Wednesday, October 29, 2008

Forbes College Rankings, Bad Methodology

Forbes magazine has introduced a new college ranking. They start with a good idea, but it is extremely poorly executed.

“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 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 . 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, 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.

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Tuesday, October 28, 2008

Cell phones, consumer expenditure survey and pollster.

Here is a story with a lot of digressions. I was looking something up at the consumer expenditure survey today. To get side tracked the consumer expenditure survey is really great it interviews a bunch of households in the US and finds out how people spend their money. I was looking up how much the average person making $20,000-$30,000 spends on their rent (the answer 37%). This is useful information if you are doing a budget or renting someone a house to see how you or your renters stack up against the average person.

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.
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Monday, October 27, 2008

A Two Handed Economist's Take on Slots in Maryland and a Casino in Ohio

A previous commenter asked for my take on Ohio’s Issue 6, which would allow a casino to open in Ohio. My home state of Maryland also has an issue on the November ballot to allow slots. This ballot is closer to my pocket book, not because I’m looking for a place to put my quarters, but because the slot issue is tied to the Maryland education budget. I’m still not sure which way I’m going to vote, but I want to lay out the argument on both sides for Ohio casinos and Maryland slots.

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.
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Friday, October 24, 2008

Microcredit versus payday loan

When my father was visiting last week he asked me to compare micro loans in developing countries with payday loans.

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.
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Thursday, October 23, 2008

Credit Part II: An Economist's Take on Ohio Issue 5 To Cap Pay Day Loan Interest

Sorry about the lack of blog posts, I’m learning how to advise students this week. So back to the credit market. This November Ohioans will be voting on a cap of interest payments for loans. As I noted in a blog post over a year (one of my first at Towson), interest rates at payday loan locations can approach 400% per year, the cap on the ballot is 28% a yea.

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.

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Monday, October 20, 2008

Consumer Credit

I’m going to be focusing on credit this week. Later this week, I’ll be discussing micro-credit in developing countries, but I thought I would start with some interesting developments in the US credit market. Felix Salmon over at Market movers, says consumers may have finally reached too much debt:

“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. 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.
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Wednesday, October 15, 2008

What Parking Tickets and Red Cards Can Tell US About Corruption?

Economists Ray Fisman (Columbia University) and Edward Miguel (California University) have a new book, Economic Gangster: Corruption, Violence and the Poverty of Nation.
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.”
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Tuesday, October 14, 2008

Google’s Knol , Technology Adoption, Increasing Returns to Scale, and Paul Krugman

Over at Underlying Logic, Eric Simpson, discusses Google’s new web encyclopedia Knol. Knol is in some sense is competing with Wikipedia, but the difference is that article are written and attributed to an individual author. The idea is that as more people link to an article, the article gains in rankings. Good articles like websites on Google’s search engine will rise to the top.

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.
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Monday, October 13, 2008

Paul Krugman Nobel Prize 2008

Paul Krugman coined a phrase called “airport economists” to talk about sensational books with titles like Dow 36,000 and The Next Great Depression. At the same time more serious economics books were hard to follow. Krugman’s Age of Diminished Expectations was one of the first economics books I read, and Krugman bridged the gap between not serious and seriously boring. I like this quote from a recent Krugman interview

“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.
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Wednesday, October 8, 2008

How the Economic Crisis Can Be Good For You!

If you lose your job or need your 401k money now the economic crisis is bad for you. Wage growth might slow, but I was thinking about ways the economic crisis might be good for some people.

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.

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Monday, October 6, 2008

What to Do When The Market is Running Wild? Ask Your Mom.

The stock market has been all over the place (although generally going down) over the last few weeks. At this point it might be good to see which sorts personality traits help people best survive the market turmoil.

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.

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Thursday, October 2, 2008

Make Wall Street Pay Even if It Hurts Us

Duke’s behavioral economist Dan Ariely yesterday on NPR’s market place explains why Americans want revenge against Wall Street.

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 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?
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Wednesday, October 1, 2008

What are the Opportunity Cost of 700 Billion Dollars? Aid to Developing Countries Instead of Wall Street.

I have not commented much on the bailout proposal, because I don’t completely understand what is going on (actually this sentiment is quite common among my colleagues). But a good question anytime someone spends money is what where the opportunity costs, or what could the money have been spent on instead?

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
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