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.

Here is a new article from yesterday's San Antonio Express-News (2-13-2011). Romance in bloom at workplace: Survey indicates 59% have taken the risk-filled leap. It seems like many people admit to having a romance at work and/or meeting their spouse at work. So what starts out as economic activity leads to some other needs being met.

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.

Then there was this related article: 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."

New Technologies Open Up Oil And Gas Reserves

In one of my macro sections this week we read a chapter from the book The Economics of Macro Issues about technology. It mentions how better techniques have expanded our proven reserves of resources like oil. Some more cases of this were in the news recently.

One was New drilling method opens vast oil fields in US from the Associated Press. Here is an excerpt:

"A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day — more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers."

Something similar has happened with natural gas. See IEA doubles global gas reserves estimates from the BBC. Here is an excerpt:

"The world may have twice as much natural gas than previously thought, according to the rich nations' think tank the International Energy Agency (IEA).

The world may have 250 years of gas usage at current levels thanks to "unconventional gas" from shale and coal beds, Anne-Sophie Corbeau, senior gas expert at the IEA told BBC News."

It also has a nice picture explaining the new technique (I pasted it below). The authors of The Economics of Macro Issues also have a book called The Economics of Public Issues. Here is an interesing excerpt:

"In 1914, for example, the Interior Department announced that there was only a ten-year supply of oil left. That same department told us in 1939 that there was a thirteen-year supply. Then in 1951 we were told that oil wells would run dry in the mid-1960s. President Jimmy Carter in the 1970s said that we would use all proven reserves of oil in the world by the end of the 1980s."

Should Children Be Forced To Visit Their Aging Parents?

A couple of weeks ago I had a post about something from SuperFreakonomics, how children are more likely to visit their parents in nursing homes if the parent is rich (and if they have a sibling, since they are in competition for the inheritance). Now it turns out that China might force children to visit their parents. A proposed law would allow parents to sue their children if they don't visit. It is not clear how often they would have to visit or for how long. See China Might Force Visits to Mom and Dad from the NY Times. Here is one tidbit that has economic implications:

"In Shandong Province, for instance, a court ordered three daughters to each pay their 80-year-old mother between 350 to 500 renminbi, roughly $53 to $75 a month, after the mother claimed that they ignored her and treated her like a burden, The Qingdao Evening News reported this month."

Will Computers Replace Professors?

This past week in one section of my macro class we read a chapter about technology and how people respond to it from the book The Economics Of Macro Issues. It mentioned Luddites, people who destroyed industrial equipment in England in the early 1800s. They were weavers who lost their jobs to new machinery. See What is a Luddite? by Steve Anderson at Utah State University.

Today, the New York Times had an article called Online Courses, Still Lacking That Third Dimension by Randall Stross. It raised the question of computers doing the teaching, making it possible to do away with professors. Here are some excerpts:

"“We should focus on having at least one great course online for each subject rather than lots of mediocre courses,” Bill Gates suggested in his 2010 annual letter for the Bill & Melinda Gates Foundation.

Developing that best-in-the-world online course — in which students would learn as much, or more, than in an ordinary classroom or a hybrid online class — requires significant investment. The Open Learning Initiative at Carnegie Mellon University, which has developed about 15 sophisticated online courses, mostly in the sciences, spent $500,000 to $1 million to write software for each. But neither Carnegie Mellon nor other institutions, which are invited to use its online courses, dares to use them without having a human instructor, too."

'Separately, many universities have put free videos online featuring their best lecturers. And Academic Earth, an aggregator Web site founded in 2009, makes the lectures easy to navigate. It says it offers 150 full university courses.

But even when lectures are accompanied with syllabuses, handouts, sample problem sets and other aids that Academic Earth has for some of its courses, is the experience really complete? The Massachusetts Institute of Technology also shares the raw materials of courses in its OpenCourseWare program. For the benefit of autodidacts who aren’t M.I.T. students, it strives to publish materials online for every M.I.T. course. But students cannot interact and do not receive vital feedback about their own progress that an instructor or software provides.

“Unlocking the Gates,” by Taylor Walsh (Princeton University Press) is a recently published history of M.I.T.’s online venture, as well as those of Columbia, Harvard, Yale, the University of California, Berkeley, and others. Comparing the book’s case studies, I found that Carnegie Mellon seems to have made the most progress in developing fully self-contained online courses. Anyone can use them free, with the proviso that Carnegie Mellon doesn’t offer credit.

But course credit can be earned at other institutions if instructors send their students to the site. Students pay nominal course registration fees, generally $15 to $60, and Carnegie Mellon sends data about each student’s progress to the instructor at the student’s home institution.

Carnegie Mellon, however, does not use these online courses as replacements for its own humanoid instructors. “Any tuition-driven, private university would have a hard time being the first one to make a change as drastic as offering an entirely automated course,” Ms. Walsh told me recently."

Even If You Don't Like Sports, You Might Be Paying For Them

See The Price of Football That Even Nonfans Pay by Mark Frost. From the Wall Street Journal, page D6, February 3, 2011. Cities spend tax payers money on stadiums. They don't always generated the hoped for benefits and some cities are still paying for stadiums that have be demolished. Here are some excerpts from the article:

"...the state (i.e., the taxpayers) still owes about $110 million in debt on the old Giants Stadium."

"Harris County, Texas, still owes about $32 million in debt on the Houston Astrodome, which opened in 1965 and was dubbed the "Eighth Wonder of the World." The RCA Dome in Indianapolis, which was demolished in 2008, still has about $60 million of outstanding debt and will not be paid off for at least 10 years. Even tiny Vero Beach, Fla., longtime home to Dodgers Spring Training, is on the hook for some $17 million in debt after the Dodgers moved to Glendale, Ariz., two years ago. Pima County, Ariz., taxpayers similarly still have to pay $21.3 million in stadium debt after the Chicago White Sox and Arizona Diamondbacks moved their training camps to Phoenix from Tucson."

""The problem with tearing down stadiums early isn't the debt," said Neil deMause, who co-wrote "Field of Schemes" (Bison) and blogs at a website with the same name. "It's the revenues that you're giving up by allowing teams to move into new buildings with sweetheart leases.""

"...there was nothing functionally wrong with the old Yankee Stadium, the old Giants Stadium, or many other stadiums that have been replaced over the past decade. The problem was that the old stadiums didn't generate enough luxury revenue. So New Jersey, which is about $36 billion in debt at last count, gave up about $15 million in annual tax revenue so that the Giants and Jets could be more profitable."

"The politicians spent the money that was originally intended to pay off the debt on other things. It's a common problem. Revenues get diverted to other programs and the stadium debt gets refinanced."

"The other problem is that cities often overestimate how much revenue a stadium tax will generate—and they often do it to make the new tax and the new stadium more palatable to the citizenry."

If Profits Are Up, Why Is The Unemployment Rate Still Over 9%?

See Profits Are Booming. Why Aren’t Jobs? by Michael Powell. From the NY Times, 1-9-11. Here are some of the reasons he gives as possibilties:

"More so than in the past, many American-based corporations earn a great portion of their profits overseas. And thanks to porous tax laws, these companies return fewer of those profits to American shores than in the past.

“The big American companies are really global,” said Robert Reich, former labor secretary for President Clinton. “They can show big profits from foreign sales. G.M. is making more Buicks overseas than in the United States. There’s no special pop for the United States worker.”

Key corporate sectors, too, have undergone a Darwinian pruning during the last three years. In the financial arena, a few hyperprofitable firms now stand where many more once stood.

“If you’re Goldman and Morgan Chase, and you once had to compete against Bear Stearns and Merrill Lynch, well, of course it’s easier now to show a profit,” said Daniel Alpert, managing partner of Westwood Capital L.L.C., an investment banking firm. “If you have a modest reduction in expenses, and an industry consolidation at the same time, that translates into a massive increase in earnings.”

Surviving corporate leaders drew sobering lessons from their near-death experience of 2008 and 2009, when brand-name corporations nearly ran short of the cash needed to meet payrolls.

“They found the financial system was nowhere near as safe as they thought — they no longer think they can borrow as quickly,” said Simon H. Johnson, an economics professor at M.I.T. and former chief economist for the International Monetary Fund. “So the amount of cash that they think they should have for precautionary purposes is way up.”

Interest rates are so low that traders can pile up profits by exploiting the spread between a near-zero funds rate and rates on Treasury bonds. This allows some corporations to mark profits without selling much or hiring anyone.

Desmond Lachman, a former managing director at Salomon Smith Barney who now serves as a scholar at the American Enterprise Institute, a conservative policy center, sees corporate leaders reshaping their worlds.

“Corporations are taking huge advantage of the slack in the labor market — they are in a very strong position and workers are in a very weak position,” he said. “They are using that bargaining power to cut benefits and wages, and to shorten hours.” That strategy, Mr. Lachman said, serves corporate and shareholder imperatives, but “very much jeopardizes our chances of experiencing a real recovery.”

These profits, however, may not be as large as they seem. Justin Fox, editorial director of the Harvard Business Review Group, dices the question of productive corporate profits still more finely in a recent column. He figures that pre-tax domestic corporate profits exclusive of the financial sector are the best measure of the “underlying health of business in America.”

He’s not terribly impressed. Profits for these companies “repeatedly topped 12 percent in the 1950s and 1960s,” he writes. But in the third quarter of 2010, this sector’s share of national income stood at 7.03 percent.

Some economists, conservative and liberal, divine forbidding portents in all of this. If profits and employment no longer rise and fall together, they worry, then an already strained social compact will grow yet more frayed.

Market bulls applauded in November when the Conference Board revealed that consumer confidence was on the rise. But David Rosenberg, an economist at the investment firm Gluskin Sheff, noted that this increase owed entirely to the optimism of higher-income Americans, who are feeling better and better."

31% Of Americans Cheat On Their Spouses--About Finances

See Is Your Partner Cheating On You Financially? 31% Admit Money Deception. It seems selfish to cheat. If there is any circumstance in which people might not follow their own self-interest, it would be with their significant other. Yet many people admit to doing it.

A related post from last Sept. was Should You Break Up With Your Fiancé If They Have Too Much Debt?

This cheating undermines trust in the relationship. One woman says she does not tell her current husband about the child support she gets from her first husband that she puts in a secret bank account.

Here are some excerpts:

"Among both offenders and victims, the leading money crimes were hiding cash, minor purchases and bills. Meanwhile, a significant number of people admitted hiding major purchases, keeping secret bank accounts and lying about their debt or earnings.

“A third of the population admits to not being honest with their spouse,” says NEFE chief executive Ted Beck. “That is a big number. These indiscretions cause significant damage to the relationship.”"

"Among couples impacted by financial infidelity, 67% said the deception led to an argument and 42% said it caused less trust in the relationship. Perhaps most alarming, 16% of these respondents said the money lie led to a divorce and 11% said it led to a separation."

"According to the survey, over half of all financial cheaters admitted hiding cash (58%) or minor purchases (54%). NEFE’s Beck says this is particularly concerning, as small lies often compound over time to become increasingly larger and more harmful deceptions. Of the offenders, 30% have hidden a bill, 16% have hidden a major purchase, 15% had a secret bank account, 11% lied about their debts and another 11% lied about the amount of money they earned."

Want Your Kids To Visit You When You're In A Nursing Home? Then Be Rich

See Do We Really Only Care About Ourselves? What Makes People Give? Economists Say Charity Almost Always Has Strings Attached from ABC News. They talked to Steven Levitt and Stephen Dubner, authors of the books Freakonomics and SuperFreaknomics (links to their Amazon pages are below).

Here is an excerpt:

"What the "SuperFreakonomics" duo found at retirement homes surprised them.

"If you're a parent in a nursing home, the best predictor that your child will show up is if you, the parent, are quite rich," Levitt said. "Children of rich parents are much more likely to show up in nursing homes than are children of poor parents."

But even that wasn't a guarantee.

"If you didn't have to compete against your brothers and sisters to go and get the bequest, you didn't show up at the nursing home," said Levitt.

It may sound depressing to think that's what drives us, but as Dubner said, "It would be depressing if we were all just cruel and selfish all the time, but we know we're not."

Americans donate $300 billion to charity every year, according to Giving USA 2009. Clearly, we are incredibly giving. So what gives? Is this pure altruism or does something else motivate us to give?"

The whole question of how selfish or altruistic we are is one of the more important issues in economics. We normally assume people act on their self-interest. We may be altruistic, but how much?

They also mention that good looking people raise more money for charity than average looking people. People like the benefits of giving, like when a college names a building after them. So what sometimes looks like an altruistic act might be motivated by self interest. And if people are altruistic, how come we never have enough kidney donors?

They also give a different view on the famous Kitty Genovese murder and the question of whether or not 38 people watched her get killed and did nothing.

Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

and

SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance.

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.

About a year ago, Paul Krugman 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.

The table below shows how much per capita income would be at various rates after 100 and 200 years. Assume we start with a per capita income of $1,000. If we grow 2.0% per year, after 100 years it will be $7,245. At 2.1% per year, it would be $7,791 or about $700 more. That is how much that little .1% matters. The difference over 200 years is about $11,000. After 100 years at 2.5% per year, per capita income would be $11,814. That is $4,000 more than the 2.0% rate. Small differences in growth rates add up to big differences over time.

Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With $1,000)

The Recession Cleaned The Air, Another Example Of How Life Is Full Of Tradeoffs

One of the first things I teach each semester is how there is no free lunch. If you want more of one thing you have to give up something else. This is usually when I talk about scarcity, opportunity cost and the production possibilities frontier.

The recession has been painful for many people. But the air is probably cleaner than it otherwise would have been. See Recession Special: Cleaner Air from last Sunday's NY Times. Here are some excerpts:

"emissions of global warming gases in the United States are down.

According to the Energy Department, carbon dioxide emissions peaked in this country in 2005 and will not reach that level again until the early 2020s."

"“The recession has led to a smaller economy, less activity and less energy consumption,” said Revis W. James, director of the Energy Technology Assessment Center at the Electric Power Research Institute, a utility consortium.

Electricity consumption had been growing at a rate of 1 percent to 1.5 percent a year, but the recession brought on the steepest drop in decades. When demand fell, the utilities cut back on the use of their least-efficient generating stations, the ones that emit the highest amounts of carbon dioxide per kilowatt-hour."

Milton Friedman vs. John F. Kennedy

Yesterday was the 50th anniversary of Kennedy's famous inaugural address. You might have noticed that Google commemorated it. Many writers have commented on it this past week. Below are the first two paragraphs from the introduction to Friedman's 1962 book Capitalism and Freedom. Friedman won the Nobel Prize in Economics in 1976.

"IN A MUCH QUOTED PASSAGE in his inaugural address, President Kennedy said, "Ask not what your country can do for you - ask what you can do for your country." It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is the patron, the citizen the ward, a view that is at odds with the free man's belief in his own responsibility for his own destiny.

The organismic, "what you can do for your 'country" implies tht government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.

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

Would You Pay $250,000 To Get Your Friends' Respect?

This is the question rasied by the article Is Law School a Losing Game? (from the NY Times) The article discusses how law school graduates are having a harder time finding good paying jobs as lawyers. In the last 10-15 years many more students have graduated but law firms have cut their staffs. Some students end up tens of thousands of dollars or even hundred of thousands of dollars in debt to pay for law school. The schools seem to fudge the numbers as to how many of their graduates actually get jobs. Many students don't make anything close to a six-figure salary.

But here is something interesting about one student, who is now $250,000 in debt:

"Mr. Wallerstein, for his part, is not complaining. Once you throw in the intangibles of having a J.D., he says, he is one of law schools' satisfied customers.

"It's a prestige thing," he says. "I'm an attorney. All of my friends see me as a person they look up to. They understand I'm in a lot of debt, but I've done something they feel they could never do and the respect and admiration is important.""

That seems like alot of money to pay to get respect. It just does not seem necessary for the price to be that high.

Tough Professors Are Better For Students In The Long Run

See One Measure of a Professor: Students' Grades in Later Courses: Course sequences may indicate instructors' strengths, but colleges find the data hard to tease out. It was in the Chronicle of Higher Education (it might only available to subscribers but I'm not sure).

The research shows that although tougher professors don't give out as many A's and B's, and their student evaluations are not as good, their students do better when they get to upper level (junior and senior level) classes.

It can be hard to find this out. A study like this needs "ceteris paribus" conditions. That is, all other factors have to be held constant (something discussed in the first chapter of probably all principles of economics texts). For example, if good students intentionally take tough profs, then we can't be sure why they did better later. Was it because they were better students or because the profs were tough and upheld high academic standards?

But at the Air Force Academy, here is why they have "ceteris paribus" conditions:

"All students at the academy are required to take a common core of 30 credits. No matter how much they might hate Calculus I, they still have to take Calculus II. Most course sections are small—about 20 students—and students have no discretion in choosing their sections or instructors. Finally, every Calculus I section uses the same common tests, which are graded by a pool of instructors. (One instructor grades Question 1 for every section, another instructor grades Question 2, and so on.)

All those factors make the Air Force Academy a beautifully sterile environment for studying course sequences.

Mr. West and Mr. Carrell (the economists who did the study) didn't have to worry that their data would be contaminated by students self-selecting into sections taught by supposedly easy instructors, or male instructors, or any other bias. They didn't have to worry about how to account for students who never took the follow-up courses, because every student takes the same core sequence. And they didn't have to worry about some instructors subtly grading the tests more leniently than others."

Sitting Too Much Can Damage Your Health, But Taking Breaks May Help Offset The Effect

A few days ago the news media reported on a newly published study that said that:

"Spending lots of free time glued to the TV or computer screen can hurt your heart and shorten your life, no matter how much exercise you get when you're not riding the couch, a new study suggests."

See Too much TV time may hurt your heart by Anne Harding. The research was done by Emmanuel Stamatakis, Ph.D., an epidemiologist at University College London. The article also says:

"Why is sitting harmful? It's not entirely clear, but animal studies have shown that prolonged sitting slows down the action of an enzyme (lipoprotein lipase) that breaks down fats in the blood, such as cholesterol and triglycerides. When the enzyme activity slows, levels of those substances climb. This is a "very plausible explanation" for the findings, Stamatakis says."

It concluded with "Stamatakis and his colleagues are now investigating whether getting up and walking around or even just standing can help counter the ill effects of sitting."

But just today another article came out about research which says that taking breaks will help. See Taking Short Breaks From Sitting May Help Waistline and Heart: Even a little more activity spread through the average workday boosts health, study suggests by Alan Mozes.

This research was done by Genevieve N. Healy, of the Cancer Prevention Research Centre at in the School of Population Health at the University of Queensland in Herston, Australia.

""This research suggests that even small changes to a person's activity levels [as little as standing up regularly] might help to lower cardiovascular risk. These changes can be readily incorporated into the person's day-to-day life [including the work environment]. Stand up, move more, more often, could be used as a slogan to help get this message across.""

Dave Brubeck, Economist

Okay, he isn't an economist. But he is one of my favorite musicians and composers. He did say something related to economics, though, in a recent Wall Street Journal article. See Ranching's Loss, Jazz's Gain. Brubeck has been in the news lately because he celebrated his 90th birthday on Monday, Dec. 6. Here is the quote:

"Mr. Brubeck also has taken heat for prospering in a profession that isn't supposed to pay well. "It never has," he responded dryly. "My wife Iola and I were always very careful with our money. When I started out, Joe the butcher in our San Francisco neighborhood would ask me weekly if I wanted beef bones for our dog. He knew we didn't have a dog. I'd take them to make soup. I'd also go to the farmer's market to pick up discarded fruits and vegetables. We saved every penny.""

Here are some links so you can watch and hear some of his music performed:

Take Five

Blue Rondo à la Turk

The saxophonist is Paul Desmond. Eugene Wright on base and Joe Morello on drums.

Okun's Law

In my macro classes when I talk about how the unemployment rate falls when GDP increases (because greater output usually requires more workers), I usually say something like "but we probably need at least some minimum increase in GDP to see the unemploymet rate go down." This where Okun's Law might come help out. See Mr. Okun Saw This One Coming: Jobs Report Follows His 'Law'.

This is the key passage:

""Okun's Law," as it came to be known, has been tweaked over the years, and now states that for every two percentage points the economy grows above its long-term trend annually, unemployment falls by a percentage point.

Most economists peg the economy's long-term trend rate at about 2.5%, which is roughly where economists polled by The Wall Street Journal estimate growth stands in the current quarter.That means, according to Okun's Law, that the economy isn't growing fast enough to bring down unemployment."

See also Arthur M. Okun from the Library of Economics and Liberty.

And Is Okun’s Law Really Broken? By JUSTIN WOLFERS.

Thrift Might Be Okay Nowadays

See In a tough economy, old stigmas fall away. For example, more people are using layaway, even the wealthy.

"The old stigmas are the new realities," says Emanuel Weintraub, a New York-based retail consultant. "Now, people don't have a problem saying, 'I can't afford it.' It's a sign of strength."

Here is some evidence:

"Store-branded groceries now make up 22 percent of total sales, up from 20 percent before the recession, according to The Nielsen Co. The private-label business is worth $500 billion a year, so even a 2 percentage point change means $10 billion."

"At an Aldi location in Chicago on a recent evening, shoppers didn't care that the only recognizable brands were the Splenda sweetener, a Butterball turkey and a few kinds of candy.

Six no-name grocery items - macaroni and cheese, potato chips, cream cheese, sour cream, olive oil and guacamole - cost about $10. The same six brand-name items cost $22 at the nearby Dominick's."

"New research from American Express found that the super-affluent, which it defines as those who put at least $7,000 a month on their credit cards, spent 24 percent more on fast-food last spring than the year before. They spent 12 percent more on fine dining."

See an earlier post, Frugal Is The New Sexy.

Does Wealth Make Us Happier?

In my micro class, the last chapter we covered dealt with incomes and wealth. The question "does money buy happiness?" is perennial. Matt Ridley wrote a column about some new happiness research recently in The Wall Street Journal. See Wealth Makes Us Happier, But Why? Here is an exerpt:

"As Buddhists have long recognized, attaining our desires doesn't seem to bring satisfaction, just further restlessness. This is no surprise to evolutionary psychologists. Natural selection shaped human nature to be ambitious, not to settle for contentment. The person who kept striving to be successful left more offspring behind than the Epicurean hedonist.

So the pursuit of happiness turns out to be as frustrating as hunting the holy grail. Forcing people to be jolly seems to be counterproductive. Having children, which we do to make ourselves happy, generally makes us a bit unhappier in practice.

If you ask people whether suffering a disabling accident would make them unhappy a year after the event, they say "of course." But if you ask people who were disabled in an accident a year before if they are unhappy now, they say "no." For some people at least, happiness almost seems to have a thermostat: After good or bad things happen, we return to our own personal levels of contentedness.

Nonetheless, people say they've been getting slowly happier. In 45 of 52 countries, happiness has risen during the past 30 years. This coincides with people getting richer. Contrary to myth, rich countries have slightly happier citizens than poor countries. Of course, it's possible to be rich and unhappy, as many a celebrity deliciously reminds us. A study done in the 1970s bolstered the cheering (for the rest of us) notion that rich people are not necessarily happier, but it has since been challenged by larger statistical samples, especially in the work of Betsey Stevenson and Justin Wolfers at the University of Pennsylvania.

What is it about prosperity that brings happiness? Rather than having more "stuff," it is probably the freedom that wealth buys, letting us make choices about our lifestyle—where to live, who to marry, what to wear. The political scientist Ronald Inglehart argues that the big gains in happiness come from living in a society that frees you to be yourself—"

Another interesting article is The pursuit of happiness: Author seeks to take its measure and find where people are most content. It quotes former University of Chicago psychologist Mihaly Csikszentmihalyi. He said "Without dreams, without risks, only a trivial semblance of living can be achieved."

Some earlier posts on happiness:

Does Or Can Money Buy Happiness?

Interesting Book: Stumbling on Happiness

Does Money Make You Mean?

I wonder if you can be mean and happy at the same time.

Robot Journalists-A Case Of Structural Unemployment?

In macroeconomics, the definition of "structural unemployment" is usually something like "unemployment caused by a mismatch between the skills of job seekers and the requirements of available jobs." One example is when machines replace workers. Now there is a company that has created computer programs that will look at the statistics in the box score of college basketball games and then write a story about it. If any sports writers lose their jobs, they will be structurally unemployed.

See When the Software Is the Sportswriter by Randall Stross of The New York Times. It explains how StatSheet, the company involved, does it: "it just uses template sentences and a database of phrases that numbers about 5,000 for now." Here is one story written by the computer software based solely on the statistics of the game:

"Ohio State has already started living up to monumental expectations with a good first game. On November 12th on their home court, the Buckeyes waxed the Aggies, 102-61. The game lacked a lot of drama, with Ohio State up 52-25 at halftime and never letting up.

Ohio State was able to win by overpowering North Carolina A&T in rebounding and assists.

Ohio State used a big advantage on the boards to win the possession battle with 60 rebounds to 22 for North Carolina A&T. Ohio State spread the ball around and got 24 assists compared to 8 for North Carolina A&T.

Deshaun Thomas was the leading scorer for the Buckeyes with 24 points in 20 minutes. Jared Sullinger contributed 14 big rebounds.

Ohio State has incredible expectations for this season, and this victory over the Aggies was a good start.

When we look to our next game, we see a tenacious team in Florida on November 16th."

Some researchers at Northwestern University have been working on this, too. It was mentioned in a The Robots Are Coming! Oh, They’re Here
. by David Carr. Sportswriter King Kaufman had some interesting observations in the comments section.

This is okay as long as computer programs can't write blog entries:)

The Robots Are Coming! Oh, They’re Here

Who Was Alex P. Keaton's Favorite Economist? Milton Friedman

Click on the following video link to find out:

Who Was Alex P. Keaton's Favorite Economist?

You will only have to watch a few minutes to find out. It is from the 1980s sitcom "Family Ties." Michael J. Fox played Alex Keaton. In this episode he tells another character that Milton Friedman was his favorite economist.

Friedman came up in macro recently while discussing the money supply and the differences between Keynesians and monetarists.

Here is what IMDB has to say about the show:

"A couple who were ardently leftwing political activists in the sixties face the problems of raising a family with children who have strongly conservative views."

Click here to go to the IMBD page about the show.

Were The Pilgrims Capitalists Or Socialists?

See The Pilgrims Were ... Socialists? from The New York Times. There seems to be some controversy. One story has them owning property in common and not doing well until they went with private property. Not everyone agrees with that version of history. Here is what seems to be the most interesting thing from the report:

"Historians say that the settlers in Plymouth, and their supporters in England, did indeed agree to hold their property in common — William Bradford, the governor, referred to it in his writings as the “common course.” But the plan was in the interest of realizing a profit sooner, and was only intended for the short term; historians say the Pilgrims were more like shareholders in an early corporation than subjects of socialism.

“It was directed ultimately to private profit,” said Richard Pickering, a historian of early America and the deputy director of Plimoth Plantation, a museum devoted to keeping the Pilgrims’ story alive."

So when you eat turkey tomorrow, you might really be celebrating that great American institution...the corporation. Makes me feel real patriotic.

This part was interesting too.

"The competing versions of the story note Bradford’s writings about “confusion and discontent” and accusations of “laziness” among the colonists. But Mr. Pickering said this grumbling had more to do with the fact that the Plymouth colony was bringing together settlers from all over England, at a time when most people never moved more than 10 miles from home. They spoke different dialects and had different methods of farming, and looked upon each other with great wariness."

"“One man’s laziness is another man’s industry, based on the agricultural methods they’ve learned as young people,” he said."
"Bradford did get rid of the common course — but it was in 1623, after the first Thanksgiving, and not because the system wasn’t working. The Pilgrims just didn’t like it. In the accounts of colonists, Mr. Pickering said, “there was griping and groaning.”"

"“Bachelors didn’t want to feed the wives of married men, and women don’t want to do the laundry of the bachelors,” he said.

The real reason agriculture became more profitable over the years, Mr. Pickering said, is that the Pilgrims were getting better at farming crops like corn that had been unknown to them in England."

Adam Smith vs. Ace Ventura

Well, sort of. See 'Liar Liar,' 'Nutty Professor' Director's Life Has Taken Quite The Turn. It is about Tom Shadyac who also directed "Ace Ventura: Pet Detective." He stopped liking what was going on in Hollywood. Here is an exerpt:

"So he sold his Pasadena mansion and most of his possessions, moved to a trailer park in north Malibu and began work on his documentary "I Am." What's "I Am" about? It's about how human beings are too competitive, about whatever is hard-wired in our brains that makes us want to work against each other rather than cooperate."

That last part, about competition and cooperation, is something that "neuroeconomics" studies.

Earlier this year, I attended a lecture by Paul Zak, a neuro-economist from Claremont Graduate University, at 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. In September 2009, 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.

To watch a lecture by professor Zak (very similar to the one he did here in San Antonio), go to The Moral Molecule.

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

Click here to read the latest findings from the Center For Neuroeconomics Studies

Rare Video Interview Of Karl Marx

It provides some interesting insights into his theories. It is about 4 minutes long.

Click here to go to the You Tube page that has it

Coming Soon To A Theater Near You: Night Of The Living Shopping Zombies!

See Making Ads That Whisper to the Brain from this past Sunday's New York Times. Here is the opening:

"WHAT happens in our brains when we watch a compelling TV commercial? For one thing, certain brain waves that correlate with heightened attention become more active, according to researchers who have used EEGs, or electroencephalographs, to study the brain’s electrical frequencies."

"Neuromarketers" are studying what happens to people's brains when they look at ads and watch commercials to see how they react unconciously. This will allow them to find out what we all really like, deep down. It is hard for us to express in words our unconcious desires. Now the companies will be better able to figure out what we like. Will this make us all happier? Who knows. Maybe companies will make less of what we don't want and more of what we really do want.

The article goes on to ask:

"But should we worry that a technique that probes subconscious brain patterns might be used to unduly influence consumers, turning them into shopping robots without their knowledge and consent?"

Some feel that neuromarketing should be regulated to prevent "brand washing." Other experts think that neuromarketing may not be that affective and will not turn us into shopping zombies.

What Do Vampires And Innovation Have In Common?

Maybe not much. But a paper on vampires and a book on innovation both use an article I wrote as a reference. The article of mine that they both cite is "Mythology, Joseph Campbell, and the Socioeconomic Conflict”, from The Journal of Socio-Economics, Volume 23, No.4, 1994.

The paper on vampires is "Shadow of the Vampire: Understanding the Transformations of an Icon in Popular Culture" by Michelle Bohn of Texas State University. It is very interesting, using history and psychology to explain when and why vampire stories become popular. It even occassionally mentions economics (the Industrial Revolution, for example).

The book is Unleashing Innovation: How Whirlpool Transformed an Industry by Nancy Tennant Snyder & Deborah L. Duarte.

Vampires have been linked to economics before. Here is a passage from Crisis and Leviathan: Critical Episodes in the Growth of American Government by Robert Higgs:

"Without embarassment, Karl Marx wrote about the capitalists' "were-wolf hunger for surplus-labour" and their "vampire thirst for the living blood of labour."

There is an article called THE POLITICAL ECONOMY OF THE DEAD: MARX’S VAMPIRES by Mark Neocleous. Here is the abstract:

Abstract: This article aims to show the importance of the vampire metaphor to Marx’s work. In so doing, it challenges previous attempts to explain Marx’s use of the metaphor with reference to literary style, nineteenth-century gothic or Enlightenment rationalism. Instead, the article accepts the widespread view linking the vampire to capital, but argues that Marx’s specific use of this link can be properly understood only in the context of his critique of political economy and, in particular, the political economy of the dead.

World War I Finally Ends

Yesterday was Veteran's Day. But at one time it was called Armistice Day because World War I ended on Nov. 11, 1918. Once the war was over, the allies made Germany pay war reparations, which turned out to be fairly expensive. Just last month, they made the last payment. See Why Did World War I Just End? from Time magazine (Hat Tip: Devon of the The 1982 Topps Baseball Card Set blog). Here is an excerpt:

""Large parts of Belgium and France were so destroyed by trench warfare that they looked desolate, like moonscapes, just huge areas of land where nothing remained," explains Stephen Schuker, professor of history at the University of Virginia and author of American "Reparations" to Germany, 1919-33. "They needed money to help rebuild the area."

But how do you put a price on war? Is it the property value of destroyed buildings? Rounds of ammunition shot? The cost in human life? It took two years for the international Reparations Commission to assess damages in relation to Germany's national wealth — after all, the payment plan needed to be affordable — and decide how much the government owed. The first reparation demands were 266 gold marks, which amounted to roughly $63 billion then (close to $768 billion today), although this was later reduced to $33 billion (about $402 billion today)."

The economist John Maynard Keynes said this would cripple the German economy. The Germans simply printed money to pay the first installment. That lead to hyper-inflation. Charles Dawes, an American banker, came up with a plan to convert the debt to bonds. He won the Nobel Peace prize but not long after that Germany defaulted on the bonds. Then Hitler decided not to pay. In the 1950s, West Germany said they would repay the money if their country was ever again united. Well, the Berlin wall fall and in the 1990s they started paying again and finally made the last payment in October.

Here is the "Pepper ... and Salt" comic from the 11-11 Wall Street Journal.

A Good Spanish Blog On Economics By Noé Hernández Cortez

Noé Hernández Cortez is a professor at Universidad del Valle de México, Campus Coyoacá. Here is the link to his blog: Noehernandezcortez's Blog. A recent entry dealt with the "2010 Human Development Index." To read a traslation of that entry (translated by google), click on this link: 2010 Human Development Index.

The index takes into account life expectancy, education and gross national income per person. The top ten countries were:

1. Norway 0.938
2. Australia 0.937
3. New Zealand 0.907
4. United States 0.902
5. Ireland 0.895
6. Liechtenstein 0.891
7. Netherlands 0.890
8. Canada 0.888
9. Sweden 0.885
10. Germany 0.885

To read the Wikipedia article on this go to Human Development Index.

How Can The Average Major League Baseball Player Salary Be $3.3 Million A Year?

In my microeconomics class this week I talked about monopsony, when there is only one buyer. Before 1976, baseball players could only play for one team, the one they were currently under contract to. Starting in 1965, each player coming out of high school or college was drafted by one of the teams. That player could never leave that team and try to make a deal with another team. Before 1965, they could sign with the team that gave them the best offer. But then they were tied to that team for as long as they played baseball or until they were traded.

An economist in the 1970s, Gerald Scully, wrote an article showing that players were getting paid alot less than the revenue they generate (their "marginal revenue product"). Why would teams pay less? They could get away with it since they had monopsony power. Other teams could not outbid them for the player. But after players with seven years in the major leagues were allowed to become "free agents" and could negotiate deals with other teams, salaries shot up.

Where do teams today get the money to pay such high salaries? Major league baseball had about $7 billion in revenue in 2010. With 30 teams, that works out to about $233 million each. Each team has 25 players. At $3.3 million per player, that is an average payroll of $82.5 million. Subtract that from $233 million, and the average team has about $150 million left over. See Baseball's picture bright amid economic gloom.

During the World Series, FOX was able to charge $450,000 for each 30-second commercial. New team owners are willing to pay alot to buy a ball club. The Cubs were sold for $845 million and the Rangers were sold for $593 million.

How Our Brains Help Create Financial Bubbles

See Microscopic Microeconomics. It was in last Sunday's New York Times magazine. It described research where people were given money to invest in a stock market simulation (that actually mimicked real history). How people felt about the changes in the market and the money they were making was monitored. Here is a description of the expirement and the results. It seems like we get excited about the gains, the primitive part of our brains get a little fearful, realizing that the stock prices are too much, but the rational part of our brain tries to come up with reasons to explain why (it reminds me of the book This Time Is Different: Eight Centuries of Financial Folly-here is a review Recession, You Look Familiar)

"Montague’s experiments go like this: A subject is given $100 and some basic information about the stock market. After choosing how much money to invest, the player watches as his investments either rise or fall in value. The game continues for 20 rounds, and the subject gets to keep the money. One interesting twist is that instead of using random simulations of the market, Montague relies on real data from past markets, so people unwittingly “play” the Dow of 1929, the S&P 500 of 1987 and the Nasdaq of 1999. While the subjects are making their investment decisions, Montague measures the activity of neurons in the brain.

At first, Montague’s data confirmed the obvious: our brains crave reward. He watched as a cluster of dopamine neurons acted like greedy information processors, firing rapidly as the subjects tried to maximize their profits during the early phases of the bubble. When share prices kept going up, these brain cells poured dopamine into the caudate nucleus, which increased the subjects’ excitement and led them to pour more money into the market. The bubble was building.

But then Montague discovered something strange. As the market continued to rise, these same neurons significantly reduced their rate of firing. “It’s as if the cells were getting anxious,” Montague says. “They knew something wasn’t right.” And then, just before the bubble burst, these neurons typically stopped firing altogether. In many respects, these dopamine neurons seem to be acting like an internal thermostat, shutting off when the market starts to overheat. Unfortunately, the rest of the brain is too captivated by the profits to care: instead of heeding the warning, the brain obeys the urges of so-called higher regions, like the prefrontal cortex, which are busy coming up with all sorts of reasons that the market will never decline. In other words, our primal emotions are acting rationally, while those rational circuits are contributing to the mass irrationality.

This is a costly mental mistake. Montague notes that investors who listened to the prescient dopamine neurons would earn much more money than the typical subjects, largely because they would get out of the market before it was too late. “It’s crazy to think that there’s a signal in our head that’s so much smarter than we are,” Montague says."

Don't Forget That Today Is Day Of The Deadweight Loss

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

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

Deadweight_loss
Deadweight_loss
Deadweight_loss

One good way to commemorate this day would be to cut out the deadweight loss triangle from a monopoly graph (like the one shown below) and burn it, to symbolize all of the lost social welfare. Doing so is both a life-changing and life-affirming ritual.

Are College Costs Actually Falling?

They might be. Report: Net cost of college has dropped from the Washington Post. The basic idea is that although the stated price (tuition) has been rising, so has financial aid. Here are some exerpts:

"The average yearly net price of public four-year universities in tuition and fees, after discounting grant aid and tax benefits, declined from $2,080 to $1,540 in inflation-adjusted dollars between 2005-06 and 2010-11, according to data from the national College Board survey.

The net price for private colleges declined in those years from $12,750 to $11,320. Add the cost of room and board, and public university students pay an average of about $10,000 a year, a few hundred dollars more than five years ago. Private university students pay a little over $20,000, a bit less than in 2005-06."

I wrote about this earlier in the year. See As college costs rise, sticker shock eased by student aid. It mentions how financial aid is really just a form of price discrimination.

The Myth Of The Ring Of Gyges And Insider Trading By Congressional Staffers

This week in one of my macro classes we read a chapter about investing in the stock market in the book The Economics Of Macroissues. Part of it was about insider trading. It turns out that congressional staffers can buy stock and they can do so based on their knowledge of what bills will pass and won't pass.

See What Conflict of Interest? How Power Blinds Us to Our Flaws from The Wall Street Journal. As the article says "...prohibitions on insider trading generally don't apply to Congress." And they only have to report their trades once a year. They can make trades based on information most people don't have. Here are some exerpts from the article:

""Power makes people feel both psychologically invincible and psychologically invisible," adds Adam Galinsky, a professor of organizational behavior at Northwestern University's business school.

Power, explains Prof. Galinsky, focuses people on their own internal goals—blinding them, in the process, to how others may view them. In Plato's "Republic," Socrates invokes the myth of the ring of Gyges, which conferred upon its wearer the power of being invisible to others. If we wear such a ring at will, Socrates says, "No man would keep his hands off what was not his own when he could safely take what he liked."

Being in a position of power also may make people feel that they can do no wrong. In recent experiments, Dana Carney, a psychologist at Columbia University's business school, has found that acquiring power makes people more comfortable committing acts they might otherwise be reluctant to commit, like lying or cheating. As people rise to a position of power, she has shown, their bodies generate more testosterone, a hormone associated with aggression and risk-taking, and less cortisol, a chemical that the body generates in response to stress.

"Having power changes you physiologically, reducing your body's internal feedback that tells you which actions are good or bad," says Prof. Carney. "Power temporarily intoxicates you.""

The Drug War In Mexico Is Not Working

In my micro class this week, we read a chapter from The Economics of Public Issues about drugs.

Read Saving Mexico: To weaken the cartels, some argue the U.S. should legalize marijuana, let cocaine pass through the Caribbean and take the profit motive out of the drug trade. It was by DAVID LUHNOW and appeared in the 12-26/27-09 WSJ, page W3.

"In the 40 years since U.S. President Richard Nixon declared a "war on drugs," the supply and use of drugs has not changed in any fundamental way. The only difference: a taxpayer bill of more than $1 trillion."

"...the horrific drug-related violence in Mexico that has claimed around 15,000 lives in the past three years."

"In the late 1980s and early 1990s, the U.S. government cracked down on the transport of cocaine from Colombia to U.S. shores through the Caribbean, the lowest-cost supply route. But that simply diverted the flow to the next lowest-cost route: through Mexico. In 1991, 50% of the U.S.-bound cocaine came through Mexico. By 2004, 90% did."

"...Colombia waged a successful war to break up the country's Cali and Medellin cartels into dozens of smaller suppliers. Both moves helped the Mexican gangs,..."

"...Mexican drug gangs are a one-stop shop for four big-time illicit drugs: marijuana, cocaine, methamphetamines and heroin."

"...illegal drugs are the most successful Mexican multinational enterprise, employing some 450,000 Mexicans and generating about $20 billion in sales, second only behind the country's oil industry and automotive industry exports."

"One drug lord's accountant who was arrested in 2006 had a mid-level job at Mexico's central bank for 15 years."

"Mexican customs has stumbled upon a long list of ingenious methods to transport cocaine, including one shipment of liquefied cocaine smuggled in red wine bottles. Another recent bust yielded 800 kilos of cocaine—worth an estimated $40 million—stuffed inside a batch of frozen sharks.

After Mexico restricted the importation of pseudoephedrine to slow the manufacture of methamphetamines, drug gangs found another way to make the drug using different, unrestricted chemicals widely used in the perfume industry."

Will Economies Of Scale Bring Down The Cost Of Producing Electric Cars?

See High Battery Cost Curbs Electric Cars: Unlike Other Devices, Power Packs May Not Enjoy Major Economies of Scale from The Wall Street Journal. Experts don't all agree.

Economies of Scale (Increasing Returns to Scale) = A situation in which long-run average total cost declines as the firm increases its level of output. The percentage increase in Q is greater than the percentage increase in TC.

Suppose a company like GM makes and sells only 1 car a year. Then the average cost of making a car will be very high. But if they make thousands of cars a year, the high cost of building and maintaining the plant or factory is spread over all those cars and they can sell the car at a reasonably low price. This is what the government is hoping for with the batteries that run these new electric cars. The batteries account for about half the cost of the car.

According to the article "The U.S. Department of Energy has set a goal of bringing down car-battery costs by 70% from last year's price by 2014." If you buy an electric car, you can get a tax credit of $7,500. Perhpaps the government is trying to help the market achieve economies of scale. But there is a problem:

"Unlike with tires or toasters, battery packs aren't likely to enjoy traditional economies of scale as their makers ramp up production, the scientists and engineers say. These experts say increased production of batteries means the price of the key metals used in their manufacture will remain steady—or maybe even rise—at least in the short term."

The article discusses various other parts and inputs into the batteries and why their costs are not likely to fall. Some experts think a there will be a big fall in cost but others are doubtful.

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

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

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

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

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

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

What Are The Best And Worst College Majors?

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

The top 5 were:

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

The bottom 5 were:

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

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

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

What The 2010 Nobel Prize Winners Studied

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

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

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

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

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

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

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

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

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

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

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

Crime and Punishment: Required Reading in My Economics Class

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

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

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

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

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

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

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

More online versions of the book.

Genetically Engineered Corn Has Positive Externalities

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

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

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

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

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

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

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

This excerpt might be my favorite:

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

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

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

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

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

Why price discrimination raises profits

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

Necessary Conditions for Price Discrimination

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

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

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

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

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

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

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

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

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

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

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

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

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

New Biography Of Adam Smith

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

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

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

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

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

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

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

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

Adam Smith vs. Bart Simpson

The Percent Of The Civilian Noninstitutional Population Employed Since 1970

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


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

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

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

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