What’s an Oscar Really Worth?

Click here to read this CNBC article by Julia Boorstin. Excerpt:

"Oscar winners bring in 7.6 percent higher box office return on average than nominees that don’t win, according to IBIS world. On average, winners of Best Picture earned 57 percent of their total revenue before the nominees were announced, 27 percent once they were nominated and more than 15 percent after winning an Oscar. Nominees that didn’t bring home the gold earn just 5 percent of their total take after the awards show."

That means that, for example, “Extremely Loud and Incredibly Close,” which has grossed $31 million so far (not very much by Hollywood standards), would end up making about $36.5 million if it wins and $32.6 if it does not. So about an extra $4 million at stake.

It is not quite clear to me if those percentages are right. For winners we have 57 + 27 + 15 = 99, which is pretty close to 100% and it could just be a rounding issue. But for losers, it only adds up to 89%. Since they only get 5% after the awards show, the earlier numbers have to be higher than 57 and 27. If the earlier 95% has a 57/27 ratio, it would be something like 64% and 31%.

The article also discusses the economics of the cost of ads and ratings issues.

Struggling Cities Turn to a Crop for Cash

Click here to read this New York Times article by Michael Cooper. The crop is marijuana. Excerpt:

"As the stubborn economic downturn has forced this city to take painful steps to balance its budget in recent years, it has increasingly turned to one of its newer industries to raise much-needed revenues: medical marijuana dispensaries.

The city has raised taxes on marijuana dispensaries several times in the past few years, and last year it collected $1.4 million in taxes from them — nearly 3 percent of all the business taxes it collected. Now Oakland plans to double the number of dispensaries it licenses, to eight from the current four, in the hopes that it can collect even more revenue.

“This is general fund revenue — it all goes into the melting pot,” said David McPherson, the city’s tax and revenue administrator. “When you’re making decisions about what to continue keeping or not, it goes into that decision process. If you don’t have that money, then you’re making other decisions about ‘Are we going to close the libraries on Monday?’ ‘Are you going to end up cutting a cop?’ ‘Are you not giving funds to our arts and things that help our kids?’ ”

Sometimes lost in the discussion of medical marijuana is the extent to which it has become a small but growing source of new tax collections for cities and states that have been struggling to balance their budgets for more than four years now."

It could be that cities have recognized that the demand for marijuana is inelastic. When government taxes products like this they tend to get more revenue than if the tax products with elastic demand (the more elastic the demand the more quantity demanded changes when price changes).

Click here to see a simple, graphical explanation of what is going on

Click here to read a paper on this topic by Harvard economist Jeffrey Miron. He found that the elasticity for marijuana is -0.5. When it is less than 1 in absolute value, it is said to be inelastic. It means that if price goes up 10% quantity demanded only goes down 5%.

The Ethics of Incentives

Do incentives always work? If so, what kind of incentives? There is a new book out that discusses these issues called Strings Attached: Untangling the Ethics of Incentives by Ruth W. Grant. Here is a link to The New York Times book review: When Life Is a Bunch of Carrots by NANCY F. KOEHN. Excerpts:

"“How can legitimate uses of incentives be distinguished from illegitimate ones — bribery or blackmail, for example?” she asks. She puts forth three standards for evaluating incentives: legitimacy of purpose, the autonomy involved in choosing to accept an incentive, and the effect on the character of the parties involved.

She explains that the current notion of incentives emerged in three spheres in the early 20th century. The first was the young field of scientific management, in which Frederick Taylor experimented with paying workers by the task to increase productivity and reduce idleness.

Incentives also became an issue in the emergence of socialist economies: Would people be motivated to work if they weren’t rewarded according to effort? And, finally, the developing discipline of behavioral psychology also relied on incentives, in the form of outside action meant to “shift behavior from its usual paths,” Professor Grant writes."

"...incentives often undermine intrinsic motivation.

For example, British women who were offered cash in exchange for their blood were almost 50 percent less likely to accept the offer than women who were just asked to donate blood. This suggests that when both ethical and self-interested motives are present, they don’t act independently, Professor Grant says. “Instead, introducing self-interested incentives has negative effects,” she writes, “ ‘crowding out’ ethical motives while failing in themselves to produce the desired behavior.”

She says that paying children to elicit certain behavior may have destructive consequences in developing character, potentially nurturing self-interest at the expense of kinder motives. “Where students work in an environment that values only extrinsic rewards for learning,” she writes, “cheating goes up.”"

Are You More Likely To Be Successful If You Do Something You Love?

I thought of this when I read a book review in The Wall Street Journal last Saturday. See Never Too Late to Learn. The book reviewed was Guitar Zero by Gary Marcus. Here is the passage:

"Brain scans show that musicians' new neuronal connections vary according to the instrument they play. Violinists have their signature brain changes, brass players theirs. Loving what we do helps to form these new connections, because the same dopamine chemistry that gives us the pleasurable rush of reward consolidates new brain connections."

This reminded me of something the Freakonomics guys, Steven Levitt and Stephen Dubner, wrote about a few years ago. See A Star Is Made. Here are some excerpts:

"Anders Ericsson, a 58-year-old psychology professor at Florida State University. He is the ringleader of what might be called the Expert Performance Movement, a loose coalition of scholars trying to answer an important and seemingly primordial question: When someone is very good at a given thing, what is it that actually makes him good?"

He believes in "deliberate practice" which

"... entails more than simply repeating a task — playing a C-minor scale 100 times, for instance, or hitting tennis serves until your shoulder pops out of its socket. Rather, it involves setting specific goals, obtaining immediate feedback and concentrating as much on technique as on outcome."

"[Ericsson] makes a rather startling assertion: the trait we commonly call talent is highly overrated. Or, put another way, expert performers — whether in memory or surgery, ballet or computer programming — are nearly always made, not born. And yes, practice does make perfect. These may be the sort of clichés that parents are fond of whispering to their children. But these particular clichés just happen to be true.

Ericsson's research suggests a third cliché as well: when it comes to choosing a life path, you should do what you love — because if you don't love it, you are unlikely to work hard enough to get very good. Most people naturally don't like to do things they aren't "good" at. So they often give up, telling themselves they simply don't possess the talent for math or skiing or the violin. But what they really lack is the desire to be good and to undertake the deliberate practice that would make them better."

"Ericsson's conclusions, if accurate, would seem to have broad applications. Students should be taught to follow their interests earlier in their schooling, the better to build up their skills and acquire meaningful feedback."

What's In A Name? Money? Success?

See Easy To Pronounce Names Help Win Friends And Influence People by Catharine Paddock, PhD, in Medical News Today. Excerpts:

"...having a name that is easy to pronounce appears to confer a subtle advantage."

"Lead author of the study, Dr Simon Laham from the University of Melbourne in Australia told the press last week that people are often not aware of subtle biases when they make decisions and choices. He and his colleagues write about their findings in the Journal of Experimental Social Psychology."

"In particular they found that:

Candidates with more pronounceable names were more likely to be be favoured for job promotion and political office.

In a mock ballot, political candidates whose names were easier to pronounce were more likely to win than counterparts whose names were not so easy to say.

Attorneys with easy to pronounce names ascended more quickly to senior positions in their firms."

by Catharine Paddock PhD in Medical News Today

A Special Valentine's Message On Romantic Love

Below is a repeat of last year's Valentine's day post. I am not sure if the links are still working:

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."

Who Is The World's Richest Primatologist?

Facebook founder Mark Zuckerberg. See Zuckerberg: The World's Richest Primatologist: People want to know about this town and that other town too. It's their nature by LIONEL TIGER in the WSJ. Excerpts:

"Primates always want to know what is going on. If it's over the hill where you can't see for sure what's up, that's even more stimulating and important to secure long-range survival."

"...in some ground-living species, members of the group glanced at the lead primate every 20 or 30 seconds. Think Louis Quatorze or Mick Jagger."

"The human who has most adroitly—if at first innocently, and in the next weeks most profitably—capitalized on this is Facebook founder Mark Zuckerberg."

"We know that many users' first and classical impulse was acquiring convivial acquaintance with young women. Facebook married that ancient Darwinian urgency to a cheap, brilliantly lucid, and endlessly replicable technology."

"Nearly one-sixth of homo sapiens are on Facebook. Half of Americans over age 12 are on it."

"His product costs him virtually nothing to produce—it is simply us. We enter his shop, display ourselves as attractively or interestingly as we can,..."

"And why? Just because we're primates with endlessly deep interest in each other, with a knack and need to groom each other..."

"There is much to transmit between towns and between people."

"...the consumer is not someone who wants something necessary, but rather one who seeks to assert simply what he is."

"The technology is new but the passion for connection isn't. In Paris a hundred years ago pneumatic tubes ran all the through the parts of town that could afford them so messages could be written and sent as if by courier."

"Mr. Zuckerberg became the richest primatologist in the world because he gave his customers nothing new, except the chance to be their old ape selves."

What Do Wall Street Traders Need Just The Right Amount Of?

See The Wall Street Gene by JONAH LEHRER of the WSJ.

In my classes I talk about how in economics the key question is often getting the right amount of something. Not too much or too little. For example, I used the Supply and Demand Game to show how markets, by reaching equilibrium, produce just the right amount of a good. Also, it comes up when I discuss Allocative Efficiency, when the amount of a public good produced makes the marginal cost equal the marginal benefit and social welfare is maximized. Any other quantity would be sub-optimal.

But in this case of Wall Street traders, it inolves brain chemistry and neuroeconomics. Key excerpts:

"A different approach to reducing the irrationality of Wall Street can be found in new research led by Steve Sapra and Paul Zak, neuroeconomists at Claremont Graduate University. Dr. Zak got the idea for the paper after spending time with leading analysts and traders at a conference. "These guys are a pretty weird bunch," he says. "They're very rational and very competitive."

Dr. Zak wanted to see if he could find the genetic signature of this personality type. Did certain genes correlate with investment success? What's the difference between the prudent decisions of somebody like Warren Buffett—he's famously unwilling to invest in bubbles—and the reckless bets that cause so many other traders to lose vast sums of money?

The scientists focused on a short list of genes that are known to affect the activity of dopamine, a neurotransmitter in the brain.

In recent years, it's become clear that dopamine helps to regulate decisions involving risk and reward, allowing us to experience both the thrill of getting what we want and the pain of losing it all.

Consider the decision to invest in an initial public offering. As Dr. Zak notes, these investment offerings are pretty exciting, leading "to lots of dopamine activity," he says. "There's the thrill of novelty and the potential for a big future reward." The problem, however, is that 63% of newly public companies fail within 10 years.

The challenge for investors, then, is to balance the allure of the new stock against the risk that the company might go bankrupt. Such calculations are often extremely difficult, even for experienced traders.

So what did the scientists find? It turned out that successful traders—Drs. Zak and Sapra measured success in terms of longevity on Wall Street—tended to hit a sweet spot of dopamine activity; their genes kept them from experiencing either very high or very low levels of the molecule. These prosperous professionals were much more likely to have so-called Goldilocks genes, placing them solidly in the middle of the dopamine distribution.

"The best traders are willing to take risks," Dr. Zak says. "They definitely want to make lots of money. But they're also able to take a long-term perspective and check their impulses. Being able to balance these competing interests seems to require a balanced dopamine system.""

Related posts:

Adam Smith vs. Bart Simpson (which has links to other related posts on neuroeconomics)

Are Women Better At Investing Than Men? (which has links to other posts on how brain functioning affects the stock market)

How Our Brains Help Create Financial Bubbles

Did Economist Hyman Minsky Predict The Financial Crisis?

Interesting Theory on Stock Market Fluctuations

Can Testosterone Help Women Earn More Money?

Male sex hormone may affect stock trades

What Tax Rate Did Corporations Pay In 2011?

See With Tax Break, Corporate Rate Is Lowest in Decades By DAMIAN PALETTA of the WSJ. Excerpts:

"Total corporate federal taxes paid fell to 12.1% of profits earned from activities within the U.S. in fiscal 2011, which ended Sept. 30, according to the Congressional Budget Office. That's the lowest level since at least 1972. And well below the 25.6% companies paid on average from 1987 to 2008.

Corporate income-tax receipts typically fall during recessions, and they declined sharply after the 2008 financial crisis, which wiped out big swaths of profits across the huge financial sector. But U.S. profits have rebounded sharply in recent quarters, while tax receipts have stayed low.

So where is the money? There are a lot of moving pieces, budget watchers say, but one view shared inside Washington is that a temporary tax break—supported by both political parties—is a key reason.

This tax break, known as "bonus depreciation," has allowed companies to write off investments in goods like industrial equipment, manufacturing machinery and computers in the year in which they're bought rather than over time."

One thing this might relate to is the taxes rich people pay. Some of the highest earners pay 15% because their income comes from dividends and those get taxed at a lower rate. But some economists say that is misleading. They point out that those earnings were already taxed as corporate profits.

The corporate tax rate is 35%. But as this article shows, it is not the same for all companies or industries, depending on what kinds of deductions they can make (like spending on new technology). And the rate changes over time, like with these temporary reductions in the rate.

So let's take the 25% rate or the long term average. Suppose I own all the stock in a company which earns a $100 profit. So I only get $75 in income. But then I pay 15% of that on the dividend I got. That is $11.25. If you add that to the $25 already paid in corporate taxes, the total tax paid is $36.25. On $100 income, the rate is 36.25%.

Obesity Rates Unchanged Over The Last 12 Years

This past week in my micro class we read a chapter about obesity in the book The Economics of Public Issues. It is good news that the rate has not gone up. But it is still very high. The book mentions two reasons why the rate is up so much in the last 40-50 years. One is that the relative wage rate of sedentary jobs has gone up (so we burn fewer calories) and the total cost of food (monetary price + preparation time) has fallen in real terms (so we consume more calories). It is so much easier to make and get food than it once was. We have microwaves, vending machines everywhere and drive up lanes for fast food restaurants. Those trends are not going away, so the obesity rate will not change easily.

Here is a story about the obesity rate from the NY Times: Obesity Rates Stall, But No Decline by TARA PARKER-POPE. Here is an excerpt:

"After two decades of steady increases, obesity rates in adults and children in the United States have remained largely unchanged during the past 12 years, a finding that suggests national efforts at promoting healthful eating and exercise are having little effect on the overweight.

Over all, 35.7 percent of the adult population and 16.9 percent of children qualify as obese, according to data gathered by the federal Centers for Disease Control and Prevention and published online Tuesday by The Journal of the American Medical Association. While it is good news that the ranks of the obese in America are not growing, the data also point to the intractable nature of weight gain and signal that the country will be dealing with the health consequences of obesity for years to come."

Here are some other posts on obesity:

A Few Extra Pounds Might Bring Extra Years

Should Overweight People Pay More For Health Insurance?

Are Your Friends Making You Fat?

Should We Pay People To Adopt A Healthy Lifestyle?

Smokers and the obese cheaper to care for, study shows

Did the industrial revolution cause children to take on adult roles later and later?

See What's Wrong With the Teenage Mind? by ALISON GOPNIK, professor of psychology at the University of California, Berkeley. From last Saturday's WSJ.

In one of my classes this week, we read a chapter about poverty and capitalism from the book The Economics of Macro Issues. One thing it mentioned was:

"In the 25 most capitalist countries around the world, fewer than 1 percent of children under the age of 15 are working rather than in school. In the 25 least capitalist countries, one child of every six under the age of 15 is working rather than in school."

It is certainly good that we don't have children working long hours in factories, never getting an education. But it seems that people are becoming fully responsible adults at older ages now.

It isn't just a social phenomena. It party has to do with biology. Here is part of the article:

"Becoming an adult means leaving the world of your parents and starting to make your way toward the future that you will share with your peers.

The second crucial system in our brains has to do with control; it channels and harnesses all that seething energy. In particular, the prefrontal cortex reaches out to guide other parts of the brain, including the parts that govern motivation and emotion. This is the system that inhibits impulses and guides decision-making, that encourages long-term planning and delays gratification.

This control system depends much more on learning. It becomes increasingly effective throughout childhood and continues to develop during adolescence and adulthood, as we gain more experience. You come to make better decisions by making not-so-good decisions and then correcting them. You get to be a good planner by making plans, implementing them and seeing the results again and again. Expertise comes with experience. As the old joke has it, the answer to the tourist's question "How do you get to Carnegie Hall?" is "Practice, practice, practice."

In the distant (and even the not-so-distant) historical past, these systems of motivation and control were largely in sync. In gatherer-hunter and farming societies, childhood education involves formal and informal apprenticeship. Children have lots of chances to practice the skills that they need to accomplish their goals as adults, and so to become expert planners and actors. The cultural psychologist Barbara Rogoff studied this kind of informal education in a Guatemalan Indian society, where she found that apprenticeship allowed even young children to become adept at difficult and dangerous tasks like using a machete.

In the past, to become a good gatherer or hunter, cook or caregiver, you would actually practice gathering, hunting, cooking and taking care of children all through middle childhood and early adolescence—tuning up just the prefrontal wiring you'd need as an adult. But you'd do all that under expert adult supervision and in the protected world of childhood, where the impact of your inevitable failures would be blunted. When the motivational juice of puberty arrived, you'd be ready to go after the real rewards, in the world outside, with new intensity and exuberance, but you'd also have the skill and control to do it effectively and reasonably safely.

At the same time, contemporary children have very little experience with the kinds of tasks that they'll have to perform as grown-ups. Children have increasingly little chance to practice even basic skills like cooking and caregiving. Contemporary adolescents and pre-adolescents often don't do much of anything except go to school. Even the paper route and the baby-sitting job have largely disappeared.

The experience of trying to achieve a real goal in real time in the real world is increasingly delayed, and the growth of the control system depends on just those experiences.

Knowing physics and chemistry is no help with a soufflé. Wide-ranging, flexible and broad learning, the kind we encourage in high-school and college, may actually be in tension with the ability to develop finely-honed, controlled, focused expertise in a particular skill, the kind of learning that once routinely took place in human societies. For most of our history, children have started their internships when they were seven, not 27.

Instead of simply giving adolescents more and more school experiences—those extra hours of after-school classes and homework—we could try to arrange more opportunities for apprenticeship. AmeriCorps, the federal community-service program for youth, is an excellent example, since it provides both challenging real-life experiences and a degree of protection and supervision."

Obama Plans To Slow Rising Tuition

See Obama Details Plan to Curb Tuition By LAURA MECKLER and STEPHANIE BANCHERO of The Wall Street Journal.

Part of the problem is "...concern about the rising costs of college tuition, which have increased by an average of 136% over the past 20 years, adjusted for inflation."

Here are some key excerpts:

"[Obama] wants to withdraw federal campus-based aid from colleges and universities that increase tuition too rapidly or fail to provide a "good value" for the money."

"William Powers Jr., president of the University of Texas at Austin, said he supports using a threat of funding as a lever to get specific outcomes, but said there could be nasty debates about how those outcomes are measured. "This could be fabulously successful, or not, depending on the details and implementation.""

"Mr. Obama would change that by rewriting the formula so that schools that keep tuition down and that provide "good value" would be rewarded with more money. The White House did not say what would constitute "good value," but said the new formula would include measures such as graduation rates and debt repayment.""

This might put pressure on teachers to pass students so they can graduate and keep their school's graduation rate high enough.

"Some critics warned that federal efforts to control tuition costs amount to price controls, while others pointed out that the $2.7 billion the plan affects is tiny compared to total spending in colleges and universities."

There is always a danger that a price ceiling (the type of price control mentioned) can cause shortages, as I mentioned in class last week. A lower price enforced by the government raises the quantity demanded while lowering the quantity supplied.

Now it may be more complicated than what a simple supply and demand graph would show. Higher education might be what is called "monopolistic competition," where firms have some pricing power. That does not mean, though, that price controls will work. The government would have to somehow know the right level of tuition for every school.

With competition intense, schools bid for superstar faculty which raises tuition. Also, they have been competing with amenities like better dorms and facilities. Colleges also offer scholarships to the best students, meaning others pay more. See chapter 18 of the book The Economics of Public Issues, 16e.

But some of the higher tuition has been covered by financial aid. See a post from March, 2010 called As college costs rise, sticker shock eased by student aid. From 2004-09, the net price that students pay, once financial aid is taken into account, actually fell.

U.S. GDP grows 2.8% to its fastest pace in 1-1/2 years, but slower than expected

Click here to read the article from the New York Daily News.

"Economists, however, had been betting on a slightly faster fourth-quarter pace of 3%."

That might not seem like a big deal, just .2% less than expected. 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.

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.

Using the latest GDP figures for another example, if we grow 3.0% a year for the next 30 years, and if per capita GDP now is, say, $50,000, it would reach $121,363. But if it only grows 2.8% for 30 years, per capita GDP would be $114,488. That is $6,874 less than if we grow 3.0%

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

What We Give Up for Health Care

Interesting article by Ezekiel J. Emanuel in Sunday's NY Times. Click here to read it. He is a doctor. One of his brothers is mayor of Chicago Rahm Emanuel who is also former White House Chief of Staff under Obama.

One of the first lessons every semester is that there is no such thing as a free lunch or that everything has an opportunity cost. Here are some excerpts:

"The more we spend on health care, the less we can spend on other things we value."

"Over the past 30 years, health care inflation has been a major reason average wages have remained stagnant. For employers, the cost of labor is total compensation — wages plus benefits. As the cost of benefits rises, wages tend not to rise, or to rise much more slowly. According to the Bureau of Labor Statistics, as health care costs skyrocketed between 2000 and 2009, workers’ total compensation increased by 1.3 percent per year, but workers’ hourly wages alone increased by just 0.7 percent per year, significantly below the rate of inflation.

During those 30 years, the only sustained period when real hourly earnings increased was 1990 through 1998 — which coincided almost exactly with a period of unusually low increases in health care costs."

"Last year, Medicaid spending was estimated to account for nearly a quarter of total state spending — the largest portion of their budgets — and it’s getting only more expensive."

"And so states have turned to cutting funding for public education — the next biggest item in their budgets."

"as health care costs rise, so too do the number of uninsured Americans. According to an analysis I did a few years ago, for every 10 percent increase in the average cost of family health insurance premiums, the ranks of the uninsured (excluding seniors covered by Medicare) increased by 0.55 percent. When premiums doubled between 2000 and 2009, the percentage of Americans who were covered by employer-sponsored health insurance dropped to 61 percent from 69 percent."

"We cannot have it all."

"...we could speed up the implementation of payment reform, stop Medicare payments for tests and treatments that provide no benefit and endorse competitive bidding for medical goods and services."

What Is Economics According To Keynes?

This might be an appropriate way to end the semester. I will not be keeping to my regular schedule until the next semester starts. Here is the quote from Keynes:

“The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.”

I saw this in Know What You’re Protesting by Harvard Economis Greg Mankiw in Sunday's NY Times.

Economists also like parables and fables. Perhaps these are part of the apparatus or techniques that Keynes mentioned. So here is a post from January 2010 on this.

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

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

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

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

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

And

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

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

Keynes vs. Hayek

Probably most people have seen this video or know about it. We watched it in my macro classes this week. There are actually two videos. Here they are in order. My class saw the second one. Then there is a link to readings over these issues.

Fear the Boom and Bust

Fight of the Century: Keynes vs. Hayek Round Two

Get the Story Behind the Fight of the Century

If you want to tell Russ Roberts, the economics professor who made the video, what you think, go to Fight of the Century in the classroom

Fight of the Century with Polish subtitles

Economist Mark Thoma on making dollars available to troubled European banks

Mark Thoma teaches at the University of Oregon. This is from his Wednesday article at CBS Money Watch. See Will the Fed's move to help Europe hurt the U.S.? Here it is:

"(MoneyWatch) Central banks in the U.S., England, Canada, Japan and Switzerland along with the European Central Bank announced on Wednesday that they are taking steps to make dollars readily available to troubled banks in Europe. The plan is to reduce the cost of loans between central banks -- these are known as liquidity swaps -- so that dollars are cheaper to obtain.

What are the central banks doing?

The worry is that the financial troubles in Europe will cause problems similar to when Lehman failed in the U.S. An event such as a default on government loans, a bank failure or even just the fear that such events are just around the corner can cause short-term money markets to tighten up. If this happens, then it will be harder for banks to obtain the money they need to fund their operations. Many banks make money by borrowing short and lending long, and make a profit on the spread between short and long interest rates. When the short-term money markets dry up, these banks lose the ability to obtain the money they need to stay liquid and that puts them in danger of failing.

Why are the central banks taking this step?

One reason is to make sure that the banks have the liquidity they need to stay afloat. A widespread domino-like cascade of bank failures would be disastrous and this provides insurance against that possibility. In addition, even without bank failures a loss of liquidity is troublesome. As liquidity dries up, interest rates rise and the loans that businesses and consumers need become harder or impossible to get. That can have a large negative impact on economic activity.

How does the plan work?

These swaps are loans between central banks. For example, the Federal Reserve in the U.S. might swap dollars for euros with the European Central Bank, and then the European Central Bank can lend those dollars to banks that are in trouble.

Why can't the European Central Bank provide liquidity in euros? Why are dollars needed?

The dollar is still considered a safe haven, and when troubles erupt in financial markets, the demand for dollars goes up considerably. Providing extra euros doesn't help when the banks want to be in dollars.

Is there any possible downside? As a taxpayer, will it cost me money to help the Europe mess?

Since these are loans between central banks -- the U.S. Fed will not lend to any foreign banks directly -- there is essentially no risk to the U.S. If the Fed makes a loan to the European Central Bank, and the ECB lends the money to a bank that later fails, it is the ECB that is on the hook for losses, not the U.S. The European Central Bank would still be obligated to pay back the U.S. in full.

The other possible downside is that the short-term expansion in the Fed and other central bank balance sheets that would come with these loans will stoke inflation fears. But since these loans have an expiration date (i.e. the balance sheet will be expected to contract at some point in the future), this shouldn't be a big problem.

Finally, note that while this move can ease financial market conditions, it does nothing to address the underlying problems creating those conditions. So this is no substitute for the difficult decisions that Europe must make to overcome its troubles."

What has happened to the distribution of wealth in recent years?

Here are a couple of links that look at this quesion.

Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007 by Arthur B. Kennickell of the Federal Reserve.

Go to page 34, Table 3. The gini coefficient for net worth went from .7863 in 1989 to .8120 in 2007. As the gini coefficient gets closer to 1, the distribution gets less equal (the gini coefficient can go from 0 to 1).



This link from the Cato Institute shows different estimates of what the top 1% owns. The EPI actually shows the top 1% owning less of the wealth in 2007 than it did in 1989 or 1998.

Cato link.

Here is some related information.

Click here to see the data

At this link you can see the gini calculated after taxes and transfers and, it seems, is adjusted for household size. For all people in the mid 2000s, the US has .38 and the OECD average is .31.

Here are the mid-2000s Ginis for household income in selected countries After taxes and transfers and accounting for household size. The U.S. is not that much different.

Australia 0.3
Canada 0.32
France 0.28
Germany 0.3
Italy 0.35
Japan 0.32
Korea 0.31
OECD Total 0.31
United Kingdom 0.34
United States 0.38

Is Willpower An Untapped Resource?

In economics we say that there are three resources: land, labor and capital. Maybe willpower should be added as a fourth resource. See Willpower: It’s in Your Head by GREG WALTON and CAROL DWECK. Greg Walton is an assistant professor of psychology at Stanford. Carol Dweck, a professor of psychology at Stanford, is the author of “Mindset: The New Psychology of Success.” Excerpts:

"...attributing failures of willpower to our fixed biological limits justifies our procrastination as well as our growing waistlines. But are these theories correct?

We don’t think so."

"...we confirmed that willpower can indeed be quite limited — but only if you believe it is. When people believe that willpower is fixed and limited, their willpower is easily depleted. But when people believe that willpower is self-renewing — that when you work hard, you’re energized to work more; that when you’ve resisted one temptation, you can better resist the next one — then people successfully exert more willpower. It turns out that willpower is in your head."

"...we found that people who believed that willpower was not limited continued to perform well on the second task, making few mistakes, even after facing the difficult initial task. They were not “depleted” and kept on doing well."

"...we found that anyone can be prompted to think that willpower is not so limited."

"During stressful times, like final-exam week, students who believed that willpower was not limited reported eating less junk food and procrastinating less than students who did not share that belief. They also showed more academic growth, earning better grades that term than their “pessimistic” counterparts.

Furthermore, when we taught college students that willpower was not so limited, they showed similar increases in willpower."

"People who think that willpower is limited are on the lookout for signs of fatigue. When they detect fatigue, they slack off. People who get the message that willpower is not so limited may feel tired, but for them this is no sign to give up — it’s a sign to dig deeper and find more resources."

"...when people believe in willpower they don’t need sugar..."

"It’s also a question of what kind of people we want to be. Do we want to be a people who dismiss our weaknesses as unchangeable? When a student struggles in math, should we tell that student, “Don’t worry, you’re just not a math person”? Do we want him to give up in the name of biology? Or do we want him to work harder in the spirit of what he wants to become?"

Economists debate issues at new online policy forum

See IGM Economic Experts Panel. Here is the description:

"This panel explores the extent to which economists agree or disagree on major public policy issues. To assess such beliefs we assembled this panel of expert economists. Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population.

To that end, our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President's Council of Economics, and past and current editors of the leading journals in the profession. This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.

Finally, it is important to explain one aspect of our voting process. In some instances a panelist may neither agree nor disagree with a statement, and there can be two very different reasons for this. One case occurs when an economist is an expert on a topic and yet sees the evidence on the exact claim at hand as ambiguous; although we try to word the statements carefully to avoid this, it will no doubt happen at times, and in such cases our panelists vote "uncertain". A second case relates to statements on topics so far removed from the economist's expertise that he or she feels unqualified to vote. In this case, our panelists vote "no opinion".

The panel data are copyrighted by the Initiative on Global Markets and are being analyzed for an article to appear in a leading peer-reviewed journal."

Did The Recession Help Lower The Birth Rate?

See Birth Rate Continues to Slide Among Teens by TIMOTHY W. MARTIN in the 11-18 WSJ.

"The birth rate among American teens fell to its lowest recorded level last year, according to a government report, a decline that experts attributed to more-effective sex education and the effects of a tough economy.

There were 34.3 births per 1,000 people 15 to 19 years old in 2010, a 9% drop from 37.9 births the previous year, the Centers for Disease Control and Prevention said Thursday. The rate has fallen in 17 of the past 19 years.

"We haven't seen a one-year decline like this since the mid-1940s," said Stephanie Ventura, a demographer for the CDC and a co-author of the study.

The nation's total number of births fell 3% last year, to four million from 4.1 million in 2009, the third straight year of declines.

The drop was steepest among teens, however. Teenage birth rates peaked in 1991, when there were 61.8 births per 1,000 teens. Over the past two decades, the rate has gradually declined. Fewer teenagers now report having had sexual intercourse than in previous decades. And those who are sexually experienced are more likely to have used contraception than teens in the past, according to CDC data.

In recent years, the federal government has invested millions of dollars in more than 30 sex-education programs that research has shown to lower teen birth rates, according to teen-pregnancy experts. In previous decades, it was unclear which approaches would work and which wouldn't, said Bill Albert, chief program officer at the National Campaign to Prevent Teen and Unplanned Pregnancy, a nonprofit, nonpartisan group.

The programs now have "become less of a body-parts conversation and more talking about relationships," he said.

The rough economy may also dissuade teens from wanting children, because they see their parents or older relatives struggling financially, Mr. Albert said.

Birth rates fell for most ages and all races, a sign that the sluggish economy is leading more women to delay having children. Birth rates fell during previous economic downturns, Ms. Ventura of the CDC said.

Women in their 20s and 30s reported declines, and only women aged 40 to 44 years old saw a rise, increasing 2% to 10.2 births per 1,000 women.

The nation's total fertility rate—the number of children any woman is expected to have in her lifetime—dropped to 1.9, slipping under the 2.1 rate that demographers agree is required for a population to replace itself.

The rate of caesarean deliveries dropped for the first time in 1996. Ms. Ventura said that was an encouraging sign, as the surgery carries more risks than conventional birthing and is costlier."

Did The Housing Crisis Bring Benefits To College Students?

See Animal McMansion: Students Trade Dorm for Suburban Luxury from the 11-12-11 NY Times. Excerpts:

"While students at other colleges cram into shoebox-size dorm rooms, Ms. Alarab, a management major, and Ms. Foster, who is studying applied math, come home from midterms to chill out under the stars in a curvaceous swimming pool and an adjoining Jacuzzi behind the rapidly depreciating McMansion that they have rented for a song.

Here in Merced, a city in the heart of the San Joaquin Valley and one of the country’s hardest hit by home foreclosures, the downturn in the real estate market has presented an unusual housing opportunity for thousands of college students. Facing a shortage of dorm space, they are moving into hundreds of luxurious homes in overbuilt planned communities."

"The finances of subdivision life are compelling: the university estimates yearly on-campus room and board at $13,720 a year, compared with roughly $7,000 off-campus. Sprawl rats sharing a McMansion — with each getting a bedroom and often a private bath — pay $200 to $350 a month each, depending on the amenities.

Gurbir Dhillon, a senior majoring in molecular cell biology, pays $70 more than his four housemates each month for the privilege of having what they enviously call “the penthouse suite” — a princely boudoir with a whirlpool tub worthy of Caesars Palace and a huge walk-in closet, which Mr. Dhillon has filled with baseball caps and T-shirts."

"A confluence of factors led to the unlikely presence of students in subdivisions, where the collegiate promise of sleeping in on a Saturday morning may be rudely interrupted by neighborhood children selling Girl Scout cookies door to door.

This city of 79,000 is ranked third nationally in metropolitan-area home foreclosures, behind Las Vegas and Vallejo, Calif., said Daren Blomquist, a spokesman for RealtyTrac, a company based in Irvine, Calif., that tracks housing sales. The speculative fever that gripped the region and drew waves of outside investors to this predominantly agricultural area was fueled in part by the promise of the university itself, which opened in 2005 as the first new University of California campus in 40 years."

60 Minutes: Insider trading is legal for members of Congress-but it is nothing new, it started in 1790

See Congress insiders: Above the law?. Here is a brief excerpt:

"* Members of Congress have bought stock in companies while laws that could affect those companies were being debated in the House or Senate.

* At least one representative made significant stock purchases the day after he and other members of Congress attended a secret meeting in September 2008, where the Fed chair and the treasury secretary informed them of the imminent global economic meltdown. The meeting was so confidential that cell phones and other digital devices were confiscated before it began."

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

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

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

The debts were securities or bonds. Some congressman owned them. I found how much about half the congressmen owned in these bonds from McDonald's book. The ones who voted yes on the bill had an average of about $6,800 while the ones who voted no had about $764. So it is possible that money influenced the vote.

Here is a passage from John Spencer Bassett's book about the "Funding and Assumption Act" The Federalist System, 1789-1801:

"All the speculating class, in Congress and out of it, were zealously in favor of the scheme; and while it was till being debated they were trying to by all the means known to their class to buy up, even in the remote parts of the country, the old bonds at the depreciated values."

Here are they guys who voted yes and their dollar value of their bond holdings:

AMES 35
BASSETT 0
BURKE 5252
BUTLER 0
CLYMER 14000
DALTON 12
DCARROLL 227
ELLSWORTH 5985
FITZSIMMONS 2668
GALE 4252
GERRY 50000
GROUT 0
IZARD 20865
JOHNSON 0
KING 10000
LANGDON 27921
MORRIS 11000
PARTRIDGE 2195
PATERSON 0
READ 341
SEDGWICK 1680
SHERMAN 7729
STRONG 10903
STURGES 189
SUMTER 0
WADSWORTH 1625
WHITE 1619
WLSMITH 11910

Now the no votes

BALDWIN 2500
COLES 0
FEW 640
GILMAN 1025
GRIFFIN 0
HARTLEY 0
LIVERMORE 0
MADISON 0
MATHEWS 0
MJSTONE 3814
MOORE 0
MUHLENBERG 0
SCOTT 127
WILLIAMSON 2600

The San Antonio College Student Newspaper, "The Ranger," Has A Front Page Story On "Occupy Wall Street"

Here is the link:

Occupy movement only beginning, political science professor says

I submitted an op-ed piece in reply. It is below. I guess I will find out on Monday if they print it.

I am very concerned about the front page article the Ranger did on the Occupy Wall Street Movement.

I can understand and sympathize with the protesters. Unemployment is especially high for young people. I got my B.A. in 1982, a year when the unemployment rate was over 9%. It was again the next year. In fact, both unemployment and inflation averaged 7.7% over the nine years from 1975-1983. I began college in the middle of that difficult economic period. It was also a time of bailouts. The government bailed out Chrysler and Continental Bank.

The article said that "the movements' focus is big business and the government's failure to regulate big business." They also seem to be concerned about inequality and how much money the top 1% makes. I believe that the movement is either wrong about these issues or overstates their importance. And their solutions could harm the economy in the long run. How exactly regulations and taxes can harm the economy is not widely understood. So let me try to explain.

Let's take regulation. Many feel that it was a lack of regulation that caused the financial crisis. This is a highly debatable point. Experts like Nobel Prize winner Gary Becker, Peter Wallison, Jeffrey Friedman, Columbia University economist Charles Calomiris and Stanford University economist John Taylor have written on how it was regulations that were the main cause. Banks were told to lower their lending standards which caused the demand for houses to reach unsustainable levels. Even the business writer for the New York Times, Gretchen Morgenson, has written a book which lays at least part of the blame on the government created Fannie Mae and Freddie Mac.

It also may not be true that we don't have enough regulations. Federal spending by regulatory agencies is about nine times higher today than it was in 1970 (adjusted for inflation). Thousands of pages of new regulations are added every year.

But if we did add even more regulations, how will we make them work? Does each regulator do more work or do we hire more regulators? If the latter, we run into what economists call "the law of increasing opportunity cost." We have to keep taking better and better workers out of the private sector to join government agencies. Fewer goods and services will be produced. The cost of regulation will grow exponentially.

Regulators are also subject to "capture" by the interests they are supposed to be monitoring. They end up not serving or protecting the public since they may have already worked in that industry and regular people don't have time to watch what government agencies do.

Regulations cost about 8% of the national income each year since we need to pay the cost of the government agencies and businesses must spend money to comply with regulations.

Much has been made of the growing inequality problem. One way to measure this is the "Gini coefficient." The higher it gets, the less equal the distribution of income (it ranges from 0 to 1). Yet the Gini coefficient for full-time workers only rose from .31 in 1970 to .40 in 1994. It has basically been unchanged since then. So by that count, then, inequality is not especially worse now.

It is true that the top 1% of earners have seen their share of income rise. But 57% of those in the top 1% in 1996 were not there in 2005. The incomes of the top 1% fell about 16% from 2007-09 while the median income fell just 1.5%. The number of people making $1 million or more per year fell 40%.

People are also not stuck at the bottom. Of those in the lowest one-fifth of incomes in 2001, 44% had moved to a higher "quintile" by 2007. That may not be enough income mobility for some, but I think it is still quite a bit. More people might move between income brackets in Europe than the U. S., but the generally lower incomes in Europe make that easier.

Those at the bottom of the income ladder may be doing better over time than is commonly believed. To measure incomes over time, we need to adjust for inflation. But economists have discovered that we should not use the same price index for the rich and poor. The one for the poor has not risen as much over time. Once this is taken into account, we can see that incomes have not stagnated as much as is normally believed.

Many propose higher tax rates on the rich to deal with inequality. Yet this can lead to problems when recessions hit. The higher income earners are now seeing their incomes fluctuate more and they go down more than for most people in recessions. If we rely too much on them for tax revenue, it will mean extra large budget deficits in recessions, as many states have seen recently. In 2007, the top 1% paid about 37% of all federal income taxes. The more we rely on them for revenue, the bigger the problem will be in the next recession.

Taxes have another problem. They cause increasingly exponential damage to economic efficiency. Taxes distort economic activity. If I normally buy a shirt for $20 and then if that shirt is taxed, say, $5, I may choose not to purchase it. That is a loss for me and for the seller. Our total losses are called the "deadweight loss." It turns out that if you double a tax, the amount of inefficiency or deadweight loss quadruples. So every one-percentage point increase in taxes causes more harm to the economy than the previous one.

The damage to the economy from extra regulations and higher tax rates does not have to be great. Even if incentives to work and produce are only slightly diminished and inefficiency rises marginally, the costs in the long-run can be great due to the compounding effect.

The per capita GDP from 1980-2009 grew 1.95% in the US and 1.83% in the EU. That difference may seem small. But, if, for example, per capita income was 20,000 in both the US and EU in 1980, 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 it might matter to many families. But after 100 years the US income level would be 12% higher. After 200 years it would be 26% higher.

We also have to realize that recovery from a recession caused by a financial crisis takes more time than in other recessions. This is what research by economists Carmen Reinhart and Kenneth Rogoff has shown.

So I think we should be careful about adding more regulations or higher tax rates to our economy. Let's not rush into anything based on what the Occupy Wall Street movement says. The occupiers would probably site other statistics or interpret them differently. But let's recognize that theirs is not the only valid view on these issues.

Vehicle Exhaust Linked To Brain-Cell Damage, Higher Rates of Autism

See The Hidden Toll of Traffic Jams by ROBERT LEE HOTZ, science writer for the WSJ. In my macro classes earlier this semester I talked about externalities like pollution. The ideal policy to me would be to tax any activity equal to the costs it imposes. This article shows what some of the damages are. Excerpts:

"New public-health studies and laboratory experiments suggest that, at every stage of life, traffic fumes exact a measurable toll on mental capacity, intelligence and emotional stability."

"So far, the evidence is largely circumstantial but worrisome, researchers say. And no one is certain yet of the consequences for brain biology or behavior. "There is real cause for concern," says neurochemist Annette Kirshner at the National Institute of Environmental Health Sciences at Research Triangle Park in North Carolina. "But we ought to proceed with caution.""

"Recent studies show that breathing street-level fumes for just 30 minutes can intensify electrical activity in brain regions responsible for behavior, personality and decision-making, changes that are suggestive of stress, scientists in the Netherlands recently discovered. Breathing normal city air with high levels of traffic exhaust for 90 days can change the way that genes turn on or off among the elderly; it can also leave a molecular mark on the genome of a newborn for life, separate research teams at Columbia University and Harvard University reported this year."

"Children in areas affected by high levels of emissions, on average, scored more poorly on intelligence tests and were more prone to depression, anxiety and attention problems than children growing up in cleaner air, separate research teams in New York, Boston, Beijing, and Krakow, Poland, found."

"The evidence is growing that air pollution can affect the brain," says medical epidemiologist Heather Volk at USC's Keck School of Medicine. "We may be starting to realize the effects are broader than we realized.""

"...children born to mothers living within 1,000 feet of a major road or freeway in Los Angeles, San Francisco or Sacramento were twice as likely to have autism,..."

"Scientists believe that simple steps to speed traffic are a factor in reducing some public-health problems. In New Jersey, premature births, a risk factor for cognitive delays, in areas around highway toll plazas dropped 10.8% after the introduction of E-ZPass, which eased traffic congestion and reduced exhaust fumes, according to reports published in scientific journals this year and in 2009. The researchers, Princeton University economist Janet Currie and her colleagues at Columbia University, analyzed health data for the decade ending 2003."

M1 and M2 show big gains in the last 12 months

For the data, see Money Stock Measures from the Federal Reserve.

From October 2010 to October 2011, M1 was up about 21% while M2 was up about 9.9%.

From November 2009 to November 2010, M1 was up about 8.1% while M2 was up about 3.1%.

So the last 12 months have seen much bigger increases than in roughly the previous 12 months.

The CPI was up about 3.87% from September 2010 to September 2011. From November 2009 to November 2010, the CPI was up only 1.1%. From September 2009 to September 2010 it was also up only 1.1%. Maybe all the extra money is leading to some inflation.

It seems like the big increases in the CPI came early in this year. The numbers below show the annualized rate of inflation for each month (from the previous month). For example, if the price rise from January 2010 to February 2010 lasted 12 months (compounding, of course), the annual rate of inflation would have been just .30%. Obviously we had some big increases from January to May this year. When May ended, prices were 3.1% higher than at the end of December. If that rate were to last a whole year, we would have an inflation rate of about 7.6%. So it looks like things have slowed down a bit. But who knows for sure with all the money out there. It does depend on the velocity, too. The Sept. 2011 CPI was only about .4% higher than the May 2011 CPI.

2010
Feb. 0.30%
Mar. 5.04%
Apr. 2.10%
May 0.93%
June -1.17%
July 0.25%
Aug. 1.67%
Sep. 0.70%
Oct. 1.50%
Nov. 0.51%
Dec. 2.08%

2011
Jan. 5.87%
Feb. 6.08%
Mar. 12.35%
Apr. 8.01%
May 5.79%
June -1.28%
July 1.07%
Aug. 3.36%
Sep. 1.84%

Click here to see CPI figures

The numbers below show the annualized rate of increase in both M1 and M2 for each month (from the previous month). First M1.

2010
Feb. 17.13%
Mar. 6.30%
Apr. -8.81%
May 3.66%
June 14.07%
July 2.18%
Aug. 15.14%
Sep. 16.92%
Oct. 7.07%
Nov. 28.78%
Dec. 7.58%

2011
Jan. 15.43%
Feb. 14.65%
Mar. 11.25%
Apr. 6.27%
May 21.99%
June 10.01%
July 43.05%
Aug. 83.32%
Sep. 15.98%
Oct. 9.01%

Now M2

2010
Feb. 10.05%
Mar. -3.04%
Apr. 1.52%
May 5.71%
June 4.17%
July 2.26%
Aug. 6.53%
Sep. 6.82%
Oct. 5.73%
Nov. 5.36%
Dec. 4.65%

2011
Jan. 3.40%
Feb. 8.66%
Mar. 3.86%
Apr. 4.40%
May 7.16%
June 12.30%
July 30.07%
Aug. 34.42%
Sep. 6.08%
Oct. 3.59%

U.S. exports and imports as a percentage of total output, 1869-2005

Below is a graph from Macroeconomics (6th Edition) by Andrew B. Abel, Ben S. Bernanke and Dean Croushore. A question about this came up in my micro class this week. Here is how they describe the graph in the book:

"U.S. exports and imports,1869-2005 The figure shows U.S. exports (black) and U.S. imports (red), each expressed as a percentage of total output. Exports and imports need not be equal in each year: U.S. exports exceeded imports (shaded gray) during much of the twentieth century. During the 1980s, 1990s and early 2000s, however, U.S. exports were smaller than U.S. imports (shaded red). Sources: Imports and exports of goods and services: 1869-1959 from Historical Statistics of the United States, Colonial Times to 1970, pp. 864-865; 1960-2005 from FRED database, Federal Reserve Bank of St. Louis, research.stlouisfed.org/fred2/series/BOPX and BOPM; output is from Fig. 1.1."

The output data from Fig. 1.1 comes from an article by Christina Romer.

“The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908.” Journal of Political Economy 97 (February 1989): 1-37.

The percentages seem a little higher than other sources, though. Click on the graph to see a much larger version.

Does It Pay To Be A Garbage Miner?

This past week in my microeconomics class, we read a chapter about trash in the book The Economics of Public Issues. It raised the issue of how can we reduce the amount of trash we have and how do we get rid of the trash we do have.

For some people, though, going through garbage is a job. See Guatemala's trash 'miners' risk lives to find gold by ALBERTO ARCE of the Associated Press. Excerpts:

"A torrent of gray, toxic water spews from a drainage tunnel and surges along the ravine, tumbling along garbage that has fallen from the Guatemalan capital's main landfill 1,000 feet (300 meters) above.

Despite the foul odors, the danger of unstable piles of garbage collapsing and the chance for heavy rain to suddenly raise the water level, dozens of people are busily at work searching for jewelry and other metal scraps knocked loose from the trash."

One worker said:

""I found a bracelet with 9 grams (0.32 avoir ounces) of gold. I got 2,000 quetzals ($256) for it."

It may not seem like much, but it's almost as much as the monthly $270 minimum wage in this Central American nation."

"If the scavengers don't find jewelry, they collect screws, faucets and other recyclable metal items that they can sell for 85 cents a pound. That amounts to twice the minimum wage for an average trip.""

What happened to income of the top 1% from 2007-2009?

See The Rich Get Poorer by Greg Mankiw, Harvard economics professor. Here is his blog post:

"Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396."

That works out to a 1.5% drop in median income and a 16.1% drop in income for those in the top 1%.

Mankiw also mentions a paper that shows "that high-income households have riskier-than-average incomes." That is, incomes for the top earners fluctuate alot more than for everyone else. That paper is The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares by Jonathan A. Parker and Annette Vissing-Jorgensen, both of Northwestern University. Here is the abstract:

"We document a large increase in the cyclicality of the incomes of high-income households, coinciding with the rise in their share of aggregate income. In the U.S., since top income shares began to rise rapidly in the early 1980s, incomes of those in the top 1 percent of the income distribution have averaged 14 times average income and been 2.4 times more cyclical. Before the early 1980s, incomes of the top 1 percent were slightly less cyclical than average. The increase in income cyclicality at the top is to a large extent due to increases in the share and the cyclicality of their earned income. The high cyclicality among top incomes is found for households without stock options; following the same households over time; for post-tax, post-transfer income; and for consumption. We study cyclicality throughout the income distribution and reconcile with earlier work. Furthermore, greater top income share is associated with greater top income cyclicality across recent decades, across subgroups of top income households, and, in changes, across countries. This suggests a common cause. We show theoretically that increases in the production scale of the most talented can raise both top incomes and their cyclicality."

The Deficit Trials 2017 A. D.

I recall a commercial like this back in 1985 or 1986. It paints a bleak picture of America in the future, presumably caused on the growing national debt ($2 trillion then, almost $15 trillion now). I think this thing is way over the top but there may be some real dangers from the debt that I mention below. You might have to watch a brief commercial for some product first. We have been covering the deficit and debt this week in my macro classes. If the embedded video does not appear, use the link below it.


Ridley Scott - W. R. Grace Deficit Trials by angelseyth

Real problems the national debt might cause

1. About 28% of the debt is owed to foreign citizens (that is according to the textbook by Tucker-it is probably closer to 30% now). When they get paid back, they come and buy American goods. That leaves fewer goods for Americans (who can't afford to buy as much due to higher taxes that were needed to pay back the debt). BUT THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE.

People borrow money all the time to buy houses and cars. Then they pay it back to a person outside of their family or household. We don’t consider this a burden since the money was put to good use. Right after World War II, the national debt was 120% of the GDP. This was much higher than it is now and we survived. No one complains that we borrowed to win the war.

2. Raising taxes might hurt economic incentives. At higher tax rates, people might want to work and invest less. Fewer businesses might expand and fewer news ones created since you will get to keep less profit. But again, THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE. Also, if taxes only go up a little, and the debt is slowly paid off each year (like after WW II), it may not hurt too much.

3. We may have fewer government services in the future if we pay back the debt by lowering government spending. But this means that we are trading more government services today for fewer in the future. THIS IS NOT NECESSARILY A BAD THING IF THE MONEY IS SPENT WISELY (which everyone not might not agree on).

For more info ee 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."

What is the unemployment rate for people with college degrees?

4.2%. The median weekly income for college grads is $1,072 while it is $636 for high school grads. See Gloom Widespread as College Grads Face New Math By DAVID WESSEL of the WSJ. The news is not all great for college grads, though. Excerpts:

"On average, wages for workers with four-year college degrees fell by 8.6% adjusted for inflation between 2000 and 2010, according to government data."

"To be sure, data on wages and incomes don't give a complete picture. They don't count increasingly costly health benefits that many employers provide nor tax breaks enacted to cushion the recession's blow. Nor do they include aspects of life that don't show up in paychecks, from the iPhone to the growing odds of beating cancer.

And Bruce Meyer of the University of Chicago and James X. Sullivan of Notre Dame, who argue official income data paint an overly gloomy picture, note that Americans managed to keep spending in the 2000s while incomes lagged. In an American Enterprise Institute working paper, they cite consumer surveys that suggest inflation-adjusted spending of the typical household (excluding out-of-pocket medical care, education costs and retirement savings) rose 16% in the 1990s and another 16% in the 2000s—some of that fueled by an unsustainable borrowing binge."

"The unemployment rate for recent college grads is 10.7%. More than 14% of Americans between 25 and 34 (5.9 million in all) are living with their parents, up significantly from before the recession. Nearly a quarter of them have bachelor's degrees."

Untangling the Long-Term-Unemployment Crisis

Click here to read this article by David Wessel of the WSJ. Excerpts:

"...according to Fed governor Daniel Tarullo...there is little evidence that the bulk of today's unemployed would still be unemployed if the economy were growing faster or that the bulk of today's unemployment is, in the jargon of economists, "structural.""

""Most of the difference between the prerecession and current unemployment rates is attributable to an aggregate demand shortfall," said Mr. Tarullo"

"The Labor Department counts 14 million unemployed and 3.1 million job openings, or 4.6 jobless workers per job opening. Before the recession, the ratio was 1.5. If every opening were filled instantly, there would still be many unemployed."

"Wages aren't rising. "We don't see rapid wage growth almost anywhere, which is what you would expect if firms were bidding up the wages of qualified workers and were unable to find qualified workers among the unemployed," said Harvard University's Lawrence Katz."

"We had a fast-advancing economic decline with layoffs and hiring freezes in a broad range of sectors of the economy. That is not consistent with an increase in structural unemployment being the big explanation," Mr. Tarullo said."

"Data gleaned from help-wanted ads, surveys and government tallies did hint at a growing mismatch during the recession between skills jobless workers have and those employers want, but that "mostly has receded since 2009," says Mike Elsby, a University of Edinburgh economist."

"...between 12% and 33% of the five-percentage-point increase in the unemployment rate is due to this mismatch."

"...there was reasonable speculation that those who couldn't sell their houses wouldn't move to where the jobs are. But the latest data suggest that phenomenon is, as Mr. Elsby puts it, "quantitatively negligible.""

Women and the pay gap

This is a post from April 2007. This issue came up in one of my micro sections this week.

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

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

I emailed them the following question but have not heard back (not even now as of October 26, 2011):

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

An article by Steve Chapman gives a different view than the American Association of University Women on this issue. Here is a passage from his article:

"I asked Harvard economist Claudia Goldin if there is sufficient evidence to conclude that women experience systematic pay discrimination. "No," she replied. There are certainly instances of discrimination, she says, but most of the gap is the result of different choices. Other hard-to-measure factors, Goldin thinks, largely account for the remaining gap -- "probably not all, but most of it.""

Will Dropouts Save America?

Click here to read this interesting article from today's NY Times. Excerpts:

"...nearly all net job creation in America comes from start-up businesses..."

"If start-up activity is the true engine of job creation in America, one thing is clear: our current educational system is acting as the brakes. Simply put, from kindergarten through undergraduate and grad school, you learn very few skills or attitudes that would ever help you start a business."

"...most students learn nothing about sales in college; they are more likely to take a course on why sales (and capitalism) are evil."

"You don’t learn how to network crouched over a desk studying for multiple-choice exams. You learn it outside the classroom, talking to fellow human beings face-to-face."

"True, people with college degrees tend to earn more. But that could be because most ambitious people tend to go to college; there is little evidence to suggest that the same ambitious people would earn less without college degrees..."

"AFTER all, there is not one job market in America, but two. The formal market we always hear about — jobs that get filled through cold résumé submissions in reply to posted ads — accounts for only about 20 percent of jobs.

The other 80 percent get filled in the informal job market."

"You don’t need a degree (and certainly not an M.B.A.) to start a business and create jobs, nor is it even that helpful, compared with cheaper, faster alternatives."