A tank of gas costs as much as a Banana?

In Venezuela a gallon of gasoline costs 7 cents a gallon, due to government price controls (see related NY times article here). In Monday's post I discussed how price controls can lead to shortages. One way to get around this is if the government continues to supply the product at a loss. The policy is costing the government 7 Billion dollars a year. Since, many Venezuelans cannot afford cars, the policy also only generally benefits the rich. Although President Chavez has tried to change the policy their appears to be too much support for it to make any changes.

Batteries not included?

My father, who is also is an economics prof, pointed out the other day I made an error in describing externalities. In cases like TV commercials or pop-ads, these are bundled goods. Externalities are when someone not involved in the transaction is impacted, but the person watching the ads decided to watch TV or visit the website so they get the ads and the content.

Often bundled goods are obvious (a combo meal, free sugar/cream with coffee, a set of matching gloves and scarf). But, I was wondering the age old question “why are batteries not included?” in something that needs batteries. I was thinking this as I went to purchase a printer cable for my new printer. If I need a cable to use the printer (I think?), why not sell me a cable too. I was surprised Dell, where I bought the printer, did not even offer me one.

I think it is not included, because Dell wants to make the printer seem cheaper than it is (the cable cost about ½ the price of the printer). Dell has been taken to task in the UK, for this false advertising on this issue (link). However, “Dell argued that it does not supply cables as standard with printers on the assumption that many customers would have one already.”

A Banana costs more than my house

One of my colleagues at Towson came by my office last week to show me pictures of his trip to Russia in the mid 1980s. I wish I could post a copy of one of his picture of a butcher shop with no meat. Last week may have signaled a returned to the Soviet style, as the leading supermarkets placed price controls on food staples such as bread, cheese, milk and eggs (see article here).

A similar policy was adopted this year in Zimbabwe (see link here), which has not worked very well. As seen in this article shelves are empty and the government is arresting its citizens for selling goods at a price where they can stay open. These price controls do not appear to have stopped inflation, as one Zimbabwean put it a banana costs more than my house.

Update on Previous Post: Gold Diggin' IV and Beer Economics

If you recall my first column on Gold Digging (link here). It appears the woman who was called a depreciating asset, has responded (link here)

Also not suprisingly Beer is strong currency in Wisconsin (link here).

How Many Miles to Wall Drug?

In my Intro to Economics class last week, I was lecturing on externalises, that is negative or positive consequences of economic transactions not involving the buyer or seller. I have been thinking a lot about externalises and advertising. Whether it is the annoying pop-up ad on the internet or the giant bill board distracting with something you don’t want . In the past the state of Oregon has put a limit on the number of bill boards (Link to Market Place story). It then starting selling a few billboard permits, which could then be traded. Since there was a limited number of permits, the price for a billboard soon went as high as $100,000. Recently Oregonians voted to change a related law that made it so anyone who had owned land before the billboard restrictions (or other land use laws) would be grandfathered in to longer having to follow those laws. This removed the limit on billboards, not surprising new billboards are popping up, the state legislature stepped in and changed the new law. A revote on the measure will be placed on the ballot on Nov. 6th.

This brings me back to my thought, how big are the externalises of advertising in our daily lives?

How do we help

Today on Marginal Revolution, Tyler Cowen poses a reader's question (link)

“What single intervention would do the most to improve the health of people living on less than $1 a day?”

I was reading the blog while I was preparing for my economic development class this morning. I decided to show a video (which I rarely do) of a 15 minute presentation (linked here) by Bjorn Lomborg lays out the argument that HIV/AIDs then malaria then malnutrition should be the top priorities with Global warming the lowest. As he points out a HIV activist can tell you the best way to combat AIDs in Africa and a global warming scientist the best way to reduce pollution, but it is the job of the economist to determine which project to choose if we can only fund one.

As for Bjorn’s talk, I’m not sure I would put HIV/AIDs so high on the list. It is extremely expensive to treat and the money may have a better pay off in mosquito nets or providing clean water.

Kuznets in Action

In my economic development class the other day I was teaching my students about the idea of a Kuznets curve (link to Wikipedia Entry on Kuznets). Kuznets found an inverted U-shaped relationship between economic inequality and GDP per capita. Specifically he found that as countries develop there tends to be an increase in economic inequality, until the country passes a certain level of development and inequality starts to decrease.

The recent IMF World Economic Outlook for 2007 has shown that economic inequality is increasing in the developing world. Nancy Birdsall of the Center for Global Development has an interesting take on the situation. You can read her blog entry linked here, but she makes three main points

1. Inequality can inhibit future growth
2. Education is the main tool used to combat inequality, but education is highly dependent on income/wealth so education inequality is likely impacted by income inequality.
3. Globalization has losers and winners, in some cases the losers may be the already poor.

The policy to address inequality I'm most familiar with the conditional cash transfer, which pays money to families that send their children to school and if the family visits health clinics. In Brazil and Mexico a significant part of population (10-20%) receives funds through these programs. Although my research and that of most economist has focused on the impacts of these program on education it is worth noting that these programs give substainal cash payment to families usually increasing their income 10-20%. I have not seen an analysis of the long term impacts of these programs on income potential of both parents and children, but perhaps given Dr. Birdsall's 2nd point it is worth examining.

Agriculture and Development

Although fewer and fewer Americans are working in agriculture (see yesterday), in a lot the developing world agriculture (particularly Africa) employs a large majority of the population. This past Friday the World Bank released its annual World Development Report this one features the role of agriculture in development.
Some highlights from the press release linked here

“Agriculture consumes 85 percent of the world’s utilized water and the sector contributes to deforestation, land degradation, and pollution. The report recommends measures to achieve more sustainable production systems and outlines incentives to protect the environment.”

“…in Sub-Saharan Africa, where the [agricultural] sector employs 65 percent of the labor force and generates 32 percent of GDP growth.”

“The report says rich countries need to reform policies which harm the poor. For example, it is vital that the United States reduces cotton subsidies which depress prices for African smallholders.”

Two Orcs for Every Farmer

There are 4 million World of War Craft players, there are 2 million farmers (link) and 3 million Agricultural Workers in the US. Of those 3 million it is estimated that about ½ a million are immigrants working without proper authorization. On top of that appears that farmers are increasingly having a difficult time bringing in workers is through the H2A guest worker program.

The immigration debate is now coming to places like Zanesville, Ohio and Omaha, Nebraska. However, as the number of farmers shrinks will they have the ability to shape the US's immigration policy.

Green Collar Jobs

Paul Krugman and Thomas Friedman columns are free again (no more Times Select)! In Friedman’s Wednesday column (link) he discusses “Green Collar Jobs”, these are jobs retrofitting houses to increase energy efficiency or installing green technologies like solar and wind. As Friedman points out these jobs might be ideal for former blue collar workers who are losing their jobs through globalization, but in order to install a solar panel or insulation you need to be living in the US, so that job cannot be shipped overseas.

If we are going to retrain workers who lose their jobs due to globalization, getting them into industries where the more trained workers we have in the “green field” the lower the cost of these goods will be meaning more will be sold, which reduces pollution for everyone. A quick google search suggests Hillary Clinton and John Edwards are pushing for such a plan, although nothing is turning up for the Republican Front Runners or Obama.

Also for those of you in DC, today and tomorrow are the last two days of the Solar Decathlon an exciting competition where college students from across the world build houses that run on solar energy. Go down to the Mall and check it out.

Cell Phone or Crazy Person

My wife and I like to play a game called crazy person or cell phone. In our game we try to tell if someone is talking to themselves (crazy) or talking to themselves with someone on the other end pretending to listen (crazy cell phone person). The problem with these blue tooth devices is that people go around announcing their conversations to the world. This annoys the heck out of me, I do not need to hear about sending the plans to Boston or how your contractor didn’t put the right tiles in the bathroom. In economics we call the impact of someone else using or making something on an innocent bystander an externality. I thought of this yesterday after reading an article in Salon: “Why are Bluetooth headsets so lame? In search of a hands-free phone headset that won't make people hate you.” I hope we continue to shun people who use these things in public, to limit their externalities.

More on Gender

I’m taking a break from editing a paper I have been working on. In the paper I was testing the relationship between the relative power of a husband and wife on their children’s school attendance and their spending on food for Nicaraguan households. In this case I measure power as the ratio of the wife’s education to her husbands. Most of the economic literature has suggested that as a wife’s power increases her children go to more school and the family spends more on food, since mothers tend to like to spend on those things. When I submitted the paper a reviewer suggested that perhaps when women are extremely more powerful than their husbands, then perhaps increasing their power further does not still increase schooling or food spending and in fact may actually lower these outcomes. When I reexamined the data looking for this relationship, I did find that once women have 4 times the education of their husbands, additional female education actually decreases schooling. Tomorrow I’ll give some more thought as to why this could be.

My buddy Scott, also raises a question about yesterday’s Gold Digging article. If you thought your income as a man would negatively effect your chance with the ladies then you should not report your income. In that case everyone who did not report their income would have low income so everyone should report their income (unless it is zero). However, perhaps not reporting your income is a signaling device in that by not reporting your income you only attract people who do not care about income. So do not report a high income if you make a lot of money, but do not want a woman looking for a rich guy. In this case only rich men ugly men who want the pretty women who wanted to date richer men, should report their income.

Also thanks to Baysian Heresey for the link.

Gold Digging II

My good friend Andy sent me a new article in our continuing series on Gold Diggers and Economics. A recent paper using data from an online data service, using observation from San Diego and Boston suggests that men who make more money get more responses from sexier women as rated by the website. One of the basic conclusions is that an average looking guy would have to make $200,000 a year to date a woman in the top decile of “hotness” (in the parlance of our times a “10” on a 1-10 scale). While a guy who is also a “10” in hotness could make $62,000 a year and be just as likely to marry a hot woman. Also they find that once you hit above $50,000 a year more income yields a more likely response from a “hot” woman (income under 50k) does not matter.

Of course income is self reported, and 1/3 of the people do not report income. Perhaps this does not apply for people who do not use on-line dating. I do know my friend Andy is a Doctor, but unfortunately last I checked he had a girlfriend in a high declie of hotness.

The Economics of Beer

Sorry you missed your regularly scheduled blog update, but this past Friday I was visiting the Great American Beer Festival in Denver. With four good college friends I sampled beers from around the US.

In honor of that trip a couple of Beer and Economic links:

In Macrobeer news it appears that Coors and Miller are merging to create a company that would rival the size of Anheuser-Busch, which now controls half of the US market (link).


As more of a microeconomist and microbrew drinker, I enjoyed this story on Market Place for the use of beer as currency. In economics we teach that anything that is perceived to have value can be traded. Just like the bike repair man in the story, PBR is the equivalent to the Zimbabwe Dollar to me.

Live Long Eat Less

A recent study shows that Cuba might be surpassing US life expectancy (link), because of poverty during the 1990s that caused a decrease in calorie intake. I wonder where the optimal caloric intake is in terms of life expectancy. If we look at a graph of life expectancy and GDP per capita, I do not think we see a positive relationship between poverty and life expectancy. It looks like life expectancy stops increasing at about 10,000 per capita. The big outlier in this case is South Africa, which can be explained by HIV. For some reason Cuba isn’t listed on the graph (perhaps lack of data?), given Cuba’s per capita income of about $5,000 a person we would expect life expectancy base on the data to be close to similar countries like Guatemala and Morocco, which have life expectancy of around 70 years compared to about 77 in the US.

I'll have what Fidel is having to eat.

The Matching Game

Hillary Clinton unveiled her new retirement savings plan yesterday (link). There are some things to like about and other I do not. Starting with the good, the plan would offer up to $1,000 match to anyone making under $60,000 a year for the first $1,000 put away in retirement accounts. My rough calculations suggest that if you can encourage a person to save just $2,000 a year from 22-65, that person could have a steady stream of income of about $15,000 a year for ever. That seems like a good way to make sure people are set up for retirement.

Now here is the catch it is not matching in the typical sense. Normally when your employer matches your contribution they put that contribution into your 401k. The above linked article suggest the match will come as the form of a tax credit. That is someone who invests $1,000 will get $1,000 back after they file their taxes.

The other suggestion I have is if we are serious about getting people to save for retirement, why not do two things. First, anyone who has a job making less than $60,000 a year will be signed up for the program which they put in $1,000 a year (deducted from their paycheck), second the matching will go directly into their retirement savings account. Anyone can opt out of the program, but they start as enrolled once they fill out their W-4. As this report suggests automatically enrolling someone in 401k will increase participation rates to upwards of 90%

The Economics of Gold Diggin’

Steven Levitt has a great post today on the economics of gold digging (link). Basically there is a letter that was posted on craig’s list from a woman looking for a man who makes at least $500K a year. In response a high salaried man about the differences in the assets (looks and money_ the two couple bring to the table: “your looks will fade and my money will likely continue into perpetuity.”

I also like Dr. Levitt’s final aside that economists tend to marry well. I agree with this assertion from my sample of 1. A couple reasons economists might marry well is that they are in a male dominated field, in graduate school, but are in a social science so they might interact with other fields that have more women (sociology and anthropology). Perhaps household models and game theory also help in being a good spouse.

Or maybe we are better looking than other fields.

Tico Trade

In a rare popular vote on a free trade agreement Costa Ricans voted to accept CAFTA (Central American Free Trade Agreement), by a narrow margin of a few percentage points on Sunday. Those against the trade agreement rallied for a march of 100,000 citizens (link) in the capital last week. They cited US agricultural subsidies that pay farmers for milk and grain production, making it difficult for Costa Rican farmers to compete. There were concerns over privatizing state run telecommunication and public works monopolies. Finally, there were also worries that the US would include stricter enforcement of intellectual property rights on drug patents.

All of the reasons cited are legitimate concerns, but Costa Ricans passed the bill in part because of the U.S. unwillingness to renegotiate the trade agreement if the referendum on CAFTA was rejected (link). The greater lesson in all this is it is difficult for small countries like Costa Rica to bargain with the United States.

On a related noted, I once asked the then President of Costa Rica in the summer of 2000 who I met at a forum in DC if there were ever any protest against free trade agreement like Seattle in US a few years ago. He said that would never happen in Costa Rica. Things have changed.

Best Graph EVER!

As an economist I love graphs, perhaps too much sometimes. I had my mind blown yesterday! Hans Rosling has created a system to use UN data on basic economic indicators in the most visually stimulating graph I have ever seen. His graphs plot every country over the last 40 years, then the plots move over time to show change, the dots are sized by population and colored by region. Click on this graph to see the relationship between life expectancy and GDP per capita. If you have 20 minutes, I highly recommend his TED talk too.

Thanks to Dani Rodrick for pointing out this work on his blog.

World Hunger

I came across this quote today from Malvika Subba, the former Miss Nepal and an activist fighting to end global hunger:

"I am not pessimistic because reports of the Food and Agriculture Organization show that there are enough food and mineral resources to feed the whole planet. The obstacles are mostly political."

Her remarks are similar to Amartya Sen (1998 Nobel Prize Winner in Economics ), who believed that famine and hunger are often not caused by a lack of food, but by a lack of ability to distribute that food.

Over the last two years the number of those who lack adequate access to food has grown by about 5%. It is not clear that just giving food to the poor is the best option (see a previous post).

Last week when I posted about homesteading a commenter asked, what could the developing world do with an extra $2 a day to become like the modern homesteader. If the money can be distributed effetely, that amount of money is enough to get children through middle school and provide basic health care as evident by the programs I have studied (Progresa in Mexico and RPS in Nicaragua). The question now is how do we get aid to people?

Retirement day 3

See the post starting two days ago if you have not been following along.

I would like to wrap up my thoughts today on the retirement paper. Overall the paper makes some conservative assumptions (returns of only 6%) and some riskier ones (social security will still be around). The paper does show the dramatic difference in the savings levels needed to maintain lower incomes or single families. The paper also shows the importance of a house. For those of you who make $135,000 combined with your spouse. One final calculation, to reach that $167,000 suggested in the paper, you should start putting away a little over $10,000 of your income each year starting at age 25. If you are willing to live on less (say $70,000) then you can put away only about $1,000 a year then increase your contribution to retirement to 8% when you reach 40.

So the overall recommendation to start putting money in a IRA plan as soon as you can when you are young is a good one.

Retirement Day 2:

The paper cited yesterday estimates the amount needed in retirement accounts by the time someone reaches 40 years old in order to maintain the person’s current level of consumption assuming that person lives to 95. Additionally the paper has somewhat conservative estimates on returns and savings.

Assumptions:
Inflation rate 3 percent
nominal return 6 percent: assets (split evenly between money market and stocks),
Saving rate 7.5% total: 5 percent in a 401(k): 2.5 percent in non-tax-preferred
Includes social security benefits
house value is 2.5 times household income,
mortgage balance is 2.0 times household income

Let’s look at the three people again (the first two are from the paper, the final one is my own calculations)

1 Single, income $68,000, owns house: With these assumptions the single person will only need $14,000 by the time they are 40. With the 5% rate of savings, their assets will reach $272,000 is the next 25 years.
2. Married, income $136,000, owns house, two children: This couple will need 167,000 by the time they are 40. The model also figures in educational costs for children's college ($20,000 a year). By the time the couple reaches 65 they will need $850,000
3. A single person with income making 30,000, owns a house. By my calculations will need about $5,000-$10,00 in their retirement account by age 40 to reach a 50-50 shot of having about $250,000 when they retire including the assets of their house.

To perform the third calculation I used CNN’s financial calculator. A balanced portfolio of 50% stocks and bonds was used for savings. The third person also saved 8% of their income compared to 7.5% in the paper.

Retirement week

An economist at Brown, Jonathan Skinner, has written a recent paper asking if you are saving enough or too much for retirement (link here)? The paper suggests how much you have saved by the time you are 40 years old. The amount depends on your marriage status, kids, and if you own or rent a house. The paper does not offer any advice on how much someone under 40 should save, only saying that you should take advantage of matching funds and IRA accounts. This week I will look at these numbers to see how much one would need to save to reach these targets.

I will examine it for two types of people mentioned in the paper.
1 Single, $68,000, house
2. Married, $136,000,house, two children

Plus a single person making 30,000.