What kind of instrument do you play?

My father and I along with his grad school buddy, Doug Southgate, have been working on a paper on return migrants in Mexico. That is Mexicans who come to the US than return home. Using a survey of Mexican households we found those who had returned from the US, in some regions, were less likely to be employed than those who never left. When we submitted it for publication the reviewers suggested that something other than the migration itself may be the cause of the employment differences. For example perhaps economic conditions are poor currently in some regions causing lower employment and higher migration (leading to more return migrants). To control for this we needed an instrument, that is something related to migration but not likely to be related to current employment. We found a paper , by Gordon Hanson and Christopher Woodruff where for a different study the authors had used 1950s State level migration to control for the possible bias. We utilize their data to help control for this fact and once we put it in our model the negative effect of being a return migrant was no longer there. Instruments can get even more extreme. The freakonomics blog, points to a new paper that utilizes 19th century rail road patterns to instrument for where people chose to live to explain segregation. In fact I later found out the authors who used the 1950s state level migration data later found data on late 19th century railroad access. They used it as an instrument which was linked to past migration and past migration helps future migration.

Instruments can get even crazier, but those are the kind of instruments economists play. Perhaps if we find more Mexican instrument we can start a marriachi band?

Reflecting on Katrina

About two years ago many of us spent the Labor Day weekend, wondering what is happening in New Orleans post Katrina. As the national media reflects on the rebuilding process I thought I would turn to a person I trust, a college buddy Dan Rothschild has been working closely studying the rebuilding process. This link goes to his first article in a set of three on post Katrina myths. The first myth is that more money is needed. Dan argues that it is the lack or coordination and government that does not properly distribute funds. This argument mirrors one of Bill Easterly in the developing world that suggests US aid to these countries is not working. If we cannot get it together in New Orleans it is hard to imagine how development will work in a developing country post hurricane.

No Mas

There is a great article in the Economist this week about the rise of the middle class in Latin America (article linked here). Although middle class is difficult to define the article suggests in Latin America middle class families earn between $6,000 and $20,000 dollars a year. The number of Mexicans meeting this measure doubled in the last ten years and the number of Brazilians went up 50% in the last five. This trend may in part to steady economic growth in the region over the last few year. The article also cites other factors such as remittances from abroad and programs that pay money to poor households for school attendance and take them to health care clinics. As someone who has studied many of these programs, it is likely that they are responsible for helping those who are most impoverished, although I am not as sure about them increasing the size of the middle class. I have not seen evidence as to what happens to the first generation of children who began these programs in their teens around 2000 and are now entering the work force. I have been meaning to write a paper on the subject, although I'm sure someone will beet me to it.

Gifts from Chavez

Venezuela may provide more aid to their Latin American neighbors than the United States does (link to article in Forbes). Hugo Chavez the Venezuelan president has promised almost 9 billion dollars in aid to a variety of Latin American countries. The United States only gives about 3 billion dollars in direct aid to Latin America. However, as the article points out the numbers might not be totally comparable as the Venezuelan number includes investments by state run industry (particularly oil), while the U.S. number omits funding given to the World Bank and Inter-American Development Bank.

Venezuela is still a relatively poor country and continues to have problems with inequality. In fact inequality has increased in Venezuela during Chavez reign (see this link). Looking back on my previous post about CARE international refusing US funds because they were more about helping US farmers than those in poverty. Perhaps, much of this funding as the article suggests are investment in the best interest of Venezuela.

The Economic Principles of a New Job

Well, the Blog of diminishing returns, needs to change its name. I’m now a second year professor. This time at a new school Towson University. I have created this blog for my students. It is my hope to be able to show them what I find interesting about economics and to apply what we have learned in the class room to the real world.

With that in mind. Today is my first day at Towson. My experience so far reminds me of some basic economic concepts. Opportunity cost, by coming here I give up pursuing working full time at Development agencies like the World Bank. I also give up hanging out with my cat all day. I also turned down a nice offer from another university to be a professor there. At the end of the day though I’m extremely excited to be here and while I know I have given up some interesting opportunities, I look forward to working with the students and other Economics professors here at Towson.

Now to work on the fixed costs of changing jobs.

Rejecting Money for Charity

Care International one of thelargest charities in the world has recently decided to no longer accept US government funds. Why would a charity reject money? In order to receive the money CARE can only purchase US produced food and use mainly US shipping companies. From Econ 101 we know if you give away a bunch of a product you are going to lower the price of it. Not surprisingly this hurts farmers, which may mean the aid hurts more than it helps. So care has decided to stop receiving US funds.

Related Article from ISP news

Le Zombies!

So perhaps a French zombie movie was not the best choice for a movie the other night. In They Came Back, the French zombie movie, my wife and I watched the other night millions of people who had died came back to life. But unlike most zombie movies they did not attack people, instead they walked around and talked a little but were in a low functioning state. Most who came back were older than 65. The movie spent most of the time dealing with the emotional side along with the civic government side of how to take care of the zombies. The film showed the large burden that would be placed on a society to suddenly add millions at a national level or thousands a local level of new residents who were unlikely to work. Although it was really a slow movie so I can not recommend it.

First years' Mindset

Last year I taught at Beloit College. One of Beloit’s claims to fame is its annual mindset list (link here). The list includes things that might surprise older faculty that this new class has never experienced. For example the students who are first years this year were not alive (or infants) when the Berlin wall fell. Some of my economic favorites my comments in italics.


21. Eastern Airlines has never “earned their wings” in their lifetime.
(I’m 27 and I do not remember Eastern Airlines)


23. Wal-Mart has always been a larger retailer than Sears and has always employed more workers than GM.
(This really has been a huge change I can barely remember the days when WalMart was not King)


48. Microbreweries have always been ubiquitous.
(Not sure if that is as true, but thank god!)

Border Security and Remittances

The percentage of Mexicans sending money back home to Mexico has fallen to 64% from 71% at the same time last year according to an Inter-American Development Bank study. Remittances have been shown to be tied positively to good times in the sending country and bad times in the receiving country. Another important influence is how likely the person sending the remittances is going to return to their home country. Around half of Mexican immigrants to the U.S in the early 2000s returned to Mexico within on year of coming to the United States. By increasing the difficulty of crossing the boarder the number returning is shrinking. Which may explain the decrease in the amount of money sent to Mexico.

Or as one of the person on the street from the Onion suggests in response to this report. “Cutting off their family, eh? Then they've truly become Americans.”

Rank Rankings

We are number 11 The US News and World Report college rankings came out today and Grinnell has returned to #11 in a tie with Vassar, Wesleyan, and Clare Mont McKenna. There is a growing criticism of these ranking. A ny times story I read today tells story of college sending students $5 so they can send the money back and increase donations. Or the president of a school who does not answer the reputation question for other schools, but gives his own school an excellent (the ranking are in part determined by college presidents ranking each other.) These methods of gaming the system are not surprising. Perhaps a better system is needed. Several college presidents are no longer participating in the rankings. How would one create a better system? If we use the system to realize there probably is not much difference in terms of reputation between #1 Williams and #20 Oberlin, it probably is not a bad one. Perhaps a system that takes into account alumni and student satisfaction, but are we really going to improve much on a system that basically you can get a general sense of where a college falls.


Of course if you do not like it you could always go to Princeton law school and sue US News.

Send Grandpa to Mexico

Sometime back in my sophomore year of college I was speaking with a visiting economist and I told her about my crazy idea. Move nursing homes to Mexico. Labor there is so much cheaper, and nursing homes are generally labor intensive industries. It really is not that much harder to fly to Mexico than Florida and on the West coast it is often closer. So what do I see on the front page of the USA today outside of hotel room, but a story about Nursing homes for US citizens in Mexico. As the chart on the side of the story shows, labor costs are one-half to one-third of that of the U.S.

Good thing my Dad is studying Spanish!

According to Wikipedia I Cause High Ticket Prices

Before a baseball rant. One cool link about Wikipedia manipulation . Lots of interesting instances of organizations manipulating their page. Including someone who works for MLB and changes Bud Selig profile from former used car salesman to worker in his father’s car sales company.

It has been a good year for my own personal attendance at Major League baseball games (about 10 Nationals games, 3 Orioles, 3 Brewers, and 1 Dodger game). Now often people complain about the high cost of attending games. Granted my opinion may be a bit biased, I’m a huge baseball fan and an economist. There are plenty of deals to be had at major league ball parks. Granted if your favorite team is the Red Sox or Yankees your less likely to find deals. I have been to several Nationals games for only $5. Several teams have promotions. Like for $15 in Baltimore on Thursday nights you get a seat and a Boog Powell BBQ sandwich. In Milwaukee you can get free tickets by filling your tank at BP. Even when my wife and I wanted to go Dodger Stadium on father’s day against their inter-league rival the Angles, I found tickets for $25 on Ebay. Now for the economist part. I have often heard complaints about how players’ salaries are the cause of the high ticket prices. I do not believe this is the case for the most part. In essence each major league franchise acts as a seller of entertainment in monopolistic competition. (Unless you are lucky like me) there is probably only one major league ball park you can go to regularly, so in that way each team has a monopoly on the local major league baseball market. But if ticket prices or concessions are too high I could choose other entertainment options (movies, concerts, and minor league baseball). The owners will choose ticket prices that maximize their profit (or close to it with a few charity tickets). As each additional (or several) people come to the game the stadium might have to hire more peanut vendors, ushers, and parking lot help. However, no matter how many people come to the game the players are paid the same, their cost does not change. To maximize profit the owner must choose the best ticket price given the costs that change when more people come.

Now an interesting aside. As I mentioned Nationals, Brewers, and Orioles tickets are cheap. Red Sox and Yankee tickets are more expensive. The first set of teams have not been playing well over the last decade, the second has. Generally as teams do better they get more fans and they raise ticket prices. One way to make your team better as an owner is to pay for free agents. So in that way by making your team better by spending money you increase demand and prices.

Charge for Charity

Perhaps we should charge for the charity we give? The use of Clorin a water purification chemical in Zambia increased when the recipients were charged rather than given the same amount for free. The study described in this blog entry from the Center for Global Development. Why might these be? If people have to pay for what they receive they may perceive it to have more value. For example in the World Bank project I work on in Laos, communities are given assistance in building wells, schools, and health facilities. However, the community is required to donate funds and labor to help the project. The idea being that participation will lead to a better use of the funds donated by the World Bank.

Prixe Fixing

During restaurant week several DC eating establishments offer 3 course lunches and dinners for $20 and $30, respectively. My wife and I took advantage of this promotion and went to Ceviche a Latin restaurant in Silver Spring this past weekend. I began to wonder why is there a restaurant week? I think there are two main reasons. First, it is likely a period where few people go out to eat, since it is ridiculously hot and muggy outside people do not want to leave their air conditioned homes. So to get extra business everyone lowers the price. This might also explain why lunch is cheaper than dinner, since few people eat 3 course lunches. The Nationals, the DC baseball team, do something similar. When the Nationals play popular opponents such as the Mets and Cubs ticket prices are 25% to 50% higher. Or think about cheaper prices for matinee movies. Second it is a way to attract new customers. I might not be willing to risk $50 a person to try Ceviche, but at $30 I will give it a chance and may come back again. Finally, I wonder if this is a minor form of collusion among restaurants. Perhaps without restaurant week there would be even better August specials. A few years ago in my graduate school home of Madison, Wisconsin a group of bars got together and outlawed drink specials near campus. In the case of Restaurant week prices are dropping so people are unlikely to complain, but whenever a group of businesses get together and set a price we should keep an eye out.

As for dinner, we liked Ceviche. My wife, Marie, got the ceviche sampler for her appetizer and I got scallops in the shell topped with gruyere. Both were well presented and seasoned, we both made noises of delighted when trying these dishes. We also both got drinks, I had a daiquiri which was more the traditional sort with a nice grapefruit flavor and Marie got something flavored with passion fruit. The main courses a yucca lasagna and beef roast were good not great. The desserts a hazel nut chocolate cake was mainly moose and less cake like to the pleasure of Marie. I had tres leches it was good not great, a little spongy and I would have liked more fruit with it. The waitress was excellent and did a great job explaining the dishes. She also helped make sure no cilantro was present in Marie’s food. Their espresso machine was not working, and I would have liked espresso with dessert. Overall I would give it 3/5. A good overall place, but I would suggest going for appetizers and drinks over the main meal.

A Wonderful (Second) Life

What a 100% interest rate is not sustainable? Second Life banks are offering 100% interest rates, and a big surprise those banks are failing. With those rates there would be the potential to convert real US dollars to the games virtual Linden dollars then cash out. But as this blog suggests much like Itchy and Scratch money you can buy it, but you cannot sell it.

High School Economics is OK

Although most high school students do not get the benefit of taking an economics class a recent nationally administered test shows they are not doing too bad. Not sure what the standards were, but 79% of students showed a basic understanding of economics. The test did show that most people understood the idea of opportunity cost as around 72% could give a benefit and cost to leaving a job to receive more education. Recently Greg Mankiw suggested he would like students to learn three things in High School about economics: (1) Comparative Advantage (2) Supply/Demand and Efficiency of the Market (3) Market Failure and Externalities.

Although, my favorite of Mankiw’s Economic principles from his textbook is people respond to incentives. I often wonder what are the incentives for students to do well on these nationally administered tests? It reminds me of my 12 grade year in Ohio where we took a state wide 12th grade test. Students received no benefit for doing well on the test as it was only used to collect data for the Ohio school system, so I knew many students who just did not bother trying.

Snack Time!

Advertising serves two main purposes: it shapes our tastes and makes us aware of potential purchases along with their prices. In my intro to economics class room we typically assume people know where to purchase things. Additionally, we do not normally address the potential of companies to impact our preferences (or tastes). I guess not surprisingly, McDonalds has seemed to impact children as young as 3-5’s taste. According to a resent study by Thomas Robinson from Stanford, children that age when presented with the same foods (burgers, fries, chicken nuggets, carrots, and milk) in different wrappers one featuring a McDonalds logo and one with no logo they preferred the McDonald logo food. The first three items were purchased at McDonalds and the last two purchased at a local supper market. It is worth noting the tests were done on a total of 63 children in a low income head start program that is predominantly Hispanic. Interesting results, but I wish the sample size was a little larger, for what should not be a terribly difficult experiment to replicate if you have a room full of hungry preschoolers!

Link to the study:
Link to an article in Forbes about the Study:

Hop on the bus

In response to the recent airplane crash in Brazil it seems more Brazilians are opting for the bus. With the airline industry basically supply constrained by available routes and reaching capacity on loads, perhaps Americans will turn to other forms of transportation (as airline prices should rise). I guess I shouldn’t be surprise, but bussing is a very viable option on the east coast, much more so than the Midwest. There are direct buses from DC to New York, which run between $40-50 a round trip. One reason might be the large number of people going between the two cities, but I would guess the main reason there are more buses and trains for transport is people are less likely to have a car in a city like New York or DC. Even if they do (and one reason they might not) is parking in either city can is expensive. Perhaps though as one book suggests parking spaces do not cost enough in other cities, as free parking has its own cost by taking up space that could be used for other things.

Who reads these things?

I keep meaning to get this blog going again, but I had been a little down about it. I see that even great econ bloggers like Tyler Cowen at Marginal Revolution only get 7-10 comments per post. It made me wonder how few people read these things, even if you are well known. Then yesterday Tyler Cowen offered free copies of his new book to 15 people posting comments and he received over 200 comments. I read a few blogs daily, but I generally don’t post comments either so perhaps I was mistaken and there is a large set of unobservable readers like me. You could look at page view counts, but the Econ bloggers do not seem to prominently feature them. Anyways, I decided not to try to win a free copy of Tyler Cowen’s new book. I’m going to purchase it this weekend as I have gotten plenty of free entertainment from the marginal revolution blog.