Irrationality and the Minimum Wage

I have found that the hardest point to get across to students is the many adverse consequences of price controls, primarily because of their attachment to the idea of the minimum wage. Bryan Caplan has the best rejoinder I have ever read for this criticism from students:

What happens when my outraged students reach the "Salary Requirements" line on job applications? They could ask for a million dollars a year, but they don't. When their future rides on it, students honor the economic truism that labor demand slopes down.

The rest of the book is excellent, but would have been worth the read for that statement alone. Raising the wage, ceteris paribus, lowers employment.

McMillionaires

In an excellent article on the fastfood industry, George Will makes a statement about the McDonalds franchise system that shocked me for a second before I realized that it should have been obvious that this would be true:

McDonald's exemplifies the role of small businesses in Americans' upward mobility. The company is largely a confederation of small businesses: 85 percent of its U.S. restaurants -- average annual sales, $2.2 million -- are owned by franchisees. McDonald's has made more millionaires, and especially black and Hispanic millionaires, than any other economic entity ever, anywhere.

I would bet that many of the McMillionaires started out with McJobs.

The Negative Externalities of Blondes

Blondes apparently make men dumber. What are the policy implications?

1. Place a tax on blond hairs, encouraging women to dye their hair another color.
2. Pay subsidies to men who are frequently surrounded by blond women. (Economists will probably point to endogeneity problems outside the laboratory.)
3. Regulation: Ban blond hair. Inevitably deal with the problem of defining the color.
4. Assign property rights over women's hair color to either women or men.

Feel free to post your own suggested policies to the comments below. This is all tounge-in-cheek of course. I would also argue the existence of an adverse effect on male intelligence suggests there is a positive externality occurring on men, one which might swamp the adverse effect on intelligence. (Hat Tip: Division of Labour)

Capitalization and Naked Twister

An article on CNN.com details the dispute in Duncanville, Texas, a suburb of Dallas that illustrates several important points about local government that we have discussed over the last two days of class. The issue is one of the homes frequently hosts "swinger" events that draws a significant number of patrons and drawn the ire of the other locals.

Retiree Jack Martin, who lives a block behind Trulock's home, said he's concerned that the parties will reduce the value of his property.

As discussed in class, homeowners concern for the value of their property drives local government behavior, and that can be clearly seen from the points in the article. The local government officials are carefully trying to toe the line on this issue by repeatedly saying they are not interested in intervening in the private life (a signal that would hurt property values), but rather trying to prevent the nuisance of noise, traffic, and parking problems occurring in the area on the nights of these events (which also hurt property values).

Final Exam & Final Homework

The Final Exam is Thursday, December 12th, from 3:00-5:00. The review sheet explains the details of the exam.

The Last Homework was due Friday, December 7th in class. I e-mailed those who have turned it in already the solutions. If you do not plan on turning the assignment in late, e-mail me and I will send it to you.

Public Choice Features in Region Focus

The current issue of Region Focus, a publication of the Richmond Bank of the Federal Reserve, has a pair of interesting articles regarding Public Choice Economics. The first is a discussion of the theory itself, which is very readable for undergraduate economists. It discusses Bryan Caplan's new book The Myth of The Rational Voter: Why Democracies Choose Bad Policies. I'm not yet on-board with his arguments, but I have not yet finished the book and I do think it is an interesting alternative way of thinking about democracy beyond the traditional median voter framework that I teach in Micro.
The second article is of interest to WVU students, as it is an interview with our own Russell Sobel about a variety of his best research: Why FEMA fails (he wrote pre-Katrina), testing for the magnitude of the incentive to drive more dangerously when safety regulations are increased, Why West Virginia is poor, and does Wal-Mart destroy small businesses.

301 Exam II

Wedneday, 10/31/2007. We will have a review day on Monday. A review sheet will be posted on the course webpage. Bring a calculator if you need one. You do not need to bring scantrons.

If I receive any good questions concerning the material in the test, I will post them as a comment under this post.

China to Regulate Reincarnation

Seriously.

Painfully Predictable

Communist China and Socialist Venezuela have just passed the U.S. in income inequality. That is, the two have greater income inequality than us.

Not unrelated, Venezuela's brilliant leader figures he'll close out a career of shutting down government checks and balances with a lifetime position has head hancho.

There was no need for Vegas to try and give odds for either of those outcomes, they're pretty much gurantees.

"The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both". ~Economist Milton Friedman

What's Wrong with this Argument?

Are Americans Lazy? Fortune magazine at CNN Money thinks we are. Like many of their articles it seems as of late, it is surprisingly ideological rather than factual. The argument is essentially this: U.S. workers are lazy given by increased amount of leisure time (such as sleeping, days off, hours of work per week, etc). His argument is based on a very good paper out of the Boston Fed and is not one that those authors are making. So the question is, why does increased leisure time NOT equal laziness? Hint: Leisure is a normal good. I’ll leave comments open for a few days if anyone has a suggestion, then I’ll leave the answer in a comment before closing them.

Also, you may also notice a rather misleading sentence that is carefully ambiguous in its wording:
Economists see it happening already, attributing some of the surprising flatness in Americans' real total compensation of the past few years to the presence of millions of global workers competing for jobs.

Which economists? Why real total compensation and not earnings? Interestingly, part of the reason this is misleading is part of the reason the leisure = laziness argument is wrong.

Zimbabwe, Price Controls, and Socialism

Zimbabwe has arrested 7,500 since the enactment of price ceilings on many necessities on the convoluted logic that this is will curb inflation. While there are many lessons in this story, there are three big demonstrations of economic principles at play here in the story.

1. The story demonstrates the shortages created by price ceilings (Qd>Qs).
   
   
2. The price ceilings fail because black markets replace the legal markets, so you never actually get a reduction in price anyway:
   
   The price cuts have left shelves bare of corn meal, meat, bread, eggs, milk and other basics that sell for at least five times the government price on a thriving black market. Local beer became the latest item to disappear Monday. Acute shortages of gasoline have crippled commuter transportation and prevented manufacturers delivering diminishing stocks to retailers.
   
   
3. This is a demonstration of how ultimately socialism must resort to totalitarianism, that the idea we can have social freedom without economic feedom is flawed (See here for Nobel Prize Economist Milton Friedman explanation of this).
   
   "Some are ... saying they will not supply goods and services but we say you will," Mugabe said, according to state television.
   
   

FDA claims more lives...to its own benefit

It's hard to argue that the FDA does anything but kill sick people for the sake of politics. Here is a sad update on a legal case against them, provided by Alex Tabarrok at Marginal Revolution. Below is the cut and paste from the link:

Last year the Abigail Alliance won a stunning decision from the DC Circuit Court of Appeals that dying patients have a due process right to access drugs once they have been through FDA approved safety trials. Here's a sad update from Kerry Howley writing in the Aug/Sept. issue of Reason Magazine (not yet online):

After last year's ruling in the alliance's favor, the FDA argued that the group no longer had legal standing to sue it, since none of the patients who had signed the original affidavits were still members. They were all dead.

Benjamin Franklin and Self-Interest

B. Franklin has been my favorite historical persona since my 5th grade history report, and in light of an upcoming trip to Philadelphia I have returned to a biography on him written by Walter Isaacson. In it he describes what economists mean when we talk of self-interest and how it benefits society better than I think I ever could have. Here is the excerpt:

A fundamental aspect of Franklin's life, and of the American society he helped to create, was that individualism and communitarianism, so seemingly contradictory, were interwoven. The frontier attracted barn-raising pioneers who were ruggedly individualistic as well as fiercely supportive of their community Franklin was the epitome of this e of self-reliance and civic involvement, and what he exemplified became part of the American character.

A great description of self-interest and its results for society!

The Charity of the Uncharitable

There is a famous paper by economist Gordon Tullock on why people vote for taxes that carry out actions one could do on their own, known as "The Charity of the Uncharitable." To restate this, Tullock asked why people would vote for a $100 tax to support some transfer to the poor instead of giving the $100 of your own free will to the poor (or some other charity). After all, either way it costs you $100, but the taxes force everyone (not just yourself) to give $100 to the poor. Why force others to be charitable when they may need that $100 for their own survival or charity of their own choice?

Tullock believed that since people innately realize, even if they don't acknowledge it, that their democratic vote doesn't matter. It is extremely rare for any election to be decided by one vote, thus usually your vote doesn't change the outcome. Given this, you are less likely to vote your true preferences and satisfy what he called internal dissonance, which is internal conflict between wanting to be charitable and simultaneously wanting to be greedy. Since your vote doesn't matter, you may as well vote for the tax to satisfy your charitable side but then privately behave greedily, allowing you to satisfy two conflicting desires.

The reason I bring this up? Scientific American reports that research has found that the brain responds the same way to paying taxes that directly fund charity as it does when money is being given to charity. Perhaps this is the biological proof of Tullock's theory. If you read the article, you will also see that people give less to charity individually than they do when paying taxes. It is however, not a definitive study, as it has several limitations many of which are mentioned in the article.

Quantity Supplied and the Deathly Hollows

CNN reports on the retail competition side of producing the final Harry Potter book in a way that closely describes the supply curve discussed in principles. Also, this demonstrates the move to zero economic profits of a perfect competition. As the price falls (they use the term "discounting" but this is not quite correct) notice that some bookstores choose not to sell the book. This is a movement along the supply curve.

Why Tastey Animals Live Forever

What is the difference between Lions, Elephants, and Tigers from Chickens, Pigs, and Dogs? The former 3 cases you aren't allowed to own and they are going extinct, the latter 3 cases you are allowed to own and have a thriving population. In class, I gave several examples of how private property rights can save endangered animals (recall Lobster Fishieries in New England vs. Port Lincoln, Australia; the Black Rhino in Africa which can also be found on page 39 in your textbook). The Wall Street Journal reports a new case with Bison, where decades of conservation regulations barely kept the species from going extinct, recently assigned private property rights to ranchers has caused the Bison population to grow dramatically over just the last few years.

My thanks to Mark Gillis for the link.

Wal-Mart Investors: Economic Profit is What Matters

In a CNN article on 5 ways to improve Wal-Mart, it begins by stating that investors are unhappy with the largest U.S. company's performance. It states that Wal-Mart's profits have increased 1%, meaning that they took their investors money, and earned it back plus an extra 1%. So why are investors unhappy about this?

Remember the difference between accounting and economic profit. Wal-Mart has earned a 1% increase in accounting profit. However, most other companies have earned better returns well above 1%. In fact, you could open a e-savings account with Citigroup and earn 4.5%. What the investors here are implicitly complaining about is that Wal-Mart has had a negative economic profit, even though it earned a positive accounting profit. Higher returns, like the savings account, offer a better return than Wal-Mart as of late. As a result, investors have punished them as indicated by a 5.1% fall in their stock price over the last year.

Game Theory and the War Funding Bill

For those of you who have been watching the news, you are aware of the Democrats' War Funding Bill stipulating an end date for the pull-out of troops from Iraq. This whole topic is loaded with Game Theory applications. First, the pull-out date that the Bush administration opposes is based on game theory. There is a big difference in strategic games outcomes when the game has an ending point versus ones that the players perceive to have no end-date. If you take game theory here later in your schooling you will learn about that. Secondly, Bush promised to issue a veto if the Democrats passed the bill through congress. You can easily imagine a sequential game where this changed the strategy the Democrats pursued. Suppose you are a congressman who wants the political benefit of being in favor of a troop pull-out, but you also don't want to be remembered as the politician who prevented any form of success in Iraq. Now because of the veto you can have both, by supporting the bill in Congress knowing that the policy won't reach that outcome. I think the bill would have been much more likely to fail, or would hve received fewer votes anyway if Bush had not promised a veto. No way to know for sure though.

Racial Bias in the NBA

There is an interesting piece in the NYT covering a new economics article that reveals that referees (both white and black) are more likely to call a foul against players of the opposite race. Take a read when you get a chance, it is essentially contributing to the literature on peoples preferences for homogeneity (desires for similar people) and takes the standpoint that this is on the subconscious level.

The Winner's Curse

This post is inspired by Google's aquisition of DoubleClick, in which they outbid Microsoft and others to obtain. There is a well known result of auctions known to economists as "The Winner's Curse," that you would see in an advanced game theory course. This is the idea that we would expect whoever wins the auction probably got a bad deal. Assume that the bidders have similar budget constraints. Prior to going into the auction, each bidder will make estimations about the value of the aquisition (assuming that it's the same for both groups), from which this value would represent the maximum bid. Statistically as a group, we know that on average the bidders would come up with the correct estimate. That is, the bidders will have an equal amount of over- and under- estimation of the true value so that the errors will cancel each other out. However, the winner of the auction will be the bidder who overestimated the true value by the largest amount. It's an interesting idea you should keep in mind with auctions that might fit the assumptions like the Google example above. Another that might work is the Boston Red Sox's bid for the rights to negotiate with Daisuke Matsuzaka.

Update (April 14, 2007): It appears that others believe Google drastically overpaid, supporting my earlier post regarding the Winner's Curse.

Why Did Gas Prices Rise Over the Weekend?

Predictably, gas prices rose over the weekend. While prices have been rising for a few weeks now for reasons related to wholesale oil, we always expect gas prices to rise on this past particular weekend every year. Why?

Are textbooks too expensive?

An article on CNN reports the new political debate regarding the "high" prices of textbooks. There are a number of problems with the discussion in the article. I just decided to enumerate a few of them:
1. The student estimates he spend $4,500 for a career in college on textbooks. My guess is that he choose to ignore the fact that he probably was able to sell them back for a figure less than that which would probably lower that figure by 60%. The article later states that the average student pays $900 per year on textbooks and supplies, which is no where near what this guy spent. That figure also excludes the resale value.
2. Ambiguous regulations for professors to be cost-conscious. I do not know a professor who does not take this approach already. While there is technically an incentive for professors to choose high prices, there is much more incentive to choose the best book at the lowest price. If I choose the most expensive book, it probably would only earn me an extra few dollars on the resale market. However I would lose much more valuable time in answering questions for students who do not buy the book because it is too expensive or do not understand the book because it does not match my lecture very well. Chances are this regulation would do much more harm than good.
3. Textbooks are the "hidden" costs of education. This was claimed by Rep. Frank Moe. Frank apparently believes people are systematically stupid. Everyone knows that they will spend money on books and they include that estimate in their own cost-benefit analysis of enrollment. While they may over or underestimate the cost, on average they will be right. To say that no-one realizes the costs of textbooks is equivalent to saying everyone who plays darts will miss the bulls-eye to the left.
4. Much of the article is accurate in explaining why textbooks are expensive relative to other books, but they miss a big one. Comparatively low sales volume and a used book market that cannibalizes future sales are good reasons to expect prices to be high relative to the books at Barnes & Noble, but local monopoly power is a big reason too. See fellow Econ professor John Whitehead's blog post against high book costs for his students for a nice explanation.
5. "The textbook industry pulls in more than $6.5 billion dollars a year...." I don't know what this means, or what it is supposed to imply. It sounds like from the sentence that this is the industry revenue, which means nothing as profits might be really low due to costs. I don't know if this is the case or not, but I also think that there are many textbook companies, so this would be distributed among many suppliers and the economic profit would be low. I also suspect that this is a risky industry, so we should expect there to be some economic profit.
6. What is the alternative? Regulations will increase costs, causing prices to rise. You can pretty much guarantee that if the university or the government takes over the industry, both its quality will decline and prices will rise. Just look at the post office, DMV.
7. Rick Howden complains of buying books he never opens. Whose fault is that? If you weren't going to use it, why did you buy it in the first place?

What is a lifetime of sex worth?

How much would you have to be paid in order to give up a lifetime of sex? What is the dollar value of your life? What is your reputation worth? These are the kinds of questions economists are called in to answer in the courtroom and is known as foresic economics. It is an aspect of our field that some people would probably find "morbid" because it is like putting a price tag on something that many would consider priceless. An economist would probably suggest in a wrongful death suit that a 65-year-old woman's life would require lower compensation than a 20-year-old man's, ceteris paribus. If a doctor botched a surgery that left a woman unable to copulate with her husband for the remainder of her life, an economist would likely be called in to put a price on that.

If you are interested, here is a blog by forensic economist Ralph Frasca (I've met him once, he's a nice guy) and here is a list of example cases in Ohio.

Negative Externalities in the NK deal on Iran

It appears that the agreement with North Korea to disarm their nuclear facilities has been interpreted as an increased probability of U.S./Israel air strikes against Iran, as evidenced by the Intrade Trading Exchange on Current Events. On this website, people buy shares of stock based on the probability that a certain event will occur by a particular date, and if it does then those who hold stock will be paid a dollar per share they hold. Based on the link I provided, it appears that over the last few days as these talks with North Korea have advanced, people have increased the price they are willing to pay for these shares, i.e. they think it is more likely that the U.S. will attack and the shareholders will get paid that dollar. So even though Iran was not involved with the treaty, they appear to bear some cost of that transaction.

Gas Price Gouging Bill

Lawmakers in the House have introduced a bill creating a Federal Law against "price gouging" at the pump. According to the article, Rep Bart Stupak (D-MI) says he is concerned gas prices will again reach $3/gallon. This is essentially creates a price-ceiling for the retail gas market. What will happen with this?

Suppose there is some big shock: Iran gets enthralled in War, another bad hurricane in the Gulf Coast, another massive earthquake in Alaska, or whatever. Oil is traded on a global market, and one of these shocks would trigger a fast spike in oil prices. If this spike in prices is large enough, gas would need to be sold above $3/gallon for there to be any profit. Now, U.S. refineries and other U.S. gas retailers would be unwilling to purchase oil from world suppliers because it would be too expensive relative to what they could sell it for. Clearly, the result would be empty gas stations in the U.S.

Additionally, what would happen to the little bit of gas that did make it here? Even if it was sold at a retail price of $3/gallon, the individual who managed to get it would have a big incentive to turn around and sell it "black market" to somebody willing to pay a whole lot more. We'd be left with a gas shortage and paying very high prices for gas on a black market.

Remember, "high" prices does not equal price gouging.

Moral Hazard and the Catholic Church

There is an article on yahoo about the San Diego diocese filing bankruptcy because it cannot afford to pay the damages to its sexual assault accusers. Bankruptcy creates a well-known moral hazard problem because it reduces the cost of making a risky decision. In essence, if you are weighing the benefits and costs of a risky decision, the ability to file for bankruptcy means you do not have to pay back all of your creditors and others you owe money to. This reduction in cost means some people may end up making choices they otherwise wouldn't make and we have more bankruptcies as a result. It also is a problem for creditors, because they know that if someone is on the verge of bankruptcy, they are less likely to be repaid and are less likely to lend to those who are in the most need.

What is interesting about the article above regarding the SD diocese is that according to the plaintiffs' lawyers, the Catholic Church is able to hide more embarrassing information about their behavior, which means there is a second source of moral hazard in bankruptcy. Remember, they are in trouble because they were helping to cover-up for priests who sexually abused parishioners. Apparently, the ability to declare bankruptcy reduced their cost of getting caught doing this. While bankruptcy may not have made the difference in their decision, it certainly reduced the cost of the cover-up, giving them more of an incentive to engage in this behavior.

First Post for Blog

I have no idea how well this will work....but here it goes. My hope is that this blog will help you (students) pass and obtain information regarding class quickly. Especially for those who are unable to read the syllabus. Since I am not someone who checks my e-mail every hour of the day, many of the routine questions may get answered faster if they are posted for anyone to answer. For example: "When is the homework due? When is the test?" are questions anyone can easily answer.

You can also ask for general help on homework or other study material here. I have no rules for this in that respect.

Also, I hope to post interesting articles in the news relevant to understanding classroom material. We'll see how well this works.