The Ranger (The San Antonio College Newspaper) Quotes My Second Favorite Economist

The article is Students fear recession will affect education. My second favorite economist is the guy who says:

"If you save $4,000 a year for 40 years and earn an annual rate of return of 8 percent, you will have a million dollars."

So, you might wonder, if this guy is only my second favorite economist, who is my favorite? Hint: it is not Adam Smith, Milton Friedman, John Maynard Keynes, Simon Kuznets, Martin Feldstein, Skidelsky or even Dambisa Moyo (but she is third, for rather obvious reasons).

The first student to email me the correct answer (who is Cy's favorite economist) will get 5 points added to your next test. I will allow you to get 4 tries. After 4, you're done. Another hint: It will be "safe" to search for the answer even if you thought it might not be.

South Park Tackles The Economy

There is an episode called "Margaritaville" which you can watch if you go to

http://www.southparkstudios.com/

It is about the current economic problems. Click on where it says Margaritaville. It is very funny and creative. If any of my students think they see anything in the episode that reminds you of what you have learned this semester, I would like to get your comments. Also, the father of one of the creators of South Park is an economics professor.

Hat Tip: Eddika Shestko

Do You Always Learn More From Failure Than Success?

Try googling:

"learn more from failure than success"

and you get over 1,000 hits. But the New York Times Sunday business section had an article called Try, Try Again, or Maybe Not. It discusses research that calls this idea into question. Here is the intro:

"IF at first you don’t succeed, it doesn’t matter that you tried. That seems to be the message of a working paper prepared recently by a team at Harvard Business School. The study found that when it comes to venture-backed entrepreneurship, the only experience that counts is success."

Here is another key passage:

"The study looked at several thousand venture-capital-backed companies from 1986 to 2003.

Professor Gompers and his co-authors Anna Kovner, Josh Lerner and David S. Scharfstein found that first-time entrepreneurs who received venture capital funding had a 22 percent chance of success. Success was defined as going public or filing to go public; Professor Gompers says the results were similar when using other measures, like acquisition or merger.

Already-successful entrepreneurs were far more likely to succeed again: their success rate for later venture-backed companies was 34 percent. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers: 23 percent.

In other words, trying and failing bought the entrepreneurs nothing — it was as if they never tried. Or, as Professor Gompers puts it, “for the average entrepreneur who failed, no learning happened.”"

What Economists Say About "March Madness"

The first article is March Madness It Is, Economically by ANDREW ZIMBALIST. Does all the money from the NCAA basketball tournament help the schools? No:

"Amid this cornucopia, the schools themselves are usually the losers. According to the NCAA's latest Revenues and Expenses report, in 2005-06 the median Division I men's basketball team generated revenue of $480,000 and had operating costs of $1.33 million, yielding a net operating loss of $850,000. If capital expenses and full university overhead were included, these results would be even more dismal."

But the coaches do well:

"In 2005-06, the head coaches of the 65 Division I teams in Madness had an average maximum compensation of $959,486, with the top paid coach earning a guaranteed salary of $2.1 million and a maximum salary of $3.4 million. Equally startling, the average compensation of these 65 coaches is double or more that of the typical university president."

But if your school has a winning sports team, doesn't that mean more applications? Maybe, but:

"Not surprisingly, those high-schoolers who apply to a college because it has a good basketball team do not tend to score high in the SATs or in class rank. As a result, basketball success may temporarily drive up applications, but it does not raise the quality of the student body."

The other article is The Real March Madness by RICHARD VEDDER and MATTHEW DENHART. One thing they mention is that the student-athletes get very little of the revenue they generate in the form of scholarships. Then:

"If all of that money from ticket sales and television rights isn't going to student-athletes, where does it end up? In 2006, salaries for coaches and administrators accounted for nearly 32% of total athletic-department expenses."

It is true that some students go to the pros and make big money. But

"Of course, for the students who go on to the pros, putting off their financial bonanza won't be a big deal. But most college athletes do not make the pros. They may not even end up with the basic skills necessary to succeed in other workplaces, since only a minority of student-athletes in major sports even graduate (25% in top-ranked University of Connecticut men's basketball, for example). Long practices and missed classes make it difficult to succeed academically. A recent study funded by the Andrew W. Mellon Foundation shows the academic performance of athletes is lower than non-athletes even at Division III schools."

Housing And The Financial Crisis

Economist Mark Thoma gives a good overview of all the factors that came together to create the financial crisis with Who's the Villain in the Crisis? Of course, housing is part of the story and it makes me think of what my wife and I have encountered over the last several years while looking for a house (we rent an apartment now).

It always ended up that once we figured in a down payment of about 20%, that our monthly payment, including the mortgage, fees, taxes (maybe condo fees in those cases), etc. would be $300 (or more) a month than our rent. And the house that we looked at would not be as nice as our apartment, maybe it would be a little smaller and required some work. Then there would be a lawn to mow. Sometimes the backyard was just dirt that would turn to mud when it rains.

Some people say that if you buy a house "you build up equity." So? That only does you any good if later on take out a home equity loan (some owners have been borrowing against their equity or the value of their homes for consumption spending-I don't know how much this went on but less is going on now since the price of houses has fallen). Even if you can sell your house at a profit years later, you then have to find another place to live. If you buy another house, then it eats up your profit (unless you are lucky enough to find an under priced house or are just plain good at finding bargains). You could move back to an apartment and enjoy spending the profit, but you are right back where you started.

Also remember that if you are spending alot less on an apartment over the years, then you are also building up money due to compound interest, just like building up equity in your house. There was never any guarantee that home values would continue to rise so you had no guarantee that housing would be a better investment than putting the money in, say, a retirement account.

Then you could say, "at least you have a house, it is a place to live." But so is an apartment. And recall that the houses my wife and I looked at were not so great. Our rent was much less than what our monthly house payments would have been. I have had extra money taken out of my paycheck for my retirement account. So in that way, I have been building up equity.

And the strange thing is that housing prices did not rise as much in San Antonio as they did in other parts of the country. The discrepancies between buying a house and renting an apartment would have been bigger elsewhere, meaning they made less economic sense. It seems like we all should have been able to figure out something was terribly wrong. Maybe some peopled did, but not many of us.

This site shows that the vacancy rates for apartments were high and still rising when the crisis hit Housing Vacancies and Homeownership. Homeowners can deduct their interest payments from their tax returns and government sponsored entities like Fannie Mae make it easier to buy houses. One reason given for this has been that homeowners are better citizens and more community minded so that there are positive externalities from owning homes. But it might not have been a good idea to push so many people into home ownership. Maybe people who liked to buy and own houses in the past were good citizens and community minded. It is not clear that owning a house made them that way.

Two Items: Jay Leno And Arthur Guinness

In honor of St. Patrick's Day, the Heroes of Capitalism blog has an entry on Arthur Guinness, founder of the Guinnes brewing company. A true hero, indeed! They mention that "Guinness signed a 9000-year lease in 1759 with St. James Gate Brewery for an annual rent of £45."

Now to Jay Leno. He is doing a free show in Detroit. He mainly wanted it to be for people who have lost their jobs. So free tickets were given away. But some of them are getting sold on eBay, reportedly for as much as $800. Leno does not like this, which you can read about in Leno: Take tickets for free show off eBay. He doesn't want people making money off the idea. But an unemployed worker might be better off with $800 than going to see Leno's show. I don't think Leno should object to that. Either way, unemployed workers are helped.

But Leno brought this on himself. People only had to say they were unemployed to get the tickets. Since we know that there is no such thing as a free lunch, there is the possibility that some people who are not unemployed got tickets for the sole purpose of selling them. Maybe Leno should have required proof of being unemployed, but still let people sell them. Let the unemployed worker choose what makes him or her better off, money or Leno's show. Leno also could have charged for a show in Detroit and tell everyone he was going to donate the money to the poor or unemployed. A benefit show.

Harvard professor Greg Mankiw also addresses this issue with Jay Leno disses the free market.

Update: EBay Halts Sale of Free Leno Tickets

Prohibited Goods Easily Got Into Texas Prisons

To read all about it, go to Prison contraband was booming trade, an article in today's Express-News. Guards smuggle in items for the prisoners and if they get caught they usually face mimimal penalties. What are some of the items that prisoners can get there hands on?

"Knives and drugs, cell phones and smokeless tobacco. Even McDonald's hamburgers. Texas prisons were a virtual bazaar of prohibited and illicit goods smuggled in by guards and correctional employees who rarely faced the harshest punishment possible when caught, according to a San Antonio Express-News review."

It seems that it is hard to stop markets from forming when people want something, even prisoners. It may be hard for the state to punish the guards too much since their salaries are low. If you fired all the guards who broke the rules, you might not have enough. The article also mentions that at a low pay, the guards are tempted to make a little extra cash helping the prisoners. What do you have to lose but a low paying job. And again, the penalties are not that severe if you do get caught. Friends or relatives of the prisoners often contact the guards to get the trades and sales going.

Update: Another article states:

"For months, perhaps longer, the Montague County Jail was "Animal House" meets Mayberry. Inside the small brick building across from the courthouse, inmates had the run of the place, having sex with their jailer girlfriends, bringing in recliners, taking drugs and chatting on cell phones supplied by friends or guards, according to authorities. They also disabled some of the surveillance cameras and made weapons out of nails."

Go to Texas jail was an Animal House, authorities say.

When Will the Recession Be Over?

To find out what 11 experts said last week in the NY Times go to When Will the Recession Be Over?. The experts include economics professors (one Nobel prize winner) and private sector executives. Here is the one from Alan Blinder (all entries are about this link):

"It Can’t Last Forever

HERE’S the hard truth: Nobody knows when this recession will end. Economic forecasting is a dark art, and predicting when recessions begin and end is its weakest link. That said, my best guess is that growth will return in the fourth quarter of this year. Why?

First, recessions don’t last forever. If the economy continues to slide through the third quarter, as I anticipate it will, this will be the longest American recession since World War II. Housing must hit bottom at some point. For several years now, declining expenditures on homebuilding have subtracted roughly a percentage point from gross domestic product growth. The change from minus 1 percent to (at least) zero will add a full point to growth. Auto sales are also not likely to keep falling at recent rates. Second, Washington’s large economic stimulus should add more than 5 percent to real gross domestic product over two years.

Third, the price of oil plummeted from a peak of around $145 a barrel last summer to around $40 a barrel today. Since the $145 price was fleeting, let’s call the “true” decline from $100 to $40, which means the bill Americans pay for imported oil fell by about $300 billion dollars a year.

But here’s the rub. My forecast assumes that no other (big) shoes will drop. Sad to say, shoes have been dropping like rain.

Alan S. Blinder is a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve."

Slave Redemption in Sudan

In my ECON 1301 class this week we read chapter 8 of the book The Economics of Public Issues. It seeems like a good idea to buy a slave and set him or her free. But the "redeemers" have often wanted to buy large groups of slaves to redeem. This has encouraged people to capture slaves in the first place. Then it puts more money in the hands of the slave traders who buy more weapons. Some people runs scams, selling people that were not really slaves. Below are links to the three articles listed in the book's bibliography.

The False Promise of Slave Redemption

Ripping Off Slave ‘Redeemers’

Fake slaves con aid agencies in Sudanese liberation scam

The following link has links to lots of info on this issue and different views

Policy Debate: Do slave redemption programs reduce the problem of slavery?

Finally, there was a movie made in 1971 that you can read about at the Internet Movie Database called Skin Game. It was about a fake slave being sold over and over again as a scam. Here is the synopsis:

"Quincy Drew and his black friend Jason O'Rourke have pulled off every dodge known for conning a well-heeled sucker, but it wasn't until they hit on the old skin game that they started to clean up. The game is simple. Jason, though born a free man in New Jersey, poses as Quincy's slave as the pair ride through Missouri and Kansas in 1857. Quincy picks a likely mark in each town, sells Jason to him for top money and rides out of town. Then Quincy and Jason get back together on the road to another town, because if Jason can't just run off after dark, Quincy finds a way to spring him loose."

A Video of My Lecture On Entrepreneurs As Heroes

I gave a talk in 2007 at Pepperdine University called "Who Says Entrepreneurs Are Heroes?" You can watch it if you click here. It was part of the HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL. You can also watch it by clicking on the arrow in the picture below. I come on after a short introduction by Elliot McGucken, who put the conference together. After about the 2 minute introduction I come on and it lasts about 18 minutes. You can read a text version of this at Who Says Entrepreneurs Are Heroes?




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Yes, The Most Profitable Industry Involves Drilling (But Not The One That You Would Expect)

To see the list of the most profitable industries in the last 12 months, go to Sageworks. Here is the list. Notice that some of them are medical or legal. Those industries have a very important barrier to entry, a license. This is something that comes up in my micro class and my ECON 1301 class. Insurance is there and in many states there are lots of costly regulations that act as a barrier. Mining might involve either big start up costs or control over a natural resource. Barriers to entry keep out new competitors, allowing the existing firms to keep their above average profit rates.

Dim economy drives women to donate eggs for profit

That is the title of the article. Go to Dim economy drives women to donate eggs for profit. Increases in "donations" may not be totally due to the economy, but some stats show that they are rising rapidly:

""We are seeing an increase in inquiries, but we're not sure if it's due to the economy or increased awareness," said Dr. Susan Willman, a reproductive endocrinologist at the Reproductive Science Center of the Bay Area. In July 2007, the Reproductive Science Center received 120 calls inquiring about egg donation. This year, that number jumped to 158 calls.""

And

""We are so inundated right now," said Robin von Halle, president of Alternative Reproductive Resources.

Von Halle said that 30 to 50 inquiries a day from potential donors come in to her Chicago, Illinois, agency, which connects would-be parents with donors and surrogates. A year ago, it would have been 10 to 30, she said."

And

""I think there is a spike more for financial reasons," said Mahshid Albrecht, manager of Donor Services at the Reproductive Science Center. "But is that the only reason? Probably not."

An egg donor is typically compensated between $5,000 and $10,000. Experts say that although most women donate out of desire to help infertile couples, the financial allure is real."

So it is not just a donation. But not all women are accepted to "donate" and it is not an easy process, as the article explains.

With Economy Down And Consumers Wanting Good Deals, More Goods Are Stolen And Sold At Discounts

The article on this is Retail crime grows with demand for discounts. So people want these good deals. Then organized crime comes in. Goods are stolen. Then show up on the Wedb (eBay for example). Legislation has been proposed to fight this but it was not clear exactly what it would do. I have not heard of this before in past recessions. Maybe the internet makes it easier.

This Economist Is Anti-Bono (And Much Better Looking, Too!)

The story was in today's New York Times magazine called The Anti-Bono. Her name is Dambisa Moyo and she has a book coming out this year. The Times interviewed her. Here is an exerpt:

"You argue in your book that Western aid to Africa has not only perpetuated poverty but also worsened it, and you are perhaps the first African to request in book form that all development aid be halted within five years.

Think about it this way — China has 1.3 billion people, only 300 million of whom live like us, if you will, with Western living standards. There are a billion Chinese who are living in substandard conditions. Do you know anybody who feels sorry for China? Nobody.

Maybe that’s because they have so much money that we here in the U.S. are begging the Chinese for loans.

Forty years ago, China was poorer than many African countries. Yes, they have money today, but where did that money come from? They built that, they worked very hard to create a situation where they are not dependent on aid."

She thinks that foreign aid to Africa is taken by corrupt leaders and stifles entrepreneurship. Her recommendation for people who want to help Africa is microfinance. There is an organization called Kiva which allows you to lend money directly to entreprneurs in third world or developing countries that need very small loans for their businesses.

Book Review of "The Next 100 Years"

The book is The Next 100 Years: A Forecast for the 21st Century By George Friedman. It was reviewed in the San Antonio Express-News recently. The book makes some incredible predictions. Here are some that are hard to believe:

"In the '30s, America will see a massive financial crisis exacerbated by the retirement of the baby boomers and a worldwide population shortage. Instead of restricting immigration, Friedman predicts that the United States will start paying people to immigrate to America. He argues that the United States will emerge financially stronger, as it always does after such crises.

The '40s will see the emergence of three new great powers: Japan, Turkey and Poland. Japan will attempt to take control of the Pacific; Turkey will be the strongest power in the Islamic countries; and Poland will scoop up the remnants of Eastern Europe after the collapse of the Russian Federation. American interests will be threatened by the resurgence of Japan and Turkey, leading to the next global war in the '50s.

However, says Friedman, the Third World War won't be fought as the first two were: It will begin with sneak attacks on American military space stations.

America will retaliate with hypersonic weapon strikes on Japanese and Turkish forces. After about two years of fighting, America and its ally Poland will emerge victorious."

When you watch these ads, the ads check you out

That is the title of an article about a very interesting new video system. Here is the link: When you watch these ads, the ads check you out. Here is the intro:

"Watch an advertisement on a video screen in a mall, health club or grocery store and there's a slim — but growing — chance the ad is watching you too.

Small cameras can now be embedded in the screen or hidden around it, tracking who looks at the screen and for how long. The makers of the tracking systems say the software can determine the viewer's gender, approximate age range and, in some cases, ethnicity — and can change the ads accordingly.

That could mean razor ads for men, cosmetics ads for women and video-game ads for teens.

And even if the ads don't shift based on which people are watching, the technology's ability to determine the viewers' demographics is golden for advertisers who want to know how effectively they're reaching their target audience."

It is not surprising that this is happening. Since we can mute our TVs, fast forward over commercials when we record shows, etc., alot of advertising is not viewed. So they are trying new ways to get our attention. I'll really get scared when they can recognize that I'm an economics professor.

A Special Valentine's Message On Romantic Love

Below is a repeat of last year's Valentine's day post. First there are a couple of new links:

The first one is Kisses unleash chemicals that ease stress levels. The following quote gives you an idea of what it is all about: "Kissing, it turns out, unleashes chemicals that ease stress hormones in both sexes and encourage bonding in men, though not so much in women." I guess economists call this "interdependent utility functions." Meaning that what brings one person pleasure brings brings the other person pleasure, and vice-versa.

The other is Cocoa Prices Create Chocolate Dilemma. The article opens with "Soaring cocoa prices are creating a Valentine's Day dilemma for chocolate makers. They don't want to raise retail prices when recession-weary consumers are trying to limit their spending." The problem is crop diseases in Ivory Coast and Ghana. You might need to be a WSJ subscriber to read the whole article.

Now the economic definition of romantic love.

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

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

More recent research backs this up. Read Love really is blind, U.S. study finds. Here is an exerpt:

"Love really is blind, at least when it comes to looking at others, U.S. researchers reported on Tuesday.

College students who reported they were in love were less likely to take careful notice of other attractive men or women, the team at the University of California Los Angeles and dating Web site eHarmony found.

"Feeling love for your romantic partner appears to make everybody else less attractive, and the emotion appears to work in very specific ways in enabling you to push thoughts of that tempting other out of your mind," said Gian Gonzaga of eHarmony, whose study is published in the journal Evolution and Human Behavior.

"It's almost like love puts blinders on people," added Martie Haselton, an associate professor of psychology and communication studies at UCLA."

Maybe The Worst Is Over For Zimbabwe (Maybe)

In some of my classes we read about how bad Zimbabwe's economy is doing. But apparently the dictatorial president Robert Mugabe is starting to share power with a man who probably beat him in the election (Tsvangirai). The inflation rate last year was 11 million percent. The unemployment rate is 80%. The national debt as a percentage of GDP is 242%.

Here are some exerpts from the CIA:

"His chaotic land redistribution campaign, which began in 2000, caused an exodus of white farmers, crippled the economy, and ushered in widespread shortages of basic commodities. Ignoring international condemnation, MUGABE rigged the 2002 presidential election to ensure his reelection."

"April 2005, the government embarked on Operation Restore Order, ostensibly an urban rationalization program, which resulted in the destruction of the homes or businesses of 700,000 mostly poor supporters of the opposition. President MUGABE in June 2007 instituted price controls on all basic commodities causing panic buying and leaving store shelves empty for months."

An exerpt from one of the other articles is:

"Tsvangirai has been beaten and jailed by Mugabe's security forces. In 2007, police attacked him after he held an opposition meeting the government had banned. Images shown on news broadcasts around the world of his bruised and bloodied face came to symbolize the challenges his movement faced.

Mugabe, who turns 85 on Feb. 21 and has been in power since independence from Britain in 1980, has in the recent past treated the 56-year-old Tsvangirai as a junior partner at best, often not bothering to hide his contempt.

Tsvangirai won the most votes in the first round of presidential election held almost a year ago, and withdrew from a June runoff only because of attacks on his supporters."

If you want to know more, go to the following links:

CIA World Factbook on Zimbabwe

Morgan Tsvangirai Sworn In as Zimbabwe PM; Pledges Focus on Economy

Mugabe swears in rival as Zimbabwe prime minister

Zimbabwe lifts foreign currency restrictions

What it means Dollarisation formula a sham

There's A New Number 1 In The World: Liechtenstein Passes Luxembourg In Per Capita GDP

To see the complete ranking, go the CIA World Factbook. Here is the top 10:

1 Liechtenstein $118,000
2 Qatar $101,000
3 Luxembourg $85,100
4 Bermuda $69,900
5 Kuwait $60,800
6 Norway $57,500
7 Jersey $57,000
8 Brunei $54,100
9 Singapore $52,900
10 United States $48,000

Here is something the CIA reports about Liechtenstein (which is small with a population 35,000 and is only 160 square kilometers in area):

"Despite its small size and limited natural resources, Liechtenstein has developed into a prosperous, highly industrialized, free-enterprise economy with a vital financial service sector and the highest per capita income in the world. The Liechtenstein economy is widely diversified with a large number of small businesses. Low business taxes - the maximum tax rate is 20% - and easy incorporation rules have induced many holding companies to establish nominal offices in Liechtenstein, providing 30% of state revenues. The country participates in a customs union with Switzerland and uses the Swiss franc as its national currency. It imports more than 90% of its energy requirements. Liechtenstein has been a member of the European Economic Area (an organization serving as a bridge between the European Free Trade Association (EFTA) and the EU) since May 1995. The government is working to harmonize its economic policies with those of an integrated Europe. In 2008 Liechtenstein came under renewed international pressure - particularly from Germany - to improve transparency in its banking and tax systems."

In last place was Zimbabwe at $200. With 118,000/200 = 590, it means that the standard of living is 590 times higher in Liechtenstein than in Zimbabwe.

The country of Guinea-Bissau has a population of 1.5 million. But their GDP was only about $900 million. That is less money than the movie "The Darknight" has made, even if you take into account its production costs. Click here for details.

Economy Got You Down? Buy An $8 Chocolate Bar For A Little "Compensatory Consumption"

Doing this can help you regain status after getting laid off. Go to The Sweet Payoff. Don't confuse this with "Conspicuous Consumption" (consumption undertaken to make a statement to others about one's class or accomplishments)

Here are is an exerpt:

"Derek Rucker and Adam Galinsky of the Kellogg School of Management at Northwestern University have lately been exploring the relationship between feelings of powerlessness and what they term “compensatory consumption.”

In one experiment, subjects were divided into two groups and told to reflect on an incident in which they felt powerful or on one in which they felt powerless. Each group was then given a supposedly unrelated task that involved gauging how much each participant would be willing to pay for a variety of products. For items that carry little association with status — a ballpoint pen, a sofa, etc. — there wasn’t much difference between what the two groups would pay. But subjects who had put themselves in a powerless frame of mind were willing to pay measurably more than the other group for high-status items — an executive pen, a fur coat, a silk tie. In a more recent study, Rucker and Galinsky found that individuals who felt less powerful showed a preference for clothing with larger and more conspicuous luxury logos.

Their thinking is that the little boost of, say, pricey chocolate, might not be solely about mood but about responding to threats to status or competence, Rucker told me. Ideally you would respond to such challenges directly: standing up to a boss who is pushing you around, demonstrating skill to silence skeptics and so on. But often the sources of undermined confidence are more abstract. “What’s happened in modern society under capitalism is that people have found consumer products as an outlet, a safety valve for addressing these threats in a very indirect fashion,” Rucker contends."

Students Use Drugs To Get Better Grades (and guess when they go up in price)

College students are using Adderall and Ritalin to boost "cognitive function and enables [which] them to study for hours with full concentration without getting fatigued" according to this NPR report. The report also says

"Students say Adderall and its cousin Ritalin are easy to get — bought and sold in the library, the cafeteria, the dorm, pretty much anywhere on campus. The going rate, they say, is typically $5 a pill. Unless it's exam week. Then, supply and demand kicks in and the price can shoot up to $25 a pill."

I guess the demand goes up then when students need an extra boost! But maybe the students just learned this from their professors. Read about that at Some Professors Pop Pills for an Intellectual Edge: Scientists say drugs help concentration. That article reports

"In an online survey of 1,400 readers published this month, the journal Nature found that 20 percent had taken pharmaceuticals for the nonmedical purpose of improving their concentration, focus, and memory. Most of the people who responded to the survey work in science, engineering, or education."

How Special Interests Hurt The Economy

The Sunday New York Times magazine had a very good article about the problems facing the economy right now and how they might be solved called The Big Fix . It is very long, with several parts. Although it is all interesting, one part stands out, part II called "THE UPSIDE OF A DOWNTURN."

Rahm Emanuel, Obama’s chief of staff, has said “You never want a serious crisis to go to waste...it’s an opportunity to do things you could not do before.”

Then the article mentions a very important economist.

"In the early 1980s, an economist named Mancur Olson developed a theory that could fairly be called the academic version of Rahm’s Doctrine. Olson, a University of Maryland professor who died in 1998, is one of those academics little known to the public but famous among his peers. His seminal work, “The Rise and Decline of Nations,” published in 1982, helped explain how stable, affluent societies tend to get in trouble. The book turns out to be a surprisingly useful guide to the current crisis.

In Olson’s telling, successful countries give rise to interest groups that accumulate more and more influence over time. Eventually, the groups become powerful enough to win government favors, in the form of new laws or friendly regulators. These favors allow the groups to benefit at the expense of everyone else; not only do they end up with a larger piece of the economy’s pie, but they do so in a way that keeps the pie from growing as much as it otherwise would. Trade barriers and tariffs are the classic example. They help the domestic manufacturer of a product at the expense of millions of consumers, who must pay high prices and choose from a limited selection of goods."

The big question now is are the special interest groups going to stop the economy from recovering or is this crisis a chance to take some power away from special interests. The article mentions how the banking and finance industries are the special interest groups that are the major cause of the current crisis (which is a debatable point). But this issue illustrates an important sub-field of economics.

The sub-field of economics that studies politics and how special interest groups is called "public choice." For my students that want to know more about this, if you are in ECON 1301, see pages 343-346 in the main book by Tucker. If you are in 2301, see pages 307-312 in the main book by Tucker. If you are in ECON 2302, read pages 122-124 in the main book by Miller.

There Is No Such Thing As Free Salt (Or Sand)

Go to Buckland Ends Free Salt & Sand Service. The town has been letting residents take salt and sand at no charge. They expected people to just take a bucket or two, but

""We had some instances where contractors, non residents were coming across, filling up their sand trucks and taking them back to whatever towns," says Town Selectman Stefan Racz. "They're salting driveways and charging people for it with our salt.""

A good is scarce if there is not enough of it if it were given away free of charge. This is what happened with the salt and sand.

More Details And Analysis On The Stimulus Bill

It passed in the House of Representatives yesterday. It is 647 pages long. This New York Times article, Components of Stimulus Vary in Speed and Efficiency, has what seems like a good over view in terms of facts and analysis. But when the whole thing is 647 pages, who knows.

But the same concerns apply that I mentioned last week. Getting the policies to work at the right time due to policy lags. There is also the issue of who will fill the jobs that the government creates, people currently unemployed or those currently unemployed. The economist Gary Becker has pointed out

"Some of this infrastructure spending may be very worthwhile-I return to this issue a bit later- but however merited, it is difficult to believe that they would provide much of a stimulus to the economy. Expansion of the health sector, for example, will add jobs to this sector, but it will do this mainly by drawing people into the health care sector who are presently employed in jobs outside this sector. This is because unemployment rates among health care workers are quite low, and most of the unemployed who had worked in construction, finance, or manufacturing are unlikely to qualify as health care workers without considerable additional training. This same conclusion applies to spending on expanding broadband, to make the energy used greener, to encourage new technologies and more research, and to improve teaching."

As some of my students know, different resources are better suited to different productive activities (which explains why the law of increasing opportunity cost is true). Alot of the workers who have lost their jobs are construction workers and only some of the stimulus can use their skills.

Any Questions?

Some Basics On The Proposed Stimulus

There is an article called Stimulus 101: What's in the Bills. Its give a summary of what has been proposed plus the pros and cons.

Worker Tax Cut: Maybe Not so Immediate

To find out why, go to Worker Tax Cut: Maybe Not so Immediate. This is really just another version of the post I had a few days ago on the policy lag problem. The government might want to help the economy, but it takes time for the policies to be put in place and have an effect.

Job losses hitting men harder than women

To read about this go to Job losses hitting men harder than women. Here are some key exerpts:

"The economic crisis is hitting men much harder than women in the workplace, largely because male-dominated industries like construction and transportation are bearing the brunt of job losses, figures show.

Women, meanwhile, dominate sectors that are still growing, like government and healthcare, experts said.

Four-fifths of the 2.74 million people who lost their jobs between November 2007 and November 2008 were men, Sum said.

The biggest losses came in construction, where men comprise 87 percent of the work force, he said. Large losses also came in manufacturing and wholesale trade, where men make up more than two-thirds of the work force, he said.

"Males were dominant in sectors that were taking a bad hit," he said. "It's men and the blue-collar jobs. It's overwhelming."

According to the U.S. Bureau of Labor Statistics, men's employment as a ratio of the population dropped by 2.7 percent, while the ratio among women's dropped 0.8 percent from December 2007 to December 2008. The unemployment rate among men rose to 7.9 percent from 5.0, while among women, it rose to 6.4 percent from 4.8 percent, the agency said."

I am curious if any of my students have gotten laid off and whether you are male or female. Also, what about friends, relatives, co-workers, etc? Does it seem like more men or women are getting laid off? Of course, San Antonio has not been doing as badly as the rest of the country. In November, the national unemployment rate was 6.8% while it was 5.4% in San Antonio. The national rate went up to 7.2% in January.

Some Of Obama's Economic Policies Might Take Too Long To Help

You probably know that we are in a recession. Unemployment is at 7.2%, the highest in 15 years. As my macro students will learn later this semester, increasing aggregate demand (AD) through government spending can help the economy in recessions. But only if that spending hits the economy at the right time.

To read about the problems that Obama's policies might have, go to Much in Obama stimulus bill won't hit economy soon. Here are some key exerpts:

"It will take years before an infrastructure spending program proposed by President-elect Barack Obama will boost the economy, according to congressional economists.

Less than half of the $30 billion in highway construction funds detailed by House Democrats would be released into the economy over the next four years, concludes the analysis by the Congressional Budget Office. Less than $4 billion in highway construction money would reach the economy by September 2010.

The economy has been in recession for more than a year, but many economists believe a recovery may begin by the end of 2009. That would mean that most of the infrastructure money wouldn't hit the economy until it's already on the mend.

Overall, only $26 billion out of $274 billion in infrastructure spending would be delivered into the economy by the Sept. 30 end of the budget year, just 7 percent. Just one in seven dollars of a huge $18.5 billion investment in energy efficiency and renewable energy programs would be spent within a year and a half.

And other pieces, such as efforts to bring broadband Internet service to rural and underserved areas won't get started in earnest for years, while just one-fourth of clean drinking water projects can be completed by October of next year."

The parts that will hit the economy quickly are the tax cuts and aid to states, who are facing budget problems due to lower tax revenue, which always happens in recessions. Later in the semester, we will also learn about something called the "policy lag problem."

A group of economists called the Monetarists believe that when a recession occurs, it takes too long for the government to recognize it and take action to end it. The action will probably cause AD to increase when the economy is already back to the full-employment GDP. This is called the Policy Lag Problem. Here is how it works:

A recession begins (the economy produces less and workers are laid off) and at least 6 months later, the government finally recognizes that we are in a recession, so there is a Recognition Lag.

A few months later (maybe more), the government finally decides to do something about the recession (it can take time for Congress to pass a spending bill), so there is a Decision Making Lag.

A few months later (maybe more), the government implements the spending plan (maybe Congress passed a spending bill for highways and companies have to be found, bids taken and so on), so there is an Implementation Lag.

A few months later (maybe more), the government spending finally has an effect on the economy (AD increases), so there is a Effectiveness Lag. By this time, the economy is normal or back to full-employment. Then alot of spending hits the economy. This could cause inflation. Inflation is too many dollars chasing too few goods. If there is too much money in the economy, prices rise.

The Top Budget Vacation Spot Is...Austin, Texas!?

To read about this go to Top Budget Travel Destinations for 2009: The best value hot spots for the New Year. But if people really believe this and many of them go to Austin for fun or a vacation, things won't be very fun due to the crowds (which reminds me of something that Yogi Berra said about a restaurant: "nobody goes there anymore, it's too crowded").

This also illustrates what economist Steven Landsburg calls the "Indifference Principle." "Except when people have unusual tastes or unusual talents, all activities must be equally desirable." This applies to Austin or any of the other cities on the list in the article. Once everyone sees Austin as a good deal, they start going there. Only people with unusual tastes will really enjoy it. That is, you will have to like what Austin has to offer alot more than the average person or the crowds will erode your enjoyment. Austin won't be any better than anywhere else for a vacation. Other places will be just as desirable.

Touching A Product Makes You More Likely To Buy It

That is the finding of an interesting study. Click on Study: You Touch It, You Buy It to read about it. This exerpt gives the basic idea:

"Participants in the study were shown an inexpensive coffee mug, and were allowed to hold it either for 10 seconds or 30 seconds. They were then allowed to bid for the mug in either a closed (where bids could not be seen) or open (where they could be seen) auction. The participants were told the retail value of the mug before bidding began ($3.95 in the closed auction; $4.95 in the open auction). The study, detailed in the August 2008 issue of the journal Judgment and Decision Making, found that on average, people who held the mug for longer bid more for it - $3.91 to $2.44 in the case of the open auction and $3.07 to $2.24 in the closed. In fact, people who held the mug for 30 seconds bid more than the retail price four out of seven times."

I am curious if any of my students have had experiences like this. Have you noticed buying something because you touched it? If so, why? Anybody work in a store where you encourage customers to touch the merchandise?

End Of Semester

This will be finals week at San Antonio College, so I will not post very much in the next month or so. Once the next semester start, I will go back to 3 posts a week.

Is An Electronic "Helicopter Drop" Feasible? (Part 2)

I first posted on this last January. Here is the link Is An Electronic "Helicopter Drop" Feasible?. Basically, people have debit cards with a zero balance. If the FED wants consumer spending to increase, then it puts money in everyone's accounts. I initially stated that there could be a time limit, so it gets spent quickly, tyring to avoid the policy lag problem. (some people have called Ben Bernanke "helicopter Ben"-this may not be fair, but "helicopter drop" is an old term that I recall from grad school in the 80s).

Here are some additional thoughts on this:

People could have two accounts. In one, they would have to spend the money by the end of the month. In the other the money could build up so you could buy a durable like an appliance. As before, you can't convert these accounts to cash. But the stores can.

We could prohibit them from being spent in grocery stores, so people just don't save money from their own paychecks and then use these accounts to buy necessities.

Some economists say that we need to create inflationary expectations to get AD increasing again (or at least reduce deflationary expectations so things don't get worse). Getting this kind of spending going so quickly might help.

Some articles that I am reading say the FED can basicially create as much money as it wants. It has added over $1 trillion to its balance sheet in the last year. So this would just be another way to do it.

This is consistent with the FED's interest in helping consumers which we see in its buying of credit card debt.

Bank's excess reserves are very high ($600 billion). But not enough is being loaned and spent. So we may need other ways to stimulate AD. Paul Krugman said the other day that it might take awhile to get the fiscal stimulus plans in place. Maybe something like this would work faster.

State sales tax collections might rise. States need money now, so this might help.

If businesses know that consumers will be spending, then they might be more willing to invest and not layoff workers.

The debit cards could be activated like other debit and credit cards. You call the FED and tell them your SS# and you can start spending.

We might have to give people more money each month than the fall in consumer spending to make sure they just don't save their own money and then use the debit cards to buy their normal goods.

The government gives out money anyway, like in unemployment insurance and welfare and food stamps.

It is possible that when economiy start to slide into recessions people might anticipate that the FED will put money in their accounts, so they will delay purchases. But knowing that consumer spending is going to rise might also affect expectations in positively, too. Also, some research suggest that unemployment insurance keeps people unemployed longer but no one calls for ending that program.

Maybe this could only be done if there are 3 straight months of falling consumer spending and it would have to be unanimous or close to it on the FOMC.

Why We Are In A Recession And Why Fiscal Policy (increasing government spending) Might Not Help

Normally I don't like to just put in links to other blogs since you can read that stuff by clicking on my links to those blogs. But since the economy is in the news so much and since alot of that is on what caused the crisis and what needs to be done, these two links are important in giving a different perspective.

The first one is What Really Happened? by Larry White of the University of Missouri. He blames the FED keeping interest rates too low for too long and there being too many "sub prime" loans, that is, loans with lower standards for incomes of the borrowers and downpayments. The government encouraged these home loans. Adjustable rate mortgages play a role, too.

Then there is Fiscal Policy Puzzles where Harvard professor Greg Mankiw disucsses the fact that fiscal policy might not work the way we want it to. That is, increasing government spending might not help very much (although he says " I am not sure what model I should use to explain" this). He also says "At the very least, these puzzles should give us reason to pause when using the Keynesian framework for policy analysis. There is still a lot about macroeconomics that remains deeply puzzling."

Another post by Mankiw is The Bils-Klenow Stimulus Plan. This suggests that cutting payroll taxes (social security taxes) is the best stimulus.

Another One For The Law Of Unintended Consequences File: Problems Plague U.S. Flex-Fuel Fleet

But first, a funny cartoon by Steve Breen of the San Diego Union-Tribune.



The cartoon has nothing to do with the topic. It comes from this Washington Post article Problems Plague U.S. Flex-Fuel Fleet. It seems the idea was to have government vehicles use alternative fuels to save gas. But the opposite has happened. Here are the key exerpts:

"But the costly effort to put more workers into vehicles powered by ethanol and other fuel alternatives has been fraught with problems, many of them caused by buying vehicles before fuel stations were in place to support them"

"Often, the vehicles come only with larger engines than the ones they replaced in the fleet. Consequently, the federal program -- known as EPAct -- has sometimes increased gasoline consumption and emission rates, the opposite of what was intended."

"The Postal Service illustrates the problem. It estimates that its 37,000 newer alternative-fuel delivery vans, which can run on high-grade ethanol, consumed 1.5 million additional gallons of gasoline last fiscal year because of the larger engines."

"The vehicles that would allow the agency to meet federal mandates were available in six- and eight-cylinder models"

"Alternative fuel was used less than 1 percent of the time in 2007-2008."

"Agencies were required to buy alternative-fuel vehicles but did not have to run them on alternative fuel."

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

We Already Have a CEA And An NEC, So Do We Need An ERAB?

I guess we should all be thankful for having so many teams of ecnomists. Must be nothing to worry about.

Obama has created a new President‘s "Economic Recovery Advisory Board" or ERAB. You can read about it here and here and here. Here is the general idea:

"President-elect Barack Obama announced Wednesday that he is creating a new economic recovery board to provide a "fresh perspective" for his administration. The board will advise Obama on how to revive the ailing economy, offering independent, nonpartisan information, analysis and advice to the president as he formulates and implements his plans for economic recovery, Obama's transition office said."

But we alreay have a Council of Economic Advisers. Here is what the CEA is all about:

"From the "Employment Act of 1946":

"There is hereby created in the Executive Office of the President a Council of Economic Advisers (hereinafter called the "Council"). The Council shall be composed of three members who shall be appointed by the President, by and with the advice and consent of the Senate, and each of whom shall be a person who, as a result of his training, experience, and attainments, is exceptionally qualified to analyze and interpret economic developments, to appraise programs and activities of the Government in the light of the policy declared in section 2, and to formulate and recommend national economic policy to promote employment, production, and purchasing power under free competitive enterprise. The President shall designate one of the members of the Council as Chairman.

It shall be the duty and function of the Council--

to assist and advise the President in the preparation of the Economic Report;

to gather timely and authoritative information concerning economic developments and economic trends, both current and prospective, to analyze and interpret such information in the light of the policy declared in section 2 for the purpose of determining whether such developments and trends are interfering, or are likely to interfere, with the achievement of such policy, and to compile and submit to the President studies relating to such developments and trends;

to appraise the various programs and activities of the Federal Government in the light of the policy declared in section 2 for the purpose of determining the extent to which such programs and activities are contributing, and the extent to which they are not contributing, to the achievement of such policy, and to make recommendations to the President with respect thereto;

to develop and recommend to the President national economic policies to foster and promote free competitive enterprise, to avoid economic fluctuations or to diminish the effects thereof, and to maintain employment, production, and purchasing power;

to make and furnish such studies, reports thereon, and recommendations with respect to matters of Federal economic policy and legislation as the President may request."

Now, what about the NEC or National Economic Council? It sure sounds like the ERAB and the CEA:

"Keith Hennessey is Assistant to the President for Economic Policy and Director of the National Economic Council (NEC). The NEC was established in 1993 within the Office of Policy Development and is part of the Executive Office of the President. It was created for the purpose of advising the President on matters related to U.S. and global economic policy. By Executive Order, the NEC has four principal functions: to coordinate policy-making for domestic and international economic issues, to coordinate economic policy advice for the President, to ensure that policy decisions and programs are consistent with the President's economic goals, and to monitor implementation of the President's economic policy agenda.

The purview of the NEC extends to policy matters affecting the various sectors of the nation's economy as well as the overall strength of the U.S. and global macro-economies. Therefore, the membership of the NEC comprises numerous department and agency heads within the administration, whose policy jurisdictions impact the nation's economy. Director Hennessey works in conjunction with these officials to coordinate and implement the President's economic policy objectives. He is also supported in his capacity as an adviser to President Bush by a staff of policy specialists whose expertise pertains to the council's specific areas of decision-making.

Included on this staff are a Deputy Assistant to the President and several Special Assistants to the President who report on a variety of economic policy issues including: agriculture, commerce, energy, financial markets, fiscal policy, healthcare, labor, and Social Security."

Don't forget that we also have The Domestic Policy Council. Here is what they do:

"The Domestic Policy Council coordinates the domestic policy-making process in the White House and offers policy advice to the President. The DPC also works to ensure that domestic policy initiatives are coordinated and consistent throughout federal agencies. Finally, the DPC monitors the implementation of domestic policy, and represents the President's priorities to other branches of government."

Also

"Under President Bush, the Domestic Policy Council oversees major domestic policy areas such as education, health, housing, welfare, justice, federalism, transportation, environment, labor and veteran's affairs. The Office of National AIDS Policy (ONAP), the Office of National Drug Control Policy (ONDCP), USA Freedom Corps (USAFC), the Council on Environmental Quality (CEQ) and the Office of Faith-Based and Community Initiatives (OFBCI) are also affiliated with the Domestic Policy Council. The Domestic Policy Council’s formal membership includes the cabinet Secretaries and Administrators of federal agencies that affect the issues addressed by the DPC."

The New Chair Of The Council Of Economic Advisors Is Christina Romer

You can read about her at this New York Times article Christina D. Romer. She is a highly regarded scholar, being an expert on the Great Depression and business cycles. It looks like a good choice by Obama. In addition to publishing many articles in technical journals, she wrote a very good overview of the Depression for Britannica. Click on Great Depression to read it. Maybe her ability to communicate clearly to a general audience will be an asset as chief economic advisor.

Economists Offer Conflicting Views Of The Stimulus

The 2008 winner of the Nobel Prize, Paul Krugman is definitely pro-stimulus:

"So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion."

From Stimulus math (wonkish).

But Brian Riedl of the Heritage Foundation, writing in the Wall Street Journal, says

"But where does government get this money? Congress doesn't have its own stash. Every dollar it injects into the economy must first be taxed or borrowed out of the economy. No new spending power is created. It's merely redistributed from one group of people to another.

Of course, advocates of stimulus respond that redistributing money from "savers" to "spenders" will lead to additional spending. That assumes that savers store spare cash in their mattresses, thereby removing it from the economy. In reality, nearly all Americans either invest their savings (where it finances business investment) or deposit it in banks (which quickly lend it to others to spend). The money gets spent whether it is initially consumed or saved.

Governments don't create new purchasing power out of thin air. If Congress funds new spending with taxes, it is redistributing existing income. If the money is borrowed from American investors, those investors will have that much less to invest or to spend in the private economy. If the money is borrowed from foreigners, the balance of payments must still balance. That means reducing net exports through exchange-rate adjustments, thereby leaving net spending on the economy unchanged."

That is from Why Spending Stimulus Plans Fail

A professor at Gettysburg College is very critical of Riedl. They say "No, no, NO! F! John Maynard Keynes demonstrated 75 years ago to the satisfaction of economists everywhere that this logic is fatally flawed. Governments can create purchasing power out of thin air when the economy is in recession and there are unemployed workers and other factors of production."

That is from Brian Riedl fails my Intermediate Macroeconomics class.

But Donald J. Boudreaux, Chairman of the Department of Economics at George Mason University, says "Brian Riedl is correct: economic-stimulus packages are economic snake oil."

That is from Dear WSJ: Economic Snake Oil Not Stimulating

No wonder people are confused.

Corporations Pay A Lower Tax Rate Than The Official Rate

Last week I talked about how Americans in general might not be paying all the taxes they are supposed to. The same might be true about corporations. You can read about it at Tax Data Highlight Corporate Loopholes. Here is an exerpt:

"The Internal Revenue Service found that U.S. companies paid federal income taxes on their reported U.S. profits at far less than the 35% statutory rate, offering a potential revenue source for an incoming presidential administration that faces a yawning budget deficit.

Newly released data from the IRS show companies paid federal and foreign income taxes on their U.S. book income -- the amount reported to shareholders -- at a rate of 25.3% during 2005, the most recent year for which data were made available by the IRS."

Another is:

"Differences between accounting rules and tax laws mean companies keep two sets of books. Tax rules often allow them to take deductions on their tax returns that don't eat into their book profits reported to shareholders.

The IRS requires companies to file a form reconciling the gap between their book and taxable profits, called the Schedule M-3. U.S. companies included in the data reported about $1.35 trillion in pretax U.S. book income to their investors in 2005, but about $1.03 trillion to the IRS -- a difference of about 23%."

Good Career Advice

The article is It May Be a Good Job, but Is It ‘Good Work’? from Sunday's New York Times. It says that a good job is "a calling that combines excellent performance, expresses one’s ethics and offers a pleasing sense of engagement."

Research shows that "people working in very challenging professions or settings who were technically excellent might find their work difficult unless it was also important to their mission in life.”

Also

"An unexpected finding was that joy was a crucial ingredient of good work."

and

"There are three questions people can ask about their jobs to evaluate their good-work level: Does it fit your values? Does it evoke excellence; are you highly competent and effective at what you do? Does it bring you that subjective barometer of engagement, joy?"

If you are looking for a job

“Decide what you really like to do and what you would like to spend your life doing. That’s more important than deciding what particular job to hold, because the employment landscape is changing radically and quickly. Then ask, ‘Where could I carry that out?’ and be very flexible about the milieu and venue — but not about what you get a kick out of and can be good at.

And then, third, if you have any choice over where to work, when you’re considering a job, go there and talk to people. Ask yourself, ‘Is this the kind of place where I can see myself in others?’ You might make five times more money at one place, but does it reflect who you are and who you want to be? Are my colleagues people I’d admire or people I’d prefer to avoid?”

A Megabyte Of Memory Costs 10,000 Times Less Than It Did In 1989

In 1989, I bought a computer and an external hardrive that had 40 megabytes of memory.The drive cost $700 (and that was with the student discount at the Washington State University computer store). The consumer price index has gone up about 75% since then. So raising 700 by 75% gives us about 1226. So if we bought that 40 megabyte hardrive today, it would be $1,226. That works out to $30.67 per megabyte.

My wife recently bought me an 8 gigabyte flash drive for $25. A gigabyte is 1,024 megabytes. So the flash drive has 8,192 megabyters. At $25, that works out to $0.003. That is less than one cent per megabyte. Since $30.67/.003 = 10,051, it means that a megabyte now costs 10,000 times less than it did in 1989.

Of course I am no computer expert, so maybe there are even better deals out there for memory. If anyone has purchased memory for less than 1 cent per megabyte, let me know.

Shocking News: Americans Cheat On Their Taxes!

The link is Report: IRS issued $1B in bad refunds in 2007. Here is the key exerpt:

"The IRS has estimated that the tax gap _ the difference between taxes owed and taxes actually paid _ at about $290 billion a year. Of that, about 57 percent comes from individuals understating incomes or overstating deductions and exemptions."

In both fiscal 2007 and fiscal 2008, the federal government took in about $2.5 trillion. So the amount lost due to cheating is about 11.6% of what is actually collected. It would have more than covered the deficit of $162 billion in fiscal 2007 and it would be about 2/3 of the $450 billion deficit for fiscal 2008.

New York City Tax Payers To Pay $1 Billion To See Baseball

The article is As Stadiums Rise, So Do Costs to Taxpayers from the New York Times. Here is an exerpt:

"Though the teams are indeed paying about $2 billion to erect the two stadiums, the cost to the city for infrastructure — parks, garages and transportation improvements — has jumped to about $458 million, from $281 million in 2005. The state is contributing an additional $201 million.

Those totals do not include an estimated $480 million in city, state and federal tax breaks granted to both teams. In addition, neither team has to pay rent or property taxes, though both are playing on city-owned land."

Adding the $458 million to the $480 million puts it at $938. So that is closing in on $1 billion. I recall reading in a book by Andrew Zimbalist (who is quoted in the above article) that sports economists generally agree that public (tax payer) funded stadiums are not worth it. It looks like New Yorkers will be paying more for baseball whether they like it or not.

Does The Wall Street Journal's Explanation Of The Gas Tax Make Sense?

The article is Obama Builds Ties to 'Chicago School'. Here is the passage that puzzles me:

"Many economists were cheered in April when, amid higher gasoline prices, Mr. Obama opposed a gas-tax holiday -- an idea supported by Sens. John McCain and Hillary Clinton, who was competing with Sen. Obama for the Democratic nomination. Textbook economics said in response to the tax cut, demand would simply raise gas prices to their previous level, and so the benefit of the cut would flow to energy producers rather than consumers."

Here is what I think is going on (see the graph below). A tax on gas is what we call an excise tax. Since the seller must collect the tax, the supply curve shifts upwards by the amount of the tax. In the graph below the S2 line is 60 cents above the S1 line (so the tax is 60 cents a gallon). Now imagine the tax is eliminated, so we move from S2 back to S1. The price falls from $1.40 back to the original $1.00. The demand line does not move and the new equilibrium is at a lower price. The demand line is not going to move to the right (increase) to bring the price back to $1.40. Maybe some other factor will change to make that happen like incomes increasing, but that is not the issue here. It looks like that passage in the WSJ makes no sense.



Update: I exchanged emails with the WSJ reporter. Here is what he had to say:

"Basically said, maybe could have taken more time explaining in the story that with inelastic supply, existing demand will take the price right on up to where it was before the tax holiday. Here's an old Krugman column that does it better:

Reckonings; Gasoline Tax Follies

"The quantity of oil available for U.S. consumption over the near future is pretty much a fixed number: the inventories on hand plus the supplies already en route from the Middle East. Even if OPEC increases its output next month, supplies are likely to be limited for a couple more months. The rising price of gasoline to consumers is in effect the market's way of rationing that limited supply of oil.

"Now suppose that we were to cut gasoline taxes. If the price of gas at the pump were to fall, motorists would buy more gas. But there isn't any more gas, so the price at the pump, inclusive of the lowered tax, would quickly be bid right back up to the pre-tax-cut level. And that means that any cut in taxes would show up not in a lower price at the pump, but in a higher price paid to distributors. In other words, the benefits of the tax cut would flow not to consumers but to other parties, mainly the domestic oil refining industry. (As the textbooks will tell you, reducing the tax rate on an inelastically supplied good benefits the sellers, not the buyers.)""

This could be the case, but I think it would mean that the short-run supply curve is vertical. You can't shift a vertical line straight down. If, however, the line is very steep, but not completely vertical, it still shifts down. In the new graph below, the lower red line is 60 cents below the upper line. The price is lower, but not by much (it falls from $1.20 to 1.00). And again, there is no movement of the demand line.

Did California and Texas Vote Differently?

Of course they did. Obama won California with 61% of the vote while McCain won Texas with 55%. But there are differences in the two states based on incomes. In California, 72.33% of the people with incomes under $30,000 voted for Obama and it was 57.56 for people with incomes over $150,000. In Texas, 63.29% of the people with incomes under $30,000 voted for Obama and it was 28.6% for people with incomes over $150,000.

So the difference between high and low income voters in California is pretty small, just 14.77 percentage points. But in Texas it is 34.69. Why would the differences between rich and poor be so much greater in one state? Maybe this is all affected by cost of living differences, but my guess is that its slight.

There was on an article on a similar issue recently in the Chronicle of Higher Education about the 2004 election. They found something similar. The data I used here comes from exit polls. To get to exit polls, go to CNN Election Center. You can click on a state on the map and then click on the link that takes you to the exit polls.

It's The Law: No Free Products For Voters, Not Even Coffee Or Donuts

To read about this click on Authorities Eye Voter Perks. You might get a registration page for the Washington Post. If you do, come back and click it again. You might have to do it a couple of times. Here is the intro:

"Businesses that hope to reward voters today for exercising their patriotic right might be committing a felony. A number of companies, including Starbucks, Ben & Jerry's and California Tortilla, said they would give out free food and sweets today to customers displaying an "I Voted" sticker. But such freebies might be a violation of election laws -- they could be viewed as bribes even after a vote has been cast."

But this is nothing compared to the corruption of the 1800s. I had a blog post about this two years ago called Should People Be Rewarded For Voting? Here is that post again:

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

Money makes the political world go around

That is the title of an Associated Press article which you can read by clicking Money makes the political world go around. Here is the intro:

"In a presidential race filled with broken barriers, money has shattered far more than its share. Together, Democrat Barack Obama and Republican John McCain have amassed nearly $1 billion — a stratospheric number. Depending on turnout, that means nearly $8 for every presidential vote, compared with $5.50 in 2004. Using all that cash, the candidates have traveled more miles, employed more workers and advertised more than ever. But it has been Obama, with his $641 million and 3.2 million donors, who has rewritten the rules for financing campaigns."

Does money matter in politics? Steven Levitt, University of Chicago economics professor and co-author of the book Freaknomics found that maybe money is not so important in winning elections. You can read about that study at McCain, the Media, Money, and Montesinos (and Obama Too).

But another University of Chicago economist Austan Goolsbee is an advisor to Obama. He is probably aware of Levitt's research yet Obama is spending record amounts of money. If a candidate spends that much money they must think it matters.

How About A Little Buy-ology

That is the name of a new book that was just reviewed in the Wall Street Journal. You can read that review by clicking on Science Comes to Selling. It seems that marketers are using neuroscience to probe our brains to discover what really excites us and then they design their products accordingly. As always, caveat emptor.

Here are some excerpts:

"Marketers treat commodities as if they were people, with personality traits, and consumers as objects, with attributes that can be technically engineered."

"when an image of a Mini Cooper passed before" the eyes of subjects being scanned, a "back area of the brain that responds to faces came alive." Turns out it wasn't the Mini Cooper's "ultra rigid body" or "1.6L 16-valve alloy engine" that attracted consumers; it was its irresistible face."

"Drinking Coke more significantly increases blood flow in the medial prefrontal cortex because its ad campaigns, over the years, have so effectively associated Coke with sensations of warmth, security and childhood innocence."

"By tracking brain response, it (neuromarketing ) treats consumers themselves as objects: bundles of nerve centers that respond to different kinds of stimulus and form triggerable pathways as a result."

"But when neuromarketers attach personal traits to products, they are not falsely claiming that, say, a Mini Cooper actually is a "gleaming little person." What they are doing is adding a personality of warmth and fuzziness to the car, in the same way that the factory might add ventilated front disc brakes or cruise control. When you drive it, you will genuinely experience the sense of endearment that you might feel when surrounded by adorable children. Sure, it doesn't always work. But the intent is not to deceive."

Professors Donate More Money To Obama 8.33 to 1

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

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

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

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

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

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

A Good Summary Of The Financial Crisis

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

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

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

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

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

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

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

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

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

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

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

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

Hot, Flat, and Crowded

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

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

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

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

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

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

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

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

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

Want A Car That Gets 64 Miles Per Gallon?

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

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

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

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

Japan Has A Banana Shortage And Guess What Happened?

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

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

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

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

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

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

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