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.

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…..er, 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.

Collier and Haiti, Power UP!

I heard Paul Collier speak today about a report he wrote on Haiti for the Institute of Peace. Collier is well known for his book the Bottom Billion, which discusses four traps that cause severe underdevelopment. As he points out of the four traps Haiti does not fall in 3 (land locked, bad neighbors, or natural resources). He even think that governance has been OK there, with bad governance being the fourth trap.

The main solution he presents was to increase garment production. Haiti gained extremely favorable access to US markets for the next 9 year for garment exports, but still there has been little increase in the garment industry there. He blames the lack of infrastructure, particularly electricity which costs nearly twice what it does in China as the lack of a quality port.

I recommend Collier’s book the Bottom Billion, and his new book War, Guns, and Democracy comes out Tuesday. I’ll try to review and let you know how the two compare.

Giving People Money is Popular, Political Reaction to Conditional Cash Transfers

Conditional Cash Transfer, which give money to poor families in Latin American if their children go to school and the mother attends health seminars, are popular with the development community as many studies have shown their effectiveness at increasing school enrollment and nuitrition. But, they are also popular with politicians, President Lula has increased/maintained
his popularity by expanding the Brazalian program.

Chris Blattman points to a new paper, that showed in Uruguay that giving families a conditional cash transfer raised the popularity of the in power political party by over 20% compared to groups that did not receive them. So are conditional cash transfer just political pandering?

Where democracy is intact, politician still must run these programs effectively as evident by a recent paper (de Janvry, Finan, & Sadoulet) that showed for Bolsa Famalia the Brazilian transfer program, that effectiveness at decreasing drop out rates was closely linked to mayors facing reelections.

So maybe the result is that the programs increase political popularity if they are run well, that's a result I can live with

Small Farms, Supply and Demand

“To think that someone’s going to make a living on five acres is ridiculous,” “That’s not a farm.”

A local official reaction to David Knaus a local Portland farmer trying to farm a scant five acres outside of Portland, reported in this article. As the article notes David and other farmers faces four problems: expensive land, limited water access, difficult learning curve, and hard labor.


In Madison, I purchased a lot of food grown locally and had produce delivered during the summer from a local farm, and worked a couple of weeks over a summer on the farm. So I'm sympathetic to local farming.

I wonder if the best thing Knaus could do to help himself make his farm more viable is to raise his prices? More from the article:

For those who can grow crops as well as Knaus, there’s no shortage of buyers. “Demand for this type of produce is far outstripping supply,” Knaus

I feel the need to provide a teachable moment about supply and demand. I don’t mean to be snarky here, but in economic terms when demand is greater than supply there is a shortage, in this case sellers should raise prices. If on the other hand if Knaus raised his prices and then he could not find buyers, because they bought from somewhere else (or purchased non-organic food) then it is likely that supply and demand are equal.

h/t to Michael Andersen, the reporter for this story who is also a Grinnellian

There is No Such Thing as Free Parking

There are no longer any free parking spots left on Towson's campus.

From an article in the Towerlight, Towson’s student newspaper. Over break it appears the county has installed parking meters for spaces on the only street with parking that borders the main campus. In the past this street has had free parking and was always filled with cars. Now I’ve notice the spots are around 50-75% full depending on the time of day.

So is free parking good from an economic stand point? Some questions to ask.

1. Are the people who park there now with a meter, the ones that would have parked there before when it was free. If that is the case, then the meters make things worse off for parkers (since some people pay instead of not paying and some people don’t pay, but no longer get free parking).

2. Are others, new parkers, using the spots that would not have parked there previously?
a. Do these people have a higher willingness to pay for parking?
b. Should the new parkers' happiness be given a higher priority than those in free parking?

3.Finally, are there unintended consequences, will this hurt demand for University garage parking passes? For faculty willing to move their car or students only on campus a few hours twice a week, metered parking might be cheaper than a parking pass in the campus garage.

Not a question, but economists know (good article here) there is no such thing as free parking, since instead of "free" parking spaces we could have an extra lane of traffic or a flower bed so there is an opportunity cost of having a parking space.

Opportunity Cost, Does it Pay To Make Your Own Beer

Tomorrow is the first day of class for me (thank you January term), on the first day in intro to economics we usually teach the concept of opportunity cost. The idea is that cost of something is not only what you pay for it, but also what you could have had instead. If I go to a lunch with my colleague, I give up eating lunch while reading blogs.

Let’s take for example making your own beer. In a great post about a beer brewing economist, from Patrik Emerson at the Oregon Economics Blog, he points out that buying the ingredients to make your own beer cost about as much as beer from the liquor store.

For me my ingredients are usually slightly cheaper, and beer seems to be closer to $8 a six pack in the store (with tax). So I guess I’m saving about $5-10, for making my own beer. But wait, I have to spend all that time making it (probably about 5 hours of labor), when I could have been working additional hours. Luckily, I get paid more than $5-10 an hour, so traditionally economists would say, l’m losing money by making my own beer. Since there is the opportunity cost of my time in my beer production (I could have instead made more money giving extra lectures during the January term).

Now here’s another thought. For me beer making is leisure. Instead I could have gone to a couple of movies, purchased and read a book, or gone golfing. So by doing a leisure activity that produces benefits (ignoring opportunity costs), I’m actually coming out ahead.

If that does not quite make sense, do as the homebrewers do and “Relax have a home brew”