Great New Book On Neuroscience By Economist Paul Zak

It is called The Moral Molecule: The Source of Love and Prosperity. Zak coined the term neuroeconomics but this book seems to be about so much more than the title suggests. I doubt I can convey how interesting and well written this book is (I may not be totally objective since I am among the people thanked for their help in the acknowledgements).

Zak wrote a good summary article in The Wall Street Journal. See The Trust Molecule.

The "moral molecule" is oxytocin and the book explains many experiments that show that we tend to be more trusting when it is present or increases (how oxytocin affects us and works with other hormones and neurotransmitters is alot more complex than this, though, as Zak's work shows). How this is related to empathy is discussed and this is where Adam Smith comes in (his theories on sympathy).

The book examines when and why people are nice and when they are not. When are we altruistic and when are we selfish? The role that evolution played is examined. How this all affects us socially and politically is discussed. Zak is an expert on how trust is a key ingredient to the success of economies and trust is related to oxytocin. His experiments show what happens when people have their amount of oxytocin increased. How this is all related to relgion is discussed.

The book is also full of humorous anecdotes and personal stories. It is highly entertaining and thought provoking. The insights into human nature are amazing. I especially liked the discussion of "in-groups" and "out-groups." You don't have to be a neuroscientist or economist to understand it and it might be a great book for professors to assign to undergraduates.

It received an excellent review in The Wall Street Journal. See Kin and Kindness by MICHAEL SHERMER, publisher of Skeptic magazine and a monthly columnist for Scientific American.

Here are two articles about professor Zak's 2010 Mind Science Foundation lecture from the San Antonio Express-News:

Emerging field offers insight into human virtues

Humans release ‘niceness' chemical

More information about neuroeconomics can be found at (these are two short articles by Zak that give you some idea of what he does in his experiments):

Neuroeconomics Explained, Part One

Neuroeconomics Explained, Part Two

Adam Smith vs. Bart Simpson. (A post of mine from last year and it also has a link to a video of Zak lecturing on all of this)

Joseph Campbell Meets Joseph Schumpeter (The Entrepreneur As Hero)

(Published in The New Leaders: The Business Bulletin for Transformative Leadership, November/December 1992.)

Entrepreneurs are heroes. They are not like heroes, they are heroes. Heroes and entrepreneurs are called to and take part in the greatest and most universal adventure that life has to offer: the simultaneous journey of self-discovery, spiritual growth, and the personal creativity they make possible. In fact, the entrepreneur’s journey closely resembles the journey of the “hero” in mythology, as outlined in the book The Hero With a Thousand Faces, by Joseph Campbell. There is an amazing and profound similarity between not only the journey that entrepreneurs take and the adventure of heroes but also in their personality traits. The comparison is profound because the myths are about universal human desires and conflicts that we see played out in the lives of entrepreneurs. 

But what is the hero's adventure? Campbell writes "The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return, which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder; fabulous forces are there encountered and a decisive victory is won; the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man." How is the hero's adventure similar to the entrepreneur's adventure?

The hero's journey begins with a call to adventure. He or she is awakened by some herald which touches his or her unconscious world and creative destiny. The entrepreneur, too, is "called" to the adventure. By chance, he or she discovers a previously unknown product or way to make a profit. The lucky discovery cannot be planned and is itself the herald of the adventure.

The entrepreneur must step out of the ordinary way of producing and into his or her imagination about the way things could be to discover the previously undreamt of technique or product. The "fabulous forces" might be applying the assembly line technique or interchangeable parts to producing automobiles or building microcomputers in a garage. The mysterious adventure is the time spent tinkering in research and development. But once those techniques are discovered or developed, the entrepreneur now has the power to bestow this boon on the rest of humankind. 

Heroes bring change. Campbell refers to the constant change in the universe as "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero." This is similar to Joseph Schumpeter's theory of entrepreneurship called “creative destruction.” A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. The hero also finds that the world "suffers from a symbolical deficiency" and "appears on the scene in various forms according to the changing needs of the race." The changing needs and the deficiency correspond to the changing market conditions or the changing desires for products. The entrepreneur is the first person to perceive the changing needs. 

Regarding personality traits, the hero and entrepreneur are risk-takers and creators. But what is the source of their creativity? People become creative when in the words of Campbell, they "follow their bliss." This is the message of mythology. It means you should engage in an activity, pursue a career or entrepreneurial venture because it is what you love to do and it gives you a sense of personal importance and fulfillment, not because the social system dictates that you do so. The drive comes from within. It is this courageous action that opens up doors and creative possibilities that did not previously exist. This is the journey of self-discovery and spiritual growth. Although it may be long, painful, and lonely, it is very rewarding.

Both the entrepreneur and hero are aided by mentors, are humble enough to listen to others in order to learn (and thus become creative), and face a road of trials where they must continually slay the demons and dragons of their own unconscious (such as fear, their egos) in order to discover their creative ability which ultimately comes from giving themselves up to a higher power. 

Ultimately, they become selfless and can see the creative possibilities that the universe offers. They become masters of two worlds, one of imagination and creativity and the other of material things and business. This mastery makes it possible for them to bestow the boon.

Here is a link to a longer, more academic version.

The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?  

A transcript of an interview when Joseph Campbell called entrepreneurs heroes

Is There A Tradeoff Between Helping The Poor And Protecting The Environment?

See Brazilian Forestry Legislation Advances By JOHN LYONS of The Wall Street Journal. It is about a law that Brazil just passed. Excerpts:

"The law, which eases restrictions for forest set-asides on farms and waives some fines for past clear-cutting, was backed by a new generation of lawmakers with links to Brazil's economically vital rural hinterlands. Farmers there long complained that existing laws were so strict as to classify the majority of farms as illegal and their owners as criminals."

"At the heart of the bid to update the law is an unsettling fact for environmental groups: Much of the Amazon forest slashed and burned in past decades is today extremely productive farmland."

"The controversies reflect a broader political dilemma for President Dilma Rousseff. Many of her left-wing Workers Party supporters also back environmental causes. At the same time, her administration is seeking to develop Brazil's vast natural resources to speed growth and help fund programs to lift millions of poor into the middle class."

Does Neuroscience Prove That You Should Follow Your Bliss?

The Freakonomicis guys, STEPHEN J. DUBNER and STEVEN D. LEVITT wrote an article in 2006 in the NY Times magazine called A Star Is Made. In it, they discussed the research of Anders Ericsson, a 58-year-old psychology professor at Florida State University. Here is a relevant passage:

"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."

See Never Too Late to Learn. It is a book review from Saturday's WSJ. 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."

Of course, mythologist Joseph Campbell said "follow your bliss."

What does it mean to follow your bliss? In general, it means three things:

1. Money and material things are secondary (Campbell, 1988, pp. 148,229). The following is dialogue between Joseph Campbell and Bill Movers from The Power of Myth (1988,p. 148):

C: My general formula is "Follow your bliss." Find where it is, and don't be afraid to follow it.

M: Is it my work or my life?

C: If the work you're doing is the work that you choose to do because you are enjoying it, that's it. But if you think, "Oh, no! I couldn't do that!" that's the dragon locking you in. "No, no, I couldn't be a writer," or "No, no, I couldn't do what So-and-so is doing."

M: In this sense, unlike heroes such as Prometheus or Jesus, we're not going on our journey to save the world but to save ourselves.

C: But in doing that, you save the world (emphasis added).

Elsewhere, Campbell says that the savior is the one who can transcend the pairs of opposites (Briggs & Maher, 1989, p. 45). This means going beyond the duality of individual and group that is stressed in socio-economics (Campbell 1988, p. 229):

C: Each incarnation has a potentiality, and the mission of the life is to live that potentiality. How do you do it? My answer is, "Follow your bliss." There's something inside you that knows when you're in the center, that knows when you're on the beam or off the beam. And if you get off the beam to earn money, you've lost your life. And it you stay in the center and don't get any money, you still have your bliss.

Finally, Leeming sums up the Jungian importance of myths:

The person who lives without myths lives without roots, without links to the collective self which is finally what we are all about. He is literally isolated from reality. The person who lives with a myth gains 'a sense of wider meaning' to his existence and is raised 'beyond mere getting and spending" (Leeming, 1973, p. 321).

2. If you follow your bliss, doors (opportunities) will open up for you where they would not have opened up before. They will also open up for you where they would not have opened up for anyone else (Cousineau, 1990, p. 214). This echoes one of Campbell's favorite writers, Goethe:

Concerning all acts of initiative and creation, there is one elemental truth-the ignorance of which skills countless ideas and splendid plans: that the moment one definitely commits oneself, the Providence moves, too. All sorts of things occur to help one that would never otherwise have occurred (Catford & Ray, 1991, p. 5).

3. Following your bliss has to be contrasted with following a system or a social system. A system creates roles for us that are not of our own choosing. This dehumanizes us (Campbell, 1988, p. 143-144). The following is also dialogue between Joseph Campbell and Bill Movers from The Power of Myth (pp. 143-144):

M: Do movies create hero myths? Do you think, for example that a movie like Star Wars fills some of that need for a model of the hero?

C: I've heard youngsters use some of George Lucas' terms-"the Force" and "the dark side.' So it must be hitting somewhere. It's a good sound teaching, I would say.

M: I think that explains in part the success of Star Wars. It wasn't just the production value that made that such an exciting film to watch, it was that it came along at a time when people needed to see in recognizable images the clash between good and evil. They needed to be reminded of idealism, to see a romance based upon selflessness rather than selfishness.

C: The fact that the evil power is not identified with any specific nation on this earth means you've got an abstract power, which represents a principle, not a specific historic situation. The story has to do with an operation of principles not of this nation against that. The monster masks that are put on people in Star Wars represent the real monster force in the modern world. When the mask of Darth Vader is removed, you see an unformed man, one who has not developed as a human individual. What you see is a strange and pitiful sort of undifferentiated face.

M: What is the significance of that?

C: Darth Vader has not developed his own humanity. He's a robot. He's a bureaucrat, living not in terms of himself but in terms of an imposed system. This is the threat to our lives that we all face today. Is the system gong to flatten you out and deny you your humanity, or are you going to be able to make use of the system to the attainment of human purposes? How do you relate to the system so that you am not compulsively serving it? It doesn't help to try to change it to accord with your system of thought. The momentum of history behind it is too great for anything really significant to evolve from that kind of action. The thing to do is to learn to live in your period of history as a human being. That's something else, and it can be done.

M: By doing what?

C: By holding to you own ideals for yourself and, like Luke Skywalker, rejecting the system's impersonal claims upon you.

M: When I took our two sons to see Star Wars, they did the same thing the audience did at that moment when the voice of Ben Kenobi says to Skywalker in the climactic moment of the last fight, "Turn off your computer, turn off your machine and do it yourself, follow your feelings, trust your feelings." And when he did, he achieved success, and the audience broke out into applause.

C: Well, you see, that movie communicates. It is a language that talks to young people, and that's what counts. It asks, Are you going to be a person of heart and humanity-because that's where the life is, from the heart-or are you going to do whatever seems to be required of you by what might be called "intentional power"? When Ben Kenobi says, "May the Force be with you," he's speaking of the power and energy of life, not of programmed political intentions.

In the movie Star Wars, Luke Skywalker turns off his computer (the impersonal system) and relies on the "Force" or his intuition to destroy the Death Star.

Generally speaking, following your bliss unlocks your creative potential because you separate from your community or system. "You can't have creativity unless you leave behind the bounded, the fixed, all the rules" (Campbell, 1988, p. 156). Attaining the joy of being a creative, spiritually fulfilled person is probably the best thing we can do for ourselves.

Sources:

Briggs, D., & Maher, J.M. (1989). An open life: Joseph Campbell in conversation with Michael Toms. New York: Harper and Row.

Campbell, J. (1988). The power of myth. New York: Doubleday.

Catford, L., & Ray, M. (1991). The path of the everyday hero. Los Angeles: Tarcher.

Cousineau, P. (1990). The hero's journey: Joseph Campbell on his life and work. San Francisco: Harper.

Leeming, D.A. (1973). Mythology: The voyage of the hero. Philadelphia: J. B. Lippincott.

You've Heard About Death And Taxes, But What About Taxes And Death?

See Fatal car wrecks jump on tax day by Aaron Smith of CNN. Excerpts:

"The odds of getting into a fatal crash increase by 6% on tax filing day, according to a study published Wednesday in the Journal of the American Medical Association."

""One explanation is that stressful deadlines lead to driver distraction and worsen short-term human error," Dr. Redelmeier told CNNMoney. He said that sleep deprivation, greater use of alcohol, lower tolerance for other drivers, and the "unwanted distraction" of filing taxes could all contribute to a jump in accidents."

Are rich taxed less than secretaries?

Click here to read the article

Should the unemployment rate be lower given the current job-vacancy rate?

See On Jobs, No Time for a Celebratory Beveridge by JUSTIN LAHART of The Wall Street Journal. Excerpt:

"There were 3.5 million job openings at the end of February, the Labor Department said Tuesday, up from three million a year earlier. The job-vacancy rate, which measures job openings as a percentage of total jobs in the U.S., was 2.6%.

In the seven years before the recession, a vacancy rate of 2.6% was associated with an unemployment rate of about 5.7%. Now, the unemployment rate is much higher—it was 8.2% in March, down from 8.3% in February. That may augur a disturbing shift in the labor market that will keep more people out of work, slow the economy and make U.S. companies less profitable.

High job-vacancy rates come about because employers are having a hard time filling jobs. So they are associated with low unemployment rates. When vacancy rates are low, the opposite is true. Plot out unemployment rates against vacancy rates, and you get what is called the Beveridge curve, a downward-sloping line named after the late British economist William Beveridge.

But the Beveridge curve, nearly three years after the economy began to recover, looks different than it did before the recession struck in late 2007. Unemployment rates are much higher versus vacancy rates than they used to be. Shifts like that in the Beveridge curve suggest the labor market has become less efficient at matching workers with jobs, something that can happen when workers don't have the skills that employers need."

The problem could be a mismatch between the skills of the unemployed and the skills employers want (this is an example of structural unemployment). For those workers, they could be unemployed for a long time.

What’s the Easiest Way to Cheat on Your Taxes?

Click here to read this NY Times Magazine article. The easiest way is:

"Run your own company. More specifically, as Greg Kyte, a Utah C.P.A., puts it, be the sole proprietor of a Schedule C business. Then you can buy stuff for yourself and probably write it off as a business expense."

Other excerpts:

"When the modern income tax was created in 1913, the code was 27 pages long. Last year, it was 5,296 pages."

"“I’ve seen people with infant children claiming that their kids are doing work,” says Howard Rosen, a St. Louis-based C.P.A. “I’m talking about a 3-year-old doing filing,” Rosen says. “He didn’t even know the alphabet.”"

"For 2006, the most recent year for which data are available, the I.R.S. collected 86 percent of what it was owed in taxes. Most of this $385 billion shortfall came from underreporting income, which is often more creative than it sounds. Gambling winnings, for example, are taxable..."

"Loop­holes will cost the gov­ern­ment rough­ly $1 tril­lion in lost rev­e­nue this year..."

"The mortgage-interest deduction, which lets people deduct the interest they pay on their mortgages, requires the government to essentially write an annual check to everyone with a mortgage. The incentive was supposed to encourage more people to buy houses, but there’s not much evidence for this..."

"It does, however, encourage people to take out even bigger mortgages. It will cost the government an estimated $84 billion this year."

"Why is the tax code so complicated? The answer, according to most accountants, is simple: “exceptions to the exceptions,” which, typically, are extremely complicated."

Keynes As An Investor

See Keynes: One Mean Money Manager by Jason Zweig of The Wall Street Journal. This generated many comments and Zweig's response to them is at Keys to Thinking About Keynes. But not everyone thought Keynes was a great investor. See Was Keynes really a savvy investor? by Greg Mankiw of Harvard.

Here are excerpts from Zweig's article:

"From 1924 through 1946, while writing numerous books and overhauling the global monetary system, Keynes also found time to run the endowment fund of King's College at Cambridge.

Over that period, according to Messrs. Chambers and Dimson, Keynes outperformed the U.K. stock market by an average of eight percentage points annually, adjusted for risk.

Such great investors as Benjamin Graham, Peter Lynch, John Templeton and Warren Buffett beat the market by an annual average of three to 13 percentage points over their careers. Most of them, however, didn't have to cope with the Great Depression or World War II.

How did Keynes do it?

Flexibility, resilience and independence.

Keynes began as what we would today call a "macro" manager, relying on monetary and economic signals to rotate in and out of stocks, bonds and cash. He traded foreign currencies and commodities. As a director of the Bank of England, Keynes was privy to inside information about interest-rate changes, although there isn't evidence that he traded on it.

But Keynes wasn't a very good macro manager. He lagged behind the British stock market miserably until 1928, and he had 83% of his primary portfolio in stocks going into the fall of 1929.

"It's hard to time the markets," Mr. Chambers says. "Keynes struggled with it, and then he missed the 1929 crash—even with an unrivaled network of information sources."

So Keynes made a series of radical changes: He switched from being a "top down" asset allocator to a "bottom up" stock picker. He tilted sharply toward undervalued small and midsize companies.

Keynes also made titanic bets on industries he thought were cheap..."

Are Monkeys More Rational Than Humans?

See The Hard Science of Monkey Business by AMY DOCKSER MARCUS of The Wall Street Journal. It is about the research that Yale professor Laurie Santos and the economic experiments she does with primates (Capuchin monkeys). Excerpts:

"The primate lab is home to 10 "shockingly smart" brown Capuchin monkeys trained to trade tokens for food. It was a short leap for Dr. Santos and her team to decide to study how monkeys make decisions about money."

"In one experiment, they gave each monkey a wallet filled with 12 flat aluminum tokens, monkey money that the animals could trade for food. Right away, the scientists saw the similarities to human behavior. When researchers slashed the price on certain foods, the monkeys sought out the best deal. They also typically spent all their cash at once and didn't bother to save.

Then researchers decided to test a more complex economic theory which shows that people do not judge price in a vacuum. Sitting with the team at the coffee shop, Dr. Santos could see how the concept worked in her own life. Many days, she feels guilty about spending $2.20 on a cup of coffee. But when she looks up at the chalk board listing drink prices, the Nutella Latte goes for $3.85 and the Ginger Snap is $4.15. "My $2 cup doesn't seem as expensive anymore," she said.

Monkeys make similar assessments. In one experiment, a researcher showed a monkey two pieces of apple but handed over one in exchange for a token. A second researcher showed one piece of apple and gave the slice to the monkey for the token. The monkeys strongly preferred to trade with the second researcher. They did not like being offered two apple pieces and then only getting one."

"Researchers wondered whether monkeys, like humans, desire an expensive item more. For the same number of tokens, the monkeys could choose whether they got a tiny square of blue Jell-O or a big chunk of red Jell-O. Later, the monkeys were allowed to choose which kind they wanted. If the monkeys were like humans, they would have gone for the blue Jell-O, the more "expensive" choice. But the monkeys gorged happily on both.

The researchers are still gathering and analyzing the data. One possibility: Human taste preferences are based on many factors, whereas the monkeys' are not. Some might argue that human economic behavior is more advanced since it includes "culture and meta-awareness" in decision-making, said Dr. Santos. There's another, less flattering possibility too. "The monkeys," she said, "are more rational.""

Which Type Of Unemployment Is The Biggest Problem?

Ben Bernanke raised this issue in a recent speech. See Fed Signals Resolve on Rates: Cheap Credit Still Needed Despite Recent Employment Gains, Bernanke Says by JON HILSENRATH And KRISTINA PETERSON of the Wall Street Journal. Excerpt:

"The Fed chairman took on some thorny economic issues in making his case for low rates. Among them is the question of whether the nation's still-high unemployment rate represented a so-called cyclical problem that can be resolved simply by encouraging economic growth with low interest rates, or a fundamental structural problem in the labor markets that growth itself and the Fed can't fix.

Mr. Bernanke came down on the side of those who argue the problem is predominantly cyclical and low interest-rate policies are helping to alleviate it. But many economists disagree with him, and he acknowledged the matter isn't settled.

The debate about cyclical and structural unemployment has been going on for a couple of years. Economists generally say cyclical unemployment is caused when weakness in the overall economy pushes down demand for goods and services and therefore the need for workers that provide them. Structural unemployment reflects deeper problems, such as a gap between the skills workers have and those that employers want. Structural problems don't necessarily disappear as the economic recovery gains traction.

Mr. Bernanke—in making his case for primarily cyclical unemployment—pointed out that newly unemployed workers and long-term unemployed workers all experienced diminished prospects of getting new jobs during and after the downturn. That suggests the job market hasn't punished one group of people disproportionately to others. Instead, he said, there weren't enough jobs for a wide range of workers in a wide range of industries. "The fact that labor demand appears weak in most industries and locations is suggestive of a general shortfall of aggregate demand, rather than a worsening mismatch of skills and jobs," he said.

But some economists disagree and the stakes are high. "You could be seeing a policy error in the making," said Wells Fargo economist John Silvia, who lists an array of factors that he says point to structural problems in the job market, which he says faster economic growth can't resolve.

Employment of college graduates is up 5.8% in this recovery, while employment of high school dropouts is down 3.9%, according to Labor Department data. This suggests that low-skill workers are having a harder time finding work.

Mr. Silvia also notes that unemployment is especially high in certain occupations, such as construction. It is also high in places, such as Nevada, where many people can't move because they owe more on their mortgages than their homes are worth. He worries that the Fed's low-interest-rate policies might cause inflation and do little to resolve deeply embedded unemployment problems."

The WSJ also had an article called Time Not on Side of the Jobless. It mentions:

"But some economists argue that in the wake of a severe recession, the lines between cyclical and structural unemployment can become blurred. Workers who lose their jobs because of cyclical factors—a factory that lays off workers, a restaurant that closes, an office that decides to go without a front-desk receptionist—might stay out of work so long that they become effectively unemployable. Their skills erode, they fall behind on the latest technologies and industry trends, or they become stigmatized by employers who assume there must be something wrong with anyone who's been unemployed so long."

I discussed similar issues in one of my earliest posts from back in 2006. It was called Edmund Phelps, Meet Harry Hopkins. Phelps is a Nobel prize winning economist and Harry Hopkins was an adviser to FDR

Other related posts:

Structural Unemployment In The News

Untangling the Long-Term-Unemployment Crisis

A Reversal Of Structural Unemployment?

Robot Journalists-A Case Of Structural Unemployment?

Some Reasons Why Firms Are Not Hiring

Some Good Economic News

As a card carrying dismal scientist, I should not display optimism. But Google business news had 4 positive stories listed. Here they are:

S&P 500 Heads for Best First Quarter Since 1998. It is up 12% for the year!

Texas Unemployment Rate Down To 7.1 Percent. Excerpt:

"The state's jobless rate was down from 7.3 percent in January and has dropped a full percentage point since August, the Texas Workforce Commission said. February's unemployment rate is the lowest since March 2009." (The U. S. unemployment rate was 8.3% for February)

US consumer spending rises as unemployment falls. Excerpt:

"Consumer spending climbed 0.8pc in February, the Commerce Department said on Friday, following a 0.4pc increase in January.

The figure was better than the 0.6pc Wall Street economists had expected, and came as a separate survey put consumer confidence at its highest level since February last year."

Consumer sentiment index at highest rate since late 2007. Excerpt:

"High oil prices or not, American consumers are feeling more confident about conditions than at any time since the recession began in late 2007.

That's according to the latest survey by Thomson Reuters/University of Michigan, which reported Friday that its March consumer sentiment index climbed to 76.2 from 75.3 a month ago. That pushed up the average reading for the first quarter to the highest level since the fourth quarter of 2007.

What's been boosting sentiment? In a word, jobs.

The last three months have seen an acceleration of job growth, and the Reuters/Michigan survey found that more people heard news about employment gains than at any other time in the 60-year history of the survey. And only 19% said they thought the jobless rate would increase in the year ahead."

Economists see more reasons for optimism this year.

"Economists are increasingly confident that some pillars of the U.S. economy will improve this year, but they still remain cautious in their expectations on the overall pace of economic growth.

The National Association for Business Economics said Monday that forecasters have raised their expectations for employment, new home construction and business spending this year. But they held on to their average prediction that America's gross domestic product, or GDP, will grow at a rate of 2.4 percent. That's a slight improvement from 2011, when economists believe the economy grew 1.6 percent. Final economic growth numbers for 2011 are due out Wednesday.

GDP reflects the economy's total output of goods and services. The latest forecast is in line with one issued by the group in November that called for the economy to grow 2.4 percent this year. Forecasters predict growth will be stronger in the second half of 2012 than it will be through June."

I think this guy captures the excitement:

How can an economy that is growing so slowly produce such big declines in unemployment?

See Piecing Together the Job-Picture Puzzle by Jon Hilsenrath of The Wall Street Journal. Excerpts:

"Back in 1962, Yale University economist Arthur Okun described a long-running relationship between economic growth and jobs. When the economy grew faster than its long-run trend, the unemployment rate tended to fall by about half as much as the additional growth in percentage terms. So growth of 3.5% in a year—one percentage point above a long-run trend of 2.5%—would bring down the unemployment rate by a half percentage point in that year. And it worked the same way in reverse. Growth one percentage point below trend would push the unemployment rate up half a percentage point.

Economists called the relationship "Okun's Law." Forecasters still depend on this principle to make predictions about the future. But the law has been unreliable lately. Under the old rule of thumb, it would take growth between 4% and 5% to explain the improvements in unemployment in the past year—much more than the recovery has actually delivered."

"...Okun's Law also broke down in the other direction a few years ago..."

"Some of the miss was because the downturn turned out worse than expected and much of it was because unemployment rose more than Okun's Law predicted."

Why might Okun's Law not be working?

"...company managers were so shocked by the financial crisis in 2008 and 2009 that they fired workers more aggressively than they would in a conventional downturn."

"Over the past six months ... as fear and uncertainty have dissipated, firms appear to have reversed course and gone back toward more normal staffing levels."

One economist said

"these overshoots might soon run their course and that Okun's Law will reassert itself. When it does ... the unemployment rate could stall out at high levels because the economy isn't growing fast enough to justify more hiring.

"The only way unemployment will keep coming down is if GDP growth picks up substantially,"

But there are other potential sides to the story:

"Other story lines could be at play. The government's growth data are always a work in progress. Government statisticians regularly revise it as more information—such as more complete tax returns from businesses and households—becomes available. Revisions to the data could someday show the economy is actually growing more robustly than the data currently show. It is also possible that companies are on to something and they are hiring aggressively because they anticipate more growth than the data currently show.

A less sanguine explanation could be a dangerous productivity slowdown. It might be the case that the workers being hired aren't improving their productivity as much as workers had before. If they aren't as productive, companies need more of them."

Click here to read an earlier post about Okun's Law

Click here to read "Is Okun’s Law Really Broken?" by Justin Wolfers. It from 2010. A little on the technical side but very interesting.

Do Looks Help In The Job Market?

Maybe it is unfair, but it seems so. See The Beauty Premium by Christopher Shea of The Wall Street Journal. It describes a study done in Argentina where it is common for job applicants to include a picture with their resume. Here are excerpts:

"... attractive job candidates get called back 36% more often than unattractive ones,....

10.3 % of the attractive fictional candidates got called, compared with 7.6% of the unattractive candidates — and attractive people got called sooner. Attractive member of both sexes benefited from the beauty advantage."

Here are two earlier posts on related topics:

Do looks matter? (Yes, good looking workers get paid more even when taking other factors into account)

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

Bolivians fight over quinoa land

Not much I can add to this story. Click here to read it.

"LA PAZ, Bolivia (AP) — Bolivian authorities say at least 30 people have been injured in a fight between two communities over land for growing quinoa, the Andean "supergrain" whose popularity with worldwide foodies has caused its price to soar.

Oruro state police chief Ramon Sepulveda says combatants used rocks and dynamite against each other Wednesday and Thursday. A government commission was dispatched to the two high plains communities south of La Paz.

Farmland in the region is owned not by individuals but communities.

Authorities say the dispute is related to climate change because quinoa can now be cultivated in areas previously subject to frequents frosts.

Bolivia produces 46 percent of the world's quinoa, which has nearly tripled in price in the past five years."

Supply And Demand And Comic Books

See Man's childhood comic collection fetches $3.5M by Jamie Stengle of the Associated Press. Excerpts:

"A copy of Detective Comics No. 27, which sold for 10 cents in 1939 and features the debut of Batman, got the top bid at the New York City auction Wednesday. It sold for about $523,000..."

"Action Comics No. 1, a 1938 issue featuring the first appearance of Superman, sold for about $299,000..."

Why would a 10 cent comic from 1938 sell for so much now? There must be a great demand and it looks like there is not much of a supply since

"Of the 200,000 copies of Action Comics No. 1 produced, about 130,000 were sold and the about 70,000 that didn't sell were pulped. Today, experts believe only about 100 copies are left in the world..."

And barring fakes or forgeries or specially marked reprints, more copies of Action Comics #1 cannot be produced. So the price is not likely to fall very much.

DC Comics did issue some reprints in the 1970s, but they were over-sized and clearly marked as reprints. Click here to see some of them.

The CPI is about 16 times higher today than in 1939. That would make the price of Detective Comics #27 $1.60 instead of 10 cents. If you put $1.60 in an investment in 1939 and if it grew 19.29% per year for 72 years, it would end up being about $523,000 in 2011. If you put the $1.60 in the stock market and if it grew 10% per year for the 72 years, it would only end up being about $1,529 in 2011.

The Future Is Better Than You Think

That is the subtitle of a book recently reviewed in The Wall Street Journal. See Defying the Doomsayers: "Abundance" argues that growing technologies have the potential not only to spread information but to solve some of humanity's most vexing problems. The review mentions that some optimism might be good in these negative times although it discusses how over-optimism can be damaging. Perhaps the human race is always searching for the right or optimal amount of optimism.

The book they reviewed is called Abundance: The Future Is Better Than You Think by Peter H. Diamandis and Steven Kotler.

Here are excerpts from the review:

"Mr. Diamandis is the chairman and chief executive of the X Prize Foundation and the founder of more than a dozen high-tech companies. With his journalist co-author, he has produced a manifesto for the future that is grounded in practical solutions addressing the world's most pressing concerns: overpopulation, food, water, energy, education, health care and freedom. The authors suggest that "humanity is now entering a period of radical transformation where technology has the potential to significantly raise the basic standard of living for every man, woman, and child on the planet.""

"Given all the talk nowadays about income inequality, the authors' discussion of poverty is especially instructive. The number of people in the world living in absolute poverty has fallen by more than half since the 1950s. At the current rate of decline it will reach zero by around 2035. Groceries today cost 13 times less than 150 years ago in inflation-adjusted dollars. In short, the standard of living has improved: 95% of Americans now living below the poverty line have not only electricity and running water but also Internet access, a refrigerator and a television—luxuries that Andrew Carnegie's millions couldn't have bought at any price a century ago."

"Predictions of a rosy future have a way of sounding as unrealistic as end-is-nigh forecasts. But Messrs. Diamandis and Kotler are not just dreamers. They lay out a plausible road map, discussing, among other things, the benefits of do-it-yourself tinkering—like the work by geneticist J. Craig Venter in beating the U.S. government in the race to sequence the human genome—and the growing willingness of techno-philanthropists like Bill Gates to tackle real-world problems.

The biggest hurdles, however, are not scientific or technological but political. There are still too many corrupt dictators and backward-looking governments keeping millions in penury. But as we have seen lately, the misruled have a way of throwing off despotic governments. With ever more people reaching for freedom, countless millions are tacitly embracing the Diamandis motto: "The best way to predict the future is to create it yourself.""

Another book coming out now with a similar theme is The Coming Prosperity: How Entrepreneurs Are Transforming the Global Economy by Philip Auerswald.

Does high social class lead to unethical behaviors?

See New Studies Determine Which Social Class More Likely to Behave Unethically from the National Science Foundation. Excerpts are below but George Mason University economist Tyler Cowen had some interesting counterpoints. See How good are the upper classes?

"A series of studies conducted by psychologists at the University of California, Berkeley and the University of Toronto in Canada reveal something the well off may not want to hear. Individuals who are relatively high in social class are more likely to engage in a variety of unethical behaviors.

That is the finding of new research published in today's Proceedings of the National Academy of Sciences and it's a doozy.

"Our studies suggest that more positive attitudes toward greed and the pursuit of self-interest among upper-class individuals, in part, drive their tendencies toward increased unethical behavior," said lead researcher Paul Piff of UC Berkeley."

"Participants then played a "game of chance" in which a computer "randomly" presented them with one side of a six-sided die on five separate rolls. Researchers told participants higher rolls would increase their chances of winning a cash prize and were asked to report their total score at the end of the game. In fact, die rolls were pre-determined to sum up to 12. The extent to which participants reported a total exceeding 12 served as a direct behavioral measure of cheating.

Greed "is a robust determinant of unethical behavior," the researchers write in the report. "Plato and Aristotle deemed greed to be at the root of personal immorality, arguing that greed drives desires for material gain at the expense of ethical standards." For this study, the researchers conclude that, in part, due to their more favorable beliefs about greed, upper-class individuals are more willing to deceive and cheat others for personal gain."

(Hat Tip: Bruce Norton)

Sale Of The Nike All-Star Collection Sneakers Causes A Riot

See Riot erupts at Florida Mall during Nike All Star collection sneaker release event. Excerpt:

"A riot erupted late Thursday night at the Florida Mall as hundreds of people became disordelry vying to buy special NBA All Star sneakers at a special event at the Foot Locker. It was so bad police with riot shields and on horseback had to be called in."

"The full name of the sneakers is the Foamposite One Galaxy. It has a constellation-like print with a glow-in-the-dark sole and they were set to go on sale for the first time in stores at midnight Thursday at a retail price of $220.00. One thing that may have led to the increased demand at the store is that Nike decided not to sell the shoes online."

It seems like even $220 is below the equilibrium price if the quantity demanded is greater than the quantity supplied (at least on the first day or two). Perhaps part of what people are buying is being first. So any time price is too low you get a shortage and some other allocation method besides price takes over (like waiting in line).

If stores are so concerned about safety, they should consider selling it at a much higher price on the first day (with things like Play Stations, they end up getting sold for much more than the retail price on eBay very soon after the first day anyway). If some people object to such a high price or claim gouging, the store can remind people that they are trying to keep the peace and keep consumers safe. They could also pledge to donate some of the extra profit to charity. That could create some good will.

Back in 2006, police officers were allowed to go to the head of the line when the Play Station 3 came out. See If Prices Are Not Used, Other Allocation Methods Emerge: Police Officers Get PS3's First

See also How to Stop the PlayStation Violence

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."