Tuesday, December 30, 2008
Give the song a listen for yourself, before you read on. So in the song Jemaine declares his love for the most beautiful girl at the party. As he notes she’s so beautiful she could be a “part time model”, but she would still have to keep her day job.
So why would there be part time models, part time musicians, and part time actors. One explanation is that being a model, musician or actor is like a tournament. Top members of those fields make tens of millions of dollars, while other struggle. They continue with that struggle for the hopes of the big payoff. Edward Lazear and Sherwin Rosen, 25 years ago documented this phenomenon in business where CEOs make many times more than Vice Presidents (see this Forbes Article). Similarly, Steve Levitt of Freakonomics fame showed that drug dealers earn very little (in fact below minimum wage) except for King Pins at the top who earn lots.
So people are part time models in hopes of the big payoff. Now go rent Flight of the Conchords
Wednesday, December 17, 2008
My father’s response
“Suppose we look at 40 years, i.e., 1968. Prior to this year, stocks had grown at a rate such that $1,000 put in in 1968 would have grown by a factor 48 at the start of 2008. If we reduce that by 30 %, the amount the Dow has fallen this year, then the $1,000 would have grown by 33.7 times. Bonds, however, have grown 17.4 times from 1968 till the start of 2008. (I assume little change from the start of 2008 till today.) So, stocks have performed about twice as well over 40 years, even with the recent downturn. The gap is over 2:1 if we look at the last 30 years. But, over the last ten years, bonds would have returned a compound 50 % while stocks have actually lost ground.”
I think the most interesting thing is the last sentence. $1,000 invested 10 years ago in bonds would have returned $1,500 (not accounting for inflation), but the stocks actually lost money.
Is 5 years no longer the stock versus bond horizon? I wonder about investing for college. Vanguard (a well run and managed investment service), offers three options for age targeted college funds. A conservative option, which has no stocks after age 11, a moderate which stops at age 15, and an aggressive one that goes with 25% stocks until 18.
I would still lean toward the aggressive option if the amount in the college savings plan is enough to pay for college, but maybe that’s because I finished most of school before the dot-com bubble burst.
Tuesday, December 16, 2008
I found it hard to believe that rooms would rent out for thousands of $s a night. It seemed like most of these articles, talked about advertised prices and not what people actually paid.
So what happened, my guess is that those people did not actually rent out their apartments for thousands of dollars a night. A check of Craigslist has shown the prices are falling to a few hundred dollars a night, really not that out of line with downtown hotels.
It sometimes take a while for markets to sort themselves out, what price should an apartment rental during inauguration be, it seems like its approaching about $400 bucks a night per bedroom.
If you are interested though my couch is still available to friends/family.
Tuesday, December 9, 2008
Monday, December 8, 2008
Monday, November 24, 2008
From an economic stand point why do we want middlemen. Their salaries must be paid so we can get our Ortega taco shells and A1 steak sauce in our grocery stores, but wouldn’t are groceries be cheaper without them (or we cut out the middleman.)
In econ 101 it is generally assumed there are no transaction costs, and everyone knows all the goods available and at what price. But in real life a grocery store must choose among 1000s of products, by paying a broker a grocery store may gain access to knowledge about these products.
However, over time we have cut out the middleman. This brief description of food brokers by Steve Hannaford shows the number of food brokers had decreased to 3 by 2003. Unfortnatly Southern Food Brokerage is no more, it was bought by Crossmart in 1991.
It lives on in the Super Broker Shuffle, watch and enjoy!
Wednesday, November 19, 2008
So if you liked cupzzas, here is more on economics and food. Thanksgiving is a little over a week away. But, my wife and I couldn't wait so last weekend we roasted a whole turkey for the two of us. We had a nice dinner, a few lunches of turkey leftovers, plus a pot pie, and a bunch of turkey to make stock.
Was this optimal? Like most Americans we will also eat turkey on thanksgiving (thanks Mom and Dad). We all know that turkey has diminishing returns at some point (anyone for curry-turkey hash?). But I think our turkey allocation was optimal, because now we have a week in between, and I could kind of go for some turkey right now.
So is it optimal that we all eat turkey at the same time? If we all want turkey at the same time, then this should lead to higher prices for turkey during thanksgiving. But farmers know this and expand turkey farm operations during the holiday. If prices reflect cost in perfect competition, then this indicates that there are economies of scale, that is the cost of average turkey production falls as more turkeys are made.
As the graph below shows this is the case that turkey prices have dropped during the holidays, while whole chicken prices have not. It’s not perfect evidence, but really who wants to not eat turkey on thanksgiving?
Monday, November 17, 2008
Cupzzas, a pizza baked in cupcake form. Asa Wilder ’09 one of the founders is quoted in an article in Grinnell College's newspaper, the Scarlet and Black.
"We just really wanted to shatter the cupcake-pizza dichotomy. It's just existed for too long."
The Grinnellian entrepreneurs are also capital constrained, more from the article about how they made pupzzas, mini cupzzas.
"[A] lot of our ideas come from just not having the proper materials," Wilder said. "Like the pupzzas came from not being able to find the large tins."
He proposes that you purchase what is called a life cycle account. When you are in your twenties you buy on the margin, by basically buying a mortgage on stocks with 50% down. Gradually over time you reduce this 2/3 down by 40, until you start repaying your retirement mortgage in your 50s. Ayres tested this model using data for each age group going back to 1913 and found using past data that it outperformed the standard retirement plan (of buying stocks young and bonds old) and never returned less than 2.5%.
I have to say though I’m skeptical. For three reasons, first past performance does not indicate future returns as they say. I’m also curious about the general equilibrium case. If all young people start buying stocks on margin, will the cost of borrowing to purchase stock increase, could this wipe out the gains Ayres sees? Finally, I don’t fully understand the mechanics of it, it seems to me that a lot could go wrong, what if you start to earn less in your 50s, its harder to retire earlier or maybe not. What if you get disabled do you still owe your retirement debt?
Ayres is a smart guy though, so I’ll be curious to follow this. If it’s a good idea some financial company will offer it (although if it is a bad idea that might happen too).
h/t Dan Rothschild for passing on the idea
Friday, November 14, 2008
Ebay has banned the sale of inauguration ticket and there is talk in congress of banning second market sales (i.e. scalping) of inauguration speech ticket. If you are looking for tickets, it looks like e-mailing your Senator or Represenative is the only way at this point.
Economists are generally for free markets and allowing ticket resale is a type of free market. But, it is worth noting that tickets have not even been issued yet, and as the cost of tickets goes up so does the likelihood for fraud. My guess is that if you want an inauguration ticket and you strike out with your congress member, head down to the event and try to purchase a ticket a little bit after things start.
Monday, November 10, 2008
Lately though Karlan’s work has turned to US politics. In a recent paper he wrote with a number of others, the trust of New Haven children was tested. The paper received a recent write up in Slate. The abstract describes the experiment below:
We conducted experiments during trick-or-treating at Halloween, four days prior to the 2008 presidential election. We decorated one side of a porch with Obama material and the other with McCain material. Some children are asked to choose a side to get an equal quantity of candy, whereas other children are offered more candy to go to the McCain side. At the candy table, each child chooses between a clear plastic bag and a brown paper bag, thus revealing their level of trust or comfort with ambiguity. We find that, in a predominantly liberal neighborhood, children choose the Obama table and continued to do so even upon the promise of more candy at the McCain table. We also find that Obama supporters, identified as those who choose the Obama table, are more likely than to take the brown bag of candy than the McCain supporters, identified as those who choose the McCain table.
These results mimic results from the General Social Survey in which supporters of Kerry over Bush in 2004 are more trusting.
I think the main lesson we can garner though is to not trust economists with candy.
h/t to Chris Blattman
Thursday, November 6, 2008
Yesterday’s post details his attempt to purchase high speed internet. Here’s the first paragraph
I have been waiting for high-speed internet at my house for a long time. Over
three years, to be exact. I have called the ICE, the government monopoly on
telecommunications, every few months and their response is always the same. A
bored voice on the other line says, “There are no ports available.” When will
they get some ports in? Again, the same answer every time, and quintessentially
Tico: “I wouldn’t know what to tell you.” (No sabría decirle).
I won’t do it justice, but the post goes on to detail long lines, indifference, and an unwillingness to exchange money for goods. They key economic reason here is that ICE is a monopoly. My guess is that the network may have a certain capacity and that government regulation may hold the price down. So in order to offer more people network ICE would have to expand the network, which could be too expensive.
I’m also considering another theory. Rot goes on to describe something even more puzzling. An US ex-pat living in Costa Rica writes into the local English paper:
When I first moved to Costa Rica in the mid-1970s, I bought canned mushrooms at
a local pulpería [small convenience store]. After a bit, the owner stopped
stocking them, and when I asked him why, he replied, “They sell so fast that I
can’t keep them in stock, so I don’t bother ordering them anymore.” I suggested
that he place a larger order, but it fell on deaf ears.
One place where typical economics fails is when one person's effort mainly benefits another person. ICE employees do not get paid based on how many people get internet, so why work hard. It’s possible that the pulpería is owned by someone else and the manager does not want to order more mushrooms, because it is more work. Similarly I wonder if the pulpería cannot raise prices too much on the mushrooms, since people might buy them someplace else. In this case if there is a fixed costed for each mushroom order, it might be worth it to not order a many mushrooms.
In the end though, sometime economic theories fail, people do things that are counterintuitive to an economist.
Monday, November 3, 2008
I'm trying something new this semester in my Development Economics class. I had students write a request to fund a micro loan. The micro loan was requested through a website called Kiva. On the website potential borrowers request funds for a loan and people like you and me can provide a loan directly to borrowers in developing countries. To engage my students a little more I chose the top five proposals in the class. The proposal receiving the most votes will receive $150 to put toward the loan of their choice, 2nd place $50, and 3rd place $25.
I would like it if my blog readers, read their proposals and chose their favorite. To vote make a selection using the poll to the right of this post. If you only have time to read a few pick a couple of enteries at random and select one you like.
Fortunately, Kiva is becoming very popular and many of these loans have been funded. In that case I will allow the students to choose a new loan to fund. Thank you for your help, and I hope you enjoy my students' proposals.
Maisara Abdusamadova is a widow who lives with her two children in the rural Isfara region of Tajikistan. She has a small cooking business, selling ‘sambusas’ (national dumplings) as a means of supporting her family. However, despite an increase in popularity and demand from her customers, she does not possess the means to expand her business. She is requesting a loan of $800 to be repaid in span of six months, in order to invest in cooking equipment and furniture for her customers. This will enable her to expand her business and cater to the demands of her customers more efficiently, through which she can generate even bigger profits.
Maisara is represented by the International Micro-Loan Fund, which is a microfinance organization that helps the most vulnerable groups of the population to improve their economic well being. The organization currently possesses a “5-Star” risk rating on KIVA, which demonstrates a high likelihood of repayment. Since Maisara already runs an established business that caters to regular customers, it adds to her credibility and ensures repayment. As the sole earner in her household, it is important for Maisara to obtain maximum profits from her business so she can provide support for her children and their education the future.
Akua Aboka is a 42 year old married woman and mother of two. She is a merchant and owns a ready-to-wear clothing store in Kpalime, Togo. In order to address her customers demand, increase her clienteles, and prosper her business she requested a loan of $975 of which $775 has been raised so far. The amount of $200 is the only obstacle that is keeping her from buying demand brand names shoes and outfits for her clientele.
There is a myriad of reasons why I think Aboka should be the recipient of your loan. For one, like most entrepreneurs on KIVA, Akua Aboka is from a developing country which has very limited resources to offer a banking system that would allow entrepreneurs like her to request loans for their businesses.
Second, my candidate is from Togo, a very small country of about the size of West Virginia which is located in West Africa. Togo’s economy depend heavily on agriculture with about 65 % of the population employed either in commercial and subsistence agriculture. It is no surprise to see that cash crops such as cocoa, coffee, and cotton (40 % of export revenues) generate most government revenues. The only natural resources for this country consist of phosphates, limestone, marble, and some arable land; and Togo is the fourth largest exporter of phosphate in the world. Togo has a deficit of 159 million dollars, huge debts, and a GDP per capita of $900. It is safe to assume that with no degrees, my candidate would make very less than $900 therefore leaving her unable to provide for her family.
KIVA is a window of opportunity where generous people like you can help Akua Aboka improve her living conditions with very little money. I am asking you to consider my candidate, think about the joy you will bring to her and her family, and the satisfaction you will get knowing that you have helped someone in great need.
Pulcherie Konan M'Bra
Afghanistan has experienced international and civil wars resulting in the destruction and creation of various governments over the past three decades. This has undoubtedly hindered its economic development, as the state has an unemployment rate of 40% and per capita GDP of $1,000 (CIA World Factbook, 2008). Providing a loan to Mena will allow her and her husband to improve their standard of living, along with that of their three children. Although any investment is a risk, Mena has a good track record and you can expect to be paid back. Her first loan provided funds to start her husband's store and improve her pottery business. This loan will allow her expand her pottery business even more and improve the stock in her husband's store. While financing retail businesses are relatively common, it is less often that you have the chance to support the spread of artwork. Life in a war-ravaged country can be difficult and discouraging and work that displays beauty and creativity amidst the rubble of war should be encouraged. While one may not think that something as simple as a handmade and decorated bowl can have an effect on others, a small work of art may provide a little encouragement in an otherwise chaotic life. Supporting a loan to Mena and her family will allow them to further their economic progress while increasing the number of people who can enjoy Mena’s creativity through pottery.
Imagine a country with a diverse landscape, composed of wild animals running free, the tallest mountain in Africa and several landmark lakes. Think about what it would be like if you were able to live in a country where nature is more prominent than technology. Although many Americans would call this a vacation, there are millions in Africa living in such a place. Welcome to Tanzania, the dream getaway spot, where the GDP per capita is $1,300.00 and the life expectancy is 51 years old (Tanzania, 2008)! Sounds like paradise, right?
While life, in general, in Tanzania is difficult, women especially have a hard time. According to Kiva.org, the customs of the Tanzanian society make it hard for women to own property. This, in turn, leaves them without the necessary credit to borrow from financial institutions. Rosemary Maziku is one woman trying to run a business in Mwanza, Tanzania. She is a thirty-seven year-old widow with three young children, simply trying to raise enough profit to keep her family alive. She is requesting a loan for $400.00 that she will use to purchase cloth and shoes to sell. Currently working twelve hours a day, six days a week, Rosemary operates a tailoring business and sells soaps and perfumes for extra income. She turns a small profit of about $120.00 a month. Many Americans spend more than that on food each week. The field partner affiliated with loans in Tanzania is SELFINA. They greatly cater to the needs of poor women, even allowing them to use equipment as collateral for future loans. The loan is near risk-free, with a 0% reported default rate and 0% delinquency rate (RosemaryMaziku, 2008).
Knowing that Rosemary needs only $400.00 to completely better her own life and the lives of her children, how can you not feel a desire to help?
This proposal is for a Mrs. Heng Sophea, who is 41 years old who lives in the Andoung Samrith Village in Takeo Province of Cambodia. Mrs. Sophea supports her husband and four children with a rice crop that she is currently unable to harvest because she needs someone to help plow the field. Her husband assists her with her crop, while her oldest child drives a car to produce a supplemental income. Two of her children are currently attending a local school. She is asking for a small loan of $500 to hire a worker that will help her plow her rice crop. The money would be used to pay for the worker; while the remaining money would be used to buy fertilizer and pesticides to aid in the resilience of the crop.
To loan money to this women would benefit her whole family. She will be able to provide more for her family by yielding a crop that they can live off and sell to make profit. This small investment can give a family a chance to gain a higher income and become a larger contributor to the economy of Cambodia. Even though crops are very temperamental and depend on the climate, the addition of fertilizer and pesticides will greatly reduce the risk of crop loss. Cambodia has a GDP per Capita of $1,900 (CIA World Fact Book), where 31% of total GDP is in the agricultural sector, comprising of 75% of the labor force. This shows that agriculture is a way that most people try to make their incomes from. However, it may not produce a large enough income. Micro loans make it possible to loan small amounts to families that otherwise would be too risky, but with the help of these small loans, that have a high success rate, they can achieve the dreams that banks tell them that it is impossible. The borrowers from Kiva have been screened and have the assistance of groups of other borrowers that give support to each other.
Borrowers also learn the ability to save money for those unfortunate incidents. It is very important to lend just a few dollars to these people, who have nowhere else to turn to make their dreams come true.
Friday, October 31, 2008
Wednesday, October 29, 2008
“Choosing a four-year undergraduate college is one of the biggest decisions a typical American family can make. And for too many years, information about the quality of American higher education has been monopolized by one publication, U.S. News & World Report.”
The US News and World Report’s methodology is far from perfect and I agree competition is good. So how does Forbes improve on US News method for selecting the best place to go to school:
“To answer these questions, the staff at CCAP (mostly college students themselves) gathered data from a variety of sources. They based 25% of the rankings on 7 million student evaluations of courses and instructors, as recorded on the Web site RateMyProfessors.com. Another 25% depends on how many of the school's alumni, adjusted for enrollment, are listed among the notable people in Who's Who in America.”
Let’s start with ratemyprofessor.com . This website suffers from severe selection bias. For example the Forbes study author Richard Vedder, an economics professor at Ohio University, has really great teaching evaluation on ratemyprofessor.com, but on average only 3 students a year have filled out a review of Prof. Vedder. I wonder how schools differ in their use of rate my professor, but with only 3 evaluations per year its hard to believe ratemyprofessor provides an accurate picture.
The bigger issue is the next 25%, which uses Who’s Who in America. In 1999 Forbes published an article by Tucker Carlson which refers to Who’s Who, as the Hall of Lame. The article details the problems with Who’s Who, which has basically become a purchased prestige. Similarly Steve Levitt, yesterday at Freakonomics blogged about Who’s Who, citing a study that found ½ of military medals listed in biographies on Who’s Who were made up.
Normally, I do not criticize other works too much in this space, but Forbes ranking have the potential to compete with US News, and this point I do not think they should.
Tuesday, October 28, 2008
So back to the point at hand the CES has been tracking changes in spending on cell phones and land lines. By 2006 the average household spent the same on land lines as they cell phones. This probably isn’t the best data to show it but I think it confirms the trend that people are going from land line only to cell phone only, since spending on land lines is down 20% between 2001-2006 (I don’t think prices have fallen that much or at all in land line service).
This reminds me of a good article by Nate Silver over at 538. He was discussing the problem of political polls in that they do not call people on cell phones. When this is this case they need to find more people with land lines who are similar to those with those on the cell phone. In other words they likely need to call more young people on land lines to make up for all those missing a cell phone. It’s really a good article.
Monday, October 27, 2008
I think the issue is actually very similar to the payday loan issue I was discussing last week. On the one hand we have an economic transaction, in this case gaming. The transaction is completed by two consenting adults. Jobs are provided to create this transaction, so there is some economic benefit.
So the next question as an economist is there an externality? That is does gaming create negative consequences for those who are not gamblers. In the case of slots or a casino in rural Ohio, I’m skeptical of crime arising from this type of casino. Gaming addictions could increase, if the public has to support gaming addicts then this could create an externality.
However, I think the question comes down to like the payday loan decision, do we think that casinos or payday loans make people worse off even if those people chose to gamble or borrow?
Second, should the government implement laws to prevent these choices?
I’m not sure how to answer this second question. But I do know this is the question we should be asking.
Friday, October 24, 2008
It’s a little long but this New Yorker article does a great job of explaining microcredit as does this shorter piece by Karol Boudreaux and Tyler Cowen. For those of you not familiar with micro lending, basically relatively poor people in developing countries are loaned small amounts of money (10s to 100s of dollars).
As the New Yorker article discusses interest rates for micro loans in developing countries can still approach over 100% APR a year. The article also contrasts two current models of micro loans, one which works as a non-profit and one which makes a profit. So what is different between micro credit and payday loans, besides a slightly smaller interest rate. In microloans in developing countries:
1.) The money is supposed to be used to purchase something that will help generate future income.
2.) Loans are made in typically smaller amounts at first then building to larger amounts as the borrower shows they can repay.
3.) Borrowers are often put into groups of about 10 members. All group members must repay their loans or all borrowers lose the ability to borrow in the future.
4.) The programs often include financial education, and require borrowers to save some part of their loan.
5.) Running loan offices may be cheaper in developing countries, since labor is often much cheaper in developing countries, so interest rates can be lower than in the US check cashing places.
So what is the answer to addressing the problems caused by check cashing/ payday loans places in the US. I think in part it creating a way to allow people to manage their finances better.
One step in the right direction might be the Russell Simons Rush Card. Its basically a pre-paid credit card. It also offers direct deposit and check cashing, at fees that seem lower than the average. The card is aimed at the millions of Americans who are without a bank account.
If this could be linked with microloan program that included grouping borrowers and perhaps financial education. I’m however unsure of the ability of the free market and the government to provide that financial education, so I guess it is up to teachers like me.
Thursday, October 23, 2008
The Toledo Blade argues that voters should vote against the cap because “Opponents would have voters believe that 6,000 jobs will be lost if H.B. 545 goes into effect because payday lenders can't keep their doors open charging "only" 28 percent interest. They say the issues at stake are financial freedom, privacy, and not limiting lending options.”
As I noted in my previous pay day loan post, there are more payday loan operations than McDonalds in Ohio. In my home town of Delaware, OH its 4 McDs compared to 6 check cash/ pay day loan locations. Economic theory would dedicate that if one of them could still make money by charging 50% interest they would and could likely garner all the business by advertising lower prices.
Since there are many payday loan companies and anyone can start one, it is likely few loans will get made at a 28% interest rate.
I’m reasonably sure these payday loan jobs will be lost, people will no longer be able to get loans. From a pure economic theory stand point, we must believe that either people would be better off having the option of a payday loan or that people are not very good at making their own decisions so eliminating payday loan operations would be a net improvement.
I no longer live in Ohio, but I spent the first 18 years of my life there. I’m not sure how I would vote, because I see both beliefs.
Next post (hopefully tomorrow), I will compare payday loans with microcredit in developing countries. Why is that small loans in developing countries have lower interest rates (100% per year) and why are these loans more likely to be repaid.
Monday, October 20, 2008
“credit card companies were happy to lend, and consumers were happy to rack up credit card debt, because they both knew that if the credit-card balance got out of hand, it could always be paid off with home equity. Now those days are over, and we're entering a consumer-credit crunch.”
This quote is in response to a more detailed post on the credit crunch by Henry Blodgett
Consumers lost another option for borrowing at least for the time being. Prosper.com a peer-to-peer lending website, is entering a quiet period (i.e. no loans) while it tries to register with security authorities.
Tomorrow (or next post) I’ll discuss the pay day loan initiative in Ohio.
Wednesday, October 15, 2008
Chris Blattman, interviews the two authors over at his blog on their new book. I thought it might be a good opportunity to discuss their two greatest hits.
The first was a paper written a few years ago that measure the relationship between diplomatic parking tickets in New York City and corruption. As I understand it, diplomats at the UN could be issued parking tickets, but did not have to pay them. Fisman and Miguel, found that more corrupt countries like Chad and Bangladesh had over a 1,000 parking tickets, while less corrupt countries like those in Scandinavia had a dozen or less. This might be helpful since parking tickets are easier to measure than corruption. Apparently also countries that have a less favorable view of the US also had more parking tickets.
Miguel is also the lead author on another paper that links the issuing of red cards in international soccer matches and violence within a country. For non-soccer fans red cards are issued when a player commits a severe foul, receiving a red card forces the player to leave the game and the team to play a man short. The paper finds that countries with more violence have soccer players that receive more red cards.
I look forward to reading the book. I’ll end with this bit of advice from Fisman from the Blattman interview: “I always tell graduate students that if they want innovative thesis ideas, to read the newspaper, not the economics literature. This is a case in point. You usually don’t get exciting new research ideas while reading Econometrica.”
Tuesday, October 14, 2008
So what’s the problem? I was thinking of writing an article, but I wasn’t sure if Knol was popular enough. There are few article on there and few with people who seem reasonably credentialed. We might think of the value (or expected value) of me writing an article to be related to the number of articles already written. As more articles are written and Knol becomes more popular the more likely I am to write an article.
A similar problem occurs when countries try to adopt technology. In a developing country a businessman may only pay for internet service if others are also paying for internet services. This is because having e-mail access is a lot more valuable if people you want to e-mail actually have e-mail access to. For a lot of technologies the value of adoption is related to the percentage of other people who have adopted.
The difficult thing is how to get the first few people to write a Knol article or adopt a new technology. As Paul Krugman has suggested, economies cannot adopt new technologies that cost more but are more productive, unless enough others adopt. (See this article, which may be too technical for some)
So what’s the solution, in both cases it might be a “Big Push”, in the case of Knol pay a few well known experts to write articles, increasing Knol’s credibility. In the case of economies it might be to provide incentives to particular sectors to help those sectors grow and making it easier for other businesses to adopt technology.
Monday, October 13, 2008
“Princeton's Avinash Dixit has said that if Krugman were not so valuable to academics, "we should appoint him to a permanent position as the translator of economic journals into English."
Tyler Cowen over at Marginal Revolution has a run down of Krugman’s greatest hits. Because not only is Krugman a great economist for the popular reader, but he also has numerous famous academic publications. In 1991 he was awarded possibly the 2nd highest honor in Economics the Bates medal, which is given to the best economist under 40 in the US, and a lot of winners of the medal have gone on to win Nobel Prizes.
I have always been partial to his work in economic development and trade theory. He combined previous work on spillovers and put it into a context of geography and specialization. As someone who reads economics article with lots of Greek letters, Krugman’s are some of the most readable and insightful.
There may be a lot to disagree with in Krugman’s NY Times Op. editorials. But, there is a seemingly wide agreement that Krugman’s scholarly work is well deserving of a Nobel Prize.
Wednesday, October 8, 2008
With an economic slowdown, people will purchase less gasoline, this will and caused the price of gas to go down. In the last 4 months gas prices have fallen about 15%.
There is also evidence, reported by Felix Salmon that the food and commodity price bubble is starting to burst, so food prices could come down.
If you are looking to buy a new car you will be able to find some great deals, as a lot of people are switching to purchasing used cars.
This not to say the overall impact of the crisis will be positive, but its worth noting that economic forces have reactionary forces.
Monday, October 6, 2008
Recently the Christian Science Monitor had an article on “Why Women Might Be The Winners in
Today’s Market” in short women are less likely to panic and sell in a down market and make more stocks trades. Women are also more likely to seek the advice of a financial profession and are more likely to have a financial plan. Men are also more likely to double down on their investments after an initial loss. Although the article also indicates that women are more likely to use lower risk investment vehicles such as bonds and money market funds. In the long run too little risk can lead to low returns.
When the market falls and you see your 401k plunge it’s hard not to sell off. Aphorism like buy low and sell high are hard to swallow. But it might just the medicine you need to weather the financial sickness.
Thursday, October 2, 2008
In lab experiments Ariely and other have found when two players play a game and one player feels cheated, the cheated player will pay money to take away some of the gains of the other player.
This might be worth thinking of in terms of Wall Street and mortgages. A lot of people feel Wall Street cheated them out of their 401k. Similarly in the housing market people who have sat on the sidelines savings, while others in their mind cheated by lying on loans and taking out more than they can afford should suffer too.
There is also a bit of schadenfreude, as Lisa Simpson taught means finding joy in others suffering, on real estate sites, like socketsite.com which covers the bay area market.
Ariely claims its human nature to want some kind of revenge, but can the House of Represenatives rise above that revenge?
Wednesday, October 1, 2008
What are the Opportunity Cost of 700 Billion Dollars? Aid to Developing Countries Instead of Wall Street.
Over at the Oxfam Blog, Duncan Green, suggests that the 700 billion dollars could be spent on developing countries. The 700 billion is about twice what the poorest 49 countries international debt is. He also suggests it is 5 times the cost of achieving the Millennium Development Goals, which include food, schooling, and basic health care for all.
This makes me think of my class yesterday, we were discussing Paul Collier’s book The Bottom Billion. In the book he discusses his previous research that shows that international aid experiences diminishing returns, that is the first bit of aid helps a lot but each additional bit of aid does not help as much. Collier research showed that once aid reached 16% of GDP additional aid had not impact on GDP growth.
I’m not sure if there is currently the capacity and infrastructure to distribute 700 billion dollars in foreign aid. But a comparison of the numbers is always worthwhile.
h/t to Chriss Blattman
Monday, September 29, 2008
So what does this mean? Greg Mankiw, Harvard Economist, points to the good old question does correlation =? causation. In other words it could have just been a coincidence that both things happened at the same time.
Mulligan has a good response to Mankiw’s question, basically if we give democrats credit for growth then we might want to also give Republicans credit for equality.
So who knows, which party will do better?
This makes me think of a similar problem with evaluating the 700 billion bailout plan. If the economy gets better, was it the bailout plan or did the economy just get better?
Friday, September 26, 2008
I went to the Brewers Art last night for a happy hour with my fellow Towson professor pals. I’m not positive, but I believe the beers were cheaper during happy hour than during regular hours, same deal at Capital City Brewery in DC (where I happy houred on Wednesday).
Why is beer cheaper during happy hours? The supply of bars hasn’t changed from happy hour to post happy hour (dinner time), but the demand of the patrons probably has. The happy hour crowd tends to be younger and poorer, they tend to have a thirst for cheap drinks. So to attract this crowd before the dinner crowd arrives, bars lower prices.
In Madison, Wisconsin many drink specials were to be found where students ventured out for cheap drink specials. However, due to problems with people who got a little too happy, the local bars banded together to eliminate happy hour specials. A clear case of collusion, happy hour lovers sued the tavern league. The state supreme court of Wisconsin, ruled that it was OK since the tavern league had immunity.
Thursday, September 25, 2008
Over at Underlying Logic, Erik Simpson discusses the role of optimal effort and students. The discussion began with Usain Bolt, the Olympic sprinter who eased up at the end of his raise. In his teaching Erik has found that "I slowly came to realize that many of my students were choosing to incur penalties consistently so that I never got a chance to judge their best work in a straightforward way. That was the point. If you never try your hardest, nobody can ever find your limits. "
Erik makes more of psychological argument that we feel worse if we try and fail, then we fail without effort. But economist generally assume effort is costly. In the case of Bolt, that might not be, but a student would have to work longer hours. Additionally, hours worked not only have decreasing productivity the more you work (diminishing returns) and the leisure forgone when you are already working hard is extremely valuable. Try working another hour if you have worked 20 in a row, compared to the first hour worked.
There is a large economic literature on signaling models related to trying and failing. Simple example. Imagine I'm your boss, and I assign you a task say you plant carrots on my farm. I have too many workers to watch you plant carrots, so I pay you based on the number of carrots produced. Output is based not only on your effort, but also random forces (rain, rabbits, ect.). Depending on the payoffs to a good harvest or a bad harvest, your ability, and the impact of outside forces you may choose to put in a lot of effort or not.
In some sense students have only a vague idea of how an extra hour of studying will pay off both in terms of their knowledge and their grades. Part of their grade is their effort, and part is random forces (did they study the right material, is the prof in a bad mood when they grade the exam).
To optimally get the best effort generally the models conclude that high effort must be more likely to yield the good result, which is then rewarded.
So assign tough assignments, where high effort pays off.
Tuesday, September 23, 2008
To further complicate the problem those with low skills and income are not able to provide the environment to have their 5 year olds have the same level of skills as high skill and income 5 year olds. So the skill differences remain and it is harder to catch up.
Heckman is becoming a stronger advocate for pre-kindergarten education for disadvantage children. In terms of Presidential candidates Obama starts his education platform with a discussion of Zero to 5 year olds education. McCain discusses head start a policy aimed at 3-4 year olds in his early education policy, which Heckman suggests may be too late.
Monday, September 22, 2008
Humphreys and Dennis Coates, have a great readable summary of the general view of economists that show that these stadiums don’t pay off in Econ journal watch.
Friday, September 19, 2008
Here’s an article on Pirate Economics to celebrate international talk like a pirate day:
And 3 Pirate Econ Jokes!
1. How did the Pirate Economist check the validity of his model?
2. How did the Pirate Economist take advantage of different prices in two markets?
3. How did the other pirate economists honor the best young economist?
With the Clarrrrrrrrrrrrrrrrrrrrrk! Medal
If we need to defend against Economic pirates, I’m calling Nobel Prize winner James Tobin, who served in WWII on a Navy destroyer and:
“Tobin invented what has come to be called as Tobit or logit analysis where a dependent variable is restricted to certain values. This regression technique has been found to be useful in many socio-economic problems. Incidentally, the name Tobit is taken from the novel, Mutiny on the Bounty, written by Herman Wouk, who served in the Navy with Tobin and named a principal character in the novel after him.”
Wednesday, September 17, 2008
1. What's a CD? Any money with a major bank in a savings account up to 100,000 is insured by the FDIC. This includes CDs, which pay higher interest than savings account but require you to keep money in the account longer. If your Bank goes under the Federal Government will refund your money. What if all the banks go under? Then the money under your mattress is probably not worth much either.
2. Why move from a money market account to a CD?
A money market account is basically the safest thing short of a Federal Government guarantee. A money market invests in short term stable bonds. As Megan McArdle pointed out for only the second time in history a money market account has lost money, and it was only down 3%. We (my wife and I) are still contributing to my money market fund, but I’m going to hedge a little bit in case something crazy goes down. NPR has a good story on money markets here.
3. Why are you saving money in a money market account and a CD?
My wife and I plan to purchase a house in the next few years. As you can see from year to year who know what the stock marketing is going to do. If you are saving for something you will purchase within the next 5 years keep the money in a money market or CD, that way you expose yourself to less risk.
4. So you are thinking of buying a house, is it because it is a good time to buy?
The five year rule of thumb also applies to real estate, since prices can also vary a lot. The variation is less, but there is a large transaction cost to buying house. If you aren’t going to stay somewhere five years, it is not a good time to purchase. My wife and I both have good jobs now and think we’ll be in the area for a while, so it is a good time to buy for us, once we have a down payment we are comfortable with. If you think you may move or lose your job, don’t buy a house.
5. What about retirement?
Most of the people who read my blog are in their late 20s, except my parents and grandfather (but they don’t need money advice from me). So for us nearing 30 we have a lot of time left to go before retirement (35 plus years). Remember buy low, sell high. If the stock marketing is going down, think of it as everything is on sale. Most retirement advisers would recommend you stick with your general game plan and continue to purchase mostly stocks through a mutual fund (international and domestic), and some bonds (10%) ish to round out just in case. Many companies make this easy with target date retirement funds that do the balancing for you.
A great Warren Buffett story can be found here over at underlying logic.
So how did I learn this. Well as Yogi Berra once said you can observe a lot by just watching. I was lucky enough to have smart parents and grandparents, who passed on their knowledge. But I have also read a lot personal finance gurus. I recommend you go to your local library and pick a book that is right for you.
To find the right book, start with the Simple Dollar’s list of personal finance books, which recommends a book based on your personality.
Yesterday I was talking about the consumer price index (CPI), the way the government measures inflation. Basically the government makes a list of items a typical person would buy, called a basket, then tracks changes in those prices between years. One problem is that most everyone has a cell phone now, but 20 years ago they didn’t. Even if they did it would look like Zack Morris’s phone and probably cost a lot more. So it is really hard to track price changes if technology changes rapidly.
Monday, September 15, 2008
Dan has asked me to take on an interesting econ question. Here is the summary below
There were strangely few people at the mall or at any restaurants. This seems illogical to me. On the supply side, only some fraction, perhaps a third, of area restaurants were open. Grocery stores are still getting resupplied with perishable goods. Refrigerators were off long enough that anything fresh had to be thrown out. On the demand side, many people are still without power, most people are staying home from work, and everyone’s doing enough physical labor to work up a healthy appetite. And in addition, no power means no AC, and since the restaurants are all air conditioned, you’d think that it might be an additional reason for people to go out. So you might think, then, that the supply of restaurants is down and the demand for restaurant-cooked food is up. So why are there not lines out the door? I have asked the Blog of Diminishing Returns to take up this question.
Oh and that picture on the right is from Ohio, that's my child hood home the one behind the tree. Remnants of Ike hit central ohio last night. My parents lost power (in their new house not the one with the down tree), but they decided to stay in. Perhaps that is what everyone else is doing, staying in because they are too tired to go out.
Thursday, September 11, 2008
But most of my friends text a lot more and especially younger people. I would guess that most people who text buy the $5.00 all you can text add on. Although there are 82% of cell phone users who have never texted.
I think few people text like my wife and I do. We send about $7-8 a month in text messages, so paying $5.00 teach to buy the all you can text plan is not worth it. In that sense the phone companies are getting you to pay a lot for the first few messages, which have the highest value to you and pay nothing for the least important messages which have the lowest.
So in short they are trying to get everyone to sign up for an all you can text plan, and to get the most money out of people like me who don’t text enough for that type of plan unless the per text message is really high.
Wednesday, September 10, 2008
The Hotel Rwanda and Your Netflix Queue: You Can Check Out Anytime You Like, But It Will Never Leave
Slate recently collected information from readers on what type of movies people held on to the longest from their Netflix queue (great article here). At the top of the list were Hotel Rwanda and Schindler’s List. Like many other movies at the top of the list they were highly acclaimed, but not bag of popcorn and a beer to forget about your tough day at work type movies.
The article is a good insight into the work of behavioral economics. Sometimes people are not good at judging what they want to do, but instead judge what they wish they wanted to do. The other thing is that depending on the day people’s taste change.
This also verifies the Stand Up Economists Principles of Economics that Choices are Bad and People are Stupid (nerdy econ types who haven't seen this watch here).
Monday, September 8, 2008
That quip is seeming to be more true than some might have expected as highlighted by a recent Wall Street Journal article about economists doing research on the impacts of TV. About a year ago, I highlighted one work discussed by Emily Oster, which suggests that cable TV in India decreased fertility rates as women wanted to be more like the small families they saw on telanovelas.
One work not highlighted by the article, is by my fellow Wisconsin Ag Econ graduate, Jorge Aguero. Jorge watched hours of the South African version of the TV show The Weakest Link to test for discrimination against black contestants. He finds that white players don’t change their strategy to choose African teammates who performed well in the initial round. Indicating possible discrimination.
Since people spend so much time watching, discussing television, the impacts and its information are potentially particularly insightful.