Coffee and Ennui

Sitting in the new La Madeleine in Silver Spring and have to say I’m a little bit disappointed and feeling ennui on a rainy day. My local Silver Spring advice is to head down Georgia Ave to Zed’s café, which is friendlier, has better coffee,  more comfortable chairs, and working wi-fi.  A larger thought on restaurants and coffee shops. They are good example of the third factor in production. The first two factors in any output model in economics are labor and capital. That is how many people work there and how many machines (eg cash register, grills, toaster, coffee makers)  there are.  The goal of a chain restaurant like La Madeleine is to create a model where the same capital can be bought, the same number of staff can be hired and you get the same production. As anyone who visited multiple locations of the same chain can tell you some are better than other [side note, I often pass the Starbucks in the Towson library to go to the Towson Starbucks on York road because of the better service]. These differences exists despite the same amount labor and capital. This third factor in production could include human capital (how educated the workers are), local norms (do people typically work hard) and local governance (management). Just like a bad Starbucks,  La Madeleine or any chain restaurant a country like Nicaragua might produce a lot less than Costa Rica even they have similar population sizes and land endowments.

A second thought. My favorite all time coffee shops include Saint’s Rest Grinnell Iowa,  Indie Coffee Madison Wisconsin and Java House Iowa City. I’m not ready to put Zed’s in that category yet, although the free piece of cake on my last visit didn’t hurt. What I think is that changes have a problem of making the truly special at a large scale. As Matt Yglesia points out today although many economic interventions work on a small scale very few can work on a larger scale (perhaps pills are one of the few) since scaling is so much easier. Starbucks has done a decent job of scaling the small coffee shop feel, and as evident by this Washington Post article its hard on a large restaurant too. 

Anyway food for thought.

Happy Chanukah to all my favorite Jewish economic boys and girls!

Want to celebrate the holiday more. Here's my Miracle PPF if you need a little music Jodi Beggs from Economists Do it With Models sings a song I wrote for the season

Signal in a bottle, Reviewing Job Applications

I'm on the hiring committee for an assistant professor position in the economics department at Towson. We have a couple hundred applications to review and I know that many applicants apply to over 100 jobs. So how can I tell as a reviewer who is really interested in the job and who is just sending their application in. I care, because as part of the committee we will decide on a couple dozen people to interview in San Diego.

Luckily economists have devised a clever solution to help make sure candidates who really want a job can indicate it. Each job candidate is allowed 2 schools to signal. All that happens is the hiring school receives an e-mail of all the candidates who used their signal at their school.  The idea is that you can show you really care about a couple of jobs, but if a school doesn't receive a signal it doesn't show you don't care because you only can send 2. More info here

When I applied for my job at Towson, I sent one of  my signals to Towson. I'm not sure if it made a difference in me getting an interview. I sent the signal because I really wanted to move to the DC area to be with my wife and the job seemed like a really good fit given my research and teaching interest. I wasn't sure if my application would stand out enough given my background. On the other hand I did not send a signal to a job at a well known small liberal arts school in the midwest, because I thought my record with 1 year teaching at Beloit (a similar school) and an undergrad at Grinnell would be enough to get me an interview. I was right I did get an interview and an on campus interview with the well known SLAC (although not a job offer). The SLAC department chair did notice they didn't receive a signal from me, although this was more pointed out by the Dean and the Chair had explained to the Dean that I probably believed I had already shown enough interest in teaching at SLAC given my experience and didn't need a signal. I think the chair was right (given I got the interview).

In the past based on talking to my colleagues  a signal will give your application a little more attention. I think it might also help if departments are worried that a candidate won't take a job, this could also help.

I think signaling is good particularly since there is a non-zero change that it helped me get a great job.

Nudge vs a Shove: Let's hold off planning 401k's Execution

In response to a recent paper by Chetty et al. showing that lowering benefits to tax sheltered retirement account does not have much influence on retirement savings  Ray Fisman in Slate and other economists on twitter have asked if its time to end the 401k.

As Fisman states in his article "But getting rid of the tax shelters that burn a $100 billion hole in the government balance sheet might be one reform both sides can get behind"

I haven't read the Chetty paper fully, but I think a closer look might be necessary. What the paper does is estimate the influence of reducing, but not eliminating the subsidy for tax sheltered retirement accounts. The paper uses data from Denmark, which has similar tax laws but much better data availability.  The authors find that for each dollar the government increases taxes on retirement there is a less than 1 cent reduction in total savings. In other words raising taxes on retirement savings doesn't change savings much. Driving this result is the fact that 85% of savers do not respond to changes in tax laws by adjusting their savings. 

I was thinking about this in terms of the idea of a nudge vs a shove. If tax rates are adjusted just a little bit on savings, my guess is that most people wouldn't change their habits (consistent with the cited paper).  If the changes are drastic those 85% passive savers might start to make adjustments. Furthermore, if tax breaks are eliminated for retirement savings then lazy savers might not start saving in the first place. 

Many Americans use rules of thumbs to save 10-15% in their tax sheltered retirement accounts, if we eliminate the tax shelter totally the rule of thumb might change and you might see drastic changes.

The take away is behavioral economics is hard and a nudge of adjusting the benefit to retirement savings might produce a different result than a shove that eliminates the benefit totally.

That said I agree with Fisman and other economists that the tax break is mainly geared toward those with financial knowledge and/or wealth, so considering it might be worthwhile once we understand better the implications.  

Farmer's Market Disequilibrium

At my local farmer's market my wife and I love to buy eggs. Alas our favorite eggs are often sold out by 915 for a market open from 9am-2pm and I have seen similar situations at other markets. So as an economist I wondered if the eggs always sold out why would the farmer not just raise her prices as economic theory predicts would happen with a shortage. I spoke with my favorite egg seller and she told me a great story of another farmer at a different market.

He always sold his eggs for $5 a dozen unless you had exact change in which case it was $4. That was how much he hated making changing.


My favorite egg seller said the she also hated making change, so maybe she could sell all of her eggs for $5.25 or $5.50 but that's a lot of change to deal with. She thought about selling half dozens for $3 each (or $6 a dozen), but the cost of a 6 egg carton is substantially more than a 12 egg carton.

She is also planning on increasing her supply, since she easily sells out. Usually econ 101 would teach us that the farmer would reduce supply at a lower price.

She does want to raise her prices and probably will soon, but she doesn't want to raise prices as she would feel bad for her customers (they don't teach you that in econ 101).

So if you see $6 eggs next week at the farmer's market you can blame me or the invisible hand.

Why Economists Should Love 138 points from Jack Taylor

Last night Grinnell's Jack Taylor scored 138 points in a basketball game shattering an NCAA record for most points scored in a game (previously 113) [see article here]

As an economist and Grinnellian I feel it is my duty to point out why economists should love this performance

Top 5 reasons Economists Should Love Jack Taylor's 138 Points

1. Economists believe in specialization. Clearly Jack Taylor has a comparative advantage in shooting three and not in playing defense.
2. Grinnell isn't maximizing wins with their system, the maximize utility. From what I have heard Grinnell basketball players have a ton of fun, get to play a lot of minutes, and shoot lots of shots. Plus Lebron James wouldn't be asking about Grinnell today if Taylor doesn't go wild.
3. Economists love crazy strategies in games. The rules of basketball don't say you have to play defense, they don't say you can't launch a ton of threes. If Grinnell wins by shooting threes and not playing D sometimes that's an optimal strategy.
4. Economists have the Taylor rule, so in honor of Jack Taylor let's have the basketball Taylor Rule. If Jack Taylor has the ball he should shoot it, if he doesn't you should pass it to him. This reduces uncertainty of who will score.
5. Productivity is key. In this case I measure productivity in terms of points per game played. Making Jack Taylor the most productive NCAA basketball player.
 

My 101 textbook is no longer free

For my intro to economics class I have been using a textbook from Flat World Knowledge. One of the main reasons I chose the text is that an online copy of the text is available completely free to students and now that has changed. The company's model was to make money by selling paper copies or study guides to students. Today I received an e-mail from Flat World knowledge.

"Starting January 1, 2013, we will no longer be providing students with free access to our textbooks. Yes, the free Web format is going away, but our mission to provide high quality course materials at affordable prices remains as strong as ever."

It appears that the texts will now costs $19.99. I really enjoyed telling my students the book was free. I thought the quality of the text approached but was not good as alternatives from other well known authors. Now given that students can purchase old paper version used copies of well known textbooks for less than $20 I don't feel the textbook saves any money.

I'm a little upset that I was not given more warning. Yes the announcement was delayed because of Sandy, but a 6 month warning would have been better. Its not quite too late for me to change textbooks for next semester, but I'm still not sure. I know if Flatworld charges $19.99 for online texts I would prefer to switch back to Mankiw's text or look at new textbooks.

That said I'm not upset at a company for raising prices, as an economist I believe any company in a competitive market should have the ability to set their prices. Lucky for my students the economics textbook market is very competitive and I can look elsewhere.

Finally, I would be very curious to see what behavioral economists would predict will happen. In development economics, research on bed nets showed people were 60% less likely to use bednets when the price dropped from free to $0.60 for what would cost $6 to purchase. In short charging people a little makes them buy a lot less.