Author: David Gerard

2017 Advice to Students Interested in Economics

If you are considering the study of economics as a potential major, we have developed some basic guidelines for you to review and consider.  Here is an overview of our conception of economics at Lawrence. For more on the collegiate economics major more generally, here is some information from the American Economics Association.

For those of you interested in Business or “Pre-Business”, economics courses might prove to be extremely valuable, but you do not need to major in economics to develop an excellent set of skills that will make you an attractive job candidate  — or successful entrepreneur — down the line.  Your best bet is to discuss your personal and professional interests with a number of different people, and consult with your advisor on curricular and co-curricular choices that will put you in position to meet your goals.

Advice to Potential Majors:  Students interested in a major in Economics should begin with introductory classes in economics and mathematics.  The first economics class is ECON 100.  We offer a section of ECON 100 each term this year, with Spring currently having the most extra capacity.

Students who have satisfied the ECON 100 requirement should consider taking 200-level classes based on their own interests.  This year we have Public Economics (ECON 271) in the fall if you want to take something right away.   If you are interested in operationalizing some skills, Quantitative Decision Making (ECON 223) is an Excel-heavy modeling and problem solving course.   In the winter we will have Decision Theory (ECON 225) and a Latin American Development course (ECON 2XX).   Spring will feature both Environmental Economics (ECON 280) and Comparative Systems (ECON 215).   The former is an applied economics course, and the latter is more writing intensive consideration of how societies organize economic activity.

There are three intermediate theory courses that are offered sequentially each year – ECON 300 Microeconomics in the Fall, ECON 380 Econometrics in the Winter, ECON 320 in the Spring.  These courses are most effective when taken sequentially in either the sophomore or junior year.  Freshman should not enroll in these courses.

Sophomore year is a good time to take ECON 225 Decision Theory.   This is not a required course, but we strongly recommend it for all majors and minors.   We will be offereing ECON 223 Quantitative Decision Making….

Mathematics Requirements and Advice:  The introductory mathematics courses are essential because they are foundational to intermediate theory courses.  Calculus (MATH 120 and 130 or MATH 140) is a prerequisite for ECON 300 and ECON 320.  Statistics (MATH 107 or the equivalent) is a prerequisite for ECON 380.

For our purposes, we believe students should consider MATH 120 and 130 if they are interested in applied problem solving and developing some Excel skills.   Students who plan to take math beyond the calculus sequence should take MATH 140.   The decision on which calculus to take is probably worth a discussion both with the math and the econ department faculty.

A typical sequence for a student who comes in as an economics major.

Freshman: Introductory Economics (ECON 100), 200-level courses based on student interest, Calculus (MATH 120 and 130 or MATH 140).

Sophomore:  Intermediate sequence (ECON 300, 380, 320), 200-level courses based on student interest, Statistics (MATH 107).  ECON 300 and MATH 107 are offered in the fall.

Junior-Senior: Advanced electives.

This sequence can be pushed back a year for those who decide during their sophomore year to pursue an economics degree.

MINOR: The minor requirements are indeed minor.  No significant planning is necessary during the Freshman year to complete this degree, though our recommendations in terms of taking introductory economics and mathematics courses remain the same for majors and minors alike.

 

AIM Placement: If you scored a 4 or 5 on the AP micro test, you can obtain credit through the Registrar’s office for ECON 100.  This satisfies that requirement for the department, though we strongly suggest you take at least one 200-level course before beginning the 300 sequence.  Talk to a faculty member in economics for appropriate recommendations.

If you earned a 4 or a 5 on the AP macro test, you can obtain 6 units of Lawrence credit, and you should take Economics 100.

 

Advising:   Check out this Advising Syllabus for some guidance on what you can do for yourself, and what your advisor can help you with.  This remarkable document was drafted by Professor Galambos several years ago, endorsed by the Economics Department, and ultimately largely adopted university wide in the recent past.

An Obscure National Holiday

I was informed earlier today that today is, in fact, national underwear day.   That said, here is a piece I wrote on life-cycle consumption not too long ago:

Back in the day, Modigliani and Brumberg (from their perches in Urbana-Champaign!) posited that individuals smooth out their consumption over the course of their lifetimes. In other words, total individual consumption expenditures are pretty stable, or smooth, from year-to-year, rather than having individuals curb consumption in one year to pay for big expenditures in the next. The big-picture implication is that individuals base their consumption spending on their expectations of lifetime earnings.  So, if I expect to make a lot of money years from now, I will spend at higher levels now, even if I don’t have it yet. As a result, the young and the old spend more than they make, whereas the middle aged make more than they spend.

The Modigliani and Brumberg work is now known as the Life Cycle Hypothesis, and it is a seminal contribution for a number of reasons.  First, it is a micro model that has significant macro implications –aggregate consumption depends on (expected) lifetime income, not current income.  It also implies that government deficits are a source of fiscal “drag” on economic growth.  You can check out more on Modigliani and his contributions at The New Palgrave Dictionary of Economics (available at campus IP addresses; otherwise, Google it).

Even if people spend the same total amount of money every year, however,  they will probably be some variation in the items they actually spend it on.  And empirically, of course, this turns out to be the case. Exhibit A: The Atlantic Monthlyhas a fascinating set of figures showing how U.S. consumer spending on various goods and services ranging from booze and smokes to lawn and garden services to men’s furs vary by the age of the consumer.

Presented without comment
Send Grandpa some new drawers

The figures are instructive.

First off, it appears that men pour increasing amounts of money into their undergarments as they age, reaching “peak underwear” at around age 50.  The average male aged 45-54 will drop about $120 on his drawers during that ten-year stretch. After that, underwear spending falls like a stone, and by age 75 or 80 it appears that most men are only spending a couple bucks a year on those closest to them.

At the same time, however, there is a decided uptick in spending on sleepwear/loungewear. I wonder what’s going on?  (Seems like a job for the Economic Naturalist).

In addition to these brief insights, the graphs seem to corroborate some intuition about how spending changes. For example, it seems that people in their late 20s and early 30s start dropping money on childcare services, which temporarily cuts into the amount spent going out boozing. I guess kids and the nightlife are substitutes, not complements.

It is also noteworthy and possibly surprising that 70-year olds spend as much on the sauce as 20-year olds do.

Or, perhaps that isn’t surprising.

As a bonus, some clever interns at The Atlantic have peppered each graph’s url with sometimes amusing, sometimes trenchant, and sometimes bordering on subversive commentary.

Well played all around.

The Death of the Great Economists

The latest to pass away is Kenneth Arrow, who by any and all accounts was a genius.   A Fine Theorem tells us what we already know, that “Arrow is so influential, in some many areas of economics, that it is simply impossible to discuss his contributions in a single post.”

These contributions, of course, include work on social choice theory (Arrow’s Impossibility Theorem), general equilibrium theory, and innovation, and off the top of my head I can point to work on health care, organizational theory, quasi-option values, and a bunch of other stuff.   Truly remarkable.   Here is the New York Times obituary.

Meanwhile, the profession has also recently lost Thomas Schelling (2016), Douglass North (2015), John Nash (2015), Gary Becker (2014), Ronald Coase (2013), and Elinor Ostrom (2012).   You could learn a lot in a little while just reading the obits on these Nobel Prize winners.

*********** Tentative 2017-18 Schedule

Fall
100 Intro Gerard MWF 9:50
211 In Pursuit of Innovation Galambos TR 12:30
271 Public Economics & Friends Gerard MWF 1:50
300 Intermediate Micro Galambos MTWF 8:30
300 Intermediate Micro Galambos MWF 12:30 T 8:30
420 Money & Montetary Policy Finkler TR 9
481 Advanced Econometrics & Modeling Lhost MWF1:50

 

Winter
100 Intro Caruthers MWF 1:50
205 Introduction to International Economics Caruthers MWF 11:10
225 Decision Theory Galambos MWF 1:50
380 Econometrics Lhost MTWR 9:50
380 Econometrics Lhost MTWR 3:10
421 Investments Finkler TR 9
495 Topics: Institutions & Organizations Gerard MWF 9:50
601 Senior Experience: Reading Galambos T 12:30
602 Senior Experience: Research Lhost R 12:30

 

Spring
100 Intro Gerard MWF 11:10
280 Environmental Economics Gerard TR 12:30
295 Topics in Finance Vaughn MWF 12:20
320 Intermediate Macroeconomics Caruthers MTWR 9:50
320 Intermediate Macroeconomics Caruthers MTWR 3:10
405 Econ of Innovation & Entrepreneurship Galambos MWF 8:30
410 Advanced Game Theory & Applications Galambos MWF 11:10

Economics Colloquia, Winter 2017: Mark Your Calendars

We have a number of excellent talks scheduled for this term that should be of interest to our majors.   Indiana University appears to be well represented.   Each of these talks is at 4:30 in Wriston Auditorium.

Thursday, February 16, 4:30 p.m., Wriston Auditorium

Deal (with) the Burn:  The Political Economy of U.S. Wildfire Management.
Dean Lueck
Ostrom Workshop and Department of Economics
Indiana University

Friday, February 17, 4:30 p.m.    Wriston Auditorium  (Senior Experience speaker)

Seven Secrets of Germany: Economic Resilience in an Era of Global Turbulence
David Audretsch
School of Public and Environmental Affairs
Indiana University

Thursday, March 2, 4:30 p.m.    Wriston Auditorium (Cancelled)

The Brazil Economy in Transition:  Beliefs, Leadership, and Institutional Change
Lee Alston
Ostrom Workshop and Department of Economics
Indiana University

Alston’s NBER paper is here, accessible on LU campus.

Into the darkness they go, the wise and the lovely

Those of you who are acquainted with my writing on this blog probably know that (a) I study mortality risks, and (b) I sometimes comment on how these risks change when the clocks spring forward and fall backward.   This fall is no exception, as I have a piece in the venerable Costco Connectionmaking the case that maybe keeping Daylight Saving Time as is wouldn’t be the worst thing to happen to the world.  (I could have made the case the other way, as the policy decision here is very unclear, which tends to favor the status quo).

As per usual, the the remarkable Gaisma.com site shows us what’s at stake here in Appleton.  The break in the series starting in month 11 is upon us:

The Appleton Day

What does this mean for you?  Well, starting Sunday it is going to be dark at 5 p.m.  meaning that you are far more likely to get hit by a car at 5 p.m. next week than you are this week.   When I say “far more likely,” our estimate is that the risk is about three times as high!

Of course, you are also far less likely to get hit at 6 a.m. in the extremely unlikely event that you are out 6 a.m.  But, notice, but January 1 the sun won’t rise until after 7 a.m., and if DST was permanent, that would be 8 a.m.   Sunlight is the ultimate scarce resource.

Here is our previous coverage.

* The picture in the Costco piece is of me enjoying some daylight at Wrigley Field. Should Daylight Saving Time be eliminated? Of course not! More daylight means more daytime ball games.

Nobel Prize Agency

Simpsons
Oliver Williamson, Physicist?

This year’s Nobel Memorial Prize in Economic Sciences once again goes to some folks doing the heavy lifting on organizational theory.   You may recall that not too long ago, Elinor Ostrom and Oliver Williamson shared the award for their work on “governance mechanisms” — Ostrom on collective governance of natural resources, Williamson for organizational structure.

This year’s winners are Oliver Hart from Harvard and Bengt Holmström from MIT for their work on “contract theory”.    Contract theory is pretty encompassing, and includes the classic “principal-agent” problem, along with the “incomplete contracts” problem.

For the uninitiated, An agency problem arises when you as a principal delegate a task for some agent to carry out for you.  For example, you might own a business and hire someone (or someones) to work for you. That seems simple enough, except things can get all mucked up if output comes from a combination of effort and random factors, if you have several workers and can’t figure out who’s responsible for what (team production), if your workers have a bunch of things to do (multiple-task agency problem), and a host of other things.

Hart and Holmström have made fundamental contributions in getting to the heart of some of these matters, and were duly rewarded with the prize. Remarkably, Kevin Bryan from University of Toronto says that though Hart won the prize on the back of his contributions to “incomplete contracts,” he actually has not done much on incomplete contracts since two other Nobel winners — Eric Maskin and Jean Tirole, characterized the limitations of that approach:

Hart’s response, and this is both clear from his CV and from his recent papers and presentations, is to ditch incompleteness as the fundamental reason firms exist…. To my knowledge, Oliver Hart has written zero papers since Maskin-Tirole was published which attempt to explain any policy or empirical fact on the basis of residual control rights and their necessary incomplete contracts.

Professor Bryan has remarkably prescient characterizations of Hart and Holmström‘s work A Fine Theorem blog (incidentally, he often has excellent review and commentary on recent IO papers).   The post on Hart is essentially a short history of the economics of the firm and organizational economics, which many of you will be seeing next term in Econ 450.    There are a million other descriptions of their contributions (google it), including this critical piece by Arnold Kling.

And, congratulations to Milhouse!   Well done.

Fama & Thaler on the EMH

The Chicago Booth School gives us a spectacular interview with Eugene Fama and Robert Thaler on the efficient market hypothesis, the idea that prices reflect all available information.   

Thaler says he likes to parse this statement in two parts:  The first is whether you can individual investors outperform the market (doesn’t look promising); the second is whether prices are “correct” at any given point in time (I suppose it depends on what you mean).

The discussion is absolutely great, and you will learn a lot about economic modeling and thinking about testing economic models from two leading scholars who have thought a lot about it.   At one point, Fama somewhat hilariously (to economists, at least) declares himself to be “the most important behavioral-finance person, because without me and the efficient-markets model, there is no behavioral finance.”

Incidentally, the Booth school is also the source of the Initiative on Global Markets polls of economists, leading to the remarkable Which Economist are You Most Similar To? interactive tool.

 

 

Gladwell Claims There is No Free Lunch

In his latest Revisionist History podcast, Malcolm Gladwell gives us some food for thought about where we put our resources.  He claims that small liberal arts that develop gourmet-level dining services are doing so at the expense of bringing in  low-income students.  To develop his argument, he compares two elite schools from the northeast, characterizing the situation thusly:

They compete for the same students. Both have long traditions of academic excellence. But one of those schools is trying hard to close the gap between rich and poor in American society—and paying a high price for its effort. The other is making that problem worse—and reaping rewards as a result.

His logic is pretty straight forward: Schools have a budget constraint, and at the margin they can spend an additional dollar on financial aid or on campus amenities.  A school that invests in campus amenities will draw more students willing to pay a premium price, whereas a school that skimps (relatively speaking) on amenities in favor of financial aid will be at a relative disadvantage in two ways:  First, students generally prefer high-quality amenities to low-quality amenities. Second, it generates less revenue per student and therefore fewer resources to put into financial aid or campus amenities.

Malcolm Gladwell is an influential writer with best sellers to his credit such as Outliers and The Tipping Point, as well as about a million New Yorker articles, so this pieces is certain to make waves.  That he calls the investment in high-end dining services “a moral problem” and implores students not to go to schools with ridiculously good food pretty much ensures people will be up in arms about this.

This is also relevant from our perch here at a small liberal arts school with our own financial decisions to make.  I was more amused than convinced by the thesis when I first read the abstract, but after looking at the numbers and listening to Gladwell, I am more sympathetic (scroll down the Revisionist History page for the photo of a banana chocolate chip waffles with the school logo emblazoned in the center).   Though, I guess that’s why Gladwell is such a popular figure:  he makes an interesting claim, tells a good story, and makes a good case.

As an aside,  I think I speak for most people who attended a residential campus prior to 2000 when I say that the food even at campuses that “skimp” on quality is ridiculously good compared to what we ate (though I did love the Monte Cristo sandwich on Thursdays).

You can read more about it at the always lively Inside Higher Ed website.

Addendum:   It’s probably worth adding that it’s still okay to complain about food at your school.   You probably pay a lot of money for dining services, and with that, you expect certain levels of quality, variety, and availability.

A quick peek reveals that the average U.S. household (a.k.a., consumer unit) spends about $6,800 annually on food compared with college meal plans that run $2000-$3500 per semester.

Losing Interest

When I have the occasion to make a sizable consumer item — a house or a car or even a big green egg — I often will borrow some money to finance the purchase. In the past few years, the person extending the credit invariably tells me that interest rates are historically really low and you should lock in now because rates have to go up in the future.

Really?

Yes, of course.  How much lower could interest rates go?

Well, I was reading a White House report on interest rates (from July 2015) that had a figure that shows yields on 10-year treasuries have been on a downward trajectory for a very long time, like 20+ years.  Not only that, people who forecast such things have pretty much grossly overestimated future interest rates at pretty much every turn.  In other words, for the past 20 years people have been saying that interest rates “have to go up” and for the past 20 years these people have been wrong.*

Presentation1

Yeah, sure, but how much lower can they go?  It’s not like interest rates are going to go negative now, are they?

Well, actually, the bond yields for government debt around the world are increasingly going negative, with Quartz reporting that a third of all government debt worldwide has negative rates.  People are paying governments for the privilege of having a nice, safe place to park their money.**

government_bond_yields_rate_chartbuilder

 

Right, right.  Okay.   But I’m not an investor and you aren’t a government.  You don’t expect me to pay you to borrow money from me, now, do you?  I mean, I’m already offering a discounted price and zero-percent financing for 60 months, plus this oven mitt here….

 

*In fairness, the earlier forecasts on this table just predicted interest rates to be rather flat going forward, which, incidentally, is a trick I learned from my time series professor — a pretty good estimate is whatever rates happen to be right now.   If I knew where rates were going, (1) I certainly wouldn’t be telling you; and (2) I’d be enjoying a much different standard of living.

** Here’s “Everything you need to know about negative rates.”

 

 

 

Alumni College Talk

Speaking of Professor Finkler, on Friday he will be giving a talk for the Alumni College.   Here are the particulars:

The Patient Protection and Affordable Care Care (aka Obamacare):
An Efficient and Equitable Path to Life, Liberty, and the Pursuit of Health?

Professor Marty Finkler

Warch Campus Center Cinema
2:10-3:00 p.m.
Friday, June 17

Master of Supply & Demand… and Lots of Other Stuff

In a twist on the “Life After Lawrence” meme, Professor Merton D. “Marty” Finkler officially retired yesterday, after serving on the economics faculty for more than 30 years.  Professor Finkler is the consummate economist, always interested in talking about economics and ideas whether in class or at the ball game.   He also has a remarkable versatility, from his principal field of health economics to his core (and terrifying?) macro theory course to urban economics to sports economics to environmental economics and on to China.  It certainly is not possible to replace his expertise, at least not with one person.  Fortunately, he will continue to teach and engage with our students as an emeritus professor, beginning this fall with his Investments class.

Here he is pictured in his new hood (!), along with our faculty and one of our more photogenic students.   His Honorary Degree citation is below the break.

Last Hurrah

Continue reading Master of Supply & Demand… and Lots of Other Stuff

Masters of Supply & Demand

Congratulations to our 2016 graduates, many of whom walked the stage yesterday.  We were happy to see so many of you and your families at the Saturday reception.   We trust we will hear back from you at some point (and not just because you are applying for graduate school and need a recommendation(!)).

IMG_2401 (Small)

The Economics Department distributes (?) a number of awards each year, and here are the particulars:

The Iden Charles Champion Award in Commerce and Industry (Paper Prize)

  • Mishal Ayz, Astoria, NY, “A Game Theoretic Analysis of International Justice Disputes.”
  • Perrin Tourangeuau, Denver, CO, “Why Forests Fail: Exploring the Relationship between Institutions and Forest Management Outcomes in Haiti and the Dominican Republic.”

The William A. McConagha Prize for excellence in economics (Seniors)

  • Ruby Dickson, Louisville, CO
  • Zachary Martin, Brookfield, WI
  • Perrin Tourangeuau, Denver, CO

The Philip and Rosemary Wiley Bradley Achievement Scholarship in Economics (Juniors)

  • Dylan Geary, Overland Park, KS
  • Mattias Soderqvist, Stockholm, Sweeden

 

Supply & Demand in the News

From *both* of my final exams administered today….

Illustrate each of the following using “comparative static” analysis.   That is, draw a supply and demand graph, show a shift in supply or demand consistent with the headline.

Even with lots of fish, halibut prices high,” Homer News, June 7, 2016

Salmon prices are rising due to the death of millions of fish in Chile,” Daily Mail, June 7, 2016

Lumber Prices Tumble as Demand From China Falls,” 24/7 Wall Street, January 20, 2016

And my personal fave:

Germany had so much renewable energy on Sunday that it had to pay people to use electricity,” Quartz May 10, 2016

Finally, for the environmental students, we give you:

Fish Factor: Permits plummet, halibut prices soar,” Juneau Empire, March 16, 2016

 

The New Economics of Religion

That’s the title of a June 2016 Journal of Economic Literature piece, available at a website near you.   Typically, this wouldn’t warrant a response from the Lawrence Economics Blog, but typically you don’t see accolades like this directed towards one of our own:

One of the classic papers written on the economics of religion, Azzi and Ehrenberg (1975), summarized the literature on what the empirical correlates of religiosity had discovered about the United States until then.

Wow, classic papers!  If you see Professor Azzi, be sure to ask him about the genesis of that paper.

  • Sriya Iyer. 2016. “The New Economics of Religion.” Journal of Economic Literature, 54(2): 395-441.
  • Corry Azzi and Ronald Ehrenberg. 1975. “Household Allocation of Time and Church Attendance.” Journal of Political Economy 83 (1): 27–56.

Economics / Science Hall Colloquium, Monday at 4:30, Wriston Auditorium

Professor Elizabeth J. Wilson from the Humphrey School of Public Policy at the University of Minnesota will be here Monday to talk about the (potential) future of electricity systems.

Professor Wilson is a rather extraordinary interdisciplinary scholar, with a background in environmental science and a Ph.D. in Engineering & Public Policy from Carnegie Mellon University.  She is the recipient of one of the inaugural (2016) Andrew Carnegie Fellowships for her project “Nuclear Futures in a Windy World: A Comparative Analysis Balancing Energy Security, Climate Change, and Economic Development.”  She will spend the 2016-17 academic year in Denmark working on that.

Here is a blurb of her talking about sustainability and interdisciplinary research.

We will see you there.

wilson