Wednesday, May 28, 2008

How to Measure Unemployment? Is there a new scale?

My friend Anne from college asked me to comment on an interview on the NPR program On the Media. The interview was with Kevin Phillips, whose claim to fame is running Richard Nixon’s presidential campaign. His expertise appears to be in politics, journalism, and economic issues. In the interview Phillips claims that government economic statistics such as the unemployment rate and GDP are being manipulated. I thought I would take a look at some of Mr. Phillips claims.

Let’s start with this quote from the interview
“Well, let me start with unemployment. It's always a question of what the workforce is and how you define people who aren't quite in it. And this might sound like it's fairly simple, but it's not remotely. Government unemployment measurements run from the U-1 to the U-3 and up to the U-6. …….
The U-3 is the number that they generally report. The U-6 includes a lot more people who maybe they're looking for a job, maybe they're not. There's some larger explanation of why they're not working. And the U-6 has unemployment about twice as high as the U-3.”

Phillips is making this sound more complicated then it is. If you want to measure the numbver of unemployed people you might want to take out the people who are not looking for the job (as U-3 does). Basically the difference between U-3, U-4, U-5, and U-6 is how you want to count people who work part time or may no longer be actively looking for a job. (Long article here that explains the difference)

U-3 is the unemployment rate you hear in the news, which has been around 5.5% this does not include people not actively looking or people working part time. U-6 includes just about everyone and it is about 9%. Paul Krugman a few weeks ago suggested we might want to look more at U-6, as “This measure shows what most people sense: the labor market has gotten a lot worse over the past year, not just in the last few months.”

However, as commenter at Krugman’s blog and Econ blogger Karl Smith points out the two measures are highly correlated (just look at this graph)

In the end I don’t think the Bureau of Labor Statistics is trying to game the system. They are using the traditional unemployment definition (U-3) so it is in some sense easier to compare across time. Although it is worth noting that the measure of unemployment must change overtime. For example the reported measure only included household heads until 1978, so in many cases women were excluded.

A final thought a nice parallel can be drawn to baseball statistics. In some sense the homeruns Babe Ruth hit were similar to the ones Hank Aaron hit or hit by Ryan Zimmerman and Magglio Ordonez . But we have to adjust for context of those homeruns. Unemployment data is useful as long as you keep that in mind, and the difference between the two measures in terms of their change over time does not seem to be all that big.

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Tuesday, May 27, 2008

The Economics of Buying Stamps: How Many Stamps to Pickup at the Post Office

My friend Andy the other day e-mailed me to ask if I could tell him how many stamps to purchase given the relatively new forever stamp. For those of you not familiar you can purchase a stamp that will send one regular letter forever, instead of purchasing a set amount of postage. Currently the forever stamp is the same price as the 42 cent stamp used to send a letter. Several people have done analyses of the relationship between overall inflation and stamp prices. A look at this chart shows that the price of stamps grows with inflation, perhaps being out of line at certain points, but probably never more than 1 cent off.

So in short it probably does not make sense to purchase extra “forever” stamps to get ahead of inflation. But, I think there is still some analysis to be done. I will show you how to create a basic economic model to determine how many stamps to purchase. I will argue that you should purchase more stamps if the number of stamps in your wallet is less than the expected number of stamps you will use before your next expected trip to the post office. I believe the best solution is to purchase 20 stamps, unless you already have 20. If you are similar to me and send about 1 letter a month and go to the post office about every 6 months.

First, let us start with your endowment of stamps (S). As my wife points out you should carry them in your wallet, since your wallet is typically with you. Now suppose you have X letters to send over the next year. We will assume that you will send all your mail.

If you have more letters to mail than stamps X > S then you do not have enough stamps. So you must make an extra trip to the post office. We will call the pain that it is to get to the post office P. So if

X > S then your loss of happiness is P, the pain of going to the post office.

Now suppose S > X you have enough stamps. However for each additional stamp that you have there is the potential of losing that stamp and it at some point it will be annoying to have too many stamps in your wallet. Therefore if S > X, your happiness loss from not getting the right number of stamps is f(D), where f is a function of D the number of extra stamps.

I will assume that as long as the number of extra stamps is under 40 it is better than going to the post office again (I think I would rather always carry 40 stamps then go to the post office).

Now we could make the model more complex, since you do not know how many letters you will send or if you will need to go to the post office anyways to mail a package. But I think it boils down to for me, I send about one letter a month. So I should purchase a book of 20 stamps every time I’m at the post office, unless I have at least 20 already, since 40 stamps in my wallet isn't noticeable. Buying the 20 packet is easier, and they stay together in your wallet with more ease.

Sure I could buy fewer stamps, but the pain of me going to the post office (P), just does not make me want to take that chance.

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Thursday, May 22, 2008

American Economic Association Follows Basic Investment Advice

Recently a New York Times article came out with a simple investment strategy. “Index (mostly). Save a ton. Reallocate infrequently.”

What does that mean? Put your money in index mutual funds. Some well known indicies are the S&P 500 and the Dow Jones, these indices track the market by picking a group of major companies. Since the indices are pre-chosen management fees are small and few professional managers consistently do better than the major index funds.

Save a ton is obvious, while allocation is which indicies to put your money. You can do US (small or large companies), International, or bonds. So what is a good allocation? Depends on who you are.

A good indicator might be how experts invest their money. So how about the American Economic Association? They recently reallocated their portfolio to a mix of 15% bonds, 55% US Stocks, and 30% international of which 5% is emerging markets (article here). All held with Vanguard, and I think most are index funds.

That is not too far off my allocation of retirement funds, without the bonds.

Thanks to my grandfather for passing on the NY-Times article.

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Wednesday, May 21, 2008

Perfect Competition and Ebay Sellers

In my intro to economics class, I teach my students a standard economic theory. That usually when anyone can sell something, then in the long run profits for a business will go to zero. These situations are called perfect competition.

I have often thought about perfect competition and Ebay. I would guess most (at least 90%) of the stuff sold on Ebay is not made by the person selling it. Since anyone in the US can pretty much sell stuff on Ebay, if there are profits to be made more people will start selling things on Ebay. When more people start to sell, the price of the good sold will generally fall until profits are zero.

Daniel Gross at Slate has an article today about how Ebay claims that 1.3 million people a year make their living off of Ebay and most of these people are in the US. Like Daniel Gross, I’m skeptical of this figure, it looks like the actual figure is referring to people who make their fist or secondary income from Ebay. What percentage of those people actually earn enough to live on from Ebay is hard to pin down.

In graduate school, I sold coins on Ebay for my father in law. I think the amount I made was something like 10% of my graduate school stipend. Having sold about 50 items on Ebay and not having to get my own merchandise, my guess is have to find just the right niche or have some special ability to find stuff at garage sales to make a living at Ebay.

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Monday, May 19, 2008

What do Professors do with their summer?

So on Friday I finished my duties as a professor for the school year, save some grading. Sometimes people ask me what does a professor do with their summer “vacation”?

Like many professors as part of my tenure/promotion decision I’m expected to publish academic journal articles. Without teaching duties for 3.5 months, I have a lot time to dedicate to that. During the school year depending on the time in the semester I spend between 50% and 10% of my time on research. During the summer it is closer to 90%, with some time to develop courses for next year.

So how do I research? For the most part I work with pre-collected data sets. A few of the papers I’m working on use data from a program in Nicaragua that gave money to families if they sent their kids to school and got health care checkups. The data is freely available here. Another paper I’m working on involves minor league baseball attendance. In that case I had to pay for the data set. I spend time organizing the data and using statistical programs to test for various relationships between variables of interest. This part of the project I would say takes about 1/3 of the time.

Once you have results you can begin to write up the paper. Luckily, I have a cadre of great co-authors. Typically one person will write up a section, then another person will edit it. In some cases one person does a lot of the data work, so they write up the results and econometric (statistical) section, while the other writes the literature review. Typically, the junior colleague has a comparative advantage (that is they take longer to do it, but are less busy or slower at the other parts) in the statistical part, while the senior colleague has it in the introduction, literature review, and particularly editing. I play both roles depending on my co-authors. The initial write up along with the literature review takes about 1/3 of the time.

With the final 1/3 it is about editing and reediting. You present your paper at conferences or university seminars. You might have colleagues read the paper. Then you make changes, and more changes, and more changes. Then if you get enough positive feedback you send it to a journal. The journal gives it to 3-4 peers and the peers decide to accept, reject, or ask for revisions. The most common result is to reject or ask for revisions. Sometimes papers can go through 2-3 rounds of revisions, and reviewers can sometimes take a few or many months to get back to you. So sometimes you can’t work on your article for a few months, so it is best to have several projects going at once. I have five projects I plan on working on this summer, they are all at various stages.

One great thing about the summer is that I set my hours (although I typically work normal work hours) and I can work from anywhere I want.

So this summer I will be living in Palo Alto, California while my does a temporary work assignment all summer. So look for some Bay area related updates.

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Thursday, May 15, 2008

$240 worth of pudding.....awww yeah! The Pudding Index


So if you don't know anything about $240 worth of pudding watch the video first.

The video is from the State an MTV sketch comedy show from the mid 1990s. This skit was ranked #47 on the Nerve's list of best 50 comedy sketchs of all time.

Really this post will make no sense if you don't watch the video. It might not makes sense after, but just watch it.

It's time now for $240 worth of pudding......

One night my wife and I wondered how much pudding $240 would purchase. After seeing the video again, I thought how has that amount changed over time. The graph below shows the amount of pudding that could be purchased for $240 going back to 1950.
I used US government data on the price of a gallon of whole milk, plus 8 boxes of instant pudding mix per gallon. A box of instant pudding mix is assumed to cost $1.09 (based on field research at Safeway) and is indexed to the CPI. We also assume anyone who would make $240 worth of pudding would not think ahead to buy in bulk.

Currently $240 buys only 19 gallons worth of pudding, when the sketch came out in 1993 it bought almost 30. At my birth in 1980 $240 would have bought 50 gallons worth of pudding.

Still 19 gallons is a lot of pudding.... awww yeah!

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Rational or Irrational Prices? Counting Coins at Chevy Chase Bank

So you the last couple of years, I have been putting my change is this cool piggy bank (). I wanted to turn in all my change and went into the Chevy Chase bank location in the Towson student union. I had seen they had a coin counter there, and I assumed maybe it was free for Towson University people. Ok I was wrong, but I would be willing to pay to have the coins counted.

But the pricing system was weird:
Count Under $5.00 of change free
Count $5-$100.00 …. Flat $3.00 charge
Count $100.01 or more 10% charge

I think I had about $150 in change. So I started feeding my change in and I got to $95 and then stopped. Why because that cost me only $3, so for $95 of change I received $92. If I put in the whole $150 it would have cost me $15. But if I go back tomorrow and put in the other $65 worth of change I get $62. So now I have paid only $6 to have my coins counted, instead of $15. But, I do have to go to the student union twice, so you have to figure in the opportunity cost of going back over.

So why would Chevy Chase set this type of fee structure? My guess is it to prevent people from coming with hundreds of dollars worth of change. Or perhaps they were hoping to get someone thinks: I have saved this change up for years, I don’t feel like making extra trips, I’ll just pay the larger fee.

In other words, my guess is that Chevy Chase thinks the average’s person opportunity cost for a second trip to the bank is at most $14 (the savings of doing two trips just under a $100).

I should note that the service is free to Chevy Chase customers, however I bank with an online only bank.

I think I should change my bank to First Citywide Change.

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Wednesday, May 14, 2008

Mortgage Crisis Explained, This American Life Puts it all in Prospective

I have to admit I still did not quite understand how the mortgage crisis happened. It was really put into perspective last night when I listened to this week’s episode of This American Life, a public radio program. I really recommend listening to the whole thing (here). It’s an hour long but great!

To summarize. Within the last few years the amount of money around the world that is invested has double with a lot of it coming from exporting countries like China and oil producers. These countries were looking for decent but reasonably safe returns. US treasury bonds were not paying much, so someone figured out that people could buy up packages of mortgages. Sure some would default, but with enough of them the risk should even out. Soon the good packages of traditional mortgages were purchased, so the rules for mortgages changes. Instead of showing your tax return, to show you could pay your loan, you could just state your income and assets without verification, then mortgage brokers stopped asking for that. Not surprisingly if you don’t verify people’s income or don’t even ask you get a worse pool of borrowers.

Additionally, mortgage brokers lied to sell more loans, like one man whose paper work said he made almost 6 times more a year then he actually did. This is a classic economics problem if you offer a loan or insurance you are more likely to get the people who can’t repay or will need to use the insurance.

The other problem was computer models underestimated the amount of people under the non-income verifying that would default. The underlying problems now are that international investors are afraid of a variety investment. Also that as these mortgages were resold now thousands of people own each mortgage, since they were sliced up, so there is no way to renegotiate things.

So be prepared to show your tax returns and pay stubs to buy a house.

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Tuesday, May 13, 2008

Immigrant Men Taking On Domestic Tasks

I liked this story about male Latin American immigrants learning to cook and clean that was in the Washington Post yesterday. As one person interviewed for the story put it, “Most of the Latino men come from a culture where they're used to having their wives or companions do everything around the house.” So when they get to the U.S. they have to call home for help with cooking or cleaning, or they forgo the cleaning and cooking and live in substandard conditions.

From the article it seems like some men may take some of these skills home when they return to their country, although others may revert back to their social culture norms.

The specialization of women in domestic duties is not uncommon in the US. I’m reminded of a time about 5 years ago when my wife and I were recently engaged, and my wife told a church friend of her’s that I did not like her to miss dinner. The church friend tried to give this carefully constructed set of advice that she should not continue to always take care of me, once we were married and I would have to learn to fend for myself sometimes. However, when my wife informed the friend that I did the cooking and I liked her home because in graduate school that was the only time we got to see each other during the week. The friend’s response after know the real reason was much more positive.

Taking this back to economics, in graduate school I worked with a model that examined how households allocate their time between income generating activities and household chores. If one person it more productive in household chores, then that person will use their time for that (me cooking or a latina house wife doing domestic chores), while the other person will use their time to generate income. Sometimes people will do a bit of both. Additional, time can be used for leisure. The difficult question is how does a household decide to allocate this time? Not only will it be based on ability, but also bargaining power between a husband and wife will determine how a household decides to distribute its time? It gets even more complicated when you consider things like cleaning, cooking, and child rearing generally benefit all household members.

Although anyone who has ever tried to figure out who cleans the bathroom knows these are complicated decisions.

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Sunday, May 11, 2008

Can Workers' Conditions Abroad Be Monitored?

Recently Robert Reich, Bill Clinton’s former labor secretary, was doing a Q&A on the Freakonomics blog, and he picked a question I submitted.

Q: As an econ professor and Democrat I’m still having trouble with the protectionist talk of the two candidates. Do you think Obama is handling trade issues properly or should he be more pro-free trade?
A: While it makes sense to argue in favor of labor and environmental standards in trade deals (so long as they’re on a sliding scale, and poorer nations don’t have to reach the same standard as richer nations), I don’t think the candidates should feed the current frenzy against free trade.

I think Reich’s answer is a good one. I agree there needs to be some sort of labor standards and at the very least people who purchase products in the U.S. need to able to figure out the labor standards under which the products were produced. I have not given much thought to international monitoring. However, I came across a good article written by a former factory inspector.* Not surprisingly it is a tough job, and factory owners work hard to hide poor conditions.

As the article’s writer says “Monitoring by itself is meaningless. It only works when the company that's commissioning it has a sincere interest in improving the situation.” If that is the case , then without some government intervention there will be not motivation for companies to monitor their abroad factories.
I’m not sure where the balance lies between labor and environmental trade standards, but it is important to have a view of the situation as a whole, and part of that is the difficulty of actually enforcing any law.

* I came across this article through Brijit, a new web service that summarizes articles for many publications in 100 words or less. H/t to Megan Macardle for pointing to this service as an idea generator for blogs.

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Friday, May 9, 2008

What is Scott Adams Smoking at The Economics Party?

O.K. I was just going for a cool title, but Scott Adams, Dilbert’s creator, is talking about creating an economics political party, but I think he misses the mark on what economists agree on. This party idea was in response to recent debate on the gas tax. From his blog, Scott Adams suggestions for the party would be:

The Economics Party would ignore superstition in its decisions. Here are a few things I think would end up on the platform, assuming most leading economists agree:
- Withdraw from Iraq
- More aggressive energy policy (back off on ethanol)--
- More sane tax policies
- Limited government
- Legalize doctor assisted suicide
- Keep abortion legal
- Decriminalize marijuana
- Strong education policy

I’m not sure this is what economist actually agree on. Generally as Greg Mankiw summarizes a survey of American Economics Associate members, economists like free trade, don’t like agricultural subsidies, like immigration, think social security is going to run into trouble and we should raise the retiring age.

Only 62% are pro-legalizing marijuana. I’m unsure on economists views on abortion, suicide, and Iraq, but I’m guessing they largely fall in line with their political and not economic views.

Heck we can’t even agree on the minimum wage (38% think it should be higher, 47% think it should be eliminated). We do agree that economists are under paid and appreciated so next time you see one give them a hug.

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Thursday, May 8, 2008

POP for PPP: Tracking Beer Prices Around the World tracks beer prices around the world by letting people enter in the local price of pint. With entries on just about every country, and conversion to three kinds of dollars (US, Canada and Australia), Pounds, and Euros. So some of the data looks a little suspect (like where are the $2.50 beer is Washington DC)*, but overall a few lessons can be learned.

First, beer is cheapest in African countries. Can anyone confirm the sub $.50 pints for beer in Ethopia?

Second, beer is more expensive in out of the way place or expensive European countries. Also I think you should not drink beer in France on average $8 a pint, drink wine instead.

This project reminds me of the Big Mac index. This index created by the economist compares Big Mac prices in different countries to find the relative difference in prices and predict when exchange rates are out of whack. By comparing the prices of the same good in two places you can get an idea of purchasing power parity (PPP), which is the difference in prices between two countries. The reason the index works is that everywhere the Big Mac is two all beef patties, lettuce, cheese, special sauce, on a seaseme seed bun.** Could the price of a pint (POP) work for PPP, probably not since I don’t think Costa Rican ($1.32) beer is the same quality as a Czech ($1.89) beer (trust me I have done the research). That's apple and oranges or Bud and Budvar.

* actually cheap beer can be found at the Toledo Lounge in Adams Morgan
** except India, where it is made with chicken

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Wednesday, May 7, 2008

200th Post: Thanks for Reading

I thought I would put up post #200 and take a little time to reflect. Starting with a post on Renters Insurance I have covered development, energy policy, college endowments, baseball, beer, travel, and numerous other topics.

I have been averaging over 20 posts a month, which means I’m hitting my nearly every weekday goal.

As for readership so far I have gotten 8,300 hits although some of those are from people looking for picture of the Big Lebowski. In the next year I hope to increase my readership, but on an average day I still have more readers then students I teach a semester.

A couple of ideas I’m working on is to figure a way to include the blog as part of my class (or at least make it an option of reading a few blogs). Also I would be interested in dual posting with other blog writers or trading guest posts on topics of mutual interest.

Posting may be a little slow as the semester winds down. But come a few weeks posting will pick up hopefully in quantity and quality.

If you have any econ questions you would like to see me discuss let me know.

I realize you have lots of choices for your blog reading and every time you read this post there is an opportunity cost. So I hope your utility outweighs that opportunity cost, but if you are an irrational reader I thank you anyways.

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Tuesday, May 6, 2008

I’m not an Economist who supports a gas tax reduction, but one theory how it could help.

First I repeat I’m not an economist who supports Hillary Clinton and John McCain in their call to reduce the gas tax. I have covered the issue in a previous post, but I think my fellow economist should try to think outside the box. So here is one possible way that a gas tax could help give a boost to the US economy. I tried as a thought exercise to think of a scenario where I would support a gas tax removal.

First, I would bet that the average American would be able to tell you on a given day within 10 cents what is the current price of gas. That is because we see giant signs that advertise it. Next, it would not surprise me if many Americans based their feeling on how well the economy is doing on the price of gas. Recent works in behavioral economics suggest people use heuristics that is general sign to make judgments. If the price of gas were to go down (which it might not too much with the gas tax reduction), it might increase consumer confidence. If the government can use this policy faster than rebate checks, it might be a short term stimulus to consumer confidence and provide a little jolt to the economy.
Now this idea requires the following.

1.) People must be influenced by other economic decisions by changes in gas prices more than changes in other good prices. (maybe, but not unlikely if you talk to non-economists)

2.) Eliminating a gas tax would actually have to substantially decrease the price of gas.
This paper suggests that a 5% decrease in the Illinois tax led to a decrease in price of about 3% in 2000. I would guess supply is a little less responsive to price now so the drop would probably be lower.

3.) The increase in consumer confidence would have to be reasonably large to create a temporary surge in spending. (doubtful)

So my fellow economists, what evidence do we have about the relationship between gas prices and consumer confidence? I have looked and not found a lot. Gas prices may be related to other factors in the economy that also impact consumer confidence, so I’m wary of just comparing the two.

I think the possibility of this being true is 1/100(0?), but that is the best I can come up with.

I think the important lesson is that as economists we must try to continue to explain our thinking and hold our ground in the face of this…(clicking here is recomended)

But as Krugman suggests maybe its time to chill out.

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Thursday, May 1, 2008

Reverse Prostitution: Paying Tanzanians to keep STD Free

A new World Bank program is beginning in Tanzania to fight HIV/AIDs. The program will pay participants $45 if the test clean for sexually transmitted diseases, which is on average about 25% of some of the programs participants. (See article)

The idea is that if you incentivize having safe sex, HIV rates should down. However, testing for HIV is expensive. Also previous work by University of Chicago economist, Emily Oster, has shown that part of the reason for higher HIV infection rates in African countries is higher infection rates of herpes, which increase the likely hood of transmission.

Another good point of the program is that if a participant is found to have a STD they receive free treatment. As I pointed in a previous post about treating STD infections, spending $78 treating STDs is predicted to prevent 1 HIV case.

This program should help indentify STD infected people and may promote more safe sex. From the article it looks like the program will be tested as a randomized experiment. So in a few years we’ll have an idea of how well the program works.

h/t to marginal revolution

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