Wednesday, November 28, 2012

Nudge vs a Shove: Let's hold off planning 401k's Execution

In response to a recent paper by Chetty et al. showing that lowering benefits to tax sheltered retirement account does not have much influence on retirement savings  Ray Fisman in Slate and other economists on twitter have asked if its time to end the 401k.

As Fisman states in his article "But getting rid of the tax shelters that burn a $100 billion hole in the government balance sheet might be one reform both sides can get behind"

I haven't read the Chetty paper fully, but I think a closer look might be necessary. What the paper does is estimate the influence of reducing, but not eliminating the subsidy for tax sheltered retirement accounts. The paper uses data from Denmark, which has similar tax laws but much better data availability.  The authors find that for each dollar the government increases taxes on retirement there is a less than 1 cent reduction in total savings. In other words raising taxes on retirement savings doesn't change savings much. Driving this result is the fact that 85% of savers do not respond to changes in tax laws by adjusting their savings. 

I was thinking about this in terms of the idea of a nudge vs a shove. If tax rates are adjusted just a little bit on savings, my guess is that most people wouldn't change their habits (consistent with the cited paper).  If the changes are drastic those 85% passive savers might start to make adjustments. Furthermore, if tax breaks are eliminated for retirement savings then lazy savers might not start saving in the first place. 

Many Americans use rules of thumbs to save 10-15% in their tax sheltered retirement accounts, if we eliminate the tax shelter totally the rule of thumb might change and you might see drastic changes.

The take away is behavioral economics is hard and a nudge of adjusting the benefit to retirement savings might produce a different result than a shove that eliminates the benefit totally.

That said I agree with Fisman and other economists that the tax break is mainly geared toward those with financial knowledge and/or wealth, so considering it might be worthwhile once we understand better the implications.  

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Monday, November 26, 2012

Farmer's Market Disequilibrium

At my local farmer's market my wife and I love to buy eggs. Alas our favorite eggs are often sold out by 915 for a market open from 9am-2pm and I have seen similar situations at other markets. So as an economist I wondered if the eggs always sold out why would the farmer not just raise her prices as economic theory predicts would happen with a shortage. I spoke with my favorite egg seller and she told me a great story of another farmer at a different market.

He always sold his eggs for $5 a dozen unless you had exact change in which case it was $4. That was how much he hated making changing.

My favorite egg seller said the she also hated making change, so maybe she could sell all of her eggs for $5.25 or $5.50 but that's a lot of change to deal with. She thought about selling half dozens for $3 each (or $6 a dozen), but the cost of a 6 egg carton is substantially more than a 12 egg carton.

She is also planning on increasing her supply, since she easily sells out. Usually econ 101 would teach us that the farmer would reduce supply at a lower price.

She does want to raise her prices and probably will soon, but she doesn't want to raise prices as she would feel bad for her customers (they don't teach you that in econ 101).

So if you see $6 eggs next week at the farmer's market you can blame me or the invisible hand.

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Wednesday, November 21, 2012

Why Economists Should Love 138 points from Jack Taylor

Last night Grinnell's Jack Taylor scored 138 points in a basketball game shattering an NCAA record for most points scored in a game (previously 113) [see article here]

As an economist and Grinnellian I feel it is my duty to point out why economists should love this performance

Top 5 reasons Economists Should Love Jack Taylor's 138 Points
1. Economists believe in specialization. Clearly Jack Taylor has a comparative advantage in shooting three and not in playing defense.
2. Grinnell isn't maximizing wins with their system, the maximize utility. From what I have heard Grinnell basketball players have a ton of fun, get to play a lot of minutes, and shoot lots of shots. Plus Lebron James wouldn't be asking about Grinnell today if Taylor doesn't go wild.
3. Economists love crazy strategies in games. The rules of basketball don't say you have to play defense, they don't say you can't launch a ton of threes. If Grinnell wins by shooting threes and not playing D sometimes that's an optimal strategy.
4. Economists have the Taylor rule, so in honor of Jack Taylor let's have the basketball Taylor Rule. If Jack Taylor has the ball he should shoot it, if he doesn't you should pass it to him. This reduces uncertainty of who will score.
5. Productivity is key. In this case I measure productivity in terms of points per game played. Making Jack Taylor the most productive NCAA basketball player.

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Thursday, November 8, 2012

My 101 textbook is no longer free

For my intro to economics class I have been using a textbook from Flat World Knowledge. One of the main reasons I chose the text is that an online copy of the text is available completely free to students and now that has changed. The company's model was to make money by selling paper copies or study guides to students. Today I received an e-mail from Flat World knowledge.

"Starting January 1, 2013, we will no longer be providing students with free access to our textbooks. Yes, the free Web format is going away, but our mission to provide high quality course materials at affordable prices remains as strong as ever."

It appears that the texts will now costs $19.99. I really enjoyed telling my students the book was free. I thought the quality of the text approached but was not good as alternatives from other well known authors. Now given that students can purchase old paper version used copies of well known textbooks for less than $20 I don't feel the textbook saves any money.

I'm a little upset that I was not given more warning. Yes the announcement was delayed because of Sandy, but a 6 month warning would have been better. Its not quite too late for me to change textbooks for next semester, but I'm still not sure. I know if Flatworld charges $19.99 for online texts I would prefer to switch back to Mankiw's text or look at new textbooks.

That said I'm not upset at a company for raising prices, as an economist I believe any company in a competitive market should have the ability to set their prices. Lucky for my students the economics textbook market is very competitive and I can look elsewhere.

Finally, I would be very curious to see what behavioral economists would predict will happen. In development economics, research on bed nets showed people were 60% less likely to use bednets when the price dropped from free to $0.60 for what would cost $6 to purchase. In short charging people a little makes them buy a lot less. 

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