Thursday, February 26, 2009

Have You Even Ever Seen a Chicken? My Blog’s Named Explained

I received an e-mail yesterday which asked about the humor in the name of my blog title. The blog is named the blog of diminishing returns. It is a pun on the “law of diminishing returns.” The law of diminishing returns is basically this, if you are growing corn on a fixed amount of land, the impact of more corn seed will eventually go to zero. Now it may be that when we first start planting going from 10lbs of seed to 20lbs of seed will actually yield more than twice as much, but I don’t know I have never grown corn. Or if you are cooking in one kitchen as you keep adding more and more cooks the helpfulness of the next additional cook will fall.

In a sense the blog is a fixed input (there is only one blog), but my time spent on it varies. So each post I make provides a positive impact, but if I make too many the benefit to you of an additional post will fall. Plus my posts will get really crappy.

This also makes me think of diminishing marginal utility. Which works the same way home much happier the first slice of pizza makes you, will be more than the third, which will be more than the fifth

I think the same things about jokes. If you have heard the same joke five the fifth time wasn’t as funny as before. Sometimes though as a joke is repeated it gets funnier, it has increasing returns. I was thinking of the show Arrested Development, where whenever someone acts like a chicken people make the most ridiculous chicken noises. I wonder if other arrested development fans make chicken noises at each other?

For arrested development fans, click below for a chicken noise montage.

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Monday, February 23, 2009

Million of Peaches, Peaches for Me, Peaches for 3 (dollars)

Chanukah 1995, I got two CDs from Aunt Jenny. One was from a Seattle Band called the Presidents of the United States of America (PUSA). You may remember them from their hit song “Peaches”. I have followed them ever since, and have all of their albums, except the apparently the new one.

PUSA not only kicks out the jams, but they are also taking part in an innovative idea (link). You can now buy their whole catalog as an Iphone application for just $3. Dave Dederer, PUSA, "guitbassist" two string base is VP at Melodeo the company behind the new application. The application will also offer live streams of newly released music with of course a link to buy albums playing

This replaces the old model of listening to songs on the radio and running down to the local record store or CD warehouse. Maybe this model isn’t too far off the other streaming options such as Pandora, but PUSA is my favorite band and their videos had ninjas. So you gotta love them. You can watch it below but…..


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Microsaving, not microcredit

Microfinance, where entrepreneurs in developing countries are loaned a few hundred dollars or less to start a business is a well studied and popular policy tool. For those who want to get involve I have discussed Kiva in the past.

But, my dad passed on a new website called Instead of giving out loans like Kiva you provide money to match the savings of people in developing countries. Like Kiva you can choose the person you watch to provide a match for, although the selection is limited to a few Mexican communities for now.

The website is run by the World Council of Credit Unions, whose home is in Madison Wisconsin. I know of the organization and it has a good reputation and experience in providing financial services in developing countries.

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Friday, February 20, 2009

Explaining the Beer Depression

Nate Silver over at posts a graph that shows that beer sales were down 10% in the fourth quarter of last year. This is surprising, because as the graph also show beer sales tend to hold up well even during a recession. Beer is cheap, and if you just lost your job you are probably more likely to reach for a cold one.

Nate Silver’s suggests the hops shortage that raised beer prices or switching to microbrews explain the huge drop. There is some evidence of price impacts the great data from the beer institute, which tracks the beer CPI, showing beer prices up 5%. I think a part of the cause might be that so far this rescission has been causing more job losses for men than women. Men are also more likely to buy beer. The gender imbalance of the current economic crisis was pointed out in a blog post last year (here), before things really got bad. In the 4th quarter of 2008 7.8% of males were unemployed compared to 6.1 females, this is an increase in the disparity of 6.1 to 5.6 in the 3rd quarter.

So maybe we should take our $8 and buy a nice six pack for the guy who lost his job, but not Bud, Miller, or Coors since they aren't owned by American companies. Let's give them a nice Sam Adams, who also tried to help during the hops crisis.

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Thursday, February 19, 2009

Give an Economist $8 a Week To Save The Economy

The Wall Street Journal interviewed several famous economists about what they thought would be the best way to spend the $8 a week our income will increase through tax cuts in the stimulus plans. The answered ranged from haircuts to soup kitchen to energy efficiency to ATM transaction fees and economics textbooks.

So the best thing to help the economy is to spend the money. Why not forgive student debt (like this post suggests), or restructure mortgages. Because we want to help the economy now, so the most bang for the buck is current spending.

So what am I going to do with my $8, I’ll likely save it. But if I wanted to help the economy the most I think I would start tipping more at the college Starbucks.
Most of the workers are Towson students, the more money they have the more likely they are to stay in school or study harder if they can work fewer hours. Their increased human capital might help future economic growth, and college student barista are unlikely to save the money.

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Wednesday, February 18, 2009

First Rule of the Stimulus, Do not Talk About the Stimulus

I’ve been a little slow at updating the blog lately, so here a few posts ideas I have been meaning to write

So last Friday I went to see Fight Club. In Fight Club there is a strong anti-consumerist message. Instead of buying IKEA, Tyler Durdin (Brad Pitt’s character) thinks we should go back to farming and hunting. I was going to write a post about how if all the sudden we all joined a Fight Club and purchased fewer house hold goods it would hurt the economy and our faces.

In some ways a recession does the same thing. Instead of changing our attitudes about consumption because of an ethos some people might not spend as much because they are worried about losing their jobs. To combat this a local apartment complex is offering:

“If you involuntarily lose your job for any reason while in a lease agreement with us, we will WAIVE all termination fees if you decide to leave. “

So how do we solve the problem. Perhaps ask an economist, Gregory Clark points out that many economists have no idea what’s going on. After he asked one economist signatory of a NY Times letter against the stimulus to debate the stimulus with a proponent the signatory replied:

"all I know on this issue I got from Greg Mankiw's blog -- I really am not equipped to debate this with anyone."

I feel the same way, that I’m not equipped to debate the stimulus, although I do read more blogs. But what I can do is teach some Econ 101 concepts that Gregory Clark points out are at the center of the debate.

So tomorrow I’ll explain why using Econ 101, I don’t think debt forgiveness is the way to go.

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Friday, February 13, 2009

Are you better off than your parents were?

My parents were born in the 50s, and would have been my age in the late 70s. So are we better off than our parents?

I really liked this photo collage on the Woman's Day website of changes over time in the last 6 decades on the state of the household. I wish it showed more consistent statistics, but some interesting things pop out.

Median household income is up 20 to 25% after adjusting for inflation and we consume more chicken, so I think we are doing well.

Another trend you might notice is the decline in household size. Individual income over the last 30 years or so has gone up 80%, which is higher than the median household numbers suggest.

Terry Fitzgerald (Minnesota Fed) shows this is because we are living in smaller houses, so household income is not growing as fast as personal income.

From his brief of this paper:
After adjusting the Census data for these three issues, inflation-adjusted median household income for most household types is seen to have increased by 44 percent to 62 percent from 1976 to 2006.

Three data issues adversely impact reported median household income gains: the choice of price index, a change in the mix of household types and the measure of income used.

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Monday, February 9, 2009

Costs of Living

a nonprofit research group in Manhattan, estimates it takes $123,322 to enjoy the same middle-class life as someone earning $50,000 in Houston,
From this NY times article.

I was thinking about this over the weekend when my wife and I spied a house we liked in our neighborhood in Silver Spring just outside of DC. We aren’t ready to buy for a couple of years. When I compare the house from the weekend to similar houses in the neighborhood of Towson where I teach the houses are about 1/3 to ½ cheaper in Towson. The cost in Silver Spring might be about 4 to 5 times that of similar houses in Beloit, WI where I had my first job.

Difference in prices for non-tradable goods need to be corrected for in order to measure factors like GDP and income. It’s impossible to move a house (with the land) from DC to Beloit. But, we can move/ship a lot of things (cars, sweaters, beer, ect.) But remember when you buy that thing in DC like a sweater or beer, part of that costs pays for a shop to hold them in. For goods like sweaters you can buy online now, those costs are going to get closer or be the same. But for goods like houses and restaurant meals those good will have price differences in relation to differences in house prices.

So economists must estimate differences in prices and what people buy. This is tricky enough between Beloit and DC, but they also be able to compare Botswana and DC or at least Botswana and the US. To do this you compare similar goods and exchange rates, then see the differences.

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Thursday, February 5, 2009

Book Buyers the Latest Sign of Hard Economic Times

As a professor sometimes textbook companies send me preview copies of their textbook without me even requesting them. Their hope is that I assign the textbook to my class so 70 students starting buying their book. I’m pretty happy with my textbooks, so I put the preview copies in a corner of the bookshelf. Then every once in a while a textbook buyer comes by and the buyer gives me cash for the book. He (they are mostly older men) then sells that book to a used textbook seller or maybe even sells it online.

Textbook buyer is generally a low skilled job. The company gives you a scanner (or maybe you have to buy not sure), then you scan the book and walk around professor offices asking who has books for sale.

Is it a sign of bad economic times, that I have seen more textbook sellers these last few weeks? I would guess so. As the stock market falls the semi-retired guys come around a lot more, because they need the money even more. Or do furloughed professors sell more textbooks during economic downturns increase the profit for walking door to door?

Any other professors notice this?

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Wednesday, February 4, 2009

Economic Stimulus 101

Let’s start with what you know: The economy is not doing so well. The government is trying to do something to help the economy get going. The options are cut taxes, spend money, or buy bad assets.

What’s the debate? Which method is best.

How do Economists determine which method is best? They look at the multiplier.

What is the multiplier? It is the number of dollars the economy increases for each dollar extra spent by the government.

Can you give an example? Imagine the government sends you a check for $100.
Typically, you would go and spend some of that $100 (let’s say on a massage and save some. Let’s say you buy an $80 massage, the masseuse takes that $80 then uses it to buy a nice meal at a restaurant let’s say for $64 (he saves the other $16). Now $144 (=$80 + $64) dollars have been spent from that first $100. Imagine the waiter at the restaurant gets another hair cut (after saving some) then the barber buys some books….ect. Each time some of the money is spent and some is saved.

So what is a typical multiplier in an Intro to Econ textbook? Greg Mankiw's NY Times OP ED (here) points out that for government spending a typical multiplier is 1.4 (for every dollar spent 1.4 dollar increase in GDP). He also points to a paper by Obama Economic adviser Christina Romer, who showed that decreasing taxes has a multiplier of around 3.

But is this a typical time? No

So do we have an idea what the multiplier is under the current conditions? Maybe, an idea but who knows.
OK so no one knows, but where can I follow the debate? I’m reading (Greg Mankiw, Marginal Revolution, Brad DeLong, Megan McCardle, and Paul Krugman)

So why not instead pay off people’s credit card bills and mortgages, isn’t this also a credit crisis? (suggestion from the Daily Show via Grinnell friend Paul Carlson) Yes it is a credit crisis. But the goal of the stimulus is to increase spending. Paying off debt, probably has a lower impact (smaller multiplier) than the other options.

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Tuesday, February 3, 2009

The True Cost of Credit

A new website “The True Cost of Credit” created by one of Steve Levitt’s former students, examines the costs associated with using your credit card when making a purchase. As the data here suggests the fee charged to sellers can range from 18% to 1% depending on the purchase price. Since there is a per transaction cost charge, the lower the price of the good the higher the percentage the transaction fee as a total of purchase price.

Still as the website points out at 2.7% per ($300 flight), Southwest spends over 200 million dollars . This is more than Southwest earned in the third quarter of last year (a decent year for profits).

But a couple of questions arise, why does Southwest take credit cards? Because it is cheaper than hiring someone to collect all the cash. But why not give discounts to those who use debit cards with lower transaction fees? Because the credit card companies have made it illegal to do so.
So final question do credit cards improve transaction costs or make them worse? There are few credit cards, and Visa and Mastercard have essentially duopoly with some competition. Since the two cards are so wide spread merchants have to accept or they might lose business to competitors. In fact the two companies were sued and recently settled with American Express (link) over claims they tried to prevent competition.

So credit cards are most likely good as long as there is some competition between companies. So maybe we should be glad this website on the true cost of credit is run by a firm trying to lower transactions costs through the use of debit cards.

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Monday, February 2, 2009

The Hitcthiker's Guide to the Galaxy or Zimbabwe?

Below is from The Hitchhiker's Guide to the Galaxy, (or Zimbabwe I'm not sure)

-Consultant: If we could move on to the subject of fiscal policy... Read More

-Ford: Fiscal Policy!.... Fiscal Policy!?-Consultant: Fiscal Policy, that is what I said.

-Ford: How can you have money if none of you actually produces anything? It doesn't grow on trees you know.

-Consultant: If you would allow me to continue……Thank you. Since we decided a few weeks ago to adopt the leaf as legal tender, we have; of course, all become immensely rich…..but we have also run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying one ship's peanut…….So, in order to obviate the problem and effectively revalue the leaf, we are about to embark on a massive defoliation campaign, and…, burn down all the forests. I think you'll all agree that's a sensible move under the circumstances.

-Ford: You're all mad

[Although this is more monetary policy as opposed to fisccal policy]

Thanks to my student Meghan for forwarding me the scene.
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