Tuesday, December 30, 2008

Most Beautiful Girl in The Room: The Economics of Being A Part Time Model

I have been watching Flight of The Conchords with my wife over the last few days, how did I not watch this show earlier. I’m a big fan of silly songs, but I was thinking about the song most beautiful girl in the room.

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

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Wednesday, December 17, 2008

Stocks Win in the Long Run, but how Long is the Long Run.

My father cc’d me on an e-mail to my grandfather about stock returns. My grandfather had asked what his return for his retirement funds would have been over the last 30-40 years, if he had been in bonds or CDs.

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.
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Tuesday, December 16, 2008

Supply and Demand of Inauguration Rentals

A few weeks ago there were a number of stories about how DCers were trying to cash in on the Presidential Inauguration by subletting their house/apartment to visitors (example).

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.

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Tuesday, December 9, 2008

Malaria Vaccine May Come in 2012

Good news a malaria vaccine has been field tested in Africa and may be ready by 2012.

I have my students read Jeff Sachs's book, The End of Poverty, one of the things I like about the book is how Sachs shows that many aspects of development are related (schooling, water access, health, women's rights) without one it is hard to have another. Sachs is also a firm believer in geograpghy determining development. In the book he points to a map similar to the one I have here. You'll note lots of the poorest countries in the world also have malaria.

It might be causal, but I think there is a good case to be made that preventing malaria is a part of economic development.

For development workers Chris Blattman has a good overview for you on what do if you find yourself coming down with malaria.

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Monday, December 8, 2008

Why Housing Prices Will Keep Rising Compared to Food Prices

On an internet forum I participate on associated with my under grad (Grinnell College), people were talking about how much people spent on various things (rent, food, entertainment ect.) To get a better idea of how my fellow alumni spend their money I created a simple expenditure survey (you can take it and add to my data by clinking the link). The survey proved popular enough that 130 people took it. I shared more results within the community, but I thought one result demonstrates an important economic concept. Income elasticity:

On the graph above, post tax take home pay is on the X axis and two type of goods on the Y axis (Groceries and Rent/Mortgage Utilities). To me there appears to be little relationship between income and grocery spending (note food out is another category). I'm typical of this result. My income has gone over the last couple of years, my rent has gone up by about the same percentage (in part due to a move to DC) while my grocery bill hasn’t increased that much (I eat lunch out a little more, but buy slightly better food at the grocery store). For most Americans we might be at a point where the income elasticity of our grocery bill is zero, that is even if we get pay raises we won’t really increase are spending on food. But it’s not the same for housing. As we get richer we tend to live in better (i.e. more expensive) neighborhoods.

This has an interesting long term impact. As the country gets richer over time, we all will continue to demand better housing, causing an increase in the price of housing. This can be partly offset by new building. But as our income grows we are not going to eat that much more (really can Americans eat any more).

There might be better surveys to demonstrate this, but since many Grinnellians read my blog I thought you might find this interesting.

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