This Young Economist

An interesting interview with Phelps

2014-04-09T17:11:00.000-05:00

Edmund Phelps. My favorite quote:

Of course, while house prices were going up, that became a substitute for saving. People would refinance their homes, take the profit and spend that, hoping that prices would go up again. And then they would do the same thing and spend that. But I do think this home-ownership craze does tie in with a newfound fashion for spending rather than saving. I'm old enough to remember in the 1930s and the 1940s when thrift, frugality was considered an important virtue. In those days we all knew Benjamin Franklin's aphorism, "A penny saved is a penny earned." Today, the official doctrine seems to be that a penny spent is a penny earned.

I like how well he articulates the proper trade off between renting and owning your home. Owning a home is tied to the American dream, yet the choice isn't necessarily obvious.

The Enigma of Silence

2014-03-12T21:29:00.000-05:00

The Wall Street Journal has an excellent article today on the Email Enigma: When the Boss's Reply Seems Cryptic. Here's a key excerpt:

The number of emails sent or received daily by the typical corporate employee is expected to rise to 136 by 2017 from 121 this year, based on projections released last November by the Radicati Group, a Palo Alto, Calif., market-research firm. Managers, who receive the most, are "flooded by email," says Nancy Ancowitz, a New York business communications coach. Many a manager multitasks to get through it all, "emailing from a mobile device at a stoplight, typing with his thumbs," Ms. Ancowitz says.

Some bosses don't answer at all. Nearly one-third of 700 employees surveyed by researchers at Florida State University said their bosses had given them "the silent treatment" in the preceding year, according to the 2006 study.

The article is pitched as a corporate problem, but the congestion of inboxes (and its associated problems) is not limited to the business world. A number of my busiest colleagues prefer to be short and to the point in e-mail, and for the same reason as the article cites -- many of them receive 100 to 150 e-mails per day.

The entire article is worth a read, if you have the time. As for me, I better get back to responding to e-mail.

Why Do We Learn Math?

2014-02-14T14:06:00.000-06:00

I have been thinking a lot about how math and its role in higher education lately. Before getting into my thoughts, let me quote (again) from a classic article by Gale and Shapley [link here], which makes clear that math isn't numbers or calculus even, but a way of thinking:

Most mathematicians at one time or another have probably found themselves in the position of trying to refute the notion that they are people with "a head for figures," or that they "know a lot of formulas." At such times it may be convenient to have an illustration at hand to show that mathematics need not be concerned with figures, either numerical or geometrical. For this purpose we recommend the statement and proof of our Theorem 1. The argument is carried out not in mathematical symbols but in ordinary English; there are no obscure or technical terms. Knowledge of calculus is not presupposed. In fact, one hardly needs to know how to count. Yet any mathematician will immediately recognize the argument as mathematical, while people without mathematical training will probably find difficulty in following the argument., though not because of unfamiliarity with the subject matter.

The insight that Gale and Shapley put forth -- that mathematical training helps with forming and following structured logical arguments -- is a really important reminder for what role math should play in high school, college, and graduate education. If our goal in education is to enhance our students' abilities to think critically and effectively analyze problems, mathematical training is indispensable.

This reason for taking math seriously is quite different than the usual motivation to push for better math and science education. Usually, people (politicians, commentators, etc.) argue that math and science are the most practical of the subjects, and because we're going to be using these tools every day, we had better study them and master them. That's how we end up to be engineers and scientists, and those are good, high paying jobs.

It is true that math is practical for these professions that use math, but math is so much more than that. Mathematical training helps structure logic, logic facilitates problem solving, and any high-skilled job is going to require a lot of problem solving. We should take math seriously because math is a language that is particularly well suited to posing, understanding, and solving problems.

On a closing note, the tricky thing about languages is that when you become fluent in them, you do not notice how much you use it. This is especially true with mathematical training. You may not use calculus every day, but the very fact that you learned calculus changes how you think and process information. You're better at solving problems because you took calculus, and thus, have a richer experience in solving problems. This is true whether or not you need to use calculus to solve the problem.

Some interesting questions about car dealers

2014-01-30T15:37:00.001-06:00

Relating to my posts on my experience negotiating for and buying a car, a reader wrote in with the following anecdote:

I came across your article regarding the Colorado auto dealerships and Sunday sales, and found it very interesting.

We had a similar issue in Rhode Island some years ago. Dealers also had to be closed on Sunday, and there was a fight (by many dealers) to be able to open.

Being such a small state, the issue was that with dealers open in Massachusetts and Connecticut, these sales were actually "lost" by the dealer, as it was easy to go to a competing (and open) dealer on Sunday in one of those states.

The state of Rhode Island also lost a significant amount of sales tax revenue when that happened. This point was probably the main reason why the law was overturned, and dealers are now open on Sunday.

What led me to your story, however, was something else entirely.

I [...] have always been fascinated by economics. I am struck by how dealers cut prices (to a point where they are unprofitable) in order to beat out a competitors offer. It reminded me of the Prisoner's Dilemma theory, and I was doing some online research to see if anyone else had discussed this. That's why I came upon your article.

It seems that in acting in what they think is their own self-interest (getting the sale of the vehicle, at all costs) and then with competitors trying to do the same, the profit of a new car dealer has plummeted (zero or negative profit in selling cars, but still profitable in the service, parts, body shop and used car departments).

It's gotten to the point where in many cases a dealer is more profitable if the don't sell the car. Truly a sad state.

I think that this reader raises a number of interesting questions about the car dealership market. Two immediate questions, for example, are How well aligned are the incentives of the car salespeople, dealership, and the car company? and Do dealerships sell cars as loss-leaders to make profit on the back end? From the author of this comment, the answer would seem to be "not very" and "yes." I also really liked the comment about how Colorado's ban didn't work in a state like Rhode Island because it was so easy to go to an adjacent state. Very cool.

Aside from that, you might think that there are two other considerations. On one hand, car dealerships are thought to price discriminate. Perhaps, they make enough profit on the bad negotiators to offer some screaming deals. Even better, they might sell a car "below cost" as a loss leader in a different way -- as a way of generating word-of-mouth advertising. Of course, for this to work, they need to eventually charge someone a mark up.

Either way, the reader raises some interesting questions, and I thought I would share.

What does the rise of casinos say about the rest of our economy?

2014-01-07T10:00:00.000-06:00

As someone with some research on the casino market, I found today's post by Tim Harford about the Vegas-isation of the economy to be fascinating. I think the parallels Harford draws are interesting and insightful. Even if you're not drawn in by casinos, I hope you'll be drawn in by his post.

What if the future of capitalism is not to be found in Shenzhen, Abu Dhabi or the Massachusetts Institute of Technology Media Lab – but in the Nevada desert? Natasha Dow Schüll, an anthropologist, has spent 15 years conducting field research in Las Vegas, culminating in a disturbing book, Addiction by Design. We are used to thinking of Vegas as a city of gaudy spectacle and the green baize of poker, blackjack and roulette tables. It is now a city of slot machines, which have grown like weeds because they are fantastically profitable. And the spread of machine gambling offers a worrisome portent of developments elsewhere in the economy.

Three slot-machine innovations stand out: first, confusion by design; second, addictiveness by design; third, the use of play money. All have been made possible by the digital automation of the machine itself, which in Las Vegas as elsewhere eliminates the skilled service jobs of croupiers and replaces them with highly paid jobs in interface design and low-paid work as a security guard or waitress.

I have the feeling that Harford views the trend for these market innovations (exploiting confusion, addiction, and play money) as responding to a common shock, possibly technology, or a cultural shift. That's possible, even plausible, but what if exposure to casinos causes people to take more risks elsewhere, or prefer other products that have casino attributes? Research by Chi Liao, a Ph.D. student from University of Toronto, suggests that there might be some truth to this claim (paper here). You might quibble with the details of that paper, but the idea strikes me as plausible and important, given the recent rise of casinos.

GDP and Christmas

2013-12-29T22:14:00.000-06:00

Tim Harford has an excellent post that links the measurement of GDP (gross domestic product) to the Christmas season. The post is both an excellent reminder of what is important, and an excellent description of why measuring important things is hard to do. It is also an interesting history of GDP. For a sample, here is his concluding paragraph.

But divorces don’t begin at the Office for National Statistics; nor did the Bureau of Labor Statistics start the Vietnam war. GDP has its flaws – but if you give, or receive, a costly, unwanted gift this Christmas, please don’t blame the statisticians.

As for me, none of my Christmas gifts were unwanted. I very much enjoyed Christmas this year, but not for the gifts given and received, but for the time with family.

Merry Christmas

2013-12-25T09:04:00.002-06:00

Via Greg Mankiw, here is a fun article about what Christmas Cards would look like if economists wrote them. May you have much regard and strengthen your social ties this Christmas.

Delivery Drones

2013-12-02T09:10:00.002-06:00

After reading this (from my Digg feed), I checked to make sure that today isn't April 1st.

This would be awesome if Amazon could pull this off. Send in the drones.

Garth Brooks, TV Concerts, and the New Music Industry

2013-11-30T13:07:00.000-06:00

Last night, I watched the CBS Garth Brooks concert special, where Garth performed live on television from Las Vegas's Wynn Hotel & Casino. It was one of the more entertaining shows I have seen on television in a long while. Perhaps, it is the country boy in me who enjoyed it so much.

The economist in me enjoyed more than just the music.

First, it was interesting how Brooks did a live show to (presumably) paying customers at the Wynn, simultaneously with doing a made-for-TV concert, complete with commercial breaks. The live audience witnessed a more complete show with some full songs that completed during commercial breaks. It was worth watching at home, and I'm sure the ratings were pretty good for a Friday night. It made me wonder why more artists don't do big made-for-TV concerts like this (maybe they do, and I miss them -- that's possible).

Second, it was even more interesting to me that the made-for-TV concert was an advertisement unto itself. For Black Friday, Brooks was releasing an 8-disc box set of his own music and cover songs of popular other songs that influences his music. The made-for-TV event was designed to announce to the world that he was doing this. In addition, the show got us to wonder if Garth was kicking off a new run of shows in Vegas. He's not, but if he was, it would be a great way to kick off a new live series of shows.

Finally, Garth Brooks appears to be back in the pre-iTunes pre-YouTube world. He has a longstanding dispute with iTunes where he won't make any songs of his available for download, and that dispute continues with this new release, according to the Star Tribune:

It's priced at just $24.96, and can only be bought at Wal-Mart, its sister retailer Sam's Club and walmart.com. Brooks says his feelings about iTunes haven't changed, so he won't make the set available as a download or stream.

"So, until they change or I change," Brooks said, "or some other company comes and gives them some competition, then I don't think you're ever going to see us on iTunes."

This aversion to the new technology of the music industry puzzles me because it strikes me as quite popular (and potentially quite profitable for a big name like Garth Brooks). I spent the morning scouring YouTube for a Garth Brooks channel, and I didn't see one. Rather, I saw a bunch of pirated songs with Garth pictures, or poorly-done covers of his music. For the new generation of folks who engage with music through YouTube and iTunes, why would he want these knockoffs to be the first hit? I'm sure he doesn't want this, but he's not actively fighting it (and I think that's a mistake).

Even worse, not producing a well-done official YouTube channel leaves tons of money on the table. The revenue stream from new CD sales of Garth Brooks music just has to pale in comparison to the advertising revenue stream from an official Garth channel. Plus, YouTube is a whole new audience, so cannibalization of the CD market should be a minor concern.

It is hard to question a marketing decision of the greatest-selling solo performer of all time, but the choice to shun iTunes and (especially) YouTube just seems wrong to me. It is all the more puzzling when you see what a cool idea the made-for-TV production + release of the new bundle of music is.

Allies, Careers, and Organizations

2013-11-17T18:24:00.000-06:00

Robin Hanson has an interesting set of ideas on allies, careers, and organizations.

We often hear other advice, like: seek associates you are comfortable with, or who have things in common with you, or who can give you good advice. Or that you should focus on showing your value to your org as a whole. But these seem to me to be the usual fig leaf excuses. That is, these are things one can admit doing openly without violating the standard forager norms against overt coalition politics.

What smart folks probably really mean when they suggest that you get a mentor, is that you get a powerful ally. And while allies in high places can be especially valuable to you, to make it a win-win relation you are going to have to offer them a lot of value in return. You will even have to figure out how you can help them, and help them first; they don’t have the time, and don’t trust you yet. And when you succeed in finding such a powerful ally, you will submit and they will dominate. That doesn’t sound nearly as nice to say, however.

Hanson is responding to a thought-provoking and boldly-stated answer to the question, How do you start those relationships with potential sponsors you don't know well already? by Sylvia Ann Hewlett in discussing her book (Forget a Mentor) Find a Sponsor.

Nuance and Truth

2013-11-02T08:38:00.000-05:00

The Wall Street Journal has an excellent article on what aides knew and debated about Obama's repeated, "If you like your coverage, you can keep it" promises. Two quotes stuck out to me [gated]:

"You try to talk about health care in broad, intelligible points that cut through, and you inevitably lose some accuracy when you do that," the former [anonymous] official said.

"Simplification and ease of explanation were a premium, and that was true throughout the process," he [Jon Favreau] said.

In other words, the demand for a simple message was what led to the falsehood.

To me, this is distressing and fascinating at the same time. On one hand, I would love it if politicians (both Democrats and Republicans) gave the American people more credit. Simplicity at the expense of truth is something that both parties practice. This is what leads to diametrically opposed fact checks during political campaigns, and it might just contribute to the increased polarization that we see in our political landscape.

On the other hand, I can appreciate the difficulty in communicating the essence of an argument to a group of people who just want things to be simple. This is the art of teaching a complicated concept. You simplify and simplify and simplify until what you teach is just barely true. Then, once something is just barely true, you can reintroduce the nuances of the subject. Unfortunately, the reintroduction of nuance doesn't always happen in time or effectively, and part of the message gets lost.

The analogy to teaching is no excuse. Communicating a nuanced policy position is not the same as teaching a tough concept, especially when nuances have real economic consequences.

Halloween: The Coordination Game

2013-10-31T19:05:00.000-05:00

This thought occurred to me while waiting for the neighborhood children to start Trick-or-Treating. When to start Trick-or-Treating is a coordination game of sorts. It is no fun to be the only people on your block ringing random doorbells. But, this is true of everyone. So, starting from the status quo when no one has gone outside, how do we get to the scenario when the neighborhood is packed with princesses, frogs, counts, and woodland fairies?

One possibility is to announce when everyone should start, but that's not how it seems to happen. Upon observing the neighbors, the start of it happens gradually. A princess sits on her front porch, hoping to attract other Halloween revelers. Then, a count timidly poses for a picture in his parent's driveway. Then, the floodgates open, and Halloween begins!

Speaking of that, the doorbell just rang. Happy Halloween everyone!

Shark Tank's Equity Clause

2013-10-15T22:21:00.002-05:00

Here is something I didn't know about Shark Tank until it is gone:

Recently Mark Cuban gave an ultimatum to the lawyers at ABC's Shark Tank: Either remove your equity clause or I'm not coming back, reports Jason Cochran.

According to the clause, all contestants were required to give Finnmax, Shark Tank's production company, either 2 percent of their profits or 5 percent equity in their company. This rule applied regardless of the deal struck with investors, and all contestants since Season One were obliged to agree to it.

However, last Sunday, Cuban, who went to court Monday over insider trading allegations, wrote on Facebook that the equity clause had been removed, thanks to him:

"FYI, there is no additional equity or percentage of anything taken any longer. That was removed retroactively," he told a group of former contestants. "I told them I wouldn't come back this season if it wasn't." ABC and Sony Pictures Television declined to comment.

Before reading this article, I thought that entrepreneurs went on Shark Tank without having to give anything up but their time and effort to put in an application.

Now, when I find out that they had (past tense) to give up 5 percent of their company, I am even more curious about how Shark Tank sustains itself. After all, there are plenty of investors/partners out there who would hear these pitches and not charge the entrepreneurs 5 percent of their company to do it (call this other company, Guppy Tank).

The Guppy Tank could offer the same deal as Shark Tank, but without the equity clause. This would be strictly better than Shark Tank for the entrepreneur. So, how come the Guppy Tank doesn't put the Shark Tank out of business? In my mind, it comes down to publicity. For some kinds of companies, the added publicity of giving your pitch on TV is worth giving up 5 percent of your business even if you don't get the deal. Pitching your company on national television is a service that only Shark Tank provides, and that's valuable to the entrepreneur. The people at Shark Tank recognized this source of additional value, and they set the contract to capture it. If you think about how you can capture it, you can't exactly charge the entrepreneurs money (because they're cash strapped and asking for money), so you do the next best thing, require a portion of the business.

There is a problem though. Some types of companies won't find it worthwhile to give up 5 percent of their company in the event that a deal doesn't go through. These companies will automatically go to the Guppy Tank over the Shark Tank, and these are the missed opportunities that Cuban wanted to try and get by removing the equity clause.

From the perspective of Shark Tank (even as just the investment group, and not the television show), I am not sure what is going to lead to better quality deals. Eliminating the equity clause is going to increase the variety of companies (low publicity demand firms will find it optimal now), but it is also going to increase the intensity of publicity hogs who apply to the show. Perhaps Shark Tank will screen these bad apples out in the initial round, but it will be interesting to see how the Shark Tank pitches change.

Coffee, Beer, and Creativity

2013-10-02T09:53:00.000-05:00

When I wake up every morning, there's an e-mail in my Inbox from The Daily Digg. I must have signed up for these e-mails a long time ago because I don't remember doing it. At first, I was annoyed to have another source of junk mail to filter (when I get around to it), but I have gone from immediately deleting this e-mail to reading it casually to looking forward to seeing what is in The Daily Digg each day. I don't know how this happened.

Anyway, this morning's Daily Digg led me to this interesting post about coffee, beer, and creativity. On one hand, there's coffee:

The general consensus across caffeine studies is that it can increase quality and performance if the task you are doing seems easy to you and doesn’t require too much abstract thinking.

On the other hand, there's beer:

The best time to have a beer (or two) would be when you’re searching for an initial idea. Because alcohol helps decrease your working memory (making you feel relaxed and less worried about what’s going on around you), you’ll have more brain power dedicated to making deeper connections.

So, the conclusion is to drink a beer, come up with an idea, and then chase that idea down it with some coffee. Literally.

Of course, if you're the type of person who searches for the initial idea in the morning and wants to work on it through the day, following this prescription might be counterproductive. But, for the rest of us who want to justify our coffee and beer drinking habits, this article is quite interesting.

Lessons from another car-buying experience

2013-09-30T11:09:00.000-05:00

If you walk into a car dealership and start negotiating over buying a car, there are phrases that you will likely hear.

A few hundred dollars
"We don't want to lose you over a few hundred dollars."

This is a trickier phrase than it first appears. Digging past the facade of friendliness, the phrase accomplishes several things: (1) it makes the original price seem reasonable, (2) it makes the dealer seem willing to negotiate anyway, and (3) it makes you think in terms of hundreds, not thousands, of dollars.

Suppose you're considering a $20K-$30K purchase. A few (2-3) hundred is around one percent of the price. Yet, most car buying guides (example) suggest that your target price should be around 10 percent lower than the price posted. Regardless of what the salesman is trying to get you to suggest, you should ask for a couple thousand dollars off the price, not a couple hundred. If the dealer is not willing to go there, walk out. Car manufacturers make these things on assembly lines. There are plenty of others around. Plus, you can always come back.

Make us your best offer
"What price will it take for you to make the purchase right now?"

On its face, this phrase gives the control to the customer. Being in the position to set the frame of reference for the negotiation is great. Moreover, in this setting, making a take-it-or-leave-it offer theoretically gets you the most surplus in a surplus-splitting negotiation. When the salesman asks you this question, you have the option of making such an offer. That kind of control is nice, but it is limited by several factors.

First, you don't really know the salesman's reservation price. They do a really good job of hiding that, and pointing to the sticker price as the focal point in the negotiation. Moreover, this reservation price is a bit fuzzy because it depends on the dealer's evaluation of how likely another buyer will walk in the door and pay that price or higher (and the cost of getting a comparable car on the lot before that happens). That's hard to predict, but the dealer knows that much better than the customer. In this case, information about these factors protects the dealer from overly savvy negotiators.

If you knew the dealer's reservation price, your best bet would be to make a take-it-or-leave-it offer at that price. The dealer would still make a profit on the books, but he'd be indifferent between selling to you now, and waiting for the next guy who is going to (in expectation) pay a higher price. Given that you don't know the reservation price, you have to feel it out, and that will tend to raise prices -- both the price that others would pay and yours. Note: indirectly, this is going to improve the dealer's outside option, and thus, you're going to be stuck bargaining with a less willing negotiator. Not an accident, I'm sure.

Second, the what-will-it-take-right-now tactic manipulates customer information. If the customer hasn't done advance research, the "right now" part of the question really bites. If you don't know what price to ask for, you have no business answering this question. Plus, there is only so much you can look up while you are under the watchful eye of a car salesman. Smartphones are great, but they're not a perfect substitute for a laptop and a cup of coffee to mull it over.

Even worse, the dealer has the option of rejecting bad offers and accepting good ones. If some customers make unnecessarily high offers when put on the spot, this option is valuable for the dealer and costly to the customer. Again, the dealer can just reject the unacceptable offers, so it is hard to accidentally stumble into a good deal.

Finally, the what-will-it-take-right-now tactic tends to follow closely on the heels of the dealer's framing of the negotiation. You just heard that they're not willing to lose you over a few hundred dollars. If you haven't spent time looking up fair prices, thoughts creep into your head. Maybe asking for $500 off will seem like a tough starting position. Is it crazy to ask for $1,000 off? A few hundred dollars could buy a few weeks of groceries.

The dealer wants you to think in these terms because they've built in lots of surplus for themselves, more than a few hundred dollars. I think they're counting on you making a mistake under pressure.

----

Believe it or not, all of that is context. This post was motivated by the fact that we recently went through the car buying process to buy a second car. After having another car buying experience, I am glad I will not hear these phrases any time soon.

Informed by our previous buying experience, we did our due diligence.

We narrowed down the make and model that interested us. This facilitated head-to-head comparisons across dealerships.
We went with a Certified Pre-Owned vehicle. This slashed the price significantly while retaining most of the factory warranty.
We used Kelly Blue Book and Autotrader to get an idea of what a fair price is before going into a negotiation.
We test drove cars at multiple dealerships, and we let the salespeople know that we were doing so.
We walked out of a couple of negotiations when our terms were not being met.

At the end, we were looking at a Certified Pre-Owned vehicle that was marked down $3,000 below the Kelly Blue Book price for a car of that vintage, with those options, and with the number of miles it had. We knew that the sticker price was a good deal, but we asked for an additional discount of $1000 anyway, as a start to the negotiations.

We had also conveniently left a chicken in the oven at home, and went shopping around dinner time. I suppose this could be a credible commitment to leaving the dealership. Telling him about our chicken, I told him we would start negotiating the next day with $1000 less than sticker (already a good price), and I insinuated that I would commit to buying at the price the next day, but not today. I was being fully transparent. I was hungry and our chicken was getting dry. I was going to come back the next day, and I would pay what I said I would pay.

The salesman must have thought of this as tough negotiating because he came back and said "What price would it take to get you to buy this right now?" Annoyed, I slashed my offer by another $2000. He'd have to take $2K off of a good deal for me to delay dinner. That's not my usual reservation price on delaying dinner, but I really wanted to just pick up the negotiation the next day.

He went back to his boss, and came back saying, "Boss says it's a no go on $2,000 off, but $750?" He held out his hand to shake.

"No. Not tonight."

He countered. "OK, $1,000 off. That's what you originally asked for, right?" He held out his hand again, eagerly.

Me: "No! I said I'd do that tomorrow, but not tonight."

Him: "So, if I go back there, and tell him that you're firm on $2,000 off, you'll do the deal if he agrees?"

Me: "That's what I'm saying."

After a few moments, the dealership agreed to this deal, and I am puzzled. I flat-out told them I would pay $1000 more the next day, and I was being truthful. They must not have believed me. Even if they didn't think I was coming back, they must have (a) higher inventory costs than I thought, (b) lower turnover than I thought, or (c) both. Regardless, we have a new-to-us car, and we got a great deal. When our cars wear out, we may be going back to this place. And, maybe that's the point.

"... but thinking makes it so."

2013-09-13T13:21:00.000-05:00

Last week, on my parents' first trip to visit us in Colorado, my parents brought a car full of my old stuff that I have done without for the last 5+ years: Trophies, certificates of achievement, pictures from camp, books that I bought and never read, my baseball card collection, etc. With the CU-Boulder campus closed today, this was a good day to start going through that stuff. It is an interesting walk down memory lane.

In the midst of the trophies and memorabilia, I found a journal that was empty except for one page, and on that page, there was a handwritten poem that I had written when I was in high school. In case you're interested in what Teenage Tony had to say, here is a picture and the text from that poem.

Some say happiness is like a butterfly
fluttering in the sky above.
Some see life as a pesky moth,
which makes everything tattered and rough.
These two divisions of humanity
share a common thread,
though one sees joy, life and excitement,
while the other wishes he were dead.
What is common among all walks of life
is the determination of their destiny.
The direction of thought that one begins
has the power to chain or set free.
Freedom lies in optimism
and a smile on your face.
Slavery bears the shackles
of derogatory thoughts and distaste.
Bad or good do not exist
except for in sacred thought,
and eternity will continue on
as good and bad are forgot.

American Exceptionalism

2013-09-12T12:22:00.001-05:00

Vladimir Putin speaks to the American people about Syria. Here's his concluding paragraph:

And I would rather disagree with a case he [Obama] made on American exceptionalism, stating that the United States’ policy is “what makes America different. It’s what makes us exceptional.” It is extremely dangerous to encourage people to see themselves as exceptional, whatever the motivation.

Some comments on American exceptionalism.

John McCain took exception to that point, calling it "an insult to the intelligence of every American."
Another way to express American exceptionalism is to say that "The United States is the greatest country in the world." The fact that most Americans would unthinkingly agree to this statement speaks volumes about American culture.
Based on Putin's choice of words, Putin claims that Obama was encouraging Americans to believe that we're exceptional. If Putin understood American culture, he would know that Americans already buy into American exceptionalism, by and large. In other words, Obama was echoing, not injecting, that American sentiment.
Having completed graduate school with a number of people from foreign countries, I have encountered pushback on American exceptionalism before. To a German, for example, the ideal that you are exceptional because you're American is strange and off-putting. It is likely that Russians feel the same way. Nevertheless, American exceptionalism is part of American culture.
On the other hand, if Putin really understands American culture, his comment about exceptionalism is a deliberate barb designed to insult Americans. Perhaps, this is most likely. That brings us full circle to McCain's comment. I have to disagree that Putin's words insult American intelligence. Putin's column is an insult to American culture, not to American intelligence. Either way, it is an insult.

I wonder how diplomacy will evolve if we're already at the stage where leaders of other countries are insulting our culture. Regardless, I think both sides need to take a break to (re)read Dale Carnegie's How to Win Friends and Influence People. We desperately need both sides to have some real insight into what the other side is thinking.

=====

Back to the high ground.

Attention by Country to an EduEcon YouTube Channel

2013-09-08T11:56:00.000-05:00

About a year ago, YouTube added an interesting feature for people who upload videos -- it started reporting to uploaders how much time people spent watching their videos. Don't worry. These are aggregate statistics. From these statistics, I still can't pinpoint your viewing habits too closely as a content provider, but there is an interesting depth to the amount of information.

For example, YouTube reports the total and average watch time by country of viewership. From my YouTube channel's views, there are some interesting patterns. There are 24 countries where people watched at least 10,000 minutes of my channel's videos. Restricting to these 24 countries (to reduce statistical anomalies), the five nations that paid the most attention to my videos are:

1. Jamaica (47.6% of video length)

2. Sweden (46.6%)

3. Portugal (46.2%)

4. United Kingdom (44.4%)

T5. Australia and New Zealand (43.9%)

The five nations that paid the least attention to my videos are:

1. Turkey (33.7%)

2. India (35.3%)

3. Malaysia (35.6%)

4. Spain (38.1%)

5. Hong Kong (38.5%)

What can account for such differences in attention? Based on the countries that showed up in these lists, I have several ideas, but before I reveal these, I would like to see what you -- the reader -- think. One thing that jumps out at me is that the United States, my home country, is not in the top five (or the bottom five for that matter).

What is your vision for the future?

2013-09-03T09:58:00.000-05:00

Last night, I learned the sad news that Ronald Coase died at age 102. In his career, Coase fundamentally changed the way economists think about firm and market transactions, externalities, law and economics, and even, durable goods. The study of economics is much richer and more full of life because of Coase's fundamental contributions to the field. The economics profession owes Coase a great debt of gratitude.

I could write a detailed narrative on how each of Coase's contributions have permeated the field, but I am sure that others will take on this task. My comparative advantage lies elsewhere. Instead, I want to share a story about the only time I met Coase at a Ronald Coase Institute roundtable this spring in Chicago.

I was invited to this roundtable because I participated in in the 2008 Ronald Coase Institute (RCI) Workshop in Los Banos in the Philippines. The RCI workshops are a part of Coase's desire to support academic research by young scholars on developing economies. These workshops are an important part of Coase's legacy. The people at the Ronald Coase Institute (Lee and Alexandra Benham, and Mary Shirley, in particular) work tirelessly to promote research on new institutional economics.

I saw the Chicago roundtable as a great opportunity to visit with the RCI folks I met in the Philippines, as well as meet other people who are part of the Coase Institute network. As such, I signed up without any expectations. Although the event had Coase in its title, I had no idea that Ronald Coase would be there. He wasn't slated to speak, and the thought that he might actually attend never crossed my mind.

To my surprise and delight, Coase showed up halfway through the roundtable. I was not the only one who was surprised. Coase's arrival caused a small commotion that actually led to a slight pause in the program (because the speaker was as astonished as I was) while he got settled in.

After the roundtable discussion and before dinner, Lee Benham took the opportunity to introduce me to Coase. At age 102, Coase was hard of hearing and in a wheelchair, so people who spoke with him had to kneel next to him and speak up. This humbling way to meet Coase only magnified the significance of the moment. What do you say to a man who revolutionized economics and helped establish the field that you so humbly try to advance? Before I said much, I was whisked away. Coase was the man of the hour, and lots of people wanted to talk with him. Lee Benham took a picture.

After meeting Coase, I went back to filling my plate for dinner, and looking for a place to sit. I figured that the excitement of meeting Coase before dinner would be the highlight of the evening, but it was not. Just as I began looking for a table to sit, Lee Benham pulled me aside and told me that I would be dining with Coase. This distinct honor was not phrased as a question ("Would you like to dine with Coase?"), but as a command ("You will be dining with Coase").

Again, what do you say to Coase when you are thrust into dinner conversation with him? Compounding the natural anxiety of what to discuss, conversation was difficult because he was hard of hearing. Nevertheless, we eventually had a nice conversation about support from our families of research (Coase's family never really understood what he was doing) and a little about my research on institutions. Then, Coase asked me, "What is your vision for the future?"

The question floored me. Most people who are at the sunset of their lives are almost too excited to share all of the experience that they've had, yet Coase wanted to know how the next 102 years would turn out (and what I thought about it).

Back to the question, I expressed optimism that we would meet the challenges of our world, and that 20 to 50 to 100 years from now, the world would be a better place due to the accumulated wisdom of creative minds. Then, I concluded, "but I'm young enough to be optimistic." Coase replied, "I'm old enough to be optimistic." More than just reassuring me, you could see it in his eyes that he really took an optimistic view on the future.

Now, with Coase gone, we are left with his legacy, and we are blessed to have his vision for the future. Although Coase will be missed, the world has been greatly enriched by his life and work.

I knew textbooks were getting expensive, but...

2013-09-01T18:03:00.000-05:00

...this is unreal (screenshot from Amazon).

Apparently, this is the paperback version. The hardcover version sells for a mere $223.87. I wonder if this is some sort of experiment, or just another automated pricing scheme gone wrong.

Prices and Products in a 1950s Catalog

2013-08-26T08:08:00.000-05:00

An interesting letter to the editor from Don Boudreaux, posted to Cafe Hayek:

I challenge you and other Americans to do what I did and lay your hands on a Sears catalog from the 1950s. My catalog – bought recently on eBay (a company founded in 1995) – is from 1956. Peruse the catalog. What do you see? You see, for example, Sears’s cheapest TV (black’n'white, of course), priced so that a typical full-time manufacturing worker in 1956 had to toil 61 hours to earn enough money to buy that TV. Today, the typical American worker can buy an infinitely superior TV with only ten hours of work. And this lower cost in term of work-time is true for nearly everything else that Sears sells: clothing, kitchen appliances, automobile parts, office furniture, sporting goods, children’s toys. The list is long.*

An even longer list can be made of what you don’t see in that catalog or in any other record of the economy’s offerings to Americans in the 1950s: no digital cameras; no lightweight waterproof sportswear; no microwave ovens; no CDs, DVDs, or MP3 players; no personal computers; no cellphones; no GPS devices; no indexed mutual funds; no soft contact lenses; no statins; no measles or meningitis vaccines; no portable defibrillators; no oral contraception; no MRI machines. Commercial jet travel did arrive in 1958 – but at fares well beyond the reach of most Americans.

It is remarkable how much better off we are than the 1950s. What is more remarkable is that plenty of people long for the 1950s out of nostalgia. I know few people who wouldn't want to get back to 2013 as quickly as possible after a few hours in the 1950s.

Racquetball, Soda, and Liberty

2013-08-19T23:39:00.001-05:00

A friend of mine, Stephen Richer, recently authored an interesting analysis of the New York City ban on large colas. Here is an excerpt:

Instead, the court invalidated the soda ban because it violated the city’s separation of powers doctrine. The city’s legislature never voted for a soda ban, nor had the legislature granted specific authority to the mayor’s office to tackle the obesity problem. In short, the Board of Health – part of Mayor Bloomberg’s executive branch – had usurped power from the legislative branch to act as lawmakers who wanted to ban soda.

The ruling is certainly a win for libertarians. A major factor in the growth of government is the unchecked lawmaking by unelected bureaucrats, be they at the federal Environment Protection Agency or New York City’s Board of Health. By making certain that only legislative branches pass actual laws, we, the people, can better keep track of new laws, and we can hold our legislators accountable for the laws they pass.

The court, however, did not say anything about individual liberties or the equity of law across beverage and food industries. This gave hope to proponents of the soda ban who see the New York ruling as a procedural hurdle – cumbersome, but manageable. Consider the food regulation advocate Marion Nestle who optimistically wrote after the ruling, “Even if the city loses the final appeal, the 16-ounce soda cap is the writing on the wall for soda companies.”

In addition to being a great writer and a scholar of the law, Stephen is also the best racquetball player I have ever met. Seriously.

We've come a long way

2013-08-10T21:50:00.000-05:00

A 1969 advertisement for Virginia Slim cigarettes:

A 2013 advertisement about cigarettes:

It is amazing how cigarette advertising has changed.

Au Shucks: Gold and the Average Investor

2013-08-01T22:00:00.000-05:00

Disclaimer/Disclosure: This post is not intended to be investment advice. I currently hold no gold, nor anti-gold (non-standard term: read on if you dare) in my portfolio of assets, nor do I plan to acquire a position in gold in connection with my writing this post. The post is for entertainment purposes, but you will hopefully also find it educational if you haven't caught the discussion through some other channel.

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With that out of the way, Greg Mankiw has an interesting New York Times article in which he analyzes the investment properties of gold. Many economists get this question, "Should I buy gold?" Mankiw's answer (in a nutshell):

My instinct was to say no. Like most economists I know, I am a pretty boring investor. I hold 60 percent stocks, 40 percent bonds, mostly in low-cost index funds. Whenever I see those TV commercials with some actor hawking gold coins, I roll my eyes. Hoarding gold seems akin to stocking up on canned beans and ammo as you wait for the apocalypse in your fallout shelter.

But, then he takes a serious crack at the question, citing gold's historically low return, high volatility, and low correlation with other assets (stocks and bonds). He ultimately concludes:

In the end, I abandoned my initial aversion to holding gold. A small sliver, such as the 2 percent weight in the world market portfolio, now makes sense to me as part of a long-term investment strategy. And with several gold bullion exchange-traded funds now available, investing in gold is easy and can be done at low cost.

I will continue, however, to pass on the canned beans and ammo.

To a first order, this seems like sensible advice to me. After all, Mankiw's initial impression - like mine - was to stay far away from gold as an investment. More importantly, all of this is in an environment where naive investors are being told that there's no safer investment than gold ("buy gold" commercials will tell you something to the effect that "gold is an asset with real value."). Much of this is nonsense. Thus, it's incumbent upon Mankiw to push back against the tide, and push he does.

But, what was interesting to me is that John Cochrane chimed in, and eminent financial economist he is, Cochrane deepened Mankiw's first order analysis:

I think Greg made two basic mistakes in analysis.

First, he assumed that returns (gold, bonds, stocks) are independent over time, so that one-period mean-variance analysis is the appropriate way to look at investments. Such analysis already makes it hard to understand why people hold so many long-term bonds. They don't earn much more than short term bonds, and have a lot more variance. But long-term bonds have a magic property: When the price goes down -- bad return today -- the yield goes up -- better returns tomorrow. Thus, because of their dynamic property (negative autocorrelation), long term bonds are risk free to long term investors even though their short-term mean-variance properties look awful.

Gold likely has a similar profile. Gold prices go up and down in the short run. But relative prices mean-revert in the long run, so the long run risk and short run risk are likely quite different.

Second, deeper, Greg forgot the average investor theorem. The average investor holds the value-weighted portfolio of all assets. And all deviations from market weights are a zero sum game. I can only earn positive alpha if someone else earns negative alpha. That's not a theorem, it's an identity. You should only hold something different than market weights if you are identifiably different than the market average investor. If, for example, you are a tenured professor, then your income stream is less sensitive to stock market fluctuations than other people, and that might bias you toward more stocks.

With the average investor theorem in hand, Cochrane doesn't come to a different conclusion:

I don't come down to a substantially different answer though. As Greg points out, gold is a tiny fraction of wealth. So it should be at most a tiny fraction of a portfolio.

There is all this bit about gold, guns, ammo and cans of beans. If you think about gold that way, you're thinking about gold as an out of the money put option on calamitous social disruption, including destruction of the entire financial and monetary system. That might justify a different answer. And it makes a bit of sense why gold prices are up while TIPS indicate little expected inflation. But you don't value such options by one-period means and variances. And you still have to think why this option is more valuable to you than it is to everyone else.

Alternatively, you could think about why the option is less valuable to you than it is to everyone else, and include anti-gold in your portfolio. Technically, anti-gold doesn't exist, but the exchange traded funds that Mankiw mentions also allow you to hold an asset that is supposed to behave as if you hold negative gold. I have known a few economists who invested in these funds as well.

And, a follow-on after I have already written the post, this is an advertisement in today's (August 1) Wall Street Journal.

Mankiw and Cochrane would agree, but they'd suggest using only a thin layer of gold.

Tony Talking Traffic

2013-07-30T10:04:00.000-05:00

Paul Krugman complains about traffic and sprawl:

Consider the following thought experiment: you are driving on a road — let’s arbitrarily call it Interstate 91 — and must choose a lane. Traffic is so heavy that you can’t really change lanes thereafter. But there are many bad patches along the road; half of the distance can be covered at 60 miles an hour, but the other half only at 15.

You might imagine that your average speed is halfway between 15 and 60, but a little thought shows that this isn’t true: your average speed is only 24 miles an hour. Also, the lanes aren’t perfectly correlated: sometimes your lane is going 60 while the next is going 15, sometimes it’s the reverse. Again, you might think that this means you spend equal amounts of time watching the other lane whiz by and whizzing by yourself, but not so: you spend four times as much time watching the other guys race past.

And this creates intense frustration and anger, a sense that it’s grossly unfair that you are in the wrong lane. This sense persists even though (a) you have worked out the analysis above, and realize that in principle the lanes are equally good or bad and (b) you have in fact been playing leapfrog with the same Boltbus the whole way, so that you know that in fact neither lane is better. No matter; you are angry, frazzled, and late for your family event. (Which you make up for by having a good time, and drinking enough wine that it’s past 9 when you realize that you didn’t post Friday Night Music).

But it’s a good thing I didn’t ride the train (which for complicated reasons wasn’t an option); after all, that would have diminished my individualism.

Having grown up in Montana (rural), moved to Chicago (urban), and now, moved to Colorado (mixed), I can understand both sides of this debate.

On one hand, the rural side of me knows that it is impossible to find a convenient bus or train route between any two "major" towns in Montana. For example, if you want to pick up grandma from Billings on your way to see the parents in Helena, and then just send grandma back on a bus or train, here are your options: (a) drive her back - a 3.5 hour journey each way, (b) drive her to Butte and have her take the Greyhound bus - 1 hour of driving each way, a 5 hour bus ride for grandma, (c) no train options available unless you know the conductor on some commercial train, (d) put grandma on a "one-way" flight to Billings, where she'll have to change planes in Denver or Seattle, time in transit ~ 7 hours.

Each of these choices (plane, car, and bus) involve around the same amount of travel time, and none are convenient, but a road trip would actually give us more options. For example, we could stop for lunch along the way while the closest thing to that on the plane is the complimentary biscotti, and I don't even want to know what's happening on the bus. I think this is precisely the type of tradeoff that George Will has in mind (and Paul Krugman ridicules). When it comes to traveling town-to-town, you don't want to be stuck taking the bus or train. This is a tradeoff that rural Americans (who have few shared town-to-town transit options) understand, but urban Americans take for granted.

Why is the nearest bus in Butte (60 miles away from Helena)? The route from Helena to Billings was shut down for safety concerns, but it really comes down to profitability. What about the plane route? Why are there no direct flights? There used to be a direct flight, but the airline that offered that flight pulled the plug due to lack of demand.

Even $20,000 to $25,000 in financial help from Helena’s airport failed to tip the flights into profitability, Mercer said. “We were giving them free landing fees, mostly free rent, we spent about $10,000 on marketing and supplemented the costs of ground handling,” he said.

It simply isn't profitable to offer these transportation options in rural areas.

On the other hand, the urban side of me gets Krugman's point. There is nothing that will suck the life out of you more than being stuck on a truly congested Interstate. Even worse, if you're driving, you have to pay attention. If you're taking the train, you avoid the congestion and you can open your laptop to do some work. It might take the same amount of time to go by train or by car, but train-goers will arrive rested and productive while car-goers will be frazzled.

For certain regions of our country (connected only by congested pipelines, or frequent and harried plane routes), train transit and high-speed rail make a lot of sense. And, expanding the range of shared-ride options would create value in terms of reduced congestion and happier travelers. That said, none of these regions are in Montana, so I can understand why people with a rural mindset tend to recoil at the thought of expanding these options (with which they have little experience).

The problem, I think, is that not everyone has a full appreciation for the rural advantages of individualized transit at the same time as having a full appreciation for the urban advantages of shared transit options. In the end, the debate over sensible public transit options ends up having the tone of ridicule (or condescension) because neither side really understands the other side's perspective. And, that's a shame because this is a case where both sides have something reasonable to bring to the table.