Lawrence Economics Blog

Creative Instruction

Gordon Tullock on Voting

As we wind down 3+ years of the presidential campaign, we stop to talk about the basic economics of voting.  And if you’ve ever heard an economist talk about voting, you’ve probably heard of Gordon Tullock.

Here’s Professor Tullock in epic curmudgeon mode giving a three-minute pep talk for tomorrow’s election.  He explains that he doesn’t vote because the chance that his vote will “matter” — in the sense that it is pivotal — is zero.  In other words, he doesn’t vote because the likelihood of his vote being decisive is essentially zero.  If that one guy who always sleeps through my classes also happens to sleep through the election, that one abstention will not affect who wins on Tuesday.

Of course, this prompts the response that starts something like “If everyone thought that way…”, to which Tullock responds:

“Suppose nobody voted?…. If nobody else voted I would vote… And the fewer other people vote, the more  likely I am to vote.”

Again, here’s the Tullock video.

You think we’re kidding?  Here’s more in the same vein from the Freakonomics site.

 

Economics and Sandy

In the aftermath of Hurricane Sandy, it is probably a good time to revisit the basic economics of natural disasters.

(Like Sandy), We’ve been over this ground before.

First, are natural disasters good for the economy?  Also here.

Second, is price gouging a bad thing?  Many, many links at Knowledge Problem — including this one from Slate.com.  And here’s an archived EconTalk where Duke’s Mike Munger takes an hour with Russ Roberts to lay it out for us.

Economic Recovery: How Slow Has Our Recovery From the 2007-2009 Recession Been?

Much political debate – more appropriate described as hot or even toxic air – attempts to address how poorly the economy has recovered from what Reinhardt and Rogoff call The Great Contraction.  As noted in Professor Gerard’s recent post, R and R argue– as they have done many times before – that recoveries from balance sheet or financial crisis recessions are much slower than those related to “garden variety” declines in aggregate demand.  So what does the current recovery look like?  One way to answer this is to view the four major indicators that the National Bureau of Economic Research’s Business Cycle Dating Committee uses to identify the beginning and ending points for recessionary and expansionary periods.  Fortunately, our friends at the Federal Reserve Bank of St. Louis have done all the hard work.  As can readily be seen below (or more clearly here), industrial production and real retail sales have grown roughly in line with the average of past recessions.  Real income started to grow similar to past history, but for the past 18 months growth has slowed markedly.  The employment growth pattern, however, has shown the least responsiveness to the medicinal help provided by the Federal Reserve and other governmental policies.    This suggests that “financial crisis” related recessions require both more time and different policies than demand deficient recessions not induced by too much debt.  I will have more to say about why in future posts.

Presidential Candidates and the Economy

Tonight (Tuesday, 10/30) Amnesty International is hosting a panel of Lawrence professors talking about the presidential candidates at 7 p.m. in the Cinema.  In addition to human rights issues, the panel will address the potential economic implications of the upcoming elections.  In preparation for the panel, I took a look for some general sentiment from the economics profession.  Here are a few choice items:

My first-order reaction was that it doesn’t matter much one way or the other who gets put into office in terms of the broad macro implications, but that is possibly because my macro expertise isn’t what it might be.  It’s pretty clear that November’s winner will have a pretty pronounced influence on certain aspects of administrative regulation, with possibly significant implications for the energy and health care sectors.

UPDATE:  Here are some links to works discussed this evening:

Andrew Gelman, Red State, Blue State, Rich State, Poor State, Why Americans Vote the Way They Do. (Article in Quarterly Journal of Political Science and link to the Book).

Thomas Frank, What’s the Matter with Kansas?

More Principals of Economics

David Warsh of Economic Principals has a nice piece on the Nobel Prize winners, Al Roth and Lloyd Shapley.   You may have heard something about Roth, and Warsh describes him as immediately relevant to modern market making:

[H]e is surrounded by generations of students and researchers, some of them computer scientists, working on all kinds of cutting-edge topics.  These include circuit breakers (forced trading halts) in panicked markets, random assignments in long waiting lines, school choice, new wrinkles in the auction of broadcast spectrum rights, corporate restructuring refinements and all manner of other market processes, anything, in other words, that might be improved by a little engineering.

As for Shapley, I didn’t know much about him beyond my familiarity with the Shapley Value.  It turns out Shapley kept rather spectacular company, including the likes of John Von Neumann and John Nash.   Robert Aumann called him the “greatest mathematical game theorist.”  Wow.

You’ll definitely learn something from reading this piece.

More here.  Cool.

You Shan’t Know Our Velocity

Put me in, Coach…

Robert Higgs has a very readable post about the demand for holding cash these days.  To wit, the Fed has been pumping massive amounts of liquidity into the system over the past four years, and what has the public been doing with it?

Nothing.

Exhibit A, this extraordinary graph from our pal, FRED, shows the run up in bank reserve balances from roughly $0 in 2009 to about $1.5 trillion today.  In other words, that’s cash on hand, ready to lend, reserve balances, come and get it.

Higgs points out that this would normally be inflationary, potentially seriously inflationary, but that hasn’t happened because loans aren’t going out and the velocity of money seems to have tanked.

What is the velocity of money?, you ask.

Well, if you have to ask, it is the ratio of nominal GDP to the money supply.  That didn’t help?  Then try here (or if you aren’t from a campus URL, here).

So, that leaves us with the question, why are people holding so much money?

Tough to say.  But here’s some food for thought:

  • At a price north of $1700 / oz, gold is a pretty expensive store of value.
  • Treasuries are yielding about 0%, about the same as the under-the-mattress play (TIPS are actually negative — you pay the government to hold your money, figure that one out).
  • Who knows what’s in store for the stock market?  Greece is in the process of defaulting as I type this.  Is that the domino that sets off Europe and brings us down with it? Is the presidential election going to be resolved in a timely fashion? Hey, if I knew, I wouldn’t be holding cash.
  • The US, of course, is no different (see Reinhart and Rogoff’s latest on this point).  The choice may well be “fiscal cliff” versus “painful austerity.”  Not sure I like the sound of either of these.

One of the things I assume you learn in macro is that money creation only works if the financial system makes loans, otherwise, not going to happen. Higgs is the champion of the “regime uncertainty” idea, and while I have no pony in this race, I have no better explanation.

InTrade Market Manipulation Fail

Though the recent presidential election polls show a virtual dead heat, the prediction markets (particularly InTrade) have consistently shown President Obama with a decisive 3:2 advantage or better.  The 3:2 advantage for Obama amounts to paying $0.60 to win $1, which is (loosely) interpreted as a 60% chance of winning — though it’s not really a probability. In contrast, you can buy Romney shares at around $0.40 to win $1.

Yesterday, however, some heavy money came flooding in on Romney, temporarily pushing the Romeny price / odds closer to $0.50.  This spike was short lived, however, and the price soon settled back down to the $0.40 range.

Was it an attempt to manipulate the market? And if so, who would do such a thing? Derek Thompson at The Atlantic talks with prediction-market guru Justin Wolfers:

At around 9:57am this morning, I noticed something funny happening on InTrade: Obama’s stock was tanking, and this was happening in the absence of any concrete political news… Romney’s stock shot up from 41 to 48 in a matter of minutes (suggesting that his chances of winning the election had risen from 41% to 48%).

Notice though that the effect disappeared very quickly. The Obama Flash Crash disappeared nearly as quickly as it appeared.

Two conclusions follow. First, you can manipulate prediction markets fairly easily. But second, you won’t get much bang for your buck.

This made news in about a dozen wonky blogs, so it appears that prediction markets are here to stay.

Those of you who don’t know what I’m talking about might start by checking our previous posts on prediction markets for some background.

I should mention that since that time the Romney price / odds have been rising a bit, to about $0.45;  I knew I should have bought at $0.25.  I could have cashed in.

Incidentally, InTrade has a state-by-state breakdown based on its current market prices, showing Obama with a razor-thin lead.  At current prices (Oct 24 at noon), if Wisconsin flipped, it would be an electoral college tie.  Zoinks.

Some argue that the prediction markets simply follow the polls.  I guess we’ll see.

Impending Change in Chinese Leadership

Want to learn more about (rare) peaceful transitions of power in communist countries?  Come to Mark Frazier’s lecture.  Want to understand how China sees its own future?  Come to Mark Frazier’s lecture.  Want to know the relationship between communism and capitalism in China?  Come to Mark Frazier’s lecture.

Former Lawrence Professor, Mark Frazier, presently co-director of the India China Institute at the New School in New York City, will give the second Povolny lecture this fall tomorrow night at 7:30 PM in the Wriston Auditorium.  The title for his talk is “Who is Xi?  Knowns and Unknowns in China’s Political Future.  For more information see Frazier talk_ Oct 2012

The Triumph of Ed Glaeser

For those of you who are concerned that I don’t blog enough about economist Edward Glaeser, this post is for you.  I finally got around to finishing up his New York Times bestseller, Triumph of the City,  and it is indeed a triumph.  The tagline and thesis is “How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier, and Happier,” with “the city” being the greatest invention. It’s a provocative read, and Glaeser’s argument will have you nodding your head one way or the other throughout the book.

Certainly, the book covers a lot of ground. If you’ve ever wondered why cities are where they are, he covers that.  If you want to know why cities like Buffalo, Cleveland, Pittsburgh have depopulated — and why many urban renewal efforts are destined for failure –he covers that, too. But perhaps the most interesting and most debatable subjects are in the environmental arena.  Glaeser spends several chapters on topics such as the “antiurban public policy trifecta” that foments urban sprawl — healthy highway funding budgets, the home mortgage interest deduction, and poor inner-city schools.  While many progressives might nod their head in agreement, they might be surprised to hear Glaeser take down of high housing prices in many urban areas as “the handiwork of regulation, not nature” (p. 191).  Indeed, Glaeser leverages this point in his comparison of Houston to New York City in terms of affordability (pp. 183-193), which is a very compelling explanation as to why we observe greater population growth in the southern U.S.

Really great stuff.

One of the marvelous aspects of the book is that Glaeser is not constrained to the format of the academic research paper, and consequently gets to show off how much he actually knows about his subject matter. There are a number of fascinating anecdotes and story lines as he proceeds to summarize and synthesize vast swaths of the urban economics literature –the paperback features 30 pages of endnotes and a 17-page research bibliography!

For a taste of Glaeser’s writing for the popular audience, you might check out his piece “Green Cities, Brown Suburbs” at the City Journal site.

I would pretty much recommend the book to anyone who might be interested in urban economics and the rise and decline of cities.  I also found myself marking down some of the academic papers that look to be of particular interest. Here’s a taste:

Matias Busso & Patrick Kline “Do Local Economic Development Programs Work? Evidence from the Federal Empowerment Zone Program,” Forthcoming in American Economic Journal: Economic Policy.

Raymond Fisman (2001) ‘Estimating the Value of Political Connections,” American Economic Review , 91(4):1095-1102

Edward L. Glaeser (1998) “Are Cities Dying?” Journal of Economic Perspectives, 12(2): 139–160.

Joshua D. Gottlieb & Edward L. Glaeser (2006) “Urban Resurgence and the Consumer City” Urban Studies 43(8): 1275-1299.

Edward L. Glaeser, Joseph Gyourko, & Albert Saiz. 2008.”Housing supply and housing bubbles,” Journal of Urban Economics.64(2): 198-217.

Edward L. Glaeser & Kahn, Matthew E., (2010) “The greenness of cities: Carbon dioxide emissions and urban development,” Journal of Urban Economics 67(3):404-418.

Edward L. Glaeser and, Bruce Sacerdote (1999) “Why Is There More Crime in Cities?” Journal of Political Economy  107(6): S225-S258.

Edward L. Glaeser, Jenny Schuetz, Bryce A. Ward (2006) Regulation and the Rise of Housing Prices in Greater Boston: A Study Based on New Data from 187 Communities in Eastern Massachusetts, Pioneer Institute for Public Policy Research,

Andrew Haughwout, Robert Inman, Steven Craig, Thomas Luce (2004) “Local Revenue Hills: Evidence from Four U.S. Cities,” The Review of Economics and Statistics 86(2): 570-585.

Thomas J. Holmes (1998) “The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders,” Journal of Political Economy  106(4):667-705

Lawrence Katz and Kenneth T. Rosen (1987) “The Interjurisdictional Effects of Growth Controls on Housing Prices,” Journal of Law and Economics. 30(1):149-160

If anyone is interested in reading through a sample of these, this would make a very nice directed study project.

There’s a Little Less to Explore in Minnesota

The internet lit up today when it became known that the state of Minnesota has a law on the books outlawing online education courses.  Evidently, the state decided to send off a letter notifying the rampant lawbreaker, Coursera:

The Chronicle of Higher Education reports that the state has decided to crack down on free education, notifying California-based startup Coursera that it is not allowed to offer its online courses to the state’s residents.

Alert reader “Mr. C” alerted me to this as an example of “rent seeking,” whereby the purveyor of market power erects a barrier to entry as a means to maintain its preferred status.  I wouldn’t really call this rent seeking in the conventional sense, as the state itself is simply kicking online providers in the teeth.  The state itself runs several non-online operations.  It would be rent seeking if one of the many fine private institutions went to the state to enforce the policy.

As for the policy itself, Slate online has a comical clarification.

It later was clarified that online education was okay, but the provider had to register with the state, and have its registration renewed annually.

So, what is the rationale for this?

George Roedler, manager of institutional registration and licensing at the Minnesota Office of Higher education, clarifies that his office’s issue isn’t with Coursera per se, but with the universities that offer classes through its website. State law prohibits degree-granting institutions from offering instruction in Minnesota without obtaining permission from the office and paying a registration fee…

The law’s intent is to protect Minnesota students from wasting their money on degrees from substandard institutions, Roedler says. As such, he suspects that Coursera’s partner institutions would have little trouble obtaining the registration. He says he had hoped to work with Coursera to achieve that, and was surprised when they responded with the terms-of-service change notifying Minnesota residents of the law.

The thing is, no one is wasting their money on Coursera courses, because they’re free. (Yes, says Roedler, but they could still be wasting their time.)

So the state is in the business of protecting its citizenry from wasting its time.

Unfortunately for its denizens prone to taking unlicensed and potentially time-wasting courses, within a day of the initial report the state capitulated and will allow Coursera to “operate without a license.”

The end must be nigh.

77 Cents is really more Like 91 Cents, but It’s Still Not a Dollar

Here is a very interesting interview with leading labor economist Francine Blau’s at The Atlantic Monthly about differences between male and female pay.

The topic is one that you have probably heard before — “women only make 77 cents for every dollar men make.”  Now why would that be?  Is it because of discrimination?

Many economists discount the idea that discrimination is the driver, because bigotry is such an expensive vice.  Consider the following: Suppose Bigoted Bob’s hires only men and has annual labor costs of $100 million per year.  If the difference in male and female earnings is due solely to discrimination, then it should be possible to hire a staff of women who are exactly the same quality and produce exactly the same quality and quantity of output for only $77 million per year.  So, it hardly takes benevolence to hire women — simple greed, er, profit maximization will do — the “benevolent” employer can presumably pocket the $23 million in labor savings!  In other words, a business that wants to exercise its discriminatory preferences for men over women for whatever reason will have to pay a steep price on the labor market.

So, perhaps it’s some other factors, and this is partly true.  If you control for human capital accumulation (education and experience, for example) and industry choice, the gap is less than the largely purported, but there is still a gap of about nine cents on a dollar. In other words, controlling for what we control for, women only make 91 cents for every dollar men make.

You might also take a look at this WSJ piece on the pay to female executives.  Hmm.

Money in the Market

There has been a recent spate of students asking me for advice on how to “invest” their extra money.   My initial reaction has generally been “in a better hair cut,” but it is probably also useful to tell them how economists think about what’s going on in the equities and securities markets.

So, in that spirit, here are a couple of introductory readings that I would recommend, all available in The Mudd or free online:

Steven Landsburg, “Random Walks and Stock Market Prices: A Primer for Investors,” in The Armchair Economist (initial publication in 1993, updated “for the 21st century” in 2012).

Burton Malkiel, A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (most recent edition in 2007).

Burton Malkiel, “The Efficient Market Hypothesis and Its Critics,” Journal of Economic Perspectives, 17(1):59-82

Robert J. Shiller “From Efficient Markets Theory to Behavioral Finance,” Journal of Economic Perspectives, 17(1): 83–104.

Again, these are simply very good accounts of how mainstream economists view the financial world, so this is not an endorsement of any particular investment strategy and shouldn’t be taken as investment advice.

Unless it works, in which case by all means I’m happy to take credit.

Nobel Winners: Game Set Match

The Nobels go to Alvin Roth and Lloyd Shapley for their work on matching and/or market design; that is, markets without prices.

Professor Galambos was talking about Roth’s work in our community read this last week, and Alex Tabarrok has a lot more here.  Here’s an accessible piece on matching kids to schools. Here’s the famous Gale-Shapley piece on college admissions and marriage.

In a related note, I often use Roth’s JEP excellent repugnance piece in my public policy classes.

Here’s Al Roth’s excellent blog.

A complement, not a substitute, we hope.

Well, no winners in our guess the Nobel contest, so the prizes will be rolled over into next year’s contest.

Schumptoberfest 2012

Schumptoberfest 2012 is taking place this weekend on the Grinnell College campus.  We started this back in 2010 with a group of students as a Bjorklunden retreat, and for the past two years the Associated Colleges of the Midwest has provided funding to bring in faculty and students to talk about innovation and entrepreneurship in the liberal arts curriculum.

This year’s keynote comes from Columbia Business School’s Ray Horton, “The Utility of Schumpeter’s Conception of Entrepreneurship Then and Now.”  It will be interesting to hear what he has to day.

Lawrence will also have a solid presence.  The Flickey guys will be talking about the fruits of the Pursuit of Innovation course, which was the subject of a nice This is Lawrence feature.   Babajide Ademola and Patrick Pylvainen will also talk about their work looking at innovation & entrepreneurship in post-conflict Sierra Leone.  You can learn about Professor Skran’s work there in this This is Lawrence video.

You can read  more at the LU homepage or on the Grinnell homepage.

Pick the Nobel Update

Here is some more information on the possible Nobel winners in economics from Tyler Cowen and the guys at the Cheap Talk blog.   Cowen picks the trifecta of Fama, Shiller, and Richard Thaler.

The Cheap Talkers show us the picks from the Kellogg School’s annual pool, which has Oliver Hart (of Grossman & Hart and Hart & Moore fame) and Jean Tirole (of Tirole fame) as odds-on favorites.  However, the bloggers note the IO bias at Kellogg, and provide a far more sophisticated assessment:

While I think all these researchers will get this prize eventually, their age works against them – they are too young.  they did seminal work at a time when Duran Duran ruled the airwaves or perhaps the Smiths in the case of Tirole.  The Nobel Committee is still sorting out the time when ABBA was Number One and Bjorn Borg won Wimbledon. (Note Swedish influence on pop culture was high in the 1970s!)

Indeed.

Though, I don’t think The Smiths ever “ruled” the airwaves.

Here’s the previous post.  Make your picks in the comments thread or yell them at me as I walk by you at the WCC.

Be Careful What You Ask For

Have you heard the one about the Frenchman who asked for higher taxes on himself?

A little over a year ago, some of the most prominent and wealthy executives in France signed a petition seeking higher taxes on themselves. Yes, higher taxes…

You may know what happened next: François Hollande, the country’s socialist president, proposed a 75 percent marginal tax rate on all income over $1.3 million. (The highest marginal tax rate on the first $1.3 million would be 45 percent, up from 41 percent.) Marginal tax rates on capital gains would rise to as much as about 60 percent.

Now many of the nation’s wealthiest executives — including some who signed the original petition — and entrepreneurs, private equity managers and others who are millionaires, or want to become millionaires, are crying foul. In a sign that executives are moving, or threatening to move, to lower-taxed countries, high-end real estate in Paris is being thrown on the market.

Another post that would seem to speak for itself, except for this:

The purpose of the tax is more populist than mathematical: the marginal income tax increase is estimated to raise only about $300 million.

To give that some perspective, France’s budget deficit last year was on the order of $150 billion, so $300 million is equivalent to about 0.2% of the shortfall.

Better Late than Never, I Say

But why are economists, once thought to be humorless practitioners of the “dismal science” suddenly becoming celebrities? Since when did they become gurus to whom ordinary people can turn to for everyday-life advice?

That’s from “Rise of the Celebrity Economist,” at Salon.com.

If you have to ask why, then my guess is that you aren’t going to get a very flattering portrait.

Regulating Wall Street: Did We Go Too Far?

Lawrence alum Elijah Brewer will address the above question in the next Economics Colloquium.  It will take place next Monday, October 8th, in Steitz Hall 102 at 4:30.  We encourage all to attend.

Brewer characterizes what he will argue as follows:

The causes of the financial crisis of 2007-09 are many and varied. Indeed, the crisis may be viewed as the product of a perfect storm. This address will discuss many of the popular causes of the U.S. crisis and enumerate their more important sins. It then presents the traditional way we like to think about commercial banks, and how that had changed leading up to the financial crisis. Indicators of stress in the financial system, and commercial banks in particular, are presented. What you will see is that many of these indicators were flashing red well before regulators got their hands around the problem. I will argue that it was not the lack of regulation, but a lack of will by regulators to enforce the rules that were already on the books.  Thus, the government’s and Congress’s desire to regulate Wall Street is mis-placed. The banking industry does not need more regulation for the regulators to ignore when it’s convenient for them to do so, but we need a greater will by regulators to enforce the regulations that they do have. I will conclude by offering an assessment of the Dodd-Frank Act.

Predict the Economics Nobel Prize

UPDATE: Professor Gerard picks Paul Romer,  Professor Finkler picks Romer and William Baumol (both at Stern!), Professor Galambos still undecided, see comments for additional picks.

Anxiously Awaiting the Announcement

The 2012 Nobel Prize in Economic Sciences will be announced on Monday 15 October, and once again all the world is riveted in anticipation. The riveted parties include those residing on Briggs 2nd, where we will once again sponsor a Predict the Nobel Prize Contest, with the winner to take home some fabulous prizes.

I don’t see any formal odds online yet, but Thomson Reuters provides some thoughts on Steven Ross for arbitrage pricing theory, Robert Schiller for work on market volatility, and Anthony Atkinson & Angus Deaton for the famous Atkinson & Deaton work on income, consumption, and well-being.

So, submit your pick to Prof Gerard prior to October 15, keeping in mind that the Nobel winner will not necessarily come from that draw (Of course, I’m still partial to Armen Alchian, and I have to believe Jerry Hausman will win sooner or later).  You can also post them in the comments, first come, first serve.

 

For further reading:

Robert J. Shiller 2003. “From Efficient Markets Theory to Behavioral Finance,” Journal of Economic Perspectives, 17(1): 83–104.

Stephen A.  Ross, 2004 “Review of The New Financial Order by Shiller,” Journal of Economic Literature, 42(4): 1098–1101.

Angus Deaton 2008. “Income, Health, and Well-Being around the World: Evidence from the Gallup World Poll,” Journal of Economic Perspectives, 22(2): 53–72.

 

The Chicken Dance is a Grim Trigger

The Sheboygan Press reports on a recent showdown at the Sheboygan North High School Homecoming dance.  It seems the jubilant student dancers broke out some moves that strayed a bit too far to the salacious side, prompting Principal Jason “Takes No” Bull to issue this dictum:

[Bull announced] that if inappropriate behavior were to continue, the lights would stay on, the chicken dance song would be played for the rest of the night, and/or the dance would be canceled.

The grim trigger is a strategy in a non-cooperative game, where one party threatens to end cooperation forever if the other party fails to cooperate.  Evidently, it was a credible threat.

Perhaps this helps to explain why.