Which Party Will Be Better for Economic Growth?

Alan Blinder, Princeton Economist, in a recent NY times article points out that economic growth has been higher under Democratic presidential administrations than Republican, but Casey Mulligan a University of Chicago Economist, shows that women’s wages grew faster relative to men’s wages during Republican presidencies than democratic.

So what does this mean? Greg Mankiw, Harvard Economist, points to the good old question does correlation =? causation. In other words it could have just been a coincidence that both things happened at the same time.

Mulligan has a good response to Mankiw’s question, basically if we give democrats credit for growth then we might want to also give Republicans credit for equality.

So who knows, which party will do better?

This makes me think of a similar problem with evaluating the 700 billion bailout plan. If the economy gets better, was it the bailout plan or did the economy just get better?

The Economics of Happy Hour: Why Beer is Cheaper During Happy Hour

I went to the Brewers Art last night for a happy hour with my fellow Towson professor pals. I’m not positive, but I believe the beers were cheaper during happy hour than during regular hours, same deal at Capital City Brewery in DC (where I happy houred on Wednesday).

Why is beer cheaper during happy hours? The supply of bars hasn’t changed from happy hour to post happy hour (dinner time), but the demand of the patrons probably has. The happy hour crowd tends to be younger and poorer, they tend to have a thirst for cheap drinks. So to attract this crowd before the dinner crowd arrives, bars lower prices.

In Madison, Wisconsin many drink specials were to be found where students ventured out for cheap drink specials. However, due to problems with people who got a little too happy, the local bars banded together to eliminate happy hour specials. A clear case of collusion, happy hour lovers sued the tavern league. The state supreme court of Wisconsin, ruled that it was OK since the tavern league had immunity.

You Tried and Failed, Lesson is Never Try

Should you try your hardest? Generally the answer is no. Most things in life we could have put more effort into, but we need and want to sleep, eat, ect.

Over at Underlying Logic, Erik Simpson discusses the role of optimal effort and students. The discussion began with Usain Bolt, the Olympic sprinter who eased up at the end of his raise. In his teaching Erik has found that "I slowly came to realize that many of my students were choosing to incur penalties consistently so that I never got a chance to judge their best work in a straightforward way. That was the point. If you never try your hardest, nobody can ever find your limits. "

Erik makes more of psychological argument that we feel worse if we try and fail, then we fail without effort. But economist generally assume effort is costly. In the case of Bolt, that might not be, but a student would have to work longer hours. Additionally, hours worked not only have decreasing productivity the more you work (diminishing returns) and the leisure forgone when you are already working hard is extremely valuable. Try working another hour if you have worked 20 in a row, compared to the first hour worked.

There is a large economic literature on signaling models related to trying and failing. Simple example. Imagine I'm your boss, and I assign you a task say you plant carrots on my farm. I have too many workers to watch you plant carrots, so I pay you based on the number of carrots produced. Output is based not only on your effort, but also random forces (rain, rabbits, ect.). Depending on the payoffs to a good harvest or a bad harvest, your ability, and the impact of outside forces you may choose to put in a lot of effort or not.

In some sense students have only a vague idea of how an extra hour of studying will pay off both in terms of their knowledge and their grades. Part of their grade is their effort, and part is random forces (did they study the right material, is the prof in a bad mood when they grade the exam).

To optimally get the best effort generally the models conclude that high effort must be more likely to yield the good result, which is then rewarded.

So assign tough assignments, where high effort pays off.

The Rich Get Richer and The Smart Get Smarter

James Heckman, the University of Chicago Economist, won his Nobel for his work on econometric techniques to estimate various possible influences of wages. Over the last few years he has turned his focus to explaining the difference in skills and wages based on a worker’s education. Generally, he’s finding that skill gaps that exist at ages as young as 3 years old explain most of the difference. He describes his recent work over at Voxeu

To further complicate the problem those with low skills and income are not able to provide the environment to have their 5 year olds have the same level of skills as high skill and income 5 year olds. So the skill differences remain and it is harder to catch up.

Heckman is becoming a stronger advocate for pre-kindergarten education for disadvantage children. In terms of Presidential candidates Obama starts his education platform with a discussion of Zero to 5 year olds education. McCain discusses head start a policy aimed at 3-4 year olds in his early education policy, which Heckman suggests may be too late.

If You Subsidize Not Enough Come

Over at The Sports Economist, Brad Humphreys, discusses the problems with the new Nationals baseball stadium in DC. I have been to a few Nationals game this year (including this one), but not any more than I would have if they still played in RFK. The Nationals attendance has increased a bit this year, but with a sub-par team the new stadium has had one of the smallest bumps in attendance from a new stadium. In short new major league baseball stadiums increase attendance by 2.5 million fans (based on estimates in a recently published paper), but with new stadiums costing 500-600 million the costs to tax payers out weight the benefits even before you account for people substituting ball park expenditures from other forms of entertainment.

Humphreys and Dennis Coates, have a great readable summary of the general view of economists that show that these stadiums don’t pay off in Econ journal watch.

RRRRRRRRRRRRRRRRRRRRRR!!!! Second Annual Talk Like an Economist Pirate Day.

Enough talk about the market downturn plundering your booty. Last Year, this blog got taken over by pirates on International Talk Like a Pirate Day.

Here’s an article on Pirate Economics to celebrate international talk like a pirate day:

And 3 Pirate Econ Jokes!

1. How did the Pirate Economist check the validity of his model?

RRRRRRRRRRRRRRRR-square

2. How did the Pirate Economist take advantage of different prices in two markets?

Arrrrrrrrrrrrrrrrrrrrrrrrrr!bitrage

3. How did the other pirate economists honor the best young economist?

With the Clarrrrrrrrrrrrrrrrrrrrrk! Medal


If we need to defend against Economic pirates, I’m calling Nobel Prize winner James Tobin, who served in WWII on a Navy destroyer and:

“Tobin invented what has come to be called as Tobit or logit analysis where a dependent variable is restricted to certain values. This regression technique has been found to be useful in many socio-economic problems. Incidentally, the name Tobit is taken from the novel, Mutiny on the Bounty, written by Herman Wouk, who served in the Navy with Tobin and named a principal character in the novel after him.”

What Should Your Response Be To The Stock Market Plunge? Not Much

So I called my bank yesterday to move some savings for a house fund from a money market account to a CD. That’s my entire response to the current stock market plunge, now why and a brief primer on what to do. Through a series of questions. Note even with my Ph.D. in economics I have no special training in personal finance, I'm not your financial planner please consult a professional or better yet learn for yourself.




1. What's a CD? Any money with a major bank in a savings account up to 100,000 is insured by the FDIC. This includes CDs, which pay higher interest than savings account but require you to keep money in the account longer. If your Bank goes under the Federal Government will refund your money. What if all the banks go under? Then the money under your mattress is probably not worth much either.

2. Why move from a money market account to a CD?
A money market account is basically the safest thing short of a Federal Government guarantee. A money market invests in short term stable bonds. As Megan McArdle pointed out for only the second time in history a money market account has lost money, and it was only down 3%. We (my wife and I) are still contributing to my money market fund, but I’m going to hedge a little bit in case something crazy goes down. NPR has a good story on money markets here.

3. Why are you saving money in a money market account and a CD?
My wife and I plan to purchase a house in the next few years. As you can see from year to year who know what the stock marketing is going to do. If you are saving for something you will purchase within the next 5 years keep the money in a money market or CD, that way you expose yourself to less risk.

4. So you are thinking of buying a house, is it because it is a good time to buy?

The five year rule of thumb also applies to real estate, since prices can also vary a lot. The variation is less, but there is a large transaction cost to buying house. If you aren’t going to stay somewhere five years, it is not a good time to purchase. My wife and I both have good jobs now and think we’ll be in the area for a while, so it is a good time to buy for us, once we have a down payment we are comfortable with. If you think you may move or lose your job, don’t buy a house.

5. What about retirement?

Most of the people who read my blog are in their late 20s, except my parents and grandfather (but they don’t need money advice from me). So for us nearing 30 we have a lot of time left to go before retirement (35 plus years). Remember buy low, sell high. If the stock marketing is going down, think of it as everything is on sale. Most retirement advisers would recommend you stick with your general game plan and continue to purchase mostly stocks through a mutual fund (international and domestic), and some bonds (10%) ish to round out just in case. Many companies make this easy with target date retirement funds that do the balancing for you.
A great Warren Buffett story can be found here over at underlying logic.


So how did I learn this. Well as Yogi Berra once said you can observe a lot by just watching. I was lucky enough to have smart parents and grandparents, who passed on their knowledge. But I have also read a lot personal finance gurus. I recommend you go to your local library and pick a book that is right for you.


To find the right book, start with the Simple Dollar’s list of personal finance books, which recommends a book based on your personality.