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Friday, October 31, 2008
Wednesday, October 29, 2008
Forbes College Rankings, Bad Methodology
Forbes magazine has introduced a new college ranking. They start with a good idea, but it is extremely poorly executed.
“Choosing a four-year undergraduate college is one of the biggest decisions a typical American family can make. And for too many years, information about the quality of American higher education has been monopolized by one publication, U.S. News & World Report.”
The US News and World Report’s methodology is far from perfect and I agree competition is good. So how does Forbes improve on US News method for selecting the best place to go to school:
“To answer these questions, the staff at CCAP (mostly college students themselves) gathered data from a variety of sources. They based 25% of the rankings on 7 million student evaluations of courses and instructors, as recorded on the Web site RateMyProfessors.com. Another 25% depends on how many of the school's alumni, adjusted for enrollment, are listed among the notable people in Who's Who in America.”
Let’s start with ratemyprofessor.com . This website suffers from severe selection bias. For example the Forbes study author Richard Vedder, an economics professor at Ohio University, has really great teaching evaluation on ratemyprofessor.com, but on average only 3 students a year have filled out a review of Prof. Vedder. I wonder how schools differ in their use of rate my professor, but with only 3 evaluations per year its hard to believe ratemyprofessor provides an accurate picture.
The bigger issue is the next 25%, which uses Who’s Who in America. In 1999 Forbes published an article by Tucker Carlson which refers to Who’s Who, as the Hall of Lame. The article details the problems with Who’s Who, which has basically become a purchased prestige. Similarly Steve Levitt, yesterday at Freakonomics blogged about Who’s Who, citing a study that found ½ of military medals listed in biographies on Who’s Who were made up.
Normally, I do not criticize other works too much in this space, but Forbes ranking have the potential to compete with US News, and this point I do not think they should.
“Choosing a four-year undergraduate college is one of the biggest decisions a typical American family can make. And for too many years, information about the quality of American higher education has been monopolized by one publication, U.S. News & World Report.”
The US News and World Report’s methodology is far from perfect and I agree competition is good. So how does Forbes improve on US News method for selecting the best place to go to school:
“To answer these questions, the staff at CCAP (mostly college students themselves) gathered data from a variety of sources. They based 25% of the rankings on 7 million student evaluations of courses and instructors, as recorded on the Web site RateMyProfessors.com. Another 25% depends on how many of the school's alumni, adjusted for enrollment, are listed among the notable people in Who's Who in America.”
Let’s start with ratemyprofessor.com . This website suffers from severe selection bias. For example the Forbes study author Richard Vedder, an economics professor at Ohio University, has really great teaching evaluation on ratemyprofessor.com, but on average only 3 students a year have filled out a review of Prof. Vedder. I wonder how schools differ in their use of rate my professor, but with only 3 evaluations per year its hard to believe ratemyprofessor provides an accurate picture.
The bigger issue is the next 25%, which uses Who’s Who in America. In 1999 Forbes published an article by Tucker Carlson which refers to Who’s Who, as the Hall of Lame. The article details the problems with Who’s Who, which has basically become a purchased prestige. Similarly Steve Levitt, yesterday at Freakonomics blogged about Who’s Who, citing a study that found ½ of military medals listed in biographies on Who’s Who were made up.
Normally, I do not criticize other works too much in this space, but Forbes ranking have the potential to compete with US News, and this point I do not think they should.
Tuesday, October 28, 2008
Cell phones, consumer expenditure survey and pollster.
Here is a story with a lot of digressions. I was looking something up at the consumer expenditure survey today. To get side tracked the consumer expenditure survey is really great it interviews a bunch of households in the US and finds out how people spend their money. I was looking up how much the average person making $20,000-$30,000 spends on their rent (the answer 37%). This is useful information if you are doing a budget or renting someone a house to see how you or your renters stack up against the average person.
So back to the point at hand the CES has been tracking changes in spending on cell phones and land lines. By 2006 the average household spent the same on land lines as they cell phones. This probably isn’t the best data to show it but I think it confirms the trend that people are going from land line only to cell phone only, since spending on land lines is down 20% between 2001-2006 (I don’t think prices have fallen that much or at all in land line service).
This reminds me of a good article by Nate Silver over at 538. He was discussing the problem of political polls in that they do not call people on cell phones. When this is this case they need to find more people with land lines who are similar to those with those on the cell phone. In other words they likely need to call more young people on land lines to make up for all those missing a cell phone. It’s really a good article.
So back to the point at hand the CES has been tracking changes in spending on cell phones and land lines. By 2006 the average household spent the same on land lines as they cell phones. This probably isn’t the best data to show it but I think it confirms the trend that people are going from land line only to cell phone only, since spending on land lines is down 20% between 2001-2006 (I don’t think prices have fallen that much or at all in land line service).
This reminds me of a good article by Nate Silver over at 538. He was discussing the problem of political polls in that they do not call people on cell phones. When this is this case they need to find more people with land lines who are similar to those with those on the cell phone. In other words they likely need to call more young people on land lines to make up for all those missing a cell phone. It’s really a good article.
Monday, October 27, 2008
A Two Handed Economist's Take on Slots in Maryland and a Casino in Ohio
A previous commenter asked for my take on Ohio’s Issue 6, which would allow a casino to open in Ohio. My home state of Maryland also has an issue on the November ballot to allow slots. This ballot is closer to my pocket book, not because I’m looking for a place to put my quarters, but because the slot issue is tied to the Maryland education budget. I’m still not sure which way I’m going to vote, but I want to lay out the argument on both sides for Ohio casinos and Maryland slots.
I think the issue is actually very similar to the payday loan issue I was discussing last week. On the one hand we have an economic transaction, in this case gaming. The transaction is completed by two consenting adults. Jobs are provided to create this transaction, so there is some economic benefit.
So the next question as an economist is there an externality? That is does gaming create negative consequences for those who are not gamblers. In the case of slots or a casino in rural Ohio, I’m skeptical of crime arising from this type of casino. Gaming addictions could increase, if the public has to support gaming addicts then this could create an externality.
However, I think the question comes down to like the payday loan decision, do we think that casinos or payday loans make people worse off even if those people chose to gamble or borrow?
Second, should the government implement laws to prevent these choices?
I’m not sure how to answer this second question. But I do know this is the question we should be asking.
I think the issue is actually very similar to the payday loan issue I was discussing last week. On the one hand we have an economic transaction, in this case gaming. The transaction is completed by two consenting adults. Jobs are provided to create this transaction, so there is some economic benefit.
So the next question as an economist is there an externality? That is does gaming create negative consequences for those who are not gamblers. In the case of slots or a casino in rural Ohio, I’m skeptical of crime arising from this type of casino. Gaming addictions could increase, if the public has to support gaming addicts then this could create an externality.
However, I think the question comes down to like the payday loan decision, do we think that casinos or payday loans make people worse off even if those people chose to gamble or borrow?
Second, should the government implement laws to prevent these choices?
I’m not sure how to answer this second question. But I do know this is the question we should be asking.
Friday, October 24, 2008
Microcredit versus payday loan
When my father was visiting last week he asked me to compare micro loans in developing countries with payday loans.
It’s a little long but this New Yorker article does a great job of explaining microcredit as does this shorter piece by Karol Boudreaux and Tyler Cowen. For those of you not familiar with micro lending, basically relatively poor people in developing countries are loaned small amounts of money (10s to 100s of dollars).
As the New Yorker article discusses interest rates for micro loans in developing countries can still approach over 100% APR a year. The article also contrasts two current models of micro loans, one which works as a non-profit and one which makes a profit. So what is different between micro credit and payday loans, besides a slightly smaller interest rate. In microloans in developing countries:
1.) The money is supposed to be used to purchase something that will help generate future income.
2.) Loans are made in typically smaller amounts at first then building to larger amounts as the borrower shows they can repay.
3.) Borrowers are often put into groups of about 10 members. All group members must repay their loans or all borrowers lose the ability to borrow in the future.
4.) The programs often include financial education, and require borrowers to save some part of their loan.
5.) Running loan offices may be cheaper in developing countries, since labor is often much cheaper in developing countries, so interest rates can be lower than in the US check cashing places.
So what is the answer to addressing the problems caused by check cashing/ payday loans places in the US. I think in part it creating a way to allow people to manage their finances better.
One step in the right direction might be the Russell Simons Rush Card. Its basically a pre-paid credit card. It also offers direct deposit and check cashing, at fees that seem lower than the average. The card is aimed at the millions of Americans who are without a bank account.
If this could be linked with microloan program that included grouping borrowers and perhaps financial education. I’m however unsure of the ability of the free market and the government to provide that financial education, so I guess it is up to teachers like me.
It’s a little long but this New Yorker article does a great job of explaining microcredit as does this shorter piece by Karol Boudreaux and Tyler Cowen. For those of you not familiar with micro lending, basically relatively poor people in developing countries are loaned small amounts of money (10s to 100s of dollars).
As the New Yorker article discusses interest rates for micro loans in developing countries can still approach over 100% APR a year. The article also contrasts two current models of micro loans, one which works as a non-profit and one which makes a profit. So what is different between micro credit and payday loans, besides a slightly smaller interest rate. In microloans in developing countries:
1.) The money is supposed to be used to purchase something that will help generate future income.
2.) Loans are made in typically smaller amounts at first then building to larger amounts as the borrower shows they can repay.
3.) Borrowers are often put into groups of about 10 members. All group members must repay their loans or all borrowers lose the ability to borrow in the future.
4.) The programs often include financial education, and require borrowers to save some part of their loan.
5.) Running loan offices may be cheaper in developing countries, since labor is often much cheaper in developing countries, so interest rates can be lower than in the US check cashing places.
So what is the answer to addressing the problems caused by check cashing/ payday loans places in the US. I think in part it creating a way to allow people to manage their finances better.
One step in the right direction might be the Russell Simons Rush Card. Its basically a pre-paid credit card. It also offers direct deposit and check cashing, at fees that seem lower than the average. The card is aimed at the millions of Americans who are without a bank account.
If this could be linked with microloan program that included grouping borrowers and perhaps financial education. I’m however unsure of the ability of the free market and the government to provide that financial education, so I guess it is up to teachers like me.
Thursday, October 23, 2008
Credit Part II: An Economist's Take on Ohio Issue 5 To Cap Pay Day Loan Interest
Sorry about the lack of blog posts, I’m learning how to advise students this week. So back to the credit market. This November Ohioans will be voting on a cap of interest payments for loans. As I noted in a blog post over a year (one of my first at Towson), interest rates at payday loan locations can approach 400% per year, the cap on the ballot is 28% a yea.
The Toledo Blade argues that voters should vote against the cap because “Opponents would have voters believe that 6,000 jobs will be lost if H.B. 545 goes into effect because payday lenders can't keep their doors open charging "only" 28 percent interest. They say the issues at stake are financial freedom, privacy, and not limiting lending options.”
As I noted in my previous pay day loan post, there are more payday loan operations than McDonalds in Ohio. In my home town of Delaware, OH its 4 McDs compared to 6 check cash/ pay day loan locations. Economic theory would dedicate that if one of them could still make money by charging 50% interest they would and could likely garner all the business by advertising lower prices.
Since there are many payday loan companies and anyone can start one, it is likely few loans will get made at a 28% interest rate.
I’m reasonably sure these payday loan jobs will be lost, people will no longer be able to get loans. From a pure economic theory stand point, we must believe that either people would be better off having the option of a payday loan or that people are not very good at making their own decisions so eliminating payday loan operations would be a net improvement.
I no longer live in Ohio, but I spent the first 18 years of my life there. I’m not sure how I would vote, because I see both beliefs.
Next post (hopefully tomorrow), I will compare payday loans with microcredit in developing countries. Why is that small loans in developing countries have lower interest rates (100% per year) and why are these loans more likely to be repaid.
The Toledo Blade argues that voters should vote against the cap because “Opponents would have voters believe that 6,000 jobs will be lost if H.B. 545 goes into effect because payday lenders can't keep their doors open charging "only" 28 percent interest. They say the issues at stake are financial freedom, privacy, and not limiting lending options.”
As I noted in my previous pay day loan post, there are more payday loan operations than McDonalds in Ohio. In my home town of Delaware, OH its 4 McDs compared to 6 check cash/ pay day loan locations. Economic theory would dedicate that if one of them could still make money by charging 50% interest they would and could likely garner all the business by advertising lower prices.
Since there are many payday loan companies and anyone can start one, it is likely few loans will get made at a 28% interest rate.
I’m reasonably sure these payday loan jobs will be lost, people will no longer be able to get loans. From a pure economic theory stand point, we must believe that either people would be better off having the option of a payday loan or that people are not very good at making their own decisions so eliminating payday loan operations would be a net improvement.
I no longer live in Ohio, but I spent the first 18 years of my life there. I’m not sure how I would vote, because I see both beliefs.
Next post (hopefully tomorrow), I will compare payday loans with microcredit in developing countries. Why is that small loans in developing countries have lower interest rates (100% per year) and why are these loans more likely to be repaid.
Monday, October 20, 2008
Consumer Credit
I’m going to be focusing on credit this week. Later this week, I’ll be discussing micro-credit in developing countries, but I thought I would start with some interesting developments in the US credit market. Felix Salmon over at Market movers, says consumers may have finally reached too much debt:
“credit card companies were happy to lend, and consumers were happy to rack up credit card debt, because they both knew that if the credit-card balance got out of hand, it could always be paid off with home equity. Now those days are over, and we're entering a consumer-credit crunch.”
This quote is in response to a more detailed post on the credit crunch by Henry Blodgett
Consumers lost another option for borrowing at least for the time being. Prosper.com a peer-to-peer lending website, is entering a quiet period (i.e. no loans) while it tries to register with security authorities.
Tomorrow (or next post) I’ll discuss the pay day loan initiative in Ohio.
“credit card companies were happy to lend, and consumers were happy to rack up credit card debt, because they both knew that if the credit-card balance got out of hand, it could always be paid off with home equity. Now those days are over, and we're entering a consumer-credit crunch.”
This quote is in response to a more detailed post on the credit crunch by Henry Blodgett
Consumers lost another option for borrowing at least for the time being. Prosper.com a peer-to-peer lending website, is entering a quiet period (i.e. no loans) while it tries to register with security authorities.
Tomorrow (or next post) I’ll discuss the pay day loan initiative in Ohio.
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