income was $1,000 to begin with, 100 years later it will be $11,810. But if your economy grows 3% a year, after 100 years your per capita income would be $19,219. More than $7,000 higher than the other country and about 62% higher.

A recent study by the Dallas Federal Reserve Bank shows that the country's that had the most economic freedom among the former communist nations or Soviet republics have had the highest growth rates. You can read this study here. I think this result is important because someone could always claim that the countries around the world with higher growth rates had them not because of more economic freedom but for some other reason. But this study has alot of countries that began with alot in common, having been former communist states. Yet again, more economic freedom means more growth.

What Rules Pop Culture?

There was an interesting article in the Sunday New York Times Magazine. You can read it here. The article raises the question of why do some bands or movies become so popular. Were they just good or was there some kind of luck involved? According to the article, "reliable hit prediction is impossible." Maybe if the world had been only slightly different, the Beatles might not have been as popular as they were. The author of the article, Duncan Watts, used the internet to run some experiments (described in the article). To make a long story short, it seems that what we end up liking is based largely on knowing that someone else likes it. But in some experiments a song became very popular and in others it did not. If, in the beginning, people saw that other people just happened to like a song, then they liked it and vice-versa. All of this is clearly described in the article, which is relatively short and well written.

A Real Estate Double Whammy?

The housing market is always in the news. Prices soar. Then prices fall because there is a glut on the market. But within a couple of blocks of where I live, there are two apartment buildings that both have a for sale sign and a for rent sign on the front lawn. It seems like the for sale sign would scare away renters since you won't know who your landlord will be. The for rent sign would scare away potential buyers since they might wonder if they could actually make money on the building. It would also make you think that is why the building is being sold-not enough renters.

Maybe this is sign of where the housing market is. There are so many houses out there that not too many people need apartments anymore. So being a landlord is not attractive. But owning a house is not always better than renting an apartment. When my wife and I looked at houses a few years ago, anything that would have given us a comparable amount of square footage as our apartment would have been $200-$300 more a month when you consider the mortgage and property taxes. Then if anything needs fixing, we would have to pay. And take care of the lawn.

Now some would say we would build up equity in the house. But we can also save more money and that builds up over time. The only good the equity in the house would be is if we borrowed against it later in life, like with a reverse mortgage. But that is only if the value of the house appreciates. There is no guarantee that the value of the house would rise fast enough to match how much our savings account would increase.

Interesting Theory on Stock Market Fluctuations

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

Life in the Pits: Anthropology Meets Economics

There is a new book out called Out of the Pits: Traders and Technology From Chicago to London. It is by Caitlin Zaloom, an assistant professor of social and cultural analysis at New York University. Below are some exerpts from an article she wrote in The Chronicle of Higher Education. Maybe you have heard of or seen the trading pits of commodities exchanges (like in the Eddie Murray/Dan Ackroyd movie "Trading Places"). The traders are buying and selling commodities like gold and wheat by yelling out their orders and offers to the other traders. But things are changing and becoming more computerized. Here are the exerpts from Zaloom's article:

"At work on the trading floor, I soon learned that a fundamental transformation was, indeed, taking place. The trading pits of Chicago were quickly being dismantled by the electronic technologies that connected traders at computer terminals around the world to a central server, swapping the raucous action of the pits for the quiet hum of online circuits. Geertz's example (Clifford Geertz was a famous anthropologist who looked at economic life) inspired me to assess what social changes facilitated such an important shift in the way money circulated around the globe, even as advocates championed the power of network connectivity and low costs of electronic trading.

The most significant transformations concerned the kind of people and the types of skills that do well in online markets. For generations, Chicago's trading fathers helped their sons into the business, and neighbors who shared fences provided entry-level jobs, like clerking, to each others' kids. (In fact, such family connections eased my own way onto the Chicago floor, providing the kind of object lesson in the culture of the trading pits that only fieldwork could offer.) Once in the pit, traders proved their mettle by being quick, loud, and brash. Each trader had to wrest his living from his competitors on the steps of the trading pit, reading a market in the voices, hands, and faces of his rivals.

The shriveling of the pits, once muscled by erstwhile Big Ten linebackers, had opened a niche for Ivy League engineers, M.B.A.'s, and math geeks, who quickly found a place in the Chicago futures markets. On a recent visit to Chicago, I met with the director of a trading firm — one located far up in a tower away from the trading floor — who gave me a blunt assessment of the social foundation of derivatives markets. "It's getting really Revenge of the Nerds around here," he reported. The unmediated physical competition that had created famously efficient markets for 150 years no longer seemed sufficient.

The talents of the traders must match the kinds of technologies with which they work. Instead of bodies, voices, and well-known personalities, traders now confront changing numbers on a "dealing" screen. This simple display creates an image of the market seemingly separate from the people who make it up, and which appears to exist beyond the cities in which they work. Training on the football field is less important now than hours and days spent in front of video games. Stamina is no longer displayed in a crowded pit but in the ability to resist the eye-glazing glare of the computer screen. In the shift from the trading pit to the computer, a new kind of trader emerges, one who can shape complex mathematical models, observe the market, make cool judgments, and take dispassionate action; in other words, a trader who can embody the value of efficiency that we associate with the market itself."

The Free Market: Friend to Third World, Less Developed Countries

Three recent articles illustrate this:

Writing in the San Antonio Express-News, Jeanie Wyatt writes about Ireland. It is one of the fastest growing economies in the world and is now 4th in the world in per capita GDP. How did they do it? Several factors bu among them are low taxes " The corporate tax rate was 10 percent to 12.5 percent throughout the late 1990s" and "limited government intervention."

New York Times columnist Thomas Friedman had an article about Kenya. The government is getting out of the way to let entrepreneurs set up call centers that are helping the economy. It even did away with the government phone monopoly.

The Wall Street Journal had an editorial called The Mozambique Miracle. You have to be a subscriber to read that one. But here are some exerpts:

""We opened our markets and dropped the centralized economy," says Miquelina Menezes, who chairs the country's association of economists and runs a fund devoted to bringing electricity to rural areas."

"But hyperinflation and a stagnant economy forced leaders of the neo-Marxist liberation movement, Frelimo, to shift their approach. Starting in the early 1990s, the ruling party cut subsidies, opened to outside investment, privatized firms nationalized after independence in 1975 and got a grip on borrowing and the budget. An independent central bank brought inflation into single digits. According to the World Economic Forum's competitiveness index, Mozambique has reformed more than any sub-Saharan African country."

"The payoff is the highest average growth rate, at 8% over the last decade, among the continent's non-oil exporters. GDP per capita is a still tiny $320, but that's compared with $178 in 1992. Since 1997, poverty rates decreased more in rural areas (from 71% to 55%) than in urban (62% to 52%), according to the World Bank. Child mortality has declined to 152 per 1,000 live births from 235. And primary-school enrollment has risen to 71% from 43%. Once a leading recipient of food aid, Mozambique now exports maize, with 5.6% average yearly growth in farming in the last 15 years. Banks, telecom and tourist firms, many from neighboring South Africa, have come in."

"But neighbors in similar straits haven't put in place Mozambique's fixes. Inflation in Zimbabwe is 1,700%; nearby Malawi and Zambia, their economies distorted by subsidies on commodities, are growing haphazardly."

Interesting Looking Movie: The Call of the Entrepreneur

The Acton Institute for the Study of Religion & Liberty has produced a documentary titled The Call of the Entrepreneur. If you go to the link you can view the trailer. It looks good. Nice to see someone promoting the good side of capitalism and entrepreneurship.

San Antonio College Math Professor Reforms Texas State Lottery

His name is Gerald Busald and over the years he has found inaccuracies in the odds that the lottery states as well as other misleading aspects. Becaue of him (and his students), the lottery has had to institute reforms. Great to see a professor from my college getting such richly deserved recognition. You can read all about it here for the full article. Below are some key excerpts.

"Until recently, the Texas Lottery did not disclose cash values — the amount won if players chose to collect a top prize in one lump sum payment. The lottery only disclosed the amount that would be collected in 25 annual installments. Players have always known that a winning cash-value ticket contained a lesser prize than the jackpot listed. But now, thanks to the intervention of local lottery critic Gerald Busald, millions can actually know what they're playing for.

In June, Busald recommended eight changes in the lottery. In December, the Texas Lottery Commission implemented one of them — disclosing cash-value amounts on its Web site. By Aug. 31, cash-value amounts will appear on tickets. More remarkably, TLC has agreed to implement all of Busald's recommendations.

On the back of a ticket are the overall odds of winning Lotto Texas: 1 in 71. What a ticket doesn't reveal are the odds of winning the top prize: One in 25.8 million.
Thanks to Busald, jackpot odds will soon be posted on tickets, and the print will be larger.

Thanks to Busald, lottery billboards across the state have been changed to include "annuitized" beside the word jackpot. Most players, Busald says, know the advertised jackpot will be paid in annual installments. But inclusion of "annuitized," he insisted, is proper disclosure.

Persuading TLC to make minor changes is one thing. But Busald's fingerprints appear on a major one. In a January TLC meeting, Busald chided the lottery for continuing to sell scratch-off tickets after all top prizes had been claimed. Commissioners refused to halt the practice. Last week, TLC capitulated. Gerald Busald wields clout because he helped TLC in its search for a new executive director."

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.

Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)

Friday's Wall Street Journal had an article titled "Conspicuous Virtue and the Sustainable Sofa." You have to be a subscriber to read it online. But here is the intro:

"Lance Armstrong's ubiquitous yellow "Live Strong" wristbands have become a world-wide phenomenon: More than 60 million have sold since 2004, one of the greatest successes in nonprofit fund-raising history, with the proceeds going to cancer-related causes. No doubt some wear the bands in solidarity, or for inspiration -- but, that said, the wristband conceit was simply ingenious. It allowed people to make a show of their virtue. They could give to a good cause, and they could advertise their caring to everyone else. Not for nothing did John Kerry flaunt a Live Strong."

The author, Joseph Rago, calls this "conspicuous virtue." It is inspired by the term "conspicuous consumption" coined by Thorstein Veblen in his book The Theory of the Leisure Class. (the whole book is online there)

This site which has a short bio for Veblen, an economist who lived from 1857-1929, states:

"Veblen is best known for his book The Theory of the Leisure Class. In it he introduced the term "conspicuous consumption." Conspicuous consumption was consumption undertaken to make a statement to others about one's class or accomplishments. This term, more than any other, is what Veblen is known for."

But The Wall Street Journal article argues that now people are buying certain items to show how virtuous they are, like a Toyota Prius to show that you care about the environment even though "fuel savings do not justify the price premium of a gasoline-electric power train."

Adam Smith may have beaten Veblen to the punch. In The Wealth of Nations, he wrote:

"With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. In their eyes the merit of an object which is in any degree either useful or beautiful, is greatly enhanced by its scarcity, or by the great labour which it requires to collect any considerable quantity of it, a labour which nobody can afford to pay but themselves. Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common." (the entire book is online)

In Veblen's chapter on "Conspicuous Consumption," there is no mention of Adam Smith. There is statistical or empircal evidence that supports Veblen's theory. A Ph. D. student found that rich families do spend more on "Conspicuous Consumption." Click here to read about it. See also Doctoral Thesis Says Rich People Spend More on Conspicuous Things

Economic Growth: A Little Goes Very Far in the Long Run

We all like economic growth, ceteris paribus. It means more for everyone. In chapter 1 of the book The Economics of Macroissues, they discuss how economies with common law systems have grown faster than those with civil law systems. Common law systems do a better job of enforcing property rights and usually grow faster. The difference does not have to be much. In the macro textbook by Krugman and Wells that I use for my video course, they report that Japan has grown at a rate of 1.7% while Mexico has had a rate of 1.1% (those numbers are approximations-I left that book at the office). That does not seem like a big difference. But in the long run, it adds up. If you grow 1.1% per year, after 150 years your income is is about 5.16 times what it started at (so, for example, you go from $1,000 to $5,160). The formula for this is 1.011 raised to the 150th power

But if you grow 1.7% per year. After 150 years, your income is about 12.54 times what you started at (1.017 raised to the 150th power is 12.54). So your income would go from $1,000 to 12,540. But your income is more than double the other country since 12.54 is more than twice 5.16. So that .6% difference each year matters alot in the long run. It might seem trivial or insignificant, but it adds up.

Crime and Rationality

There was an article on "neurolaw" in the March 11 Sunday New York Times magazine. Nerolaw studies brain patterns to learn more about crime. One of the experts they quoted "wrote a widely circulated affidavit arguing that adolescents are not as capable of controlling their impulses as adults because the development of neurons in the prefrontal cortex isn’t complete until the early 20s."

This reminds me of something at the bottom of page 152 in the book The Economics of Public Issues. It discusses work by Steven Levitt on crime and mention that teenagers respond to incentives.

"In states tough on youth but easy on adults, violent crime rates rise 23% at age 18, but in states that are easy on juveniles and tough on adults such crime drops 4% at age 18."

I don't know if this accurately portrays Levitt's research, but it shows the opposite of what the expert said might be true. Teenagers might be able to control their impulses. In fact, economists have found that even people in mental hospitals can act rationally. For example, if doctors paid agoraphobics tokens to walk outside, very often they did (tokens that could be used to buy things in the hospital store). Patients also got paid for doing jobs or performing tasks. If no one would mop the floor, the pay for mopping the floor was raised and several patients came forward to do the mopping. That is completely consistent with economic theory. Offer a higher pay, more people will do the job (law of supply).

They aslo changed the prices of items in the store. If the price of an item was dropped, the amount purchased went up (and vice-versa). This means that even patients in mental hospitals follow the law of demand. When patients got paid for doing jobs, they did them. But when the hospital tried to get them to do the jobs without pay, the patients stopped working. In another case, if their pay in one job was taken away, they took a job that they liked less if the pay was still there.

The discussion of patients in mental hospitals comes from the book The Best of the New Worlds of Economics.

Do We Always Behave Honestly?

In a recent post (called "Is It Rational To Be A Little Crazy?"-see below), I discussed how seeming irrational behavior might make sense if it reveals our emotional state. That means the information we are trying to send out could be more believable since emotions are costly to fake.

But one commentor said that we fake things all the time. Like at work, we act like we like the job (or at least don't hate it). Related to this, there is an interesting looking book (I have not read it) called Private Truths, Public Lies: The Social Consequences of Preference Falsification by Timur Kuran. Here is what one reviewer wrote:

"... people's choices, and even their desires, are not given and fixed, but are a function of social and psychological conditions, above all pressures imposed by other people...Kuran's book is a terrific success."

Spring Break, The Great Depression and Entrepreneurship Festival

I will post something new on Sunday. We are on spring break here at San Antonio College. Last week in my macro class we watched a video about the Great Depression. The highly respected economist and monetary expert Christina Romer has written an excellent overview of the depression. It is online here. It is written for a general audience yet it provides alot of insights. It is about 10 pages or the length of a short chapter in a textbook. For any student studying this period, it is a great place to start and it has a good bibliography so you can learn more.

Another reminder that I will be speaking at the Entrepreneurship Festival. It is on March 31 at Pepperdine U. So anyone who will be in Southern Calif. then might check it out. You may need to register, so go to the website.

Starbucks's, India Style

A woman in India wants to start a chain of coffee shops called Starstruck's. Starbucks is trying to stop it. This is similar to an issue that came up in my macroeconomics class. We read a chapter in the book The Economics of Macroissues that stated that China often does not enforce patent and copyright laws. If a country does not enforce such laws it might reduce investment by foreign companies. You can read the story here.

Is It Rational To Be A Little Crazy?

On the first day of the semester, I tell the students that we assume people are rational in economics. That means that no one intentionally makes themselves worse off. People only engage in actions if the benefits outweght the costs. What should we think when we see people do things that might seem crazy or at least look very much like they are hurting themselves? Consider the following from an article in Sunday's New York Times Magazine called "Darwin's God"

"Rituals are a way of signaling a sincere commitment to the religion’s core beliefs, thereby earning loyalty from others in the group. “By donning several layers of clothing and standing out in the midday sun,” Richard Sosis wrote, “ultraorthodox Jewish men are signaling to others: ‘Hey! Look, I’m a haredi’ — or extremely pious — ‘Jew. If you are also a member of this group, you can trust me because why else would I be dressed like this?’ ” These “signaling” rituals can grant the individual a sense of belonging and grant the group some freedom from constant and costly monitoring to ensure that their members are loyal and committed. The rituals are harsh enough to weed out the infidels, and both the group and the individual believers benefit."

Here is another example. In his book Passions Within Reasons, economist Robert Frank demonstrates how emotions communicate ability and intentions more effectively than rational signals. In one example from a novel, he explains why a private investigator (PI), would smash the window on the car of gangster boss. The PI wanted the gangster's help in finding his girlfriend's murderer. The gangster needs a reason to help. The PI's only option is to make the gangster think he is crazy enough to try to hurt the gangster. The PI cannot simply say "I am crazy." He must communicate that his emotional state is at least somewhat unbalanced or abnormal. A crazy person is much more likely to smash the window than a normal person. This action successfully demonstrates the PI's possible emotional state better than any normal, rational signal. It works partly because emotions are costly to fake and therefore emotional demonstrations are more believable.

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

Yes, There Are Lots of Jobs Out There

A couple of days ago I discussed jobs, outsourcing and insourcing. Is it hard for Americans to find jobs? Compared to what? I guess historical patterns should be looked at. We could just look at unemployment rates. But that only looks at the number of people out of work relative to the labor force. And you have to be trying to find a job to be in the labor force. So if you gave up looking (became a discouraged worker) you are not even part of the equation. So the data below includes the labor force participation rate.

In 1969, the unemployment rate in the United States was 3.5% But the labor force participation rate (LFP) was just 60.1%. Right now the unemployment rate (UE) is higher, at 4.4% (as of Sept-it will probably be about 4.6% for all of 2006) and the LFP is 66.2% in 2005. So alot more people are trying to find jobs but we still have a pretty low UE. The LFP has actually been as high as 67.1% (from 1997-2000). It will probably average just under 66.2% for all of 2006. For people over 16, that is higher than any year before 1989. Here are the decade averges for LFP starting with the 1950s

1950s-59.28%
1960s-59.23%
1970s-61.51%
1980s-64.82%
1990s-66.67%
2000s-66.41%

So LFP is just a little lower so far this decade than last.

The next set of numbers is the average percent of the entire U.S. population that was employed

1950s-56.1%
1960s-56.4%
1970s-57.66%
1980s-60.1%
1990s-62.85%
2000s-63.01%

The 2000s are just a bit above the 1990s. Now the average unemployment rates

1950s-4.51%
1960s-4.78%
1970s-6.21%
1980s-7.27%
1990s-5.75%
2000s-5.11%

We are not as low as the 1950s and 1960s, but we are much closer to them than we are to the 1970s and 1980s. Now a slightly different breakdown for the 1970s and 1980s

1970 to 1974-5.4%
1975 to 1983-7.7%
1984 to 1989-6.4%

So for all of the attention given to outsourcing and immigrants taking jobs away from Americans, it seems like alot of people are working.

Sources

ftp://ftp.bls.gov/pub/suppl/empsit.cpseea1.txt
ftp://ftp.bls.gov/pub/special.requests/lf/aat1.txt

New Book Uses Economics to Analyze Religion

Can you buy and sell salvation? Well, maybe not. It is probably all up to the big guy upstairs. But there is a new book out called The Marketplace of Christianity by economists Robert B. Ekelund Jr., Robert F. Hébert and Robert D. Tollison. Below are a few brief exerpts from a Chronicle of Higher Education article about it.

"Churches are susceptible to the same corruptions and incentives as any other institutions. "What I think the economic point of view has to offer," one author says, "is that you can say, OK, this is a spiritual institution and it has spiritual goals. And that's all fine and good. On the other hand, it's run by human beings."

The new book extends an argument that the authors developed in a controversial 1996 book, Sacred Trust: The Medieval Church as an Economic Firm (Oxford University Press). (Sacred Trust was written with two more authors, Gary M. Anderson and Audrey B. Davidson.) The scholars argued there that the pre-Reformation Catholic Church exploited its monopoly position just as monopoly industries do, looking for each and every opportunity to raise fees on its trapped "customers."

For example, the authors suggested that the concept of purgatory was invented in the 12th century precisely so the Church could extract financial donations from people who wanted to make sure that their deceased relatives' souls would move from purgatory to heaven. That innovation, the economists argued, allowed the Church to engage in "price discrimination" similar to modern industrial firms. The "doctrine of purgatory," they wrote, "provided the Church an opportunity to enhance its revenues and its power by offering differential prices for assurances of salvation to different demanders."

In The Marketplace of Christianity, the authors move forward into the Reformation, arguing that the Catholic Church reacted to the new "market entrant" — Protestantism — much as AT&T reacted when its own monopoly was broken. Among many other things, they argue, the Church competed by increasing the number of Catholic feast holidays offered in regions where Protestantism closely competed with Catholicism."

For general information about the book, go to

MIT Press

For a review, go to

Publishers Weekly

To read the article from the Chronicle of Higher Education go to

The Supply and Demand of Salvation (you may need to be a subcriber-my SAC students might be able to read it if they are logged into their PALS account or are at a school terminal).

Jobs, Outsourcing and Insourcing

Perhaps you have heard about companies laying off workers here in the USA then having low wage workers in some other country do the work. This is usually called "outsourcing." But what if workers in the USA are employed by foreign firms? That is called "insourcing." According to the Organization for International Investment, we had 341,000 insourced jobs here in Texas in 2004 (only New York and California had more). I have not heard any complaints about the jobs Toyota has brought to San Antonio, where I teach.

No one knows if we have more outsourced jobs than insourced jobs. But what happens if there are more outsourced jobs than insourced jobs? Then our unemployment rate goes up. That, however, does not have to be a problem. If our economy falls below what we call the "full employment" GDP, the federal government can, as my students know, increase aggregate demand (AD) or the demand for all goods and services in the economy. This increases GDP, which means more workers will get hired since businesses that produce more goods, ceteris paribus, will hire more workers. So unemployment goes back down. In this case, inflation will not be a problem since the increase in AD happened with GDP being less than the "full employment" GDP (demand shifts to the right in a part of aggregate supply that is relatively flat, so prices rise very little).

If we tried to block outsourcing to protect jobs we would be blocking the gains and benefits we normally see from free trade. Many economists don't think that trade costs us jobs. But if just for the sake of argument that trade did cost jobs, we can get them back, using the policies explained above. Economists Paul Krugman and Douglass Irwin have made this agrument. Krugman suggests cutting interest rates as the way to increase AD.

For information on insourcing in Texas, see Texas is ranked third for 'insourced' jobs

Should People Be Rewarded For Voting?

A couple of weeks ago, Cynthia Crossen had a good column in The Wall Street Journal about why voter turnout has fallen in the USA. Basically, we don't vote as much as we used to because there is not as much in it for us. That certainly makes sense from an economic perspective, where we assume people act based on incentives. Here are some exerpts:

"Your forebears would be ashamed. In late-19th-century midterm elections, turnout ranged from 65% to 78%. For presidential elections, almost 80% of the nation's eligible Then, in the early 20th century, turnout began falling precipitously. By 1920, less than half of the voting-age population made it to the polls on Election Day.

A 19th-century man (in most states, women weren't enfranchised until 1920) could decide to vote on the spur of the moment, pick up a simple ballot from party headquarters and drop it at the poll on Election Day, where his like-minded neighbors would give him a cheer and perhaps a beer. No preregistration was required, no taxes, no proof of residency, literacy or even citizenship. If, like most people then, he was a party man, his vote might earn him a reward -- a small cash gift or even better, a job with the post office.

Election day was rowdy and festive, a thrilling climax to a political campaign that featured bonfires, barbecues, parades, torchlight rallies and passionate oratory. Politics were social and recreational at a time when there wasn't much other public entertainment.

But many people thought the political parties, which basically ran the elections, were too powerful and corrupt -- that the government should administer elections, and ballots should be secret so party leaders couldn't monitor their flocks' choices. Party symbols, like the elephant and donkey, would no longer appear on ballots, creating a de facto literacy test. The practice of rewarding loyal voters with cash on Election Day was widely outlawed. Competitive exams replaced patronage in awarding government jobs.

And citizens would no longer be able to depend on their party officials to vouch for their eligibility. Voters would have to register themselves in person, well ahead of the election, usually during working hours. Some states even required voters to register every year.

Other broad social trends also damped the electoral spirit. Americans were leaving their small towns, where social ties often reinforced their political biases. Candidates for office began using radio, rather than rallies, to spread their messages, making voters more passive. With the proliferation of other recreational activities -- spectator sports, vaudeville, movies -- Americans no longer needed to look to politics for escape."

Why Don't Americans Like to Vote?
Politics Are Only One Reason
October 16, 2006; Page B1

Return of the Love Headhunters

Saw an interesting article on Netscape's offbeat news called Disillusioned online daters turn to matchmakers. Here is the beginning of the article:

"Online daters, disappointed by potential partners lying about their age, weight or marital status, are turning to professional matchmakers to find love. Rather than risk taking pot luck online, chief executives, entertainers and politicians are among those paying thousands of dollars to matchmakers to discreetly "headhunt" and vet the perfect partner."

In some cases the fee is as high as $25,000. Besides saying that there is a market for "love," another interesting economic angle might be that by paying a very large fee you are sending a signal to potential mates that you are serious. It is possible that only very serious prospects would pay so much.

Did Katrina Refugees Increase Crime in Houston & San Antonio?

The evidence is suggestive, but not totally conclusive. The city of San Antonio has not tried very hard to learn whether or not victims and perpetrators came from New Orleans. Houston did, and got federal money. Both cities saw a spike in crime after the refugees arrived. San Antonio's crime rate had been falling prior to their arrival. Here are the articles:

Katrina crime: Perceived or real?

S.A. killings show few ties to storm.

Remember, to prove cause and effect, you need ceteris paribus conditions. Does this analysis meet that criteria?

UPDATES. Ken Rodriguez, a columnist for the Express-News, thinks the answer is yes. Here is the link

Ken Rodriguez: Here's the unvarnished truth about Katrina crime: It happened

Here are two more articles from the Express-News

In one area with evacuees, robbery is routine

Complex with Katrina evacuees became a criminal haven

Good Economics is Good Story Telling

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

Are We Running Out of Resources?

The WWF thinks so.. Saying that we are running out of resources is nothing new. It comes up fairly often. The Club of Rome long ago predicted this would happen.. There are really three issues here.

1. The Environment
2. Natural Resources
3. Species going extinct.

1. Pollution that causes damage to other human beings can be controlled by taxing the polluting activites. This reduces those activities and therefore the pollution. So the right taxes can control this (my students might recall the class discussion of negative externalities)

2. Natural Resources. The Club of Rome predicted we would run out some time ago. This has not happened. The reason is that as the price of resources go up due to increased demand, it creates incentives for alternative sources. People also switch to things like more fuel efficient cars. It takes alot less energy to produce $1 of GDP in the USA than it did in 1980. Higher resource prices cause people to act more efficiently. Even if supply decreased, then the price would rise which would encourage conservation. So we don't need to worry about running out of resources.

3. Should humans cut back on the production of some goods and services if that is the only way to keep some life forms from going extinct? This might be necessary if humans are destroying the habitats of some animals or our pollution is killing them.As an economist, I don't think I can offer any insights. I think that is a moral question and I don't think my opinion on this would be very insightful.

Richard Posner and Nobel Prize winning economist Gary Becker have some interestng views on whether or not we should worry about over population.

Can You Find Virtue by Investing in Vice?

A recent article by Will Deener of The Dallas Morning News called
Vice Fund: The wages of sin? reports on the "Vice Fund"

"which celebrated its fourth anniversary on Aug. 30, invests in casino stocks and in companies that make liquor, tobacco and bombs. It has beaten the Standard & Poor's 500 index in each of the past three years and is on track to do it again this year, with a 10 percent gallop so far in 2006, compared with a 5 percent gain for the S&P."

So, is it okay to get rich this way? There are some funds that intentionally invest in "socially responsible" companies that work to protect the environment, treat their workers well and avoid "vice."

Are Nannies Doing Their Job?

The article on this begins with:

"Just as trucking companies put signs on their vehicles asking the public to report unsafe drivers, parents can now put license plates on their baby strollers to get feedback on the behavior of their nannies."

So if you see a nanny neglecting their duties, you can call it in and the parents login to a website with a password to find out if there are any problems. I don't know if there will be any checks and balances. What if a rival nanny calls in a phony charge of neglect (something like this happened with "rate my professor").

Will young people be less likely to become nannies if they get spied on? Will this scare away irresponsible nannies to the good of the children? What about nannies that care for kids who are out of the strollers and buggies? Will the nanny have to wear a t-shirt with the number?

Are College Professors Liberal?

From today's Chronicle of Higher Education:

"The report, by the Institute for Jewish & Community Research, was based on an online, nationally representative survey of 1,259 professors at four-year colleges and universities in the spring of 2005. It found that, in general, professors are critical of American business and foreign policy and are skeptical of capitalism.

Among other findings, the report, "A Profile of American College Faculty: Volume 1: Political Beliefs & Behavior," says that:

Professors are three times as likely to call themselves "liberal" as "conservative." In the 2004 presidential election, 72 percent of those surveyed voted for John Kerry.

Almost one-third of professors cite the United States as among the top two greatest threats to international stability -- more than cited Iran, China, or Iraq.

Fifty-four percent of professors say U.S. foreign policy in the Middle East is partially responsible for the growth of Islamic militancy.

Sixty-four percent say the government's powers under the USA Patriot Act should be weakened."

A separate report showed that there are 2.5 Democrats for every 1 Republicn amongst economics professors (That means 71% are Democrats) Actually, it was 58% Democrat, 23% Republican, 2.66% Libertarian and 0.76% Green Party.

For more info go to:

Institute for Jewish & Community Research
A PDF File of Their Survey
The Economists Survey

How Should Economists Commemorate the Day of the Deadweight Loss?

Has another year gone by already? Today is "Day of the Deadweight Loss." On this day, economists mourn all the social welfare that has been lost in the last year. That social welfare is lost and we will never get it back. The important question is what is the best way to commemorate this day? I'm open to suggestions.

Deadweight loss is the loss of social welfare caused by that dreaded demon, inefficiency. Examples are monopoly and externalities. To learn more, go the following links (which are all different)

Deadweight_loss
Deadweight_loss
Deadweight_loss

What do Nobel Prize Winners Muhammad Yunus and Edmund Phelps Have in Common?

They may have alot in common but one thing might be the importance of entrepreneurship.

Economist Muhammad Yunus won the Nobel Peace Prize for giving micro loans to the poor so they can get businesses started. Read about it here. So it looks like he thinks entrepreneurship is important.

Edmund Phelps, who won the Nobel Prize in economics, wrote an article in the Wall Street Journal earlier this week that you can read it here. He makes a strong case for the mportance of entrepreneurship.

If you click on my first post or "Why this Blog is Called The Dangerous Economist" you will see why I agree with these two men.

On Oct 17, the Wall Street Journal printed a short letter I wrote pointing out this similarity.