Monday, September 29, 2008

Which Party Will Be Better for Economic Growth?

Alan Blinder, Princeton Economist, in a recent NY times article points out that economic growth has been higher under Democratic presidential administrations than Republican, but Casey Mulligan a University of Chicago Economist, shows that women’s wages grew faster relative to men’s wages during Republican presidencies than democratic.

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?

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Friday, September 26, 2008

The Economics of Happy Hour: Why Beer is Cheaper During Happy Hour

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

You Tried and Failed, Lesson is Never Try

Should you try your hardest? Generally the answer is no. Most things in life we could have put more effort into, but we need and want to sleep, eat, ect.

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.

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Tuesday, September 23, 2008

The Rich Get Richer and The Smart Get Smarter

James Heckman, the University of Chicago Economist, won his Nobel for his work on econometric techniques to estimate various possible influences of wages. Over the last few years he has turned his focus to explaining the difference in skills and wages based on a worker’s education. Generally, he’s finding that skill gaps that exist at ages as young as 3 years old explain most of the difference. He describes his recent work over at Voxeu

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.

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Monday, September 22, 2008

If You Subsidize Not Enough Come

Over at The Sports Economist, Brad Humphreys, discusses the problems with the new Nationals baseball stadium in DC. I have been to a few Nationals game this year (including this one), but not any more than I would have if they still played in RFK. The Nationals attendance has increased a bit this year, but with a sub-par team the new stadium has had one of the smallest bumps in attendance from a new stadium. In short new major league baseball stadiums increase attendance by 2.5 million fans (based on estimates in a recently published paper), but with new stadiums costing 500-600 million the costs to tax payers out weight the benefits even before you account for people substituting ball park expenditures from other forms of entertainment.

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

RRRRRRRRRRRRRRRRRRRRRR!!!! Second Annual Talk Like an Economist Pirate Day.

Enough talk about the market downturn plundering your booty. Last Year, this blog got taken over by pirates on International Talk Like a Pirate Day.

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.”
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Wednesday, September 17, 2008

What Should Your Response Be To The Stock Market Plunge? Not Much

So I called my bank yesterday to move some savings for a house fund from a money market account to a CD. That’s my entire response to the current stock market plunge, now why and a brief primer on what to do. Through a series of questions. Note even with my Ph.D. in economics I have no special training in personal finance, I'm not your financial planner please consult a professional or better yet learn for yourself.

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.

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Zack Morris’s Telephone and the CPI

Sometimes I have trouble figuring out the mutual pop culture references that I share with my students who are 5 to 10 years younger than me. One thing that most students seem to remember is Saved by the Bell, the early 90s teen sitcom, which they watched on reruns and I remember seeing the first run.

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.

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Monday, September 15, 2008

News and Economics From Ike

My friend and fellow Grinnellian, Dan Rothschild has been spending the past three years studying Katrina. I guess he felt he didn’t have enough experience with hurricanes so he made a stop in Houston on his way back from Pheonix to ride out Ike with his family. I’ve enjoyed Dan’s live blog of the events at Ikeonography and it seems Dan is making his way back to DC.
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.

So, some theories. My first, guess it is a case of imperfect information, perhaps people don’t know that the restaurants are open. Standard economic theory requires both buyers and sellers know what is available. My second is that the demand just is not there either people have left or do not want to leave their house maybe because of fear of damaged road, little/costly gas to get to restaraunts, or perhaps in some areas looters.

One difference between local gas prices and restaurant prices. When shortages occur prices go up, imagine you are a seller with more customers than you can handle, you raise your prices. My guess is that local gas stations have more ability to change price quickly, as anyone who has seen gas prices go up the last couple of days can tell you. In the case of a chain restaurant or grocery store, my guess is that local management at Applebee’s or Safeway won’t raise prices when lines are out the door, but a gas station will. I think the reason we don’t see shortages of food as much as gas, is many people have a few days worth of food around, but perhaps not enough gas to get out of a hurricane’s way.

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.

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Thursday, September 11, 2008

Why R U paying so much per text message?

Salon’s tech blog the machinist has a piece today on text messages. A bunch of cell phone companies are doubling their prices on text messages from 10 to 20 cents a message. Now when I text my wife to say “I’m running late” it will cost us 40 cents and not 20 (since we pay for both receiving and sending).

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.
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Wednesday, September 10, 2008

The Hotel Rwanda and Your Netflix Queue: You Can Check Out Anytime You Like, But It Will Never Leave

I love Netflix! I put movies in a queue on their website they send me two at a time and each time I send one back, usually after a couple of days they send me a new one. Sometimes it takes me a week or two to watch a movie, but after that since I have the 2 at a time package I send the movie back if I have not watched it. Some Netflix users hold on to their movies for months. In fact so long that it would have been cheaper to buy a copy of the movie then to pay for the extra disc on Netflix.

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).

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Monday, September 8, 2008

No Hay Tele

A favorite quip of urban Latin American women is when a rural family has a lot of children “No Hay Tele,” there isn’t any Television.

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.
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Wednesday, September 3, 2008

Sex Education: Just Say No or Safety Dance

I liked a recent blog post by Megan Mcardle on sex education. She points to research that shows that DARE, the anti-drug program that encourages kids "to just say no", has been shown to have no impact on drug use. This result is one of my father’s favorite, because it demonstrates that showing something has no impact is often as important as showing something has an impact.

Mcardle then questions if drug education doesn’t work, then perhaps sex education does not either. But she does not cite any studies. I looked around, this article in the Journal of Health Economics suggests that Aids education in the US increases contraceptive use, but does not hasten or increase sexual activity.

I’m not able to read it, but this meta-study of 83 studies finds that some (not all) Aids education programs reduce sexual risky behavior and do not increase activity. So based on a brief literature review (i.e. Google Scholar/Econlin check),

I don’t think we can say that sex education does not work like DARE.

I think we can all agree though the best alternative is not to tax sex as Steven Dubner proposes over at Freakonomics.

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What Is it Like Living on $1 a Day?

I was rereading an article this morning by Abhijit Banerjee and Esther Duflo, which describes the lives of people consuming less than $1 a day. The $1 a day measure was originally created because it approximated what it would cost to feed a person.

The paper uses household surveys from 13 countries to get an overview of what the poor spend their money on. Not surprisingly, food is the highest expenditure with anywhere from 50-75% of the budget. Spending on alcohol and tobacco is not uncommon. But, in many countries these families also spend 10% of their budget on festivals, weddings and funerals.

Even if the poor had more money the article cites studies that have shown that not all of the additional money would be spent on food. Some would be spent on “entertainment.” I like how the study puts it into perspective in these lines:

“In other words, many poor people save money that they could have eaten today in order to spend more on entertainment in the future, which does not immediately fit the idea of their lacking self-control.
“The need to spend more on entertainment rather than on food appears to be a strongly felt need, not something that would go away if the poor could plan better.”

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