Economy's Excess Capacity Keeps Inflation Low

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

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

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

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

We can see how this works in the following graph:



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

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

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

Has The Recession Been Hard On College Graduates?

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

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

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

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

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

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

Obama To Pitch For The White Sox

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

Women Make Trade-offs When Looking For A Man

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Should We Pay People To Adopt A Healthy Lifestyle?

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

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

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

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

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

Are Women Better At Investing Than Men?

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

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

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

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

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

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

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

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

Can Testosterone Help Women Earn More Money?

Male sex hormone may affect stock trades

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

Is Your Investing Personality in Your DNA?

Crime and Punishment: Required Reading in My Economics Class

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

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

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

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

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

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

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

More online versions of the book.

Adam Smith vs. Bart Simpson

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

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

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

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

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

Emerging field offers insight into human virtues

Humans release ‘niceness' chemical

More information about neuroeconomics can be found at:

Neuroeconomics Explained, Part One

Neuroeconomics Explained, Part Two

As college costs rise, sticker shock eased by student aid

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

Here are some notes on it:

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

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


Why price discrimination raises profits

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

Necessary Conditions for Price Discrimination

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

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

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

Free Can Be Deadly

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

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

This kind of tragedy has happened before:

Freebies led to stampede in '04 too

The Depression Is Over!

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



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

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

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

Deadweight Loss & Who Won The Olympics

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

Deadweight_loss
Deadweight_loss
Deadweight_loss

Who won the Olympics? Go to

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

There Is A Funny Economist Out There

No, really, there is. My students will find this hard to believe after the groaners I tell in class. But Yoram Bauman, who has a Ph. D. in economics from the University of Washington, calls himelf a "stand up economist." He performs all over the country. Here is a link to his site:

Stand Up Economist

I wonder if he is related to Comicus, the first stand up philosopher? (who said the Christians are so poor, they can only afford to have one God) Anyway, the site has a video which you can watch.

Bauman also has a site called

You might be an economist if….

My students will find it rewarding to look at. For example, it says "you might be an economist if you refuse to sell your children because you think they’ll be worth more later."

Should The Sale Of Tiger Parts Be Legal?

This week in one of my classes we read a chapter titled ""Bye, Bye Bison" from the book The Economics of Public Issues. The chapter discussed what happens when no one owns animals. They get over hunted or over fished.

The Wall Street Journal had an article last week called China's Tiger Farms Spark a Standoff: Economists Propose Legalizing Sale of Some Animal Parts, as Poachers and Shrinking Habitat Thin Ranks in the Wild. Here are some key exerpts:

"To curtail demand for poached animals, the economists suggest legalizing the sale of bones from some farm-bred tigers. In China, the bones are in high demand for use in traditional medicines such as rheumatism cures."

"Such sales have been illegal in China since 1993, when Beijing joined a ban on international trade in tiger products. Before then, many tiger farms fed a demand for bones; after the ban, poachers and habitat destruction thinned China's ranks of wild tigers down to a few dozen."

""Farming works if the price of the poached product falls sufficiently so that poaching is no longer profitable," he said. " That's why you don't go hunting in the jungle for wild chickens—because it's cheaper to go to the supermarket. In essence. You've got to get wild tiger bone cheaper than the farmed bone—a big ask."

It costs at least $2,000 to raise a tiger bred in captivity—and $200 or less to kill a tiger, the World Bank estimates.

Mr. van Kooten disputes those figures, saying that poaching is much more costly and that farms could achieve economies of scale to decrease the price of raising a tiger."

The idea is that if tiger parts can be sold legally, the supply would increase, lowering the price. Then poachers would have no need to kill tigers in the wild. Also, I think some poachers might be willing to start doing things legally themselves.

What Was The Rate Of Inflation Last Year? Was It Positive Or Negative?

First, a note to my students. I added some links and informaton to the last post on religion and economics.

This may not be as simple a question as you might guess. You can get data on this from the Bureau of Labor Statistics at Consumer Price Index. The official rate is 2.7%. Why?

In December of 2008, the CPI = 210.228. In December of 2009, the CPI = 215.949. The latter number is 2.7% higher than the first number. But, what if we took the average CPI of all 12 months in each year and then found the percentage change?

The average CPI for all 12 months of 2008 was 215.303. The average for 2009 was 214.537. Notice that the 2nd number is lower. How much lower? 214.537/214.537 = 0.99644. That means that prices were only 99.644% as high in 2009 as they were in 2008. The percentage drop was about 0.356% since 1 - 0.99644 = 0.00356.

The table below shows the CPI in each month for each year and then the % change month-to-month going forward a year.


When you look at the BLS web site linked above, you will see in the last column a -0.4 or a -0.4% (the site does not put any % signs in). That is just rounded up slightly from the actual -0.356%. The last year there was a fall in the CPI, whether by the December-to-December method or the monthly average method was 1955 (it was only the monthly average that was negative).

Usually, the two methods are within 1 percentage point of each other (58 out of 96 years). But in each of the last two years, they differed by more than 3 percentage points (in 2008, the Dec-Dec rate was 0.1% while it was 3.8% using monthly averages). The last time there were two straight years like that was from 1946-48. So we must be having some pretty big month-to-month fluctuations. The graph below shows the absolute difference between the two methods for each year since 1914. Notice that the differences became larger in the last few years.

Can You Mix Economics With Religion?

The ancient Greeks sure thought you could. They had a god of commerce and a god of wealth. You can read about them at Britannica.

Hermes (commerce)

Plutus (wealth)

The name of Plutus came up in a Wall Street Journal article called The Greek Tragedy That Changed Europe. It is about the debt problems that Greece faces and how they might affect the European Union. It says:

"Plutus, the Greek god of wealth, did not have an easy life. As the myth goes, Plutus wanted to grant riches only to the "the just, the wise, the men of ordered life." Zeus blinded him out of jealousy of mankind (and envy of the good), leaving Plutus to indiscriminately distribute his favors.

Modern-day Greece may be just and wise, but it certainly has not had an ordered life. As a result, the great opportunity and wealth bestowed by European integration has been largely squandered."

Here are links for Wikpedia:

Hermes

Plutus

The relationship between economics and religion is summed up very well in a Family Circus cartoon.

The Freaknomics blog has a good article about people donate more money to their churches if other people can see how much they are donating called “We Pretend We Are Christians”

World Unemployment Rates And The Ideal Inflation Rate

In my macro classes this week, I talked about unemployment. Our policy goal is full-employment which means we want to have the lowest rate of unemployment compatible with price stability (when I first took economics in 1978 it was thought to be a 4% unemployment rate). Price stability means a 3% or lower annual inflation rate. The idea is that if we try to0 hard to lower the unemployment rate by increasing AD, inflation will get too high. I explained how this works with a post from last October called Fed Officials Disagree On Threat Of Inflation. It has a graph that shows what happens with AD and AS and how inflation accelerates as AD increases.

Professor Mark Thoma of the University of Oregon had a post at his blog recently on the disagreement over what the optimal inflation rate is called Do We Need to Rethink Macroeconomic Policy?. Some economists think maybe 4% would be okay. But this article gives you a good idea of the issues and controversies surrounding the unemployment-inflation tradeoff.

It might seem silly to worry about small differences in percentage rates, like a 4% vs. 5% unemployment rate. But if economists concluded that full-employment was a 5% unemployment rate but it was really 4%, then our policies would leave about 1.5 million people unemployed since the labor force has about 150 million people in it. On the other hand, if policies tried to lower the UE rate to 4% but the full-employment UE rate is really 5%, then we could trigger very high rates of inflation. So this discussion of the ideal inflation rate is very important.

I did not get a chance to talk too much about unemployment rates in other countries. So here are links to some info on that:

The CIA's country ranks by unemployment rates

A report on current country rates from the OECD

Employment Over Time

We all know that the unemployment rate is high at 9.7%. The recession has been tough. But until the last couple of years, the long-term picture was good. The percent of the civilian noninstitutional population that was employed was trending upward. Here are the average percentages per dedade:

1970s 57.66
1980s 60.1
1990s 62.85
2000s 62.57

The data comes from a Bureau of Labor Statistics site called A-1. Employment status of the civilian noninstitutional population 16 years and over, 1970 to date. The graph below shows the yearly changes.

A Special (Economic) Valentine's Message On Romantic Love

What can an economist say about love on this holiday? You'd be surprised. But first, here is a link to an interesting story in yesterday's San Antonio Express-News: Surveys: Workplace romances in full bloom. We all spend alot of time where we work, so that is going to be a place for many people to meet that special someone. The E-N also had an article about how people are not spending as much as they did last year called Saying ‘I love you’ for less.

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 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."

So How Is The Recession Affecting America's Drinking Habits?

There was an article in the San Antonio Express-News last week called Recession enough to drive a liquor salesman to drink. Apparently people are still drinking, but cheaper brands and they are not drinking high-end beverages in restaurants as much as they were a few years ago.

"San Antonians' love for fiestas hasn't abated — in fact, the March issue of Men's Health magazine ranks San Antonio the seventh drunkest city in the country. But as we've been hammered by the recession, we're cutting back on premium liquors and drinking more cheap booze."

Sounds like what we call inferior goods in economics. The things you buy more of when your income falls (as it does in recessions). Not sure if this really fits the definition because what people are doing when they switch to a cheaper brand is just that they purchasing less quality. Suppose you could measure the quality of, say, vodka (which they discuss in the article), and you could attach quality units to different brands. If you switch to a cheaper brand, you are just buying a lower number of "quality units."

It is like you still go to baseball games or Spurs games but you buy cheaper seats. So a lesser brand may not necessarily be an inferior good. But, by making more meals at home and drinking there, that could be an inferior good since you don't go to restaurants as much. People are buying more margarita mixes, for example because they are not going to restaurants as much. So maybe the margarita mixes are an inferior good.

Finally, the article quoted the chief economist of the Distilled Spirits Council of the United States. Talk about a dream job.

Liechtenstein In Number One!

In per capita GDP, that is. In my macro classes this week we started talking about GDP (gross domestic product or the value of all the goods and services produced in a country in a year). The CIA has a ranking of all countries by their per capita GDP (that is, GDP divided by population). That ranking is at Country Comparison: GDP per capita (PPP). The figures are all stated in dollar terms, so they use exchange rates to make the conversion from each country's own currency. They are also adjusted for "purchasing power parity" or the cost of living. One good thing about this list from the CIA is that each country is a hot link. If you click on a country you go to it's home page and there is alot of info there. Here is the top 10:


Here is something I reported last year:

"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."

So Avatar, too, has probably earned more money than the GDP of some countries (it is up to about $2.2 Billion in revenue and may have cost around $400 million to make).

Click here to read last year's post on GDP. It mentions that Liechtenstein was having some problems in the banking system. One thing the CIA said was: "In 2008 Liechtenstein came under renewed international pressure - particularly from Germany - to improve transparency in its banking and tax systems."

Can You Put A Price Tag On Love?

That might sound sacrilegious, especially with Valentine's day coming up. But "Online dating is a $976 million annual industry in the United States" according to a New York Times article titled: Better Loving Through Chemistry (this is one article which is definitely worth checking out because the picture is very funny). So people are willing to pay big bucks to find love.

The article discusses some online services. Some sites try to match brain chemistry. Others try to match personal values and life experiences. They may simply be facilitating the information gathering process that was once easier in the past when life moved at a slower pace and people lived in more close-knit communities. Or, they may just be getting people together who are very selective. This may sound crass, but love is about people trading something and these services might make the trading easier. Here are some interesting exerpts:

""People tend to be adept at heeding that first spark of attraction but may be less dexterous at recognizing the commonalities that are the foundations of good marriages, says Gian Gonzaga, eHarmony’s senior director of research and development. The site suggests potential matches based on areas of compatibility —like values, beliefs and important experiences — that are predictors of relationship success, he says.

“In the long haul, you want to be able to manage conflicts, celebrate positives and get through the day-to-day relationship,” Dr. Gonzaga said. “Our system is there to take care of that so you can now focus on who you find really attractive, that you feel really passionate about.”

Chemistry.com, meanwhile, uses answers to a detailed questionnaire to suggest potential partners based on their brain chemistry, says Dr. Fisher, a research professor in the anthropology department at Rutgers University. Based on a review of scientific studies on neurotransmitters and chemicals like dopamine in the brain, she determined that humans tend to express one of four dominant temperaments.

Since the site’s introduction in 2006, more than eight million people have answered Dr. Fisher’s questionnaire, and she has used their answers to pinpoint traits that attract people to one another. She says people of decisive, straight-talking temperament, whom she calls “directors,” tend to be attracted to empathetic, intuitive types she calls “negotiators.” Spontaneous types (“explorers”) tend to be attracted to their own kind, while traditional pillars of society (“builders”) also tend to seek out partners that resemble themselves.

“If Helen Fisher can give you right off the bat individuals that your brain is more likely to be attracted to,” she says, “so much the better.”

At the end of the day, however, it may be that the success of such sites is attributable not so much to their proprietary methods as to their choosy, self-selected members who don’t want to wink at and woo the first person whose profile they read online. The sites attract cohorts of people interested in slowing down the online dating and mating process, in finding out more information about potential partners — or in ruling out unlikely suitors — before they graduate to the meet-and-greet stage.

THE more advanced the partner prediction sites, the more they may actually serve a more old-fashioned role. The sites provide background details on a person’s family, education, aspirations, character, genetic traits and general health of the type that was once public information in farming or immigrant communities or even in hunter-gatherer societies, Dr. Fisher says.

Indeed, at least from the point of view of evolutionary science, you’d be better off spending $50 — and more likely to find a mate — by using a premium dating site than by dropping $50 on drinks in the uncertain waters of singles bars."

Maybe That College Degree Is Not As Valuable As You Thought

It seems that previous estimates were wrong. That is the gist of a WSJ article titled What's a Degree Really Worth? An often cited figure is that you earn, on average, $800,000 more in your working life if you have a college degree compared to having only a high school diploma. Here are what seem to be the key exerpts:

"Mark Schneider, a vice president of the American Institutes for Research, a nonprofit research organization based in Washington, calls it "a million-dollar misunderstanding."

One problem he sees with the estimates: They don't take into account deductions from income taxes or breaks in employment. Nor do they factor in debt, particularly student debt loads, which have ballooned for both public and private colleges in recent years. In addition, the income data used for the Census estimates is from 1999, when total expenses for tuition and fees at the average four-year private college were $15,518 per year. For the 2009-10 school year, that number has risen to $26,273, and it continues to increase at a rate higher than inflation.

Dr. Schneider estimated the actual lifetime-earnings advantage for college graduates is a mere $279,893 in a report he wrote last year. He included tuition payments and discounted earning streams, putting them into present value. He also used actual salary data for graduates 10 years after they completed their degrees to measure incomes. Even among graduates of top-tier institutions, the earnings came in well below the million-dollar mark, he says."

But $279,000 is nothing to sneeze at. The one thing that is not clear is if they took into account that the high-school-diploma-only people are earning money earlier and that they can save that money and earn interest. My guess is that this issue is a minor one since you won't be able to save much in these cases.

The part about tuition prices and inflation is interesting. The Consumer Price Index rose 28.8% from 1999-2009. Total expenses for tuition and fees at the average four-year private college rose 69.3%.

Banning Cell Phones While Driving And A Lesson In Ceteris Paribus

The article is Report: Study shows cell phone bans don’t lower accident rates. A study found that states that banned using hand-held cell phones while driving did not see their accident rates go down compared to other states. But "Officials believe that drivers in areas with the ban have obtained hands-free devices, whose accident rates are at the same level as the hand-held devices." This means that all other factors were not held constant. We need ceteris paribus to be able to see if A causes B. We need to change just one thing, hand held cell phone use, without anything else changing. It is possible that this ban really does lead to fewer accidents but that the increased use of hands-free devices raised it back up.

Why It Is Hard To Use Cost-Benefit Analysis

In my classes last week and this upcoming week, one of the topics is how government policy affects markets. We would like to see the benefits from a policy be greater than the cotss. Sometimes it is very hard to tell. This comes up in a recent EPA policy as reported on in the Wall Street Journal article EPA Proposes Tighter, Costlier Smog Limits. Here is the intro:

"The Obama administration on Thursday proposed tougher standards for reducing smog in a move it said would save lives and reduce respiratory illness, but businesses said the change would inflict new costs on employers and consumers in a weak economy."

Here is what the new policy will do:

"Under the proposal, the EPA would set the acceptable ozone level in the air between 0.06 and 0.07 parts per million, stricter than the current 0.075 ppm."

What are the costs?

"The EPA estimated that the costs of complying with the new standards could range between $19 billion and $90 billion annually, depending on the final standard. Much of the cost will be in the form of new technologies."

What are the benefits?

"EPA officials and public-health groups claim the new standards would mean fewer visits to the emergency room for children with asthma, and longer lives for people with chronic lung disease -- saving the U.S. $13 billion to $100 billion annually."

So the cost could be as high as $90 billion while the benefits could be as low as $13 billion. There is such a huge range as to what might happen with the costs and benefits. That makes it hard to know if it is a good idea.

A couple of years ago I posted the following:

"Last week in the San Antonio Express-News, Michael E. Kraft, professor of environmental sciences at the Unviersity of Wisconsin-Green Bay, said that "in writing the Clean Air Act, Congress explicitly instructed the agency (EPA) to base its decisions on public health and not economic costs.""

So if we don't base anything on cost, how do we know if the policy is a good idea?

Is Avatar Really King Of The Box Office?

That is the title of an article you can read by clicking on Is Avatar Really King Of The Box Office?.

There is a website called "Box Office Mojo" that adjusts box office revenue for ticket price inflation. You can see their rankings at Box Office Mojo ALL TIME BOX OFFICE. "Gone With The Wind" is still the #1 movie all-time when you take the change in ticket prices into account. When GWTW first came out in 1939, prices were alot lower. The average ticket price was only $0.23. Now it is $7.46. You can read about how they make the adjustments and what prices were in the past at Box Office Mojo: ADJUSTING FOR TICKET PRICE INFLATION.

So the average ticket price is 32.44 times higher than in 1939 (7.46/.23 = 32.44). This actually far outstrips the overall increase in prices. The Consumer Price Index (CPI) was 13.9 in 1939 and it was 214.54 in 2009. So prices across the economy are 15.4 times higher (214.54/13.9 = 15.4). So movie prices have increased at about twice the rate of overall prices.

So we might want to cut GWTW's adjusted box office total of $1,507,252,900 in half. That would leave it a mere $753,626,450. That is still higher than Avatar's $561,317,300 (which only includes U.S. ticket sales but I assume the same is true for GWTW). But GWTW was making money for a long time after 1939, so some of its later box office revenue would have be adjusted downward as ticket prices rose. I just don't know how much of its revenue or ticket sales came early on. My guess is the vast majority. That is usually what happens with movies. They make most of their money early on.

But MOJO says:

"Some movies have been released several times over the decades, and we do account for this. For example, Snow White was released in 1937, but half of its lifetime gross is from re-releases in the 80s and 90s, so each of these releases is adjusted according to the year it earned its money."

So that makes me think that GWTW is still the leader.

Update (1-30-2010): Carl Bialick has an article about this in the Wall Street Journal called What It Takes for a Movie to Be No. 1.

Should People Be Allowed To Sell Their Kidneys And Other Organs?

This came up in one of my classes this week when we discussed a chapter from the book The Economics Of Public Issues. Alex Tabarrok had a good article on this in the 1-9/10-2010 edition of the WSJ, p. W1. It was called The Meat Market. Here are some interesting exerpts:

"Iran has eliminated waiting lists for kidneys entirely by paying its citizens to donate."

"Millions of people suffer from kidney disease, but in 2007 there were just 64,606 kidney-transplant operations in the entire world. In the U.S. alone, 83,000 people wait on the official kidney-transplant list. But just 16,500 people received a kidney transplant in 2008, while almost 5,000 died waiting for one."

"To combat yet another shortfall, some American doctors are routinely removing pieces of tissue from deceased patients for transplant without their, or their families', prior consent. And the practice is perfectly legal."

"The shortage of organs has increased the use of so-called expanded-criteria organs, or organs that used to be considered unsuitable for transplant. Kidneys donated from people over the age of 60 or from people who had various medical problems are more likely to fail than organs from younger, healthier donors, but they are now being used under the pressure."

"Already, the black market may account for 5% to 10% of transplants world-wide."

"Only one country, Iran, has eliminated the shortage of transplant organs—and only Iran has a working and legal payment system for organ donation." (although the payment system works mainly through the government)

"The Iranian system and the black market demonstrate one important fact: The organ shortage can be solved by paying living donors. The Iranian system began in 1988 and eliminated the shortage of kidneys by 1999. Writing in the Journal of Economic Perspectives in 2007, Nobel Laureate economist Gary Becker and Julio Elias estimated that a payment of $15,000 for living donors would alleviate the shortage of kidneys in the U.S. Payment could be made by the federal government to avoid any hint of inequality in kidney allocation. Moreover, this proposal would save the government money since even with a significant payment, transplant is cheaper than the dialysis that is now paid for by Medicare's End Stage Renal Disease program."

Is It Hard For A Successful, Well Educated Women To Find Mr. Right?

This question was raised in a recent Wall Street Journal article called The Right Man Is Getting Harder to Find. It seems like there are just not enough well educated, high income men around. One woman, who is a telecommunications project manager, said "I've found a lot of Mr. Almosts, but I can't find Mr. Right." Here is what happens when she meets a guy:

"When she brings men back to her very nice, four-bedroom home, they often comment about her success. A few flat-out say they're uncomfortable with her salary advantage, education advantage (master's degree), or both."

Here are some interesting facts mentioned in the article:

-There's been a 145% rise in unmarried births among college-educated women since 1980more than twice the increase in such births among women without college educations.

-22% of men with "some college" are now outearned by their wives, up from 4% in 1970.

-In situations where there are fewer women than men, you see long-term monogamy

-nearly 58% of all bachelor's degrees and 62% of associate's degrees are earned by women. (men take advantage of this situation)

-colleges accept some male applicants who are not really qualified to prevent a gender imbalance. (college men seem to take advantage of this situation and like having all those women around)

-80% of the jobs lost in the recession were held by men.

Small Changes In Growth Rates Add Up Over Time

In my macro courses we read a chapter in the book "The Economics of Macroissues." The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates. I pointed out to my classes that even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.

Paul Krugman recently mentioned that the per capita GDP since 1980 has grown 1.95% in the US and 1.83% in the EU. But we should also remember that small differences in growth rates compound over time. If per capita income was 20,000 in both the US and EU 29 years ago, the per capita income (or GDP) now would be 35,015 in the US and 33,839 in the EU, a difference of $1,176. Maybe not a big difference. But after 100 years the US income level would be 12% higher. After 200 years it would be 26% higher.

Economists Love Fables And Parables (Or, The Essence Of Economic Analysis)

Nobel Prize winning economist Paul Krugman wrote the following in Slate magazine back in the 1990s:

“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.”

Here is the link to the article the quote is from: The Accidental Theorist. He has a brilliant example of how labor saving technology does not increase unemployment.

University of Rochester economist Steven Landsburg wrote the following in his book The Armchair Economist: Economics & Everyday Life:

“But as Aesop discovered some time ago, the details of reality can disguise essential truths that are best revealed through simple fictions. Aesop called them fables and economists call them models." (p. 34)

And

"Economists love fables. A fable need not be true or even realistic to have an important moral. No tortoise ever really raced against a hare, yet “Slow but steady wins the race” remains an insightful lesson.” (p. 40)

So when you see an economics professor draw PPFs on the board which show the tradeoff between houses and cars or when we draw supply and demand curves, we know that these are "simple fictions." But, by assuming, for example, that there is a society that makes only two goods and has one resource (labor, say), we can learn something important, like the The Law of Increasing Opportunity Cost.

Should We Tax Cosmetic Surgery To Help Pay For Health Care Insurance?

This the question raised in Knives Drawn Over the 'Botax'. The article says:

"Leading makers of antiwrinkle drugs, breast implants and other appearance-related products are trying to derail a proposed tax on elective cosmetic surgery in the Senate's health-overhaul bill.

The proposed 5% levy -- dubbed the "Botax" after the antiwrinkle treatment product Botox -- would raise an estimated $5.8 billion over 10 years."

Some are opposed to it, including plastic surgeons and "companies in aesthetic treatments."

"Botox treatments are by far the most popular procedure, costing an average of $443 in 2008, according to the American Society for Aesthetic Plastic Surgery. The American Medical Association, which also opposes the tax, says it would be the first federal levy on a medical procedure."

Universities Favor Athletes In Admissions

Read Admissions exemptions aide athletes By ALAN SCHER ZAGIER. I saw the article in the 12-31-09 San Antonio Express-News, page 2E.

"The review identified at least 27 schools where athletes were at least 10 times more likely to benefit from special admission programs than students in the general population."

"At Alabama, 19 football players got in as part of a special admissions program from 2004 to 2006, the most recent years available in the NCAA report. The school tightened its standards for "special admits" in both 2004 and 2007, but from 2004 through 2006, Crimson Tide athletes were still more than 43 times more likely to benefit from such exemptions."

"The NCAA defines special admissions programs as those designed for students who don't meet "standard or normal entrance requirements.""

"Texas was one of seven schools that reported no use of special admissions, instead describing "holistic" standards that consider each applicant individually rather than relying on minimum test scores and grade-point averages.

But the school also acknowledged in its NCAA report that athletic recruits overall are less prepared. At Texas, the average SAT score for a freshman football player from 2003 to 2005 was 945 — or 320 points lower than the typical first-year student's score on the entrance exam."

How Recessions Affect Young People

It is too early in the semester to have talked about recessions. But there was an interesting article called Recession may shape young adults' future habits. Here are some exerpts:

Researchers found "...young people who live through recessions tend to doubt their control over their careers. Unlike people who have lived through sweeter economic circumstances, the youth of recessions tend to look at career success as luck rather than a result of personal action."

"Beyond family pressures, unemployment among 16-to-19-year-olds is at an extraordinarily high level of more than 26 percent. Students finishing college face difficult job prospects, with hiring of this year's graduates down 22 percent, according to the National Association of Colleges and Employers."

[when] "...individuals have had low stock market returns for many years, they don't want to take risks in stocks. And bad experiences with stocks early in life "have significant influence even several decades later."

"...Americans aged 22 years to 33 years have shifted toward more conservative financial behavior too. It's influencing everything from investing to job choices: More are seeking job security and strong benefits rather than opting to jump from job to job to further their careers."

Another article, Birth date, business cycles, and lifetime income says:

"...a one percentage point increase in the national unemployment rate is associated with a 6 to 7 percent loss in initial wages. The annual wage loss declines over time, but is still statistically significant 15 years later. Comparing the wages earned by the class of 1982 (a peak unemployment year) with the wages of the class of 1988 (a peak employment year) over the first 20 years of a career, the wage difference resulted in a difference of nearly $100,000 in cumulative earnings in net present value."

Why Do Older People Hate The Imaginarium of Doctor Parnassus?

This is a recently released movie which you can read about at IMDB The Imaginarium of Doctor Parnassus. In economics, we say that tastes and preferences affect demand, but we usually don't talk much about how those tastes or preferences are formed. But at IMDB, people can rate a movie on a scale from 1 to 10. Then you can view the breakdown on how the movie was rated by age and gender categories. And then you can see the breakdown for a given group, like females aged 45+. You can see how many of them gave the movie a 1 or 2, etc. 10 is the best, 1 is the worst. Here is something I just posted at IMDB to get a discussion going about a strange pattern I see in the rankings:

I have not seen this movie. What seems weird is that 102 females age 45+ have voted yet they give it a 3.7? (the overall average is 7.4). Males that age don't rate it very higly either. Why? Why would old people not like this? I look at movie ratings at IMDB occassionally and I don't recall seeing such a huge young/old split before. Please tell me about other movies where this happens. Also, 41 of the Females Aged 45+ gave this movie a 10 while 27 have given it a 1. They either loved it or hated it? I don't see any of the other demographic groups with such a love/hate viewpoint. Seems very strange.

Here is the breakdown as of 1-10-2009

http://www.imdb.com/title/tt1054606/ratings

See user ratings report for:

Votes Average
Males 5,190 7.4 (this means that 5,190 males have voted and the average ranking is 7.4)
Females 1,503 7.2
Aged under 18 400 8.3
Males under 18 228 8.9
Females under 18 171 7.0
Aged 18-29 4,556 7.7
Males Aged 18-29 3,557 7.7
Females Aged 18-29 987 7.9
Aged 30-44 1,357 7.0
Males Aged 30-44 1,118 7.0
Females Aged 30-44 231 6.4
Aged 45+ 368 5.5
Males Aged 45+ 265 5.9
Females Aged 45+ 102 3.7
Top 1000 voters 87 6.3
US users 902 6.8
Non-US users 5,798 7.5

IMDb users 6,993 7.4

http://www.imdb.com/title/tt1054606/ratings-female_age_4

102 Females Aged 45+ have given a weighted average vote of 3.7 / 10

Demographic breakdowns are shown below.

Votes Percentage Rating
41 40.2% 10
9 8.8% 9
15 14.7% 8
6 5.9% 7
3 2.9% 6
5
1 1.0% 4
3
2
27 26.5% 1

Are Homemade Gifts Better Or More Special?

That is what world renown economist Daniel Hamermesh says. The article is A homemade Christmas. Here is the relevant passage, which says that making your gifts is

"...an option that is not only cheaper but shows care and thoughtfulness, said Daniel Hamermesh, an economics professor at the University of Texas at Austin and author of “Economics Is Everywhere.” Hamermesh said studies have shown gifts typically cost more than they are worth to the people who receive them, information that should, but often doesn't, tone down frenzied Christmas shopping behavior.

“There is too much compulsion (at Christmas) to buy something nobody wants,” Hamermesh said. “If the point is to ... show that you care, you would do better (to make something) than spend the money.”"

The point Hamermesh makes about gifts costing more than they are worth to the people who receive them is something I discussed a few weeks ago with Is Christmas Gift Giving Inefficient?.

But just because you take the time to make something does not necessarily show that you care more than if, say, you took the time to earn extra money so you could buy a nice gift for someone. Why would taking time to earn money to buy a gift be less worthy or special than taking time to make a gift? And what if you are not good at hand crafts? Or what if your time is valuable? Do we really want President Obama taking a long time to sew his wife a dress?

Economist Steven E. Landsburg had some interesting things to say about gift giving in his book The Armchair Economist: Economics & Everyday Life. From chapter 2:

"I am not sure why people give each oher store-bought gifts instead of cash, which is never the wrong size or color. Some say that we give gifts because it shows that we took the time to shop. But we could accomplish the same thing by giving the cash value of our shopping time, showing that we took the time to earn the money.
My friend David Friedman suggests that we give gifts for exactly the opposite reason-because we want to announce that we did not take much time to shop. If I really care for you, I probably know enough about your tastes to have an easy time finding the right gift. If I care less about you, finding the right gift becomes a major chore. Because you know that my shopping time is limited, the fact that I was able to find something appropriate reveals that I care. I like this theory."

I think it might also mean that you cared enough to get to know the person in the first place. Dilbert had a funny strip on Christmas about this. Here is what happens:

Panel 1
Dilbert: Merry Christmas. Here's a hundred bucks.
Dogbert: And here's a hundred bucks for you.

Panel 2
Dilbert: We could save another step by setting up an electronic transfer with an annual recurring option.
Dogbert: Excellent.

Panel 3
Dogbert: Or we could not give gifts.
Dilbert: Hush your crazy talk.

Colleges And Universities Try To Be Like Hogwarts. What Would Carl Jung Say?

There was an article in the New York Times recently about how schools tell prospective students how they are just like Hogwarts. It was Taking the Magic Out of College by By LAUREN EDELSON. Here are some things she mentioned about her visits to colleges:

"[at one school they play] a flightless version of J. K. Rowling’s Quidditch game — broomsticks and all."

"So I was surprised when many top colleges delivered the same pitch. It turns out, they’re all a little bit like Hogwarts — the school for witches and wizards in the “Harry Potter” books and movies. Or at least, that’s what the tour guides kept telling me."

"During a Harvard information session, the admissions officer compared the intramural sports competitions there to the Hogwarts House Cup. The tour guide told me that I wouldn’t be able to see the university’s huge freshman dining hall as it was closed for the day, but to just imagine Hogwarts’s Great Hall in its place."

"At Dartmouth, a tour guide ushered my group past a large, wood-paneled room filled with comfortable chairs and mentioned the Hogwarts feel it was known for. At another liberal arts college, I heard that students had voted to name four buildings on campus after the four houses in Hogwarts: Gryffindor, Ravenclaw, Hufflepuff and Slytherin."

"[In] Cornell’s fall 2009 quarterly magazine, [it says] that a college admissions counseling Web site had counted Cornell among the five American colleges that have the most in common with Hogwarts. Both institutions, you see, are conveniently located outside cities. The article ended: “Bring your wand and broomstick, just in case.”"

"I’m not the only one who has noticed this phenomenon. One friend told me about Boston College’s Hogwartsesque library, another of Colby’s “Harry Potter”-themed dinner party. And like me, my friends have no problem with college students across the country running around with broomsticks between their legs, trying to seize tennis balls stuffed into socks (each one dubbed a snitch) that dangle off the backs of track athletes dressed in yellow.""

In the same issue of the NY Times, there was a review of a book by the famous psychologist Carl Jung. The review was titled The Symbologist by KATHRYN HARRISON. The book by Jung is titled THE RED BOOK: Liber Novus. One of the passages from the book was was about Jung's belief in the "deep subliminal connections between individual fantasies and world events."

Mixing fantasy and reality. Sounds like what these colleges and universities are doing by comparing themselves to Hogwarts.

Also, since my semester ended, it will be a few weeks until I post again.

The Ugly Truth About Pirates They Don't Show You In Those Johnny Depp/Keira Knightley Movies

You probably know that there are real pirates, with many of them operating off the coast of Somalia. Their economic impact is particularly interesting. Read Pirate Payoffs Feed Big-Money Lifestyle in Somalia: Big houses, fast cars, easy drugs: Ransom-fed lifestyle creates problems in Somali towns.

For one, the money pouring in is driving up prices. A pair of shoes that used to cost $20 now costs $50, for example. It also causes social problems with so many pirates using alcohol and drugs. "Teenagers threaten their parents that they will join the pirates if they don't get their way." How widespread and accepted is piracy? This quote says alot:

"The price of clothes, shoes and cosmetics is climbing, said Anshur Kamil, a businessman. Pirates don't even have to pay upfront. Those holding ships hostage that haven't yet received ransom can buy goods on credit — at elevated prices — and settle up their debts when the ransom money comes in, villagers say."

Can you imagine walking into a store and buying a pair of Gucci loafers and an Armani suit and telling the clerk "just put it on my tab, I'm good for it because I'm a pirate?" The article also implies that pirates are able to buy brides with their money.

Pirates have set up a stock exchange to find investors. See Somali sea gangs lure investors at pirate lair. This article was discussed at The Marginal Revolution.That article also mentions that it is not hard to attract young men to piracy since there are few legitimate economic opportunities in the area.

Economist Peter Leeson has written a book called The Invisible Hook: The Hidden Economics of Pirates.

Although the Somali pirates make millions of dollars, it still pales in comparison to what the movies make. Pirates of the Caribbean: At World's End took in about $960 million worldwide at the box office while costing about $150 million to make. Then it made about $295 million in DVD sales. And that was just one of the movies.

Is Christmas Gift Giving Inefficient?

In 1993, Yale economics professor Joel Waldfogel published an article titled The deadweight loss of Christmas. The idea is that gift recipients often place a lower dollar value on the item than its actual price. Maybe someone buys you a tie for $20 that you would pay no more than $5 for. So the inefficiency or deadweight loss is $15. Waldfogel estimated that in 1992, the inefficiency or deadweight loss in the United States from Christmas was anywhere between $4 billion and $13 billion.

Not everyone agrees with this. The article Christmas gift giving: a deadweight loss? from Business World mentions:

"the process of gift giving adds value to a gift over and above its retail price. Giving a gift instead of cash says the giver bothered to know what the receiver might want. There are times, in fact, when gifts that weren’t wished for turn out to be most valued. A thing one would not have thought of buying himself might end up a pleasant surprise. Or, an item the recipient might have had money to spend on but never bought for frugal reasons could also turn out to be a gift valued more than its price."

An article from the Economist magazine, "Is Santa a deadweight loss?: Are all those Christmas gifts just a waste of resources?, raised the question "So should economists advocate an end to gift-giving?" Here is the answer they provided:

"There are a number of reasons to think not. First, recipients may not know their own preferences very well. Some of the best gifts, after all, are the unexpected items that you would never have thought of buying, but which turn out to be especially well picked. And preferences can change. So by giving a jazz CD, for example, the giver may be encouraging the recipient to enjoy something that was shunned before. This, and a desire to build skills, is presumably the hope held by the many parents who ignore their children's pleas for video games and buy them books instead.

Second, the giver may have access to items—because of travel or an employee discount, for example—that the recipient does not know existed, cannot buy, or can only buy at a higher price. Finally, there are items that a recipient would like to receive but not purchase. If someone else buys them, however, they can be enjoyed guilt-free. This might explain the high volume of chocolate that changes hands over the holidays.

But there is a more powerful argument for gift-giving, deliberately ignored by most surveys. Gift-giving, some economists think, is a process that adds value to an item over and above what it would otherwise be worth to the recipient. Intuition backs this up, of course. A gift's worth is not only a function of its price, but also of the giver and the circumstances in which it is given.

Hence a wedding ring is more valuable to its owner than to a jeweller, and the imprint of a child's hand on dried clay is priceless to a loving grandparent. Moreover, not only can gift-giving add value for the recipient, but it can be fun for the giver too. It is good, in other words, to give as well as to receive."

Important Notice About The Final Exam For My Students

As I said in class and on the final test taking guide, the 2nd half of the final will be over the "study questions for final" But there will be 3-4 questions on the 2nd half from the last 4 chapters. Please pass this along to anyone in the class.

For ECON 2301 this means chapters 14-17.

For Econ 1301 this means chapters 14, 15, 17, and "Last Chapter"

Can Testosterone Help Women Earn More Money?

You may have heard that women get paid less than men. How big the difference is not always clear. Read Women and the Pay Gap. Now there is research on how testosterone affects pay. This is from the University of Chicago alumni magazine Risky business.

"In general, women tend to avoid the risks that men undertake more frequently, but testosterone may provide an equalizer. Studying the connection between testosterone and high-risk financial careers, Chicago Booth economist Luigi Zingales, comparative human-development professor Dario Maestripieri, and Northwestern University Kellogg School economist Paola Sapienza found that the hormone played an important role for women. The researchers began with a sample of 500 Chicago Booth MBA students; 36 percent of the women chose jobs like investment banking or trading, compared with 57 percent of the men. Higher testosterone levels correlated with greater risk-appetite in women, though not in men. But in men and women with similar testosterone levels, risk-related gender differences disappeared. The findings appeared in the August 24 Proceedings of the National Academy of Sciences."

Looks Like Some Pretty Good Capitalists Run The Congress

Go to Policy, portfolios and the investor lawmaker: As stock ownership rises in Congress, experts warn of potential ethics concerns from the Washington Post this past week.

Most members of the House of Representatives own stock. The article says "The investments increasingly put lawmakers in the position of voting or advocating on matters that could affect their personal wealth, whether the lawmakers realize it or not."

Politicians who rarely agree on anything might be found to be voting for the same bill if it matters to their pocket book. They are supposed to report what they own but the drag their feet and the records are not very well computerized, so they are harder to analyze. And they are good at this investing stuff. From 1985-2001, the legislators beat the market by .55 basis points a month. In a year that means 6.6 percentage points above the market.

In that time, the market (DJIA) gained just a bit under 1% a month (from 12-31-85 to 12-31-2001). It went from 1,546 to 10,021. So, if you had $1,546 in the market it became worth $10,021. But, if you were a member of Congress, it rose about 1.5% a month and you would have ended up with $26,970. Each dollar in the market grew into $6.48 while for the lawmakers it grew into $17.44.

"The researchers, whose findings were presented at a congressional hearing in July, said the statistics suggest that those unusual returns must be based on lawmakers' access to "government and important social contacts.""

But legislators acting on their self interest is not new. Charles Beard wrote about this in his book An Economic Interpretation of the Constitution of the United States. He argued that self-interest was a big force in how the framers wrote the constitution.

In the 1950s, Forrest McDonald We the People : The Economic Origins of the Constitution, in attempt to refute Beard. But more recently, economic historian Robert A. McGuire wrote a book called To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution. He used modern statistical analysis to show that the Beard thesis may be legitimate.

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

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

I Have Alot To Be Thankful For Since I'm Soon Going To Be Rich!!

I got this email a few days ago and it looks like it is from a famous economist. Anybody have any suggestions as to what I should do with $10 million?

"Chairman Federal Reserve Bank New York

We received the instructional letter to credit $10.5million to your account. We wish to let you know that all charges are waived for the sucess of this contract fund to be credited into the your account.

Your respond is required to enable us credit your account without any further of delay and you are also required to get back to us with the reconfirmation of your banking particulars for we to know if what we have in file is correct and to avoid crediting your fund to wrong account.

Please be fast on this matter.

Regards,
Bzen S. Bernanke"

Senators And Representatives Get Paid To Talk, But Do We Always Know Who Is Paying Them?

These legislators make lots of speeches and ask questions at congressional hearings. That is part of their job and maybe they like doing that sort of thing (which might explain why they ran for office in the first place). So you might assume that the taxpayers are paying them to talk. But maybe not. The New York Times had an article recently called In House, Many Spoke With One Voice: Lobbyists’. Here is the intro:

"In the official record of the historic House debate on overhauling health care, the speeches of many lawmakers echo with similarities. Often, that was no accident. Statements by more than a dozen lawmakers were ghostwritten, in whole or in part, by Washington lobbyists working for Genentech, one of the world’s largest biotechnology companies. E-mail messages obtained by The New York Times show that the lobbyists drafted one statement for Democrats and another for Republicans."

It later says

"In recent years, Genentech’s political action committee and lobbyists for Roche and Genentech have made campaign contributions to many House members, including some who filed statements in the Congressional Record. And company employees have been among the hosts at fund-raisers for some of those lawmakers."

So it looks like this company is actually paying the representatives to say what they want them to say. This reminds me of an Associated Press (AP) article from way back in 1993 (before the internet was widespread). It described how political action committees (PACs) were requiring senators and representatives to sign pledges of what their positions were on various issues before they got their campaign contributions. Of course, the PACs would not be giving money to politicians on the "wrong" side of the issue. It sounded like vote buying back then and it still does. The article was "Interest Groups Use Pointed Questionnaires As Lobbying Tactic" by Jim Drinkard and was issued by the AP on March 26, 1993. I don't think it is online anywhere.

Did The Yankees Buy A World Championship In 2009?

This is actually a cross over post from my Cybermetrics blog. To read it click here.

The Mortgage Delinquency Rate Hits An All-Time High

In two of my classes this week we discussed the housing crisis over the last few years. The latest news is reported in Mortgage loans: Record number are late. According to the article, "In the third quarter, 9.64% of all mortgage loans were delinquent..." and "The combined percentage of loans in foreclosure or at least one payment past due was 14.41% on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey."

In a related article Foreclosure plague: It's spreading, McAllen, Texas is reported to have the fastest growing rate. And with the high unemployment rate, the foreclosure and delinquency rates could go higher. To see a map of the unemployment rates for each state, go to Where does your state rank?

Leggo Your Eggo: There's a Waffle Shortage

That is the title of a news article which you can read here. According to the article, "Kellogg is rationing its Eggo products due to flooding and equipment problems at two bakeries. The shortfall could last through mid-2010." So the solution? The article says "Remaining inventory will be rationed to stores across the country "based on historical percentage of business.""

Why not let the price rise? That way there won't be lines of people waiting to get them or people calling the stores or the stores having to establish waiting lists. Are stores going to set limits on how many you can buy? What if you are the first person in the store, are they going stop you from buying all that is there?

Three years ago strange things happened when Play Station 3 came out. Instead of charging a higher price at first, it was at the normal price. So there were long lines and certain people got first dibs. You will be surprised who. Read about that at this link.

Late Breaking News Bulletin: The depression is over! We're out of the red!

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



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

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

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

Get out of here and get me some money too

That is a line from a song that Peggy Lee (1920-2002) is well known for singing. Below is a video of her singing it with Benny Goodman (1909-86) and his orchestra. KRTU played it on the radio this morning and I have been meaning to post this for awhile. The lyrics are printed below the video.



The video is online at Peggy Lee - Why Don't You Do Right (1943). Here are the lyrics which I got at Why Don't You Do Right.

Why Don't You Do Right

You had plenty money, 1922
You let other women make a fool of you
Why don't you do right, like some other men do?
Get out of here and get me some money too

You're sittin' there and wonderin' what it's all about
You ain't got no money, they will put you out
Why don't you do right, like some other men do?
Get out of here and get me some money too

If you had prepared twenty years ago
You wouldn't be a-wanderin' from door to door
Why don't you do right, like some other men do?
Get out of here and get me some money too

I fell for your jivin' and I took you in
Now all you got to offer me's a drink of gin
Why don't you do right, like some other men do?
Get out of here and get me some money too
Why don't you do right, like some other men do?
Like some other men do

For People Who Still Have Jobs, Women's Wages Have Risen Faster Than Men's During The Recession

This was reported in a Wall Street Journal article called Women's Wages Outpaced Men's During Recession. The increase in median wages for women was 3.2% while it was 2.0% for men. The article gives a pretty thorough run down on how various demographic groups have done during the recession. Men now have an 11% unemployment rate while women have 8.4%.

Being Happy Might Hurt Your Bottom Line

This came up in two articles recently. The first is Don’t Worry, Be Happy: The Warranty Psychology. The article suggests that people are very happy when they make a big purchase like a refrigerator. So they are willing to pay alot for an extended warranty, especially if they got a discount on the product. But the price of the warranty is often too high. If a product has a 10% chance of failure, you don't want to pay more than 10% of the product price for the warranty. But people often do. To avoid this, the article concludes with "The lesson is simple: Stay grouchy while shopping."

The other article is Sadder But Wiser. It discusses research by Joseph Forgas, a professor of psychology at Australia's University. The article says "Sometimes, he finds, it pays to be sad." Also, " a bad attitude makes us more critical of what we are told and less easily duped."

Here is more:

"Not only can a mild malaise keep us from being bamboozled, but we are more perceptive and have sharper, more accurate recall when we're down in the dumps. The professor tested people on their ability to remember items viewed on a cluttered table. On a dreary, drizzly day, people "had better eyewitness memory for what they saw" than those tested "on a bright, sunny day.""

"The Icelandic mood may have been knocked down a peg or two by the collapse of the country's economy, but that may not be such a bad thing. Could it be that Iceland's positive disposition is what got it into such a mess in the first place? If a dour mood dispels credulity, then where better to peddle monumental scams than in a nation awash in good feelings?"

"The method-acting crowd long ago perfected the technique of dredging up memories of life's awful moments to produce compelling stage tears. A similar technique could have business applications. A maudlin and well-timed musing on the death of your childhood dog could save the company millions.

On the flip side, a salesman looking to close a deal should do his best to induce a warm wave of good feelings. Remember, a happy customer is a rather less critical customer. The customer may want to adopt a crotchety counter-strategy akin to the old saw about not going grocery shopping when hungry: Don't do any sort of shopping when you're cheery."

One more thing. Don't have a nice day.