Can The Fed Prevent Inflation By Paying Banks Interest On Their Excess Reserves?

This week in my macro classes we covered the Federal Reserve (Fed) policy tools that are used to control the money supply in the economy. Ceteris paribus, the more money in the economy the more aggregatge demand (AD) we have. To see how this affects the economy, go to this post from back in 2009 Fed Officials Disagree On Threat Of Inflation. It shows a graph that explains how AD affects the economy.

The Fed sets the "required reserve ratio." This tells banks what percentage of their deposits they must keep on reserve. If they keep more on reserve than they have to, the extra amount is called excess reserves. The Fed now pays banks interest on these excess reserves.

But lately, banks have been keeping alot of excess reserves. This is because of the recession and the financial crisis. Banks want to make sure they have enough on reserve and are leary of lending too much money. The borrowers might not be able to pay it back. And businesses and consumers have been reluctant to borrow since they too fear they might not be able to pay it back.

To see a good chart on excess reserves, go to Why Are Banks Holding So Many Excess Reserves And Will Those Reserves Fuel Future Inflation? (from the blog "Carpe Diem" by economist Mark Perry). The chart shows that until about the middle of 2008, excess reserves were about zero. Now they are over $1 trillion.

But what might happen if the economy starts to improve and everyone gains confidence. Then banks start lending alot more money and spending increases rapidly. Could this cause inflation? One view is that the Fed just has to raise the interest rate it pays banks on excess reserves to keep them from lending too much. The banks will prefer to keep the excess reserves and earn income from the interest rate rather than lend it out. This would keep AD from increasing past the full-employment GDP into the steep part of the short-run aggregate supply curve (see the post I mention above).

The Possible Impact Of A Lower Credit Rating For The U.S. Government

Last week I talked about problems the national debt might cause. Now this week Standard & Poors says that the government has a one in three chance of seeing it lose its AAA rating (the best rating).

See

U.S. debt finally draws serious warning by Terry Savage, a financial columnist for The Chicago Sun-Times

and

Debt worries turn up heat on Congress to act by Jim Spencer of Minneapolis Star Tribune.

Here is an excerpt from Spencer:

"For financial experts and political combatants here and in Minnesota, Monday's double dose of fiscal foreboding carried an unmistakable warning: Do something about the nation's debt.

The day began with news of a possible downgrade in the nation's credit rating and quickly turned into the stock market's worst day in a month as traders reacted to growing doubts that leaders in Washington could find a way out of the debt crisis.

"This was people on Wall Street [speaking] who are agnostic on politics," said U.S. Rep. Tim Walz, D-Minn. "Either we listen to what they said [Monday] or we pay a horrific price."

When Standard & Poor's switched its outlook on the nation's AAA credit rating from stable to negative, it raised the possibility that Americans could find more of their taxes spent on interest instead of public services. The cost of loans to consumers, government and businesses would go up, as well, suppressing an already fragile economic recovery.

"It's kind of scary," said Murray Frank, a University of Minnesota finance professor, adding that the announcement "is taking one of the central pillars of the world's economy and saying it is not grounded.""

Now one from Savage:

"Interest on the national debt is the third-largest federal spending category. In the last 12 months, the Treasury has paid more than $400 billion in interest — and rates are currently at historically low levels. A ratings drop could cost the taxpayers billions in extra interest payments every year. Worse, the higher rates needed to entice borrowers also would negatively affect our economy.

The United States still maintains its “triple A” bond rating, but the downgrade warning signifies concern that Congress will not act prudently to rein in deficit spending.

In its statement, S&P emphasized “the importance of timely bipartisan cooperation and action on fiscal reform.”"

The Wall Street Journal has an article with a chart showing how annual interest payments on the debt will change in the near future. They also say that it was $200 billion this past year. See As Budget Battle Rages On, a Quiet Cancer Grows

What Do Men In China Need To Get A Bride?

See For Many Chinese Men, No Deed Means No Dates from the NY Times. Excerpts:

"Although there are few concrete ways to measure the scope of involuntary bachelorhood, more than 70 percent of single women in a recent survey said they would tie the knot only with a prospective husband who owned a home.

Among the qualities they seek in a mate, 50 percent said that financial considerations ranked above all else, with good morals and personality falling beneath the top three requirements. (Not surprisingly, 54 percent of single men ranked beauty first, according to the report, which surveyed 32,000 people and was jointly issued by the Chinese Research Association of Marriage and Family and the All-China Women’s Federation.)

The marriage competition is fierce, and statistically, women hold the cards. Given the nation’s gender imbalance, an outgrowth of a cultural preference for boys and China’s stringent family-planning policies, as many as 24 million men could be perpetual bachelors by 2020, according to the report.

Zhang Yanhong, a matchmaking consultant at Baihe, one of the country’s most popular dating sites, said many disheartened men had simply dropped out of the marriage market.

“This fixation on real estate has twisted the popular notion of love and marriage,” she said. “Women are putting economic factors above everything else when looking for a mate, and this is not a good thing for relationships or for society.”"

"Many women are unapologetic about their priorities, citing the age-old tradition in which men provided a home for their brides, even if that home came with a mother-in-law."

"With such women on the prowl, even men who do have their own homes have come up with techniques to weed out the covetous and the inordinately materialistic."

Do We Need To Raise Taxes On The Wealthy?

I submitted an op-ed article to the San Antonio Express-News about this issue. It looks like it will not get printed. In it, I disagreed with the idea that we need to raise taxes on the wealthy and upper income groups. The article that I responded to was Millionaires and their tax request.

What I submitted is below. One thing I should add is that economist Veronique de Rugy wrote at the Reason magazine site the federal government has never been able to collect 21 percent of GDP in tax revenues. Even in the 1950s when the highest tax rate was over 90%.

"I disagree with investment banker John Kortenhaus who wants to increase taxes on the wealthy (“Millionaires and their tax request,” April 2).

For one, he says “trickle-down” economics doesn’t work, that the spending of the rich won’t create jobs. But we would have to compare this to how well government spending creates jobs and some economists are skeptical of that, too. There is no guarantee that the federal government will spend the money wisely.

Then he says “the wealthy ought to pay progressively higher percentages of their incomes in taxes because they benefit more” from government. It might be true the rich get more from government, but that does not necessarily prove progressive taxes are a good idea.

Let’s look at a flat-rate tax system. With a tax rate of 20%, someone earning $100,000 pays $20,000 in taxes, ten times what someone who earns $10,000 pays.

That seems equitable: You make ten times as much, so you benefit ten times as much from government. Paying ten times as much in taxes covers your benefits.

I am not aware of any scientific study that proves the rich receive disproportionate benefits from government.

He also says “many inherited their wealth.” But according to the book The Economics of Macro Issues, “current living standards are chiefly determined by the incomes people have earned for themselves” and not inheritance.

He then also says some inventors are lucky and don’t deserve their high incomes. But how would the government figure out who was lucky and should have to pay progressive taxes and who was not lucky?

I don’t think they could and making all high-income people pay progressive tax rates and punishing some who don’t deserve it seems like using guilt by association.

Maybe someone like Bill Gates could not have gotten so rich one-hundred years ago since there were no computers.

This only shows that all of us are much better off than people once were. It does not tell us that the rich have disproportionately benefited from progress. The typical low-income person is also much better off now, too.

Where does all this progress come from? Partly from entrepreneurs, some of the people Mr. Kortenhaus wants to tax so much.

Recently the eminent economic historian Deirdre McCloskey said around the year 1800 economic growth took off because societies started to treat entrepreneurs, their innovations and their drive to earn high incomes with dignity.

High taxes on the rich might hurt the innovation that benefits us all. Is punishing them a good vision for America?

We have income mobility, too. From 2001-2007, 44% of the top income earners fell out of the top bracket (top fifth). High incomes may be fleeting. Why punish some for having a good year with extra-high taxes?

Relying too much on the rich for tax revenue can hurt budgets in a recession. The Wall Street Journal recently reported that high income earners saw even bigger losses than everyone else in the recession. That partly explains the big deficits in many states.

In 2007, 37% of federal income tax revenue came from the top 1% of income earners. If we tried to get even more revenue from them, when the next recession hits and they see larger than average income drops, the federal deficit will grow even more.

I do agree with him on eliminating some deductions and loopholes that allow the rich to pay less in taxes, but let’s be careful before we make the system even more progressive.

Finally, full disclosure: I am not a millionaire even though the one car I own is a Honda Civic."

Why is college so hard?

This was a guest column I wrote that appeared on The Ranger website (that is the school paper for San Antonio College). Here is the link:

Why is college so hard?

Smokers and the obese cheaper to care for, study shows

See Smokers and the obese cheaper to care for, study shows from the New York Times. The idea is that the healthy live longer and that tips the scales to make them more costly. Excerpt:

"The researchers found that from age 20 to 56, obese people racked up the most expensive health costs. But because both the smokers and the obese people died sooner than the healthy group, it cost less to treat them in the long run.

On average, healthy people lived 84 years. Smokers lived about 77 years and obese people lived about 80 years. Smokers and obese people tended to have more heart disease than the healthy people.

Cancer incidence, except for lung cancer, was the same in all three groups. Obese people had the most diabetes, and healthy people had the most strokes. Ultimately, the thin and healthy group cost the most, about $417,000, from age 20 on.

The cost of care for obese people was $371,000, and for smokers, about $326,000.

The results counter the common perception that preventing obesity will save health systems worldwide millions of dollars."

Why High Taxes To Pay Back The Debt Might Be A Problem For Economic Efficiency And Future Economic Growth

This is a continuation of Wednesday's topic.

Suppose that you buy a new shirt every month for $20. But now there is a high tax on shirts to help pay back the debt so that the price is $35. You might not buy that new shirt. Many other people might not, either. Then some stores go out of business and some t-shirt makers lay off workers. This will slow down economic growth in the future.

Also, if taxes are especially high, businesses will have less incentive to invest (build new factories, stores, restaurants, buy new capital, etc.). Less capital means less economic growth. The problem with taxes is that each incremental tax increase causes more harm to economic efficiency than the previous increase (and probably harms economic growth more). I will explain more of this below.

But also remember that just a small drop in the growth rate hurts us in the long run. For example, in the last 30 years or so, the annual growth rate in the real GDP in the U.S.has been about 2.8%. If per capita GDP goes up 1 percentage point less than that to take population growth into account, we would have a per capita growth rate per year of 1.8%.

If 30 years ago per capita GDP was $27,500 then today it would be about $46,900 (actually close to what it really was last year). But what if we had only grown 1.3% per year? The per capita GDP would be only $40,500. That would be $6,000 less, which is big and that kind of difference just keeps getting bigger over time and that is only a .5% lower growth. This big difference is due to compound interest.

Below is a letter to the editor of the WSJ I wrote a few years ago. It helps explain the exponentially growing damage that taxes cause:

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

This is consistent with the fact that deadweight loss also grows exponentially with tax increases. There will be some links to deadweight loss at the end of this post (my students can simply look at the appendix to chapter 3 in their textbooks). But the idea is that a tax on a good causes the problem mentioned above when the price of a shirt increases.

In supply and demand, if an excise tax has to be collected by the seller, the supply line shifts up by the amount of the tax. In the graphs below, the green triangle shows the deadweight loss or the total economic harm from the tax.

In the first graph, the tax on the good is $2 per unit, so the supply curve shifts up by $2 (the red line represents the new supply line). The area of the green deadweight loss triangle is 1 (one-half times the base times the height (I turn it sideways to make a base of 2)).

But in the second graph, the tax is doubled. It is $4 per unit, so the supply curve shifts up by $4. Now the area of the deadweight loss triangle is 4. So we doubled the tax but the damage caused has quadrupled. This shows that tax increases cause exponential damage to economic efficiency, which harms economic growth in the future.

If the supply line gets shifted up by $20 (if taxes were that high), then there would be no market left at all.






Links on deadweight loss:

Deadweight loss

Deadweight loss

Gross public debt exceeding about 90% of annual economic output can slow growth

See Reinhart and Rogoff: Higher Debt May Stunt Economic Growth from the WSJ blog last year.

"To all the reasons to worry about the rapid rise in government debt in the wake of the financial crisis, add another: It’ll stunt our growth.

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.

The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens."

I will post more about this on Friday. But the big issue for me is that taxes might have to rise so much that they hurt economic growth. The loss of economic efficiency or deadweight loss grows faster than taxes. That is, every one percentage point increase in the tax rate causes more than a one percentage point increase in deadweight loss.

In the long run, that slows down growth in the economy. Even if the economy only grows 0.1% less or 0.2% less than otherwise, those losses compound every year and after 30 years we start to see big losses in our incomes (or they don't grow to as much as they could have).

North Dakota Is Number One!

See Why North Dakota May Be the Best State in the Country to Live In. The state has the lowest unemployment rate (3.8%), in 2009 had the third highest GDP growth rate, the fourth lowest crime rate and the state government has a budget surplus. Why?

"North Dakota's economic good fortune is pretty much a function of being a major producer of two very in-demand commodities: wheat and oil, both of which have seen huge global price increases. The state is the country's #1 producer of durum wheat -- that's what pasta is made from -- and is also a major grower of other crops including barley, pinto beans, and flaxseed."

But if people really believe that North Dakota is the best state and many of them go there, things won't be very fun due to the crowds (which reminds me of something that Yogi Berra said about a restaurant: "nobody goes there anymore, it's too crowded").

Prices of everything will be bid up. This also illustrates what economist Steven Landsburg calls the "Indifference Principle." "Except when people have unusual tastes or unusual talents, all activities must be equally desirable."

This applies to North Dakota. Once everyone sees it as a good deal, they start going there. Only people with unusual tastes will really enjoy it. That is, you will have to like what that North Dakota has to offer alot more than the average person or the crowds and congestion will erode your enjoyment. It won't be any better than anywhere else to live. Other places will be just as desirable.

Obama To Pitch For The White Sox

April first 2011 will go down in history. Click White Sox Sign Obama For Left-handed Bullpen Support to read all about it.

Fourth Quarter GDP Revised From A 2.8% Increase To A 3.1% Increase!

My students know how exciting this news is. See 4th Quarter U.S. GDP Revised Up to 3.1% Growth.

Why is this exciting? Let's suppose that per gapita GDP is $50,000 (it is a little less than that right now). Now what if over the next 20 years GDP (actually real GDP) rises every year by 3.1% instead of just 2.1%? How much difference will this make?

First, we need to say what the annual per capita GDP increase will be. Per capital GDP is GDP divided by population. What if we assume that population grows 1% per year. Then instead of an increase in per capita GDP of 3.1%, it would be about 2.1% (and instead of 2.8%, it will be about 1.8%).

Compounding an annual increase of 2.1% over 20 years would leave us with a per capita GDP of $75,460. That is more than $3,000 above what it would be if we grow only 1.8% per year ($71,188). An extra $3,000 in everyone's pocket is exciting news.

One technical note. When you see numbers like this reported in the media, real GDP did not increase 3.1% in the fourth quarter. It means that if it increased at the rate it actually did for that quarter for a whole year, then the yearly increase would be 3.1%. It would have increased about 0.766% for the quarter. If it does that for 4 straight quarters, the GDP will end up being about 3.1% higher than it was before.

Will The Real Multiplier Please Stand Up?

In the past few weeks in my macro classes, we have talked about the government spending multiplier. But not all economists agree on what the numerical value of the multiplier is. See Much ado about multipliers: Why do economists disagree so much on whether fiscal stimulus works? from "The Economist" magazine in Sept. 2009. Here is an excerpt:

"Different assumptions about the impact of higher government borrowing on interest rates and private spending explain wild variations in the estimates of multipliers from today’s stimulus spending. Economists in the Obama administration, who assume that the federal funds rate stays constant for a four-year period, expect a multiplier of 1.6 for government purchases and 1.0 for tax cuts from America’s fiscal stimulus. An alternative assessment by John Cogan, Tobias Cwik, John Taylor and Volker Wieland uses models in which interest rates and taxes rise more quickly in response to higher public borrowing. Their multipliers are much smaller. They think America’s stimulus will boost GDP by only one-sixth as much as the Obama team expects."

Factors Influencing The Price Of Gas

See Gas prices are about more than just oil. Here are some excerpts:

"Gas prices rise when oil prices rise, and fall when oil prices fall — except when they don't. What you pay at your gas station depends on an array of factors, from what happens on an exchange in New York to what the competition is charging."

"Sellers of commodities, like gas station owners and refineries, price their product based not on what it costs to produce it, but on what it costs to replace it. Stations like the Plainfield BP, which gets shipments of gas several times a week, must constantly adjust their prices to keep up with the changing costs of their shipments.

Oil is the biggest factor in gas prices. It accounts for 50 to 70 percent of the cost."

"In the next few weeks, gas prices are expected to rise as refiners switch to a more expensive blend of gasoline designed to help protect against evaporation during the warmer summer months."

"A wholesaler like BP or Gulf each has its own formula for setting the rack price. In an attempt to smooth out the spikes and dips of the market, a wholesaler usually buys some of his fuel through long-term contracts. The rest is bought on the so-called spot market, priced at a given moment by a benchmark like the New York Harbor gasoline price."

""If gasoline prices drop a dime, a station will only pass along one or two pennies a day," says Patrick DeHaan, an analyst at GasBuddy.com, a website that collects and publishes retail gas prices. "They are slower to pass along the discount because they need to make up for money they lost when prices went up.""

88% Of Bavarian Doctors Give Their Patients Placebos

See Half of all German doctors prescribe placebos, new study shows: Placebo cures shown to help with depression and stomach complaints – in Bavaria, 88% of doctors have prescribed them. They might help save money, too. Here are excerpts:

"The report says placebos, from vitamin pills to homeopathic remedies or even sham surgery, can prove highly effective in various treatments."

""Placebos have a stronger impact and are more complex than we realised. They are hugely important in medicine today," says Christoph Fuchs, the managing director of the BÄK.

The report recommends that students and doctors should be taught about placebos and their usage.

"Placebos can maximise the effect of medication," says Robert Jütte, author of the study and a BÄK board member.

"They can reduce undesirable side-effects and are a more efficient usage of our healthcare budget.""

"Recent research, he said, showed that placebos had helped 59% of patients who had been suffering from an upset stomach. Used to treat depression, placebos have the same effect as antidepressants in about a third of cases.

The efficacy of a placebo depends on many factors, according to the report, including the size and colour of a pill.

The more expensive the placebo, the higher the success rate, the study found, and intravenous injections are shown to be more effective than oral medication.

It's also a question of trust. Placebos produce better results if a patient feels their doctor understands their concerns, and believes they are being taken seriously, the study says."

I have blogged about this before. See

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

Can A Product Work Just Because It's Expensive?

Placebos: The More You Think They Cost, The Better They Work

People Waiting In Line For The Apple iPad 2 Is Socially Wasteful So The Price Should Be Extra High The First Few Days

See Woman Sells First Spot in iPad 2 Line For $900. She waited in line for 41 hours. This benefits no one one. No goods or services are created. It is wasted time and is inefficient. The iPad 2 starts at $499.

Apple should charge a higher price to begin with to avoid these long waiting lines. There is a shortage at the $499 price the first few days. They could start at $1000 and lower it $100 each day until it is back down to $499. Once these waiters get one they sell them for a very high price to someone else anyway and some go even higher than $1000 when sold on eBay.

Apple could get some great PR by donating the extra profit to charity. They could use that money to donate computers to schools. People who bought at the extra high price early on could get a t-shirt that says they support the Apple school computer initiative. So they could get to brag about their "donation."

Is It Getting Too Expensive To Go College?

Hedge-fund manager and author James Altucher says he will not be sending his kids to college. See Rethinking College as Student-Loan Burdens Rise. This link has both an article and a video clip. (Hat Tip: Frances Minten)

But remember that on average, college grad makes about 75% more a year than someone who only has a high school diploma. So let's say that if a high school grad makes $24,000 a year then the college grad is making $42,000. That is an extra $18,000 a year and it won't take long to make up for the $100,000 average cost of going to college.

Here are some earlier posts on related topics:

Maybe That College Degree Is Not As Valuable As You Thought

As college costs rise, sticker shock eased by student aid

Does It Pay To Go To College?

The EU Says Insurers Can No Longer Discriminate On The Basis Of Gender

See EU Closes Insurers' Gender Rate Gap from The Wall Street Journal, 3-2-11. This is actually bad news for women. Here are some key excerpts:

"The European Union's highest court declared illegal the widespread practice of charging men and women different rates for insurance, setting in motion an overhaul of how life, auto and health policies are written across Europe.

Two Belgian men had challenged the higher life-insurance premiums charged to members of their sex, arguing that it was discriminatory. In a ruling Tuesday, the Luxembourg-based European Court of Justice agreed.

The judgment can't be appealed. It will have vast implications: Insurers routinely charge women, who live longer, lower premiums for life insurance; young male drivers, who statistically cause more accidents, pay higher premiums for auto policies."

"A study last year commissioned by the British insurers' group found excluding sex would have a particular impact on the auto policies of young women, whose premiums could rise by as much as 25%."

The Problem In The Middle East Might Be The State Preventing Entrepreneurship

I saw this article mentioned at Carpe Diem, the blog of economist Mark Perry. It links an article in the New Yorker by James Surowiecki called The Tyrant Tax. Here is one paragraph:

"Healthy economies need a thriving and independent private sector, where resources are allocated by markets and competition, and where small and medium-sized businesses can flourish. But in most of the Middle East the state and big business are so tightly intertwined as to be indistinguishable, and competition has been discouraged in favor of central planning and private monopolies. It’s hard for entrepreneurs to start and run a business. Minimum capital requirements tend to be high, so you can’t get started without lots of cash, and getting business licenses and registering property are frequently arduous. Political favoritism is rampant, and byzantine regulations are difficult for outsiders to navigate. It’s instructive that the young man whose self-immolation helped set off the protests in Tunisia had had his fruit cart confiscated for violating some government rule."

and

"The state’s intrusive presence forces much economic activity off the books—in Egypt, eighty-five per cent of small businesses are in the “informal” sector—and this reduces growth, since informal businesses have a hard time getting credit or expanding beyond a certain size."

and

"Strict regulations enable the government to protect its friends in the private sector from competition, and bureaucrats line their own pockets, becoming further indebted to the system."

and

"Not surprisingly, when autocratic regimes in the region have tried to change their economies they’ve done so primarily with an eye toward maintaining power. In the past decade, countries like Egypt, Jordan, and Algeria have made vaunted public commitments to reform. But, as a recent study by the political scientist Oliver Schlumberger shows, reform did not, for the most part, aim at introducing genuine free-market competition, the most important feature of a healthy capitalist system. Instead, it strengthened what he calls “patrimonial capitalism”—a system in which the key determinant of success is how close you are to those in power."

Qatar Is The New Number One

In per capita GDP, that is. The table below shows the the top 10 countries in per capita GDP based on the the CIA's 2010 estimates (they are not all from 2010-Liechtenstein's estimate comes from 2007, for example).



Click here to go to the CIA World Factbook. The numbers are based on "purchasing power parity," which means the differences in cost of living between countries is taken into account. But it does bother me that our most recent estimate for Liechtenstein is from 2007. With all their riches, they could be a threat. So maybe the CIA should pay closer attention to them.

Update 3-4: Commentor "Sparrow" mentioned that Qatar uses slave labor. Here is a UN report on that Trafficking in Persons Report 2008 - Qatar. Here is a recent news story Online Petition Asks Qatar to Fight Human Trafficking in Advance of World Cup.

From The Life Is Not Fair Category: Better Looking, Tall, Thin People Make More Money

See Ways Your Appearance Affects Your Paycheck. Here are some excerpts:

"Men who are at least 6' tall make an average salary of $5,525 more than their shorter, 5'5 counterparts..."

"... 1% increase in body mass [for a woman] results in a 0.6 percentage point decrease in family income..."

"people with above average looks typically received premiums in pay of 5% or more, and that less attractive people "suffered a salary penalty of up to 9%.""

Here is some research from a few years ago that explains why looks might matter from an evolutionary perspective:

"So you think beauty is in the eye of the beholder? Think again. According to new research from the University of Exeter in Great Britain, the preference for pretty faces over ugly ones is embedded in our brains from the moment of birth and possibly prior to birth.

Newborn babies come fully equipped with built-in preferences, including a preference for an attractive face, that help them make sense of their new environment, report the BBC News Online and Newsweek magazine. The Exeter researchers showed more than 100 infants two images that were placed side by side. One was of an attractive face, while the other was a less attractive face. The babies, ranging in age from five hours old to two days old, spent about 80 percent of the time looking at the attractive face, while barely glancing at the unattractive face.

"You can show them pair after pair of faces that are matched for everything other than attractiveness. This leads to the conclusion that babies are born with a very detailed representation of the human face," Dr. Alan Slater, a psychologist at Exeter, explained to the BBC News. Why would infants have this capability? "It helps them to recognize familiar faces--particularly that of the mother--and it helps them in learning about the social world. Attractiveness is not simply in the eye of the beholder, it is in the brain of the newborn infant right from the moment of birth and possibly prior to birth," he added.

When those babies grow up, the preference for pretty faces doesn't change. And it crosses all cultures and geography as well. When an insular European is shown the faces of two Africans, the one he chooses as most attractive is also the same one an African chooses. And it works the other way around when an African is shown the faces of two Europeans.

"Although we think that standards of facial beauty vary over time and culture, they don't actually change that much," Slater explained to Newsweek. The evidence indicates that there is a biological and universal standard."

So don't blame a man when he can't help but look at a pretty face! He's biologically programmed that way."

The Percent Of The Civilian Noninstitutional Population Employed Since 1970

(This is a post from last October with an update at the end, including a link to a comaparison of unemployment rates in different countries from 2002-09)

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.

Update: For all of 2010, the percent employed in the US was 58.5%. From 1975-83, the average annual unemployment rate was 7.7% and the the average inflation rate was also 7.7%. The average annual percent employed in that period was 58.21%, still less than what we had in 2010 or any other recent year. The last 9 years averaged 61.9%.

Click here to see international comparison of unemployment rates by country.

Also, here is something from the Wall Street Journal last December about how GDP growth is related to unemployment:

"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."

We Spend A Much Smaller Percentage Of Our Incomes On Food And Clothing Than We Used To

Economist Mark Perry has posted two great graphs at his blog (links to the two entries are below). But here are the graphs, They show that over time the percentage of our income that we spend on food and clothing has been falling. It looks like in 1950 that about 30% of our income went to food and clothing combined. Today it is only about 12.5%.




Here are the links to his two posts on this:

As a Share of Income, Americans Have the Most Affordable Food in World & It's Never Been Better

As a Share of Income, Clothing and Footwear in U.S. Are More Affordable Today Than Ever Before

Can Some Places Really Be The "Best" Places To Retire To?

See The Best Places to Retire Outside the U.S.

But if people really believe this and many of them go to a given country, things won't be very fun due to the crowds (which reminds me of something that Yogi Berra said about a restaurant: "nobody goes there anymore, it's too crowded").

This also illustrates what economist Steven Landsburg calls the "Indifference Principle." "Except when people have unusual tastes or unusual talents, all activities must be equally desirable."

This applies to any of the countries on the list in the article. Once everyone sees it as a good deal, they start going there. Only people with unusual tastes will really enjoy it. That is, you will have to like what that country has to offer alot more than the average person or the crowds and congestion will erode your enjoyment. That country won't be any better than anywhere else for retirement. Other places will be just as desirable.

Incentives Matter, Even When It Comes To Returning Bottles

See Shades of 'Seinfeld': Maine bottle scam alleged form the AP. Here are the first two paragraphs:

"A memorable "Seinfeld" episode features Kramer and Newman taking thousands of cans and bottles to Michigan so they can get a nickel more per container than they would in New York, but beverage distributors say there's nothing funny when it happens for real.

In Maine, which has a more expansive bottle-redemption law than neighboring states, three people have been accused of illegally cashing in more than 100,000 out-of-state bottles and cans for deposits, the first time criminal charges have been filed in the state over bottle-refund fraud, a prosecutor said.

A couple that runs a Maine redemption center and a Massachusetts man were indicted this week for allegedly redeeming beverage containers in Maine that were bought in other states."

And here is more:

"An estimated 90 million cans and bottles are fraudulently cashed in each year in Maine, costing beverage distributors $8 million to $10 million, said Newell Augur, executive director of the Maine Beverage Association.

People from other states — especially New Hampshire, which has no "bottle law" — routinely redeem loads of cans and bottles in Maine, Augur said. Redemption centers pay customers 5-cent refunds on most beverage containers and 15 cents for wine and liquor bottles. The centers, in turn, get that money back from distributors, plus a 3 1/2- or 4-cent handling fee per container."

And

"Officials estimate that up to 1 billion beverage containers are sold in Maine each year. Containers sold in other states, however, carry the Maine deposit stamp because it's not cost-effective to change labeling for each state."

Adam Smith, Marriage Counselor

That is an article from the NY Times. Click here to read it. It is by Jenny Anderson, co-author of the book “Spousonomics,” written with Paula Szuchman (as you can probably guess, I am continuing with the Valentine's theme from Sunday).

They discuss how using incentives and economic theories like loss aversion, game theory and information processing costs can improve your marriage. The two authors answered questions at Freakonomics.

Finally, neuro-economist Paul Zak explains why romance in the workplace is important. Go to The Container Store Cheers Office Romance, Love This Valentine's Day. Here is an excerpt:

"Research has shown that a loving work environment causes the brains of those in it to produce the neurotransmitter oxytocin, which motivates people to care for the people around them, the company says, citing the findings of Paul Zak, founding director of The Center for Neuroeconomics Studies and professor of economics psychology and management at Claremont Graduate University.

In 10 years of research, I have shown that when we are loved and trusted, we in return love and trust others," Zak told WalletPop.

"Love is the foundation for all economic exchange which, at its core, is about serving others. Love creates employee engagement, builds customer loyalty and creates sustainable businesses. Imagine that: the best business practices derive directly from love.""

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