Kiva Update, Kiva $s are Fungible

Thank you to those who votes on the Kiva proposals! I really like the project and hope my students do to. Congratulations to the winners!

An extremely timely blogpost was made a couple of weeks ago by David Roodman about Kiva, which I was just e-mailed today. In the post Roodman outlines a lack of clarity in how Kiva presents the loans you can fund. In short, nearly all Kiva loans are prefunded. That is the person you want to give money to may have already received it from a microfinance organization. Roodman carefully discusses the implications for this highlighting the problem of a lack of transparency.

The founder of Kiva,Matt Flanery, responds to the blog post here (here).

At this point it might be important to remember an important part of microcredit and money in general, that it is fungible. If we loan a woman in Bangladesh $100 to buy cloth, but she would have purchased the cloth even without the loan but instead uses the $100 to send her children to school. Then the loan was in fact for schooling, even though she said it was for cloth. If Kiva shows a proposal that says they will loan the money to a woman in Bangladesh, but instead have already loaned her that money and use that money to loan to a store owner in Bolivia, which they later post. The money is fungible.

I think I'm OK with what Kiva does, just like Roodman. I do like that Kiva's founder stresses the importance of transparency in his blog post. I applaud Roodman's for his in depth discussion of Kiva.

Thanks to Roodman if I decide to continue with this project every semester we will know how Kiva actually works.

Kiva Contest II

Dear Blog Readers,

For my Development Economics class I'm holding a contest please help me vote for the best proposal. 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 three 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.

Thanks,
Seth Gitter

Contest Proposals

Please Vote on Your Favorite Kiva Proposal

Proposal I (link to loan)

I propose to lend money to a woman by the name of Akouvi Victoire Adanlekponsi from Lomé, Togo, who is asking for a loan of $675 for her business. She is married to her carpenter husband and has two school-aged children. Akouvi runs her own business selling cooking oil, which she started in 1991, in order to help out with family finances and to support her children’s education. Akouvi’s country, Togo, has a GDP per capita figure of $900, according to the CIA World Factbook, making it the 14th poorest country in the world. Because the country is so poor, its citizens might not have access to quality financial institutions, and this is where microfinance institutions play a role.
As Akouvi has sustained her business for almost two decades, the business is certainly viable. According to her Kiva profile, she has built up a loyal clientele over the years and now even has commercial clients. The reason she needs the loan is because her business is growing. In response to growing demands for her oil, Akouvi will be using the money to buy additional oil drums to meet her “urgent need” to increase her stock. Because Akouvi is a female, she is a good candidate for the loan, as women usually manage household budgets and tend to be more responsible. Thus, she will probably be more likely to repay her loans on time. And given the state of poverty in Togo, the loan will not only go toward Akouvi’s business, but if her family hits a rough patch financially, it may also help Akouvi keep up with household finances and continue to send her children to school.


Proposal II (link to loan)

I have chosen Edward to receive a loan to help better the life of his family and himself. He lives in a town called Dormaa in Ghana, and he is an herbalist. I have chosen him over other people because as an herbalist he supplies medicines to drug stores and also goes village to village to sell his medicines. I believe he is more important than most of the others on the kiva website because there are many farmers and general store owners but not many people who can improve the health of others. Edward lives in Ghana which is a poor country with a GDP per capita of $ 1,500, but I chose Edward because Ghana is growing at a high rate and this loan will help their growing economy. Currently Ghana’s economy is growing at a 7.3% rate, which is high. Their GDP per capita has gone from $ 1,300 to $ 1,400 and is now $ 1,500 in the last three years. For a country with such a small GDP per capita this is very promising growth which is why I feel Edward should get the loan he needs to help himself his family and his country. Also Edward makes medicines for people which are a much needed business in a country that is as poor as Ghana. With the right supplies and funds Edward is sure to succeed and improve the health of many people. He has been an herbalist for over twenty years; he already has a client base of drug stores and villagers. So with this loan Edward will help improve the lives of many people including himself.


Proposal III (link to loan)

After reading the loan description for Shapei Asilbek, I believe she is deserving of a loan through the Kiva.org microfinance program. Asilbek, a 33-year-old woman has owned and operated a pharmacy since 2005 with the aid of her husband. She is the mother of two, and lives with her two sons, her husband, and her mother in a traditional ger. Both of her sons attend kindergarten already. Located in Mongolia, a country with a GDP per capita of only $3,200, the need for pharmaceutical drugs is fairly high. She has placed her shop in a high traffic area next to the local market in the province of Bayan-Ulgii. Asilbek is looking for a total loan of $1,725 in order to purchase more medicine for her pharmacy. In the years she has operated her pharmacy, she has gained a lot of experience in the field of business, and has a very good reputation among her peers, many of which continue to come back to her when they are in need of medical assistance. Not only does she sell the medicine, but also she is a doctor and frequently sees her customers in her shop. A link to her lending page is as follows:

Will The Invinsible Hand Change This Diaper?

I have another secret blog, I have been working on over the weekend. For the 5 readers of mine that don't know, my wife Marie is pregnant and I'll be a dad sometime around Thanksgiving. In the secret blog we are detailing our adventures as a "growing" family. If you are a friend and know me and haven't been invited to read the blog and want to read it send me an e-mail.

So back to the question at hand. This New Yorker cartoon quips "maybe the unseen hand of the market will change this diaper"

So will the market change a diaper? Yes, because typical problem associated with market failures (externalities, imperfect information, and monopoly) are resolved for diaper changing.

Babies create "smelly" externalities in their diapers and noise externallities (known as crying) . Perhaps the public optimal time until a diaper changes is less than when diapers are changed, but I doubt it. Luckily the parents or care taker also bear these externalities, so market force should have parents meet a child's demand for a diaper change.

In the case of imperfect information there may be some times parents do not know if a diaper needs to be changed (why are you crying?). But, generally I expect the demand for diaper changes can be verified (see smelly externalities).

Parents may hold duopoly power over the offer of diaper changes. However, most parents set the price of a diaper change at the total surplus maximizing price of zero.

Now if only I can find someone with a comparative advantage in diaper changing who wants an economics lecture.

U RA RA Wisconsin! 100 Years of Agricultural Economics

Most of the people in the world are poor, so if we knew the economics of being poor, we would know much of the economics that really matters. Most of the world's poor people earn their living from agriculture, so if we knew the economics of agriculture, we would know much of the economics of being poor.
-----Theodore Schultz's 1979 Nobel Prize lecture

Schultz is the most famous of the alumni of the Agricultural and Applied Economics (AAE) Department at the University of Wisconsin-Madison. Over 70 years later I earned my PhD from the same department. Last weekend I traveled to Madison to celebrate the department's 100th anniversary.

In Schultz's work we can see how agricultural economics became the first economics field to study developing countries. When Schultz received his PhD 1 in 5 workers was in Agriculture in the United States. In the next 70 years this number would fall to less than 1 in 50 in the US. However, the poor in developing countries are still largely made up of farmers.

I think Schultz's Nobel lecture is well worth a read (guess whose students will read it next week?). The lecture details the relationship between health, schooling, technology, and agricultural. I'm still a firm believer that agricultural policy will play a key roll if development policy is to be effective.

There have been a lot of other great graduates and assoiciate faculty at AAE Wisconin over the years and I'm proud to be one of them.

BREAD, Development work you should know about

I'm off to Madison, which I'll talk more about on Friday or Monday. Chris Blattman is off to BREAD's conference in London. BREAD is an organization that runs regular development conferences with presentations by top economists.

The first two papers are particularly interesting looking and I'll give them a closer look later. Here is a list of the agenda and links to papers.

The first "How to Target the Poor: Evidence from a Field Experiment in Indonesia" looks at the best way to figure out which groups to target with poverty relief programs. Finding out who is poor is expensive. One way is to use a proxy means test, which in short means looking at the type of house someone lives in if they don't have running water, concrete floors, electricity or some combination then they are deemed poor and eligible. The other common tool which is cheaper is to find poor communities and give the help to everyone there. Reading the abstract suggests that the first tool works better at figuring out who is really poor, because communities are bad at ranking themselves.

The second paper "Why Do Mothers Breastfeed Daughters Less Than Sons? Evidence and Implications for Child Health in India" Suggests that girls are breast fed less because mothers want to keep fertile after daughters in hopes of having a son. Child mortality mirrors this result and may account for 22,000 missing girls (or about 14% of the difference between the # of girls and boys)

I'm happy I'm going to Madison, but looks like a good bunch of papers.

Flu Shot Rationing

So yesterday I went down to the campus center and got my flu shot. Towson was giving free flu shots to students and charging $10 for faculty members. The plan was to dispense flu shots from 7 to 7 yesterday and today.

The demand for free and $10 flu shots was too high and by just after 2pm on the first day, Towson's clinic was out of flu shots. If we were looking at this from an ECON 101 first week of class, we would say there was a shortage and the clinic should have raised their price.

But sometime later in ECON 101 we also talk about externalities. Towson can produce a lot of positive benifits (externalities) if it gets as many people to get the shot as possible. Students living in dorms are more likely to spread it to each other due to close quarters. So the price favoritism to students is probably a good idea, plus professors have more money so are less likely to decline a $10 flu shot.

I got my flu shot yesterday at 11am. But its worth noting that if the clinic would have been on Monday and Tuesday I might have waited until the second day, since I often work from home on Mondays. In which case I would have been rationed out of getting a flu shot.

Like Mankiw's magic pill from Monday's blog, there are only so many resources or this case flu shots. Should professors have received flu shots, should students have to pay, should student living in dorms pay less? No matter the set up there will be rationing of those flu shots of some sort, because if they are given away there are clearly not enough for everyone.

Finally, thank you to who ever ran and helped with the flu shot clinic. I got in and out in under 5 minutes. It should be considered a successes that all the shots were given.

Economics is the Science of Allocating Scarce Resources

This OP ED in the NY Times by Greg Mankiw is well worth the read (link).

In short Mankiw provides a thought exercise. What if there was a pill if you would take it everyday you would be 100% healthy, but it cost $150,000 a year to make. Even if the US or world spent everything it could not provide the pill to everyone.

So the hypothetical pill like health care is a scarce resource. As Mankiw says in his Principles textbook, resources are scarce. How we allocate them between people the best is economics at its core. You just have to decide what you mean by best?



-------
Also the comments from Friday are well worth the read. My Beloit friends appear to know about the textbook industry. It appears that some online schools are already forming their own cartel. From the second comment, profs in small town want to help the book store, because profs like book stores.

Both responses provide more evidence that professor are sensitive the price of their students books.

Efronomics and Textbook Cartel

Despite what most students think, some professors actually care about the textbook costs for their class. We care because we want the students to read the text, which they can't do unless they buy it and the higher the price the less likely they are to read it.

I generally teach two classes Economic Development and Introduction to Macroeconomics. For Development I assign three paper back that can be purchased on Amazon for about $10 each used. For intro to macro, I have students use an online homework system called Aplia, which for $80 also includes an online copy of the book. I think Aplia does a good job running the site as my students have few technical glitches and the homework problems are solid. I would like my students to get a better deal.

I could shop around, I think I will next year. But I'm just one professor with 50 intro students, I'll be subject to the market going prices, which is probably $80 if I want an online homework system (which I do).

I was thinking about all of this when I read an entry in Seth Godin's blog on high school musicals (the actual kind not the movie staring Zac Efron). He said his local high school paid $3,000 to stage Grease. He believes the high price was because the High School had little bargaining power when getting the rights to a musical, since few companies option the rights to well known musicals. His suggestion was to form a cartel of high schools that would option musicals. The cartel would be a set of a few hundred school that could use their size to bargain for the rights at discounted prices. My guess is 100s of schools each year put on Grease, but is that really that preferred to say Joeseph and Technicolor Dream Coat.

Back to textbooks. I wonder if universities are doing this. What if the Towson Economics department which teaches by my rough estimates 600-700 student in Intro to Macro each semester got together and tried to bargain with a company for exclusive rights to provide an online homework system. If a conservative estimate is 1,000 students a year in intro to macro and 1,000 in micro, we could be talking 2,000 students at $80 a pop we are a $160,000 in value.

Of course getting faculty members to agree on anything is always difficult let alone the same textbook. But even forming a cartel of 4 or 5 faculty may be large enough to get some bargaining power.

Beer Duopoly

"Whenever there are only two companies (in an industry), there is a tendency for prices to rise," Gitter said. "As long as they're willing to follow each other, they can keep (raising prices)."

From a recent article on the rising price of beer from Gerald Ensley at the Tallahassee Democrat.

In short with the merger of Miller and Coors now two companies MillerCoors and Anheuser Busch control 80% of the US beer market. Most people know a monopoly is when one company controls a market, when two companies control a market its called a duopoly. The two companies can't legally work together to raise prices like a monopoly (that's called collusion), but one can raise their price and hope the other follows to maintain higher prices.

The Wall Street Journal chronicles the price increase that is coming and points like I did to the new duopoly.

As I suggested to Ensley, the only way to fight these companies is to grab another beer brand, I myself fought the duopoly last night with a frosty Sam Adams (which sells 8% of the market).

But if Sam follows suit, I'm still OK because I can always relax and have a homebrew.

Last Month Cash for Clunkers, This Month no Civics for Cash

My dad forwarded me this article from the Columbus Dispatch about the aftermath of Cash for Clunkers around Central, Ohio.

The good news is that cash for clunkers led to huge increases in sales, which is what it was supposed to do. The bad? news is that as one dealer says in the article they don't have any cars left to sell, in his case the dealership's inventory fell from 200 to less than 10 cars


But I'm not sure this is bad. The point of the program was to increase the production of cars. Car makers are not going to start making cars until the dealers need more cars, which won't happen until they sell the old ones.

The key question is did the program get people to buy cars who would not have purchased cars without the program in the next year or so, or was the increase just due to people changing the timing of their purchase.

That is the more difficult analysis and it remains to be seen.

Who is Poor

An article in the National Review from the Heritage Foundation lists some Census Bureau data about people who are poor in the US.

In short the facts show most poor people in the US have TV, cars, air conditioning and reasonable sized houses.

A couple of thoughts. I agree the poverty measure in the US which is basically 3 times the amount needed to purchase a decent diet, a definition which worked well in the 1960s but not so much now. Since food is much cheaper and incomes higher. The measure also does not control for difference in prices between places like New York City and North Dakota.

I'm not sure facts about TVs and AC is the right way to look at it. Even people who are poor by international standards (live on less than $1 a day) have TVs or radios (from this article)


On the other hand keeping a consistent definition allows comparisons between eras, so I'm not sure the current poverty line measure should be thrown out.

I don't know a lot about American welfare programs to me it comes down to health care access and schools. I think there is also evidence that early childhood intervention can pay off (here)


h/t to Newmark's Door

YOU LIE! When is this over? Can I go to the Bathroom?

The connection was just too perfect his morning. Today Planet Money had a short story on the economics of misbehaving in school (here). They report on how on the first day of New York City School a principle gives a big welcome speech to the whole school. In the middle of it a student raises his hand , this wasn’t supposed to be a question and answer time. The student shouts out “when is this going to be over?” The story goes on to talk about how students use cost-benefit to decide to missbehave. The cost being punished, the benefit being the popular kid by sending a signal you are brave and aren’t scared of authority figures.

This reminded me of a scene from the 4th season of the Wire, where a kid does the same thing at an assembly, but instead yells “I have to go to the bathroom.”

Not 10 minutes after the kids misbehaving story on NPR they talked about Rep. Joe Wilson shouting “YOU LIE” at the President.

I wonder if the signal Rep. Wilson would have sent would have been different if he shouted “When is this over?” or maybe even “Can I go to the Bathroom?”

Zone Defense: I still don't understand zoning laws

The Washington Post today reports on Cleveland Park a nice DC neighborhood, which is having trouble with empty store fronts. I used to live a 15 minute walk from Cleveland park and still venture over there for food sometimes.

As the article points out that 1/6 of the store fronts in Cleveland Park are empty. From econ 101 this could indicate landlords are trying to charge too much. But they can't just rent to anyone.

From the article
"Drawing the most blame is the 1989 zoning restriction limiting bars and restaurants to no more than 25 percent of the area's total linear store frontage, a threshold that the neighborhood has reached."

The thinking behind the zoning law was that restaraunts bring in people like me who drive over from Silver Spring and take up parking and cause traffic. It also raises rents for potential dry cleaners, grocery stores, and video rental places. All businesses which sell more to those living there.

By limiting restaraunts Cleveland Park residents could have cheaper services for themselves. Although housing prices also might decline if people prefer to live in neighborhoods with more restaraunts.

I really have no clue if for Cleveland Park residents this is a good policy. For me and the building owners trying to rent out space to restaraunts who are interested in opening up the policy is bad though.

Oh well at least Spices is still there.

Those Who Do Not Work Do Not Eat

In the last quarter of the 19th century, it took 1,700 hours of labor to purchase the annual food supply for a family. Today it requires just 260 hours, and it is likely that by 2040, a family’s food supply will be purchased with about 160 hours of labor.

from Robert Fogel Nobel Prize winning economic historian via Greg Mankiw

Americans now spend around 10% of their income on food. Those living on a $1 a day in the poorest countries in the world spend between 50%-70% on food. Fogel cites that in the US late 19th century it was close to 90%.

This makes me think of the recent Planet Money (NPR's econ show) podcast on 12th century economics (listen here you may want to skip the first 1.5 minutes)

As Phillip Daileder the historian notes in the podcast most of economic progress can be thought of as the result of increasing food productivity.

On this subject my favorite recent work is this paper by Nunn and Qian claims that almsot 20% of the world's population growth is due to the spread of the potato.

So next time you go out with 4 of your friend. You should order some fries and thank the fries because without potatoes there would be one less person at the table.

I'll Go Back To Rockville: Strip Mall Food Finds

On Sunday a friend of a friend took me to a great Taiwanese restaurant in Rockville. It helped that her parents are Taiwanese and she ordered for us. It was one of the better meals I have had in the DC area in a while and with beer, dessert and tip it was $17 a person. Actually that's an understatement the meal was AWESOME!

I think this is my first strip mall find in Maryland. Tyler Cowen has been touting strip malls as the new locals of interesting ethnic cuisine. This article he wrote in the post a few years back discusses the change.

In short rents got too high in Chinatown, Dupont, Georgetown, and Adams Morgan (former hubs of great little restaurants with food from around the world) so ethnic restaurants moved to strip malls in Rockville, Annadale, and Wheaton. Also as Cowen points out second generation immigrants have more money for cars and eating out.

We had a similar experience looking for dim sum in DC all the good places are in suburbs. So unfortunately the good food finds in the DC area may require a car ride.

Baby Sitting, Video Games, and Monetary Economics

In the NY Times Magazine Paul Krugman provides an overview of the intellectual battels in economics over the last 50 years (link).

In the article Krugman cites a famous example published of a baby sitting co-op. The idea was that each parent would get 20 coupons When someone watched their kid they gave that person a coupon for each 1/2 hour of babysitting. As the story goes unfortunatly people wanted to have on hand more than 20 coupons so people where unwilling to use the coupons for fear of not having enough. This was used as an example to show that more coupons should be printed so people would spend them and babysitting would happen again. Which is an analogy for what federal reserve can do, when people aren't spending $s, print more of them.

I was thinking of this while checking out the website Goozex. The website works that you can trade video games and movies. Send someone a movie and you get points, want to get a movie then you cash in your points. The key to the system is that you can buy more points, so it isn't closed. Goozex sets the points price of each game . Unlike the babysitting co-op the price can be changed if Goozex sees a surplus or shortage of say Rock Band or Forrest Gump.

Living on a $1 a Day

Anyone interested in development economics should read the paper "The Economic Lives of the Poor" by Abhijit Banerjee and Esther Duflo (linked here). Its been out for a few years but the paper will become a classic. In 22 pages it gives a great sense of how families who live on less than a $1 a day per person spend their money (mostly on food but also on alcohol/tobacco, weddings, and funerals) and why they can't escape poverty. There is no math involved too.

I really liked this section on why it is so hard to save.

... saving at home is hard: The money may be stolen (especially if you live in a house that cannot be locked) or simply grabbed by your spouse or your son. Perhaps equally importantly, if you have money at hand, you are constantly resisting temptation to spend:. to buy something you want, to help someone who you find difficult to say no to, to let your child have the sweet he wants so badly. This is probably especially true of the poor, because many of the temptations you are being asked to resist are things that everyone else might take for granted.

But you don't have to take my word for it...

Models of Growth

Articles about how economic growth will consume all the earth's resources have been written for a few hundred year. This one by David Barash in the Chronicle of Higher Education links current economic models to a Madoff schemes, because they don't account for the finite resources of the earth

Economic models do take finite resources into account. In the Solow Growth Model, perhaps the most common model taught in economic growth, economic growth measured by GDP per capita (ie income per person) will go toward zero. One common interpretation is because of finite resources. The model also factors in that the earth's resources depreciate unless investment and savings are made. If we don't save enough the economy contracts.

Basic economic models do not rely on increased consumer spending, but on increased production through technology growth.

Reading to Your Kids is Important

I was listening to This American Life’s podcast (episode 364 Going Big) over the weekend. The first story follows a project called the Harlem Children’s Zone. The basic point of the story is that to make a real change in Children’s lives you had to start at an early age. Geoffrey Canada who runs the program philosophy is that poorer families need to do the same things middle class and rich families think is obvious: read to your young children, encourage them a lot, and use time outs and reasoning instead of corporal punishment.

As part of the episode the reporter interviewed James Heckman, Nobel Prize winner and U Chicago Economist. I wrote about Heckman’s work on these types of programs about a year ago (see this post). Heckman findings can be summed up with to make a difference you need to intervene before a child gets to 3 years old to make a difference.

A close look at the Harlem Children’s Zone data by Dobbie and Fryer in a recent paper shows “….Harlem Children’s Zone is enormously effective at increasing the achievement of the poorest minority children. Taken at face value, the effects in middle school are enough to reverse the black-white achievement gap in mathematics and reduce it in English Language Arts.”

You Don’t Have to Take My Word for It: Reading Rainbow Teaches Economics

I heard on NPR this morning that after 26 years Reading Rainbow is ending its television run. It made me a little sad as it was one of my favorite program growing up.

So I got to looking at YouTube videos of old Reading Rainbow episode to find one that teaches economics. This awesome Flash Dance style video praises the benefits of teamwork. Teamwork is the foundation of Adam Smith’s economic thought. The famous example from his book Wealth of Nations talks about a pin factory, where each worker does a different task. When each worker specializes and works together more gets done.

It doesn’t matter if you are making pins, running a restaurant, fighting fires, or dancing, specialization is a fancy word for teamwork.

But you don’t have to take my word for it: Watch the Video or check out Adam Smith’s Wealth of Nations.

Bud, Coors, and Miller are Inferior Goods

"Heineken and Corona are struggling more than Anheuser-Busch and MillerCoors -- which have 80% of the U.S. market by volume -- because beer drinkers are picking out the cheapest drink from the cooler."

From a recent CNN article on beer prices. Economist call any good where demand increases when income goes down an inferior good, famous examples include hot dogs, ramen, and low quality toilet paper. Incomes are going down now and people are reaching for the cheap beer (at least according to CNN).

My Dad forwarded me this article and said it was bad news. I'm not so sure if it so bad for people like me and my dad. If non-bud beers are normal goods, as income goes down people buy less. Then beer prices for good beers should actually fall during an economic downturn. Since we don't drink bud type beers we should be good.

But I don't worry about this too much, I just relax and have a homebrew.

Ben Bernanke and Joe Torre

Obama tapped Ben Bernanke to serve as Federal Reserve chairman for another 4 years, but has Bernanke been good at his job? Most economists seem happy with the reappointment , I haven’t seen anyone really against.

It got me thinking though judging the quality of a Fed chair is like judging the quality of a baseball manager. Was Allan Greenspan a good Fed chair or was the economic situation such that it made him look good. One could ask something similar about Joe Torre did he manage the Yankees to several World Series titles because he was a good manager or was it mostly his players. When they didn’t win the World Series how much was his fault.

I think it is hard to separate the factors outside of the control of the Fed chairman and a baseball manager and what is in their control? I think we tend to over estimate the ability of Fed chairman and managers.

So perhaps the baseball analogy is that Bernanke has been rocked early in his start in part due to some bad defense, but managed to escape a bases loaded jam and manager Obama is going to keep him in the game.

The Women's Crusade and Duflo

Esther Duflo of M.I.T. found that when the men’s crops flourish, the household spends more money on alcohol and tobacco. When the women have a good crop, the households spend more money on food. “When women command greater power, child health and nutrition improves,” Duflo says

.

From the NY Times on the role of women in economic development.

Duflo’s findings aren’t new that women are more likely to funnel extra money to their children. But this idea has been part of the two biggest successes in my view for household based economic development. Conditional Cash Transfers that pay women if their children attend school and microcredit that gives small loans that are typically targeted towards women.

Although maybe microcredit isn’t as great as some people think. Duflo is also behind recent research showing microcredit doesn't increase household consumption. See this link for a good summary of her recent work with her co-authors.



Thanks to my former student Kelly for forwarding the NY Times article to me.

Who Turned Off the AC?

Pepco our local utility sent us an offer in the mail to participate in their energy wise program. I decided to consult my in home energy expert, my wife, to figure out what this is all about. So here’s my interpretation (i.e. the views and opinions below are mine).

The Problem: On really hot days the power grid is taxed with all the ac units running. To keep up with demand the power company (PEPCO) has to keep excess capacity. This excess capacity is expensive and not used a lot of the time, so the power company would like to find a way to have fewer power plants.

Possible Solution 1: Turn off power to some people when PEPCO hits excess capacity sometimes called a rolling blackout. This type of measure is used in developing countries, but it hurts business. Imagine trying to buy something at just about any store in the US without power, in 95% plus my guess is it is not possible. Plus not having electricity is a pain for our modern lives, so it will anger consumers.

Possible Solution 2: Charge people more for power during peak times. This probably won’t work too well since people are generally price inelastic to energy cost (that is an increase in the cost of electricity does not change my electricity use too much).

Possible Solution 3 (Energy Wise): Now back to energy wise the program that started the post. The program will pay my wife and me a monthly credit ($16)* to turn off our air conditioner on days when the company really needs it. PEPCO will be able to
turn off our AC through remote control when they need the power.

This is really a case where behavioral economics will come into play. If solution 2 does not work and 3 solution 3 does I think this shows that people will respond differently to a $16 increase in their bill (probably not at all) and a $16 decrease (join the program thereby cutting their electricity use), even though economic theory would suggest there should not be a difference.

Of course there are also questions about losing control of your AC. Will allowing people to override the system and turn their AC back on twice during the year be enough? I’ll be curious to see how successful the program is at cutting energy use and saving on PowerPlant construction.

We have to check with our landlord, but we’re strongly thinking of participating.


*correction it was $16 a month not $10 a month as I had in an early draft.

The Economics of Toilet Scrubbing

About a month ago Marketplace did a story on recent college grads who had hired someone to come in to clean their apartment. Their roommate the reporter seemed a bit stunned that her roommates weren’t cleaning the house themselves.

I was thinking about this from an econ 101 standpoint. Which would generally tells us that if someone could clean your house for cheaper per hour than your hourly wage, then you should hire a house keeper and work an extra hour. You might also take into account how much you like working and how much you like cleaning.

But then again most people can’t just work another hour. So what else is in the calculation? It’s a set of 3 roommates. Sure they could divide the chores. But monitoring who does what is a pain, so is enforcing that your roommates actually clean or their effort. Splitting a house keeper is a lot easier.

Final thought, I’m really not impressed with the Psychologist interviewed as part of the story. Why is hiring a housecleaner such a big deal and indicative of a spoiled generation? In short my guess is that generation Y was more likely to grow up with a house cleaner, since their mom was more likely to work .

For what it is worth growing up we had our house cleaned about once a week by someone my parents hired. I don’t hire someone to do it now, but probably will at some point….

Anyone interested in cleaning my house in exchange for economics lectures?

Price Check in Aisle Argentina

NPR had a story this morning that the Argentine government is purposely underreporting the inflation rate in the country. Why would they do this?

As the story points out Argentina sold inflation indexed bonds, that is if you bought the bond you got a certain interest rate plus whatever the inflation rate was. So the government could save money on these bonds by under reporting an inflation rate.

Another way it could have saved money is if government workers received a cost of living adjustment (COLA). If the government reported inflation rate is lower than the actual rate it could pay workers less. Similarly, welfare payments may be linked to COLA.

Another issue is that hyper inflation has led to the downfall of several presidents including the 2001 peso crisis that saw 3 presidents it just 2 weeks. So maybe under reporting inflation is a way to help the current regime stay in power.

Dollar Dance: The Economics of the JK Wedding Video

On Friday and Saturday nights during my college years at Grinnell we would all head over to the Harris Center for dance parties. As Grinnellians grow older they don’t have as many places to bust a move, but when a wedding comes for a Grinnell alum the old Harris dance moves come out again. Jill Peterson who graduated one year after me and her husband, Kevin Heinz, took it to a worldwide level with their JK wedding dance video, which has been a Youtube sensation.

If you haven’t seen it, the video is along with this post. Now here is where the story could have turned sad. They used Chris Brown’s song “Forever” for their processional number. Many YouTube videos have been pulled off because of use of a copy righted song. But who ever controlled the rights to “Forever” realized that by posting the JK wedding video with links to iTunes for “Forever” more copies of the song will be sold. As the Google blog (which owns YouTube) documents this strategy has worked with “Forever” jumping to the top of the internet charts.

h/t to newmarksdoor

Maybe it is Time to Buy a House?

Over the weekend I had a house warming party (thanks to all those who came!). I didn’t buy a house, I’m still renting. I’m not ready to pull the trigger yet on buying as I’m not sure where in the DC-Baltimore area I’m going to want to live in the coming years.

People have told me over the last couple of years, that now is the time to buy a house and the down turn is over. I’ve ignored the real estate agents, I’ve ignored the arm chair economists, I’ve ignored my economists friends, but here is another data point.

It appears that a few people who predicted real estate crash are starting to get back into real estate. This LA Times article chronicles a few including most famously Paul Krugman.

This still isn’t enough to sway me but just another data point indicating that things might be looking up in the real estate market.

Stephen Strasburg and the Ultimatum Game

One of the classic games in game theory is called the ultimatum game. In the game there is a stack of money, say $100 in $1 bills, and two people. Person A, let’s call him Mark, gets to make an offer of how to split the $100 with person B, let’s call him Stephen. Once Mark offers Stephen an amount of money, Stephen has two choices he can accept the offer or reject it. If he accepts Stephen keeps the amount offered and Mark keeps the rest. Now Stephen can also reject the offer in which case they both get nothing.

Economic Theory says Mark should offer Stephen $1, since Stephen will think $1 is better than nothing he we’ll accept so the result is Mark gets $99 and Stephen gets $1. But when economists do experiments they find that people in Mark’s position usually offer between $25 and $50 to people in Stephen’s position. Why because those in Stephen’s position will typically reject offers if they feel they are unfair, so even though it might better for Stephen to accept an offer of $10 he might reject it because it is unfair.

This situation in some sense is happening in real life. Mark in this story is Mark Lerner the owner of the Nationals (Washington DC’s baseball team). This year they drafted Stephen Strasburg with the #1 pick in the draft. Now suppose instead of the $100, we think of the pot as the future value of Stasburg as a baseball player. Mark will make Stephen a contract offer, which is Stephen’s share of the pot. Now there are slight differences since during contract negotiations Mark can make multiple offers. But in the end (Monday at midnight) if Stephen rejects it he gets nothing, but so does Mark.

Well not exactly, the Nationals get another pick next year to make up for their inability to reach a deal with Strasburg, while Strasburg gets to try to be drafted last year. We can model this with game theory too, but it just raises the minimum offer Strasburg will accept. A rejected offer happened in negotiations with Adam Crow the Nationals top pick last year.

The lesson is that Mark Lerner and the Nationals are playing a game with a real human, so they need to make an offer that Strasburg thinks is fair.

Bill and Seth’s Excellent Adventure

Bill Easterly gives this response to the Queen of England’s question to British economists why they could not predict the current crisis.

“First, Your Majesty, economists did something even better than predict the crisis. We correctly predicted that we would not be able to predict it. The most important part of the much-maligned Efficient Markets Hypothesis (EMH) is that nobody can systematically beat the stock market. Which implies nobody can predict a market crash, because if you could, then you would obviously beat the market.”

When I first read this response it kind of blew my mind and I really liked. I still really like it, but it got me thinking about a conversation I was having recently about time travel (yes, bear with me on this one). The what if game was suppose you were transported back to a certain year with all your current knowledge and abilities. What would you do?

So let's suppose Bill Easterly and I are transported back in time with all of our current knowledge to January 1st 2006. We know there is a financial crisis coming. With our perfect knowledge of the crisis, how do we stop things. I don’t think we can. Sure we can sell all of our stock and maybe try to short a bunch of stock. One issue is that we could be capital constrained, we likely couldn’t get a hold of enough money to really make a difference in the market.

So not only would a person have to have perfect knowledge, but also the ability to change things. That’s asking a lot.

But I’m sure Bill and I would have one most excellent adventure.

Pan Asian and Menu Design

Thanks to Greg and my dad who commented on yesterday's post and helped me think of other types of food that is served like dim sum . Greg mentioned Mongolian BBQ, in the past when I have had it, you build your own stir fry at a salad bar then give it to a grill cook. My dad suggests the Brazilian steak house, but I have not been to one either, I knew about the meat part but I thought there was also a salad bar involved. I think more research is needed. Who is up for some grilled meat?

Now on to today’s topic Pan Asian restaurants. Last week I ate at two places that serve sushi, Chinese, Thai, and Vietnamese food. The first (Asian Bistro, Silver Spring) I think does a decent job on sushi, but misses the mark on Chinese I haven’t strayed from the sushi too much. The second (Spices, Cleveland Park) seems to do a decent job at all with a type of greatest hits menu (California Rolls, Pad Thai, Pho).

The benefit to having an eclectic menu is if my friend wants curry and I want sushi we can go to the same place. If a menu gets too small (say one or two items) the restautant loses groups with one person who doesn’t like the food. If a restaurant’s menu gets too big, it will be harder for the cooks to do any well or have enough fresh ingredients. Maybe that is why the second restaurant with the shorter greatest hits menu tends to do better at any one dish. Other factors like higher prices and location probably play a roll too.

My advice be weary of restaurants with too many menu items (unless they are on wheels)

Dim Sum: Why is it the only buffet on wheels?

On Saturday I went out to eat dim sum with 15 friends. For those of you have not experienced the fun of dim sum. At many places you sit down and then waitresses come by with carts full of tasty steamed dumplings and little dishes of tasty things. You point to what you like then it is set on your table and you eat. Many times you have hardly sat down and there are 5 or 6 dishes on your table already.

I can’t think of another cuisine that all the food is prepared then brought around for you to choose. To do this type of style I think you would need several things: a restaurant with high turnover and many customers, dishes that work well in small plate style, and cheep workers to bring around the food. Dim sum has all three. There are sushi boat/train places where sushi passes you by and you can pick it up, but perhaps labor is too expensive in Japanese restaurants and sushi has more expensive ingredients. Other than that if a place is not a food made to order place, then it is a buffet.

If you can think of other foods sold like dim sum let me know.

Poor People Everywhere “Waste” Money

Only now he's off to collect their unemployment benefits, electronically delivered to their bank accounts by the state of Indiana: $268 for Kelly, $390 for him.
"Payday," he says, driving to an ATM.

He withdraws $700, which he tucks into a front pocket of his jeans. He buys a Pepsi, four packs of Marlboro Lights and $20 in gas.

From this article in the Washington Post follows a family of four in Indiana struggling in the current recession. We might be quick to judge that Scott the dad of the family in the story is wasting money on cigarettes and Pepsi, later we read he spends an afternoon at a bar. It made me think of some work on developing countries where people who make less than $1 a day still save money for parties instead of eating (previous post here).

In some ways the similarities between the family living off of $1 a day and the one profiled by the Post are closer than we might think

Cash for Clunkers: The Money is Actually Being Spent

I think one thing is being missed by economists criticizing the cash for clunkers program (see freakonomics), the money is actually being spent, which seems to be the point of a stimulus to get people to spend money. I’m a little reluctant to trust the estimates of a sales analyst from GM, but one quoted in the LA Times suggests that the cash for clunkers has increased sales 115,000 since the program’s start.

A back of the envelope calculation using an estimate of $27,000 per car (average US car sale price in 2009), suggested the 1 billion dollar program created over 3 billion dollars in sales. The impact of a stimulus is often tied to a concept economists call a multiplier (see detailed description here), in short the multiplier is for each dollar the government spends how many times is that $ spent in the economy. A multiplier of 3 (as in my back of the envelope calculation) would be on the high end of the impact of government. This doesn’t even take into account what the car dealer and companies will do with the extra sales, which calculating the multiplier for cash for clunkers should take into account.

Sure there is a lot of other things to consider, but the money is being spent quickly, that's worth noting.

Too Many Baristas, Zero Marginal Product of Labor

I walked into my coffee shop today to be met by 4 smiling baristas. Now my coffee shop isn’t a constant flow of customers and two baristas could easily handle the job. Although things went a little bit quicker as one barista got my coffee while another rang me up, while a third kept at the espresso machine. My coffee shop would have sold the same number of coffees and bagels today if they had only 3 or even 2 baristas.

On Saturday my neighbors got their lawn mowed by some guys from a landscaping service. Their lawn like mine is pretty small. Now I’m wondering why they had two guys with two different lawn mowers mowing the front yard at the same time. Maybe with this configuration they could mow the lawn slightly faster, but I doubt it was that much faster.

Economists call the extra production from an additional worker the marginal product of labor. In the case of the baristas I would say the marginal product of the 4th barista was zero, and the third barista was close to zero. The landscapers seemed like the second guy mowing wasn’t cutting time that much, so I would guess it was close to zero too.

In developing countries families often work small plots of land. Like my coffee shop or the neighbor’s lawn mowing service the last family member working on the farm has a marginal product close to zero (i.e. they don’t really add much). One explanation from my coffee shop is that the 4th barista was actually a trainee, so it could be that families are training their children to work on a farm. More common is that there aren’t really alternative forms of employment in developing countries.

It still doesn’t quite explain the staffing at the coffee shop or landscapers.

The All Star Break, Summer Vacation, Back to Blogging, and S. American Starbucks

Tomorrow is Major League Baseball’s All Star game. It marks a little over halfway through the season, but also a little over half way through my summer vacation from teaching. You would think with no teaching responsibilities I would have more time to blog, but I have been traveling, moving and researching.

So I’m going to try to get back on the blogging horse. For the first three weeks of June I was in Chile and Argentina. So over the next week I’ll see if I can remember my trip well enough to blog about it.

So to start, both Santiago (Café Haitti) and Buenos Aires (Café Havanna) had cafes that were chains that had several location, just like Starbucks some within a couple of blocks of each other. There is an economic theory behind this, called the ice cream stand at the beach problem. Imagine a long beach with lots of people (evenly distributed) who want ice cream. These people don’t want to leave the beach and they are lazy so they go to the closest ice cream stand. So where is the best place for Chris to put a ice cream stand if he wants to sell as much as possible, in the middle of the beach of course. What about if Pats wants to put in a stand after Chris opens his in the middle of the beach. The answer is right beside Chris so Pat gets ½ of the customers on the other side of the beach.

Now suppose that Chris wants pays to open a second cart, he won’t put it on the end of the beach. He’ll probably put it close to Pats cart. Maybe not next to it (Although theory might say he would), but probably not that far down the beach. Where it will be depends on the assumptions of how far people are willing to travel for ice cream.

This theory also explains why you sometimes see two gas stations owned by the same company on opposite sides of the street.

Another interesting results is if a chain establishes enough stores it may make it difficult for independent places to move in. This would be the case if opening more ice cream stands or cafes lowered your per store cost. If this is the case we might see particular cafes try to expand to gain market share.

Tomorrow, coffee with soda water, cookies, and legs.

Impressions from Chilean Newspapers at Breakfast

I’m in Santiago Chile for the next five days then off to Buenos Aires for ten days. I’m not sure how much I’ll be able to update, but here are some impressions from my first time in Santiago.

First, I have decided that I’m a teen heartthrob in Santiago, after a high school girl on a micro bus called out to me to take my picture. This caused much high school girl snickering. Like the founding father of Chile, I sport some nice sideburns.

Second, you can learn a lot about what is going by reading the newspaper. However, if your Spanish is a little rusty and you have not had coffee yet your interpretation may not be correcting so a random sampling of stories from Chile that sound like the US. There was a story on how girls were much more likely than boys in Chile to read for pleasure. I would guess these figures were very similar in the US, it was something like only 20% of boy teens read for pleasure and nearly 40% of girl teens. This trend is perhaps indicative of females passing males in terms of education in several Latin American Countries. Another story like the US is that

Chilean children are not drinking enough milk, and their consumption of soda is approaching that of milk. As Latin American countries become developed they are starting to have the same types of obesity problems we do. I have heard there is growing research in how Mexico’s welfare program Oportunidades is actually creating obesity.

I also toured the presidential palace today. More thoughts on that manana.

Robert Reich’s Plan for College Debt is Anti-State School

Robert Reich (Bill Clinton’s former labor secretary) gave a commentary on public radio’s Market Place this morning, that presents a solution to the growing amount of debt that students take on.

Here is his proposal:
“Any college student can get full funding from the government, with only one string attached. Once they've graduated and are in the work force, they pay 10 percent of their incomes for the first 10 years of full-time work into the same government fund they drew on to finance their college education.”

He also notes that the average graduate has $22,000 in debt. Interestingly this figures is more than 4 years of tuition and fees at Reich’s own institution (California Berkley) and mine Towson University. Many of my students work part time to pay for school. According to this report the average Towson graduate had $16,000 in debt upon graduation.

Towson students on average could pay back their loans in 10 years by paying under $1,500 a year (I don't have the figure, but I hope our graduates make more than 15k a year). Most state governments already offer an affordable alternative to private schools.

Now Reich’s plan implies it is optional, so what would the effects be? When something is subsidized then its final price tends to rise. The price consumer pay is lower than before, but part of the benefit goes to the seller. In short the plan sends money from the government to private universities.

Perhaps increasing funding for public universities would be a better policy to alleviate student debt.

Congratulations Graduates! Words of Advice from an Economist.

The semester got to me and I lost momentum on blogging, but I’m back. It is summer time and I’m off to see Towson College of Business 2009 Graduates walk the stage along with me in my University of Maryland Librarian Science attire (thanks Jennie for lending me the robe until I can find a used one ).

I’ve been meaning to write this post about my advice to people who are still looking (or just starting to look for jobs). With the recession you are going to find lower paying jobs, when you find them. This Wall Street Journal article discusses how even ten years later, people who graduated during the recession had lower wages.

The secret to beat this problem is to take a job in the field you hope to wind up in. By doing this you lower your future wage gap. So taking a lower paying job in the field you want to work in you get both the benefit of continuing to pursue what you want and possibly a longer higher term payoff. This not to say finding a job in this economy is going to be easy, I know several smart well qualified people still looking after a few close calls to getting a job. As Robert Reich said at my graduation at Grinnell College in 2002:

"Gaining self-knowledge often comes from failing—crashing headlong into the wall of your character. And please have no doubts about it: You will fail, in some way, at some time. In fact, you will keep crashing into that character wall again and again until you finally realize its there, and that you have either got to knock it down or figure out how to get over it."


Welcome to the real world graduates!

(Actually, let me know what it is like in case I ever quit academia)

What is Costs?

What is Costs, the website answers the question in its name. With short articles on the cost of a plethora of things from Fenway Park, to getting a pilot license, to brewing your own beer. The articles are decent and kind of fun.

h/t to metafilter

New Measure Suggests Stock Market May Have Hit Bottom

Jeremy Siegel An Economist at the U Penn has come up with a new way to look at the price to earning ratio (P/E) (see an article here). P/E tells us for a given stock price how much the stock earns [or price divided by earnings]. Typically this ratio is about 15. To find the P/E ratio for the whole market, Standard and Poor's adds up all the prices of every stock in their S&P 500 index, then adds up all the earnings. The total market P/E just take those to sums and divides them.

Siegel points out this means that AIG's losses are just as important as Exxon's gains. However, investors own 20 times as much Exxon Stock as AIG (since AIG is worth a lot less now). Siegel argues that Exxon should be weighted more heavily. In other words we should count Exxons gains 20 times as much.

Siegel claims a weighted P/E ratio is most important when a few companies have giant losses. This means current P/E may be too pesimistic about the outlook of the stock market. Siegel thinks we have already hit the bottom of the market.

I guess the real question is the weighted P/E more predictive of where the stock market is going than the P/E?

h/t to Greg Mankiw

Random Economic Thoughts on Passover

Tonight is the first night of Passover. Traditionally, Jews have a Seder, which is a big meal with a bunch of Matzah. As part of the meal we retell the story of the Jews exodus from Egypt from Let me people go to the plagues to parting the Red Sea.

So 4 economic musings for Passover.

1.In many places people would be happy to see a large population of migrants return to their home country. I wonder if there weren’t some Egyptian at the lower end of the economic spectrum hoping for the Jews to leave to open up jobs building pyramids. However, for the Pharoh more cheap labor was probably better.
2.Not letting the bread rise because of fear of being attacked a great demonstration of opportunity cost.
3.Less developed economies are mainly reliant on agriculture, thus the plague of cattle disease was probably one of the worst economically. Although it is also hard to work if you are covered in boils and it is dark.
4.The last plague was killing of the first born son. According to the Solow model population growth inhibits growth and capital destruction allows for me easy growth. So we would expect strong economic growth from Egypt after the plagues. Someone will have to ask this to Solow at his Sedar.

Also enjoy my previous posts on passover and economics!

We Need Leading Indicators Not Lagging

I've lost a little momentum with blogging, let's see if I can't get it back.

So a post I've been meaning to write for a while. It seems a favorite topic recently of blogs/media has been indicators the economy is not doing well.

These indicators can be helpful if they are leading indicators, that is we can notice there is a problem before it happens. A leading indicator example, if the mall parking lots are empty on the Saturday before Christmas, then we know Christmas sales will be bad. It is leading because it tells us what will happen before it happens. A lot of economic data takes a while to get released. Unemployment data is monthly, and GDP is 4 times a year and information on the previous quarter is released 3 months later. In other words we just found out two weeks ago the economic growth from Oct- Dec of last year.

As Meghan McArdle points out unemployment is a lagging indictor, so it shows us where the economy has been.

So where might we find a leading indicator in this economy. I think we want to know if consumer spending will recover, since that drives the US economy. So I'm going to go lots of baseball games this summer. If I notice people start to buy more snacks at the game, it will indicate they are ready to spend again in other parts of the economy.

Ok, I have no idea what a good leading indicator will be that people will start spending again, but I will be going to more baseball games.

Sandbaging: Why We Still Use Sandbags

I've always had a fondness for North Dakota, my mom's home state. Right now Fargo, the capital, is experiencing major flooding. Like the floods for the last 100 years the tool of choice to prevent the river from rising are sandbags.

Recently Slate had a good article on why we still use sandbags. First, they are cheap. Second, they are easy to use. This a good combo for response to floods. Not surprisingly, Midwestern spirit had led to 100s or perhaps 1000s of volunteers to help fill sandbags. So there is usually is an abundance of cheap/free labor in response to the flood, but few volunteers have experience or expertise.

So a technology that is labor intensive is likely to be used, so that's why will likely see sandbags for years to come.

Fairtrade Coffee Not Just From Mexico, but In Mexico

One of the things that suprised me about my trip to Mexico, is that a coffee cooperative had opened a new cafe in Oaxaca City. It is a ways away from the tourist district, so I'm not sure the market they are targeting, but there seems to be a growing demand for organic fairtrade coffee (mercado justo) in Mexico.

Below are pictures of the new cafe and an advertisement for fairtrade coffee. Perhaps even in Mexico, they want to help rural farms and drink organic coffee?

From Mexico

From Mexico

Opportunitdades in Action and Underwear Sales

I’m back from a weeklong trip in Mexico, then a week getting settle. Lots of good stories to report, but I will start with this one. I visited a small village about 4 hours south of Oaxaca. It happened to be the day that the government was handing out cash as part of the Opportunidades program. This program pays households money if the children attend school and the family visits health clinics. The program has another twist in 99% of the household the payments are made to women, thus the picture on the side of the line shows a huge group of women lining of for their cash. The idea being that women are more likely to spend the cash payment on food for their children (this actually seems to work).

Of course some entrepreneurs set up a market just down the street from the school where payment were being handed out. Not surprisingly, the sellers wears included mainly household goods (plates, pans, ect.) and of some clothes.

Likely a result of the payment being made to women, the amount of women’s underwear for sale was probably triple the amount of men’s.