Friday, December 25, 2009

Minimum Wage Casualties

When I reviewed this 20/20 segment about the unintended consequences of the minimum wage for this post -- the final post for today -- I was reminded of a marvelous op-ed piece one of my former students at Hope College published in the Detroit News. Here's Adam Folsom's sad August 31, 2006 tale of being a minimum-wage casualty, in its entirety:

I am one of the first casualties of Michigan's new minimum wage law.

I am a 21-year-old economics major at Hope College who last year worked part-time at the college's Office of Career Services for $6 an hour. On Oct. 1, however, it will be illegal for the school to pay me an hourly wage less than $6.95 an hour. So my boss called me last week and told me that her budget was tight and, because of the wage increase, my job would be cut.

I would have liked to continue working at $6 per hour, and Hope College was willing to pay me that. But the state of Michigan says I do not have the right to work for that amount of money. Hope College and I are not allowed to negotiate a contract that is satisfactory to both of us.

In my study of minimum wages, I have concluded that minimum wage laws always cause unemployment among the very groups they are supposedly trying to protect.

Our nation’s first federal minimum wage law was passed in 1918 and applied only to women. Employers had to pay women in Washington, D.C., at least $71.50 per month for their labor. What happened next is that many women found themselves out of jobs.

One of the casualties of that minimum wage law was Willie Lyons who, like me, was 21 years old. She worked happily as an elevator operator at the Congress Hall Hotel. She had been paid $35 a month plus two meals a day.

When the minimum wage law passed, however, the Congress Hotel could no longer afford to keep her. She wanted to work at the old wage, just as I do, but the new law made that illegal. Instead, the Congress Hotel hired a man at $35 a day plus meals. Like me, Willie Lyons became unemployed by a "compassionate bill" supposedly designed to protect her.

The good news is that Willie Lyons regained her liberty of contract. She testified before the U.S. Supreme Court in Adkins v. Children’s Hospital (1923) and pointed out that she liked her job, her employers liked her, and she resented being ousted from her job by the new minimum wage law.

The Supreme Court agreed and struck down the federal minimum wage law (although a later court let such laws stand). In writing for the majority in the case, Justice George Sutherland wrote, "freedom of contract is the general rule and restraint the exception, and the exercise of legislative authority to abridge it can be justified only by the existence of exceptional circumstances."

Sutherland graduated from the University of Michigan Law School. I wish our Michigan legislators had studied Justice Sutherland before they passed a law that took my job.

Why Do ATMs Work Well While Voting Machines Do Not?

Why do ATMs and other machines work so well that we seldom worry they won't, while voting machines are far from foolproof? This segment from 20/20 investigates.

Are "Sweatshops" Bad? Maybe It Depends on Where You Are Living

I remember well the afternoon, during my Fulbright in Armenia, that one of my MBA students from the American University of Armenia came into my office upset and puzzled by something he'd been reading for my class.

He'd read two passages taken from a book called The New Protectionism by Tim Lang and Colin Hines. Opponents of free trade, Lang and Hines believe that global trade should be restricted in order to encourage greater regional self-sufficiency. Here are the passages:

"Trade liberalization hopes to bring more trade, yet more international trade brings more of the problems the world needs less of: threats to the environment, uneven spread of unemployment, and widening gaps between rich and poor, both within societies and between societies" (p. 3).

"Thus, the basic thesis of free trade is that instead of being self-sufficient, each one should specialize and produce what it is best at and can produce most cheaply, i.e., the things in which one has a 'comparative advantage' . . . This theory runs into difficulty where one country can produce products more cheaply than others, and has no incentive to trade, or where a country has little or no comparative advantage in anything" (p. 21).

While Armenia is an emerging former-Soviet republic, its relative poverty does not come close to the levels of extreme poverty one will find in places like sub-Saharan Africa. Yet this bright young man in my office simply could not believe what he was reading! In his eyes, the only hope for poor countries like his was greater openness, greater trade, and better access to markets. And as he had seen for himself already, some of the very best jobs in his growing nation were jobs created by foreign direct investment. He simply could not believe that there were comfortable Western "compassionate" writers out there like Lang and Hines who thought they knew better than he--a hardworking shopkeeper--what would be best for him and others in his emerging economy. How could they possibly know, he thought.

I was reminded of my conversation with my student Arthur as I watched this segment about sweatshop labor from 20/20. All of us comfortable Westerners need to remember that, no matter how noble our intentions, sometimes our hearts tell us to do something that may actually harm those we yearn most to help.

Externalities, Noisy Kids, and the Coase Theorem

From the way this video from 20/20 begins, you'll think that the Coase Theorem is a Nobel fraud, as you watch no one say anything to the out-of-control kids in a restaurant.

But even though none of the other diners gets involved, weighing their own personal benefits against costs, it turns out there is a bargain to be struck after all--though some are not happy about how things turn out.

Health-Care Tradeoffs

This brief 20/20 segment takes a quick peek at the single-payer health care system in Canada. Michael Moore makes an appearance.

How Effective Is Foreign Aid in Ending Extreme Global Poverty?

This segment from ABC's 20/20 questions the effectiveness of direct aid toward ending global poverty. Many today question the wisdom of continuing to give foreign aid in the same ways that we have in the past, given that strategy's poor performance.

The video raises many of the same questions considered in Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo. Publisher's Weekly says, "In this important analysis of the past fifty years of international (largely American) aid to Africa, economist and former World Bank consultant Moyo, a native of Zambia, prescribes a tough dose of medicine: stopping the tide of money that, however well-intentioned, only promotes corruption in government and dependence in citizens. With a global perspective and on-the-ground details, Moyo reveals that aid is often diverted to the coffers of cruel despotisms, and occasionally conflicts outright with the interests of citizens-free mosquito nets, for instance, killing the market for the native who sells them. In its place, Moyo advocates a smarter, though admittedly more difficult, policy of investment . . . . "

This is quite a different vision than that of Bono and economist Jeffrey Sachs, who think that we are all now smart enough to avoid our terrible aid mistakes in Africa during the last half-century. In The End of Poverty: Economic Possibilities for Our Time, Sachs argues that what Africa needs now more than ever is even more foreign aid, because we are now wiser than we have been about what to do with it.

The video segment begs to differ, and you will get to see Sachs defend his position in a rather contentious interview.

Weighing Carefully the Anticipated Benefits and Opportunity Costs of College

This second segment from 20/20 encourages students and their parents to weigh carefully the anticipated benefits against the opportunity costs of pursuing a college degree.

The video makes the point that undergraduate education is not a guarantee of gainful employment or a wage premium, especially in the short term. So choose your major wisely!

Creative Destruction

Today I'm collecting a few video segments that have appeared on ABC's 20/20 over the years. Each link will take you directly to the video on the ABC site.

The first dates back to U.S. automakers' lobbying efforts for a bailout--even before the current downturn.

What the segment does best is questions whether government attempts to prop up a sagging (or even dying) part of an economy are in the long-term best interest of all.

How to Have Income-Inelastic Demand? Put the Elastic in the Back of the Jeans

According to this report exclusive to NewsHour, a company called Not Your Daughter's Jeans has hit on a jean design that appears to insulate the demand for its product from fluctuations in consumers' incomes.

Paul Solman reports. And it is littered with puns.

And if the video is slow to load, here is a direct link.

Testing the Fed's Ability to Stimulate the Economy While Keeping Inflation in Check

In this Paul Solman report for NewsHour back in August, he discusses the inflationary risk courted by the Fed's recent cutting of target interest rates, as well as additional quantitative easing.

Thursday, December 24, 2009

George Frideric Handel: Musical and Financial Entrepreneur

George Frideric Handel (1685-1759), best known for his Messiah, is credited with writing the first English-language oratorio.

Not only was the oratorio a savvy business move for him; Handel also enjoyed remarkable financial success as well. This holiday segment from PBS illustrates both.

"I will honour Christmas in my heart"

Christmas night is a night of new birth. Significant, unstoppable, world-changing new birth.

And if old Ebenezer Scrooge can choose a new path at Christmas, indeed there is hope for us all.

God bless Us, Every One.
'Spirit!' he cried, tight clutching at its robe, 'hear me! I am not the man I was. I will not be the man I must have been . . . . Why show me this, if I am past all hope?'

For the first time the hand appeared to shake.

'Good Spirit,' he pursued, as down upon the ground he fell before it: 'Your nature intercedes for me, and pities me. Assure me that I yet may change these shadows you have shown me, by an altered life?'

The kind hand trembled.

'I will honour Christmas in my heart, and try to keep it all the year. I will live in the Past, the Present, and the Future. The Spirits of all Three shall strive within me. I will not shut out the lessons that they teach. Oh, tell me I may sponge away the writing on this stone!'

Thursday, December 17, 2009

That's a Rap: We're All Keynesians Now

(UPDATE: The full video has now been released. View it here. -VVC)

As many of you know, for several summers I've given a lecture at Acton University with the title, "Why Keynesianism Failed." I'll be giving an updated version of the talk again this summer.

By the way, Acton U is a fantastic program, and I would encourage anyone serious about bringing good intentions together with sound economics to consider attending.

At any rate, each summer that I give the talk it gets more and more interesting, given that Keynesian ideas appear to be winning the fiscal-policy day.

The Keynesian view is simply stated. When an economy is experiencing unemployment, the culprit is insufficient spending by consumers and firms. And because unemployment is real and painful, an appropriate role of government is to step in and start spending the taxpayers' money on goods and services, thereby raising demand. Facing increased orders, firms will begin calling back their laid-off workers.

Critics charge that Keynesian advice is a bad deal in the long run. Merely spending taxpayers' money on "stuff" to prop up a struggling economy will never correct what is fundamentally wrong with the economy. So we settle for short-term unemployment reductions in exchange for inevitable long-term damage. When Keynesian policy is used to stimulate the economy--as it is currently--we trust government to wager taxpayers' money on which industries will be "winners" and "losers" further down the macroeconomic road.

For example, who's to say whether propping up GM today is appropriate; it's possible (perhaps likely) that GM has no chance of long-term self-sufficient vitality. In the long run this really is a bad deal: keeping people busy at jobs that cannot possibly endure, while simultaneously inhibiting the longer-term growth and vitality of the economy by artificially creating demand today where there won't be tomorrow. This strategy also leads to bigger and (usually) badder deficits, as government borrows to finance today's spending plans.

Another danger that Keynesian activities court is the risk of inflationary spirals. Artificial increases in the demand for goods and services inevitably puts upward pressure on prices.

Keynes knew his critics were correct, and he famously confessed as much in his Treatise on Monetary Reform, in which he wrote, "In the long run we are all dead." For Keynes future consequences were irrelevant; we should help people who are hurting today because we have the power to do so, and ignore the future perils today's actions will bring.

Despite the myopia required to be a Keynesian, today we are vigorously pursuing a Keynesian course in both fiscal and monetary policy. And while there is little public debate these days over the merits and shortcomings of the Keynesian view, George Mason University economist Russ Roberts and award-winning director John Papola are producing a rap video in which Keynes and his free-market-minded nemesis Friedrich Hayek throw down. PBS's NewsHour covered Keynes and the video last night. Take a look:

Wednesday, November 4, 2009

Monkey Business: Trading among the Other Primates

This new piece from CNN features the unwritten economic laws of some lower-order primates. Turns out monkeys pretty much behave in the same ways we economists would predict--and they do it based on instinct alone.

Reminds me of my Hope College math colleague Tim Pennings and his Welsh Corgie, Elvis. Tim examined whether dogs act as though they know calculus when they play fetch along the West Michigan lakeshore. You can read the paper here, or just check out this video:

Friday, October 23, 2009

A Paul Solman 'Blast from the Past': 'Animal Spirits' and Consumer Confidence

From way back in the spring of 2001, Paul Solman filed this report for PBS's NewsHour on 'animal spirits' and consumer confidence measures.

I'm no Keynesian, but it was a great segment.

GDP Melee

From CNN:
Journalists scramble for a first glimpse of China's GDP report, interested in how much growth was from stimulus money.

(If only more students were this interested in learning about GDP.)

Thursday, October 22, 2009

'This American Life' Takes on Health Care Costs

In cooperation with NPR News, This American Life considers the explosion in health care costs in a first-time-ever two-part series.

The first week, "More Is Less," covers rising costs.

The second week, "Other People's Money," takes on the insurance industry--in a very entertaining hour. (In fact if you listen to just one, this is the one.)

And they do a nice job of getting at the source in nearly every case: fairly basic micro-decision-making based on the incentives and institutions at work.

So have fun listening as NPR spreads the blame around. Both may be streamed for free by following the links above.

NPR Reports on the Abuses of the Tax Credit for New Home-Buyers

Apparently about a half-billion dollars in tax credits for "new" homebuyers are fraudulent, according to the inspector general who oversees the IRS.

But it may not be that easy to catch the cheats: it requires a full audit, and the IRS has flagged over 100,000 suspicious returns so far.

A key piece of the puzzle: you don't have to prove you actually bought a house to claim the credit.

NPR's Morning Edition has a report:

Thursday, October 15, 2009

Should We Tax Soft Drinks?

On a remarkable Diane Rehm Show from this morning, three panelists discuss the consequences--intended and otherwise--of a proposed tax on soft drinks. Absolutely worth a listen.

Ms. Rehm' guests:

Kelly Brownell
, director, Yale University's Rudd Center for Food Policy and Obesity.

J. Justin Wilson, senior research analyst, Center for Consumer Freedom.

David Kessler, former commissioner of the Food and Drug Administration and author of The End of Overeating.

What are the Odds of Success of a New Site about Odds?

From American Public Media's Marketplace:
Book of Odds logo
'Book of Odds' gives eye-opening stats

Want to know what the odds are you'll survive two atomic bombs? How about more specific odds about yourself? The new Web site "Book of Odds" allows you to get up and personal about your own statistics. Bob Moon talks to founder Amram Shapiro.

Note, though, that while historical statistics can be suggestive of future events, they are not the odds that some future event will or will not happen.

What Do Wise Dairy Farmers Do When Milk Prices Fall? They Find Cheaper Methods

American Public Media's Marketplace explains how, following the lead of a New Zealand dairy farmer who moved to Missouri because he wanted to let his dairy cattle graze on inexpensive farmland, the Missouri dairy community is changing the way they feed and raise their cows.

"TANSTAAFL" Makes It Into a Letter to the Editor

A nice note from my mother arrived in the mail today. I'm lucky: I have a mom that still goes to the trouble to write notes to me by hand, rather than email. I treasure each one.

In most notes she sends along clippings of articles she has run across that she thinks will interest me. She is a voracious reader--of everything. In today's envelope, along with a very nice note and another clipping, I found a letter to the editor she'd snipped from the Star Press of Muncie, Indiana.

Moms know their sons, don't they? If you have any doubt, check out the letter:
No free lunch

JIM ARNOLD • Muncie • October 4, 2009

It was early in my student career at BSU [Ball State] when I enrolled in Econ 101. The first day of class, our long-haired economics professor strolled confidently into the classroom and inscribed TANSTAAFL on the chalk board. TANSTAAFL, he claimed, was the fundamental theory of economics.

Being a little wet behind the ears, I fell for his spiel hook, line and sinker. I pondered the language of origin of this odd sounding word . . . .

(More -- Hat tip: Mom)

Monday, October 12, 2009

Econ Nobel 2009

The Prize in Economic Science in memory of A. Nobel has its first female winner this morning. John Lunn has a nice post.

By the way, neither of the co-winners--Ms. Ostrom nor Mr. Williamson--was on anyone's short list.

Sunday, October 11, 2009

Video: The Fed Today

Though it predates the financial crises of 2008-09, this video from the Fed, hosted by Charles Osgood, is still one of the best video summaries available of the tools and responsibilities of the Federal Reserve System.

I still don't know why it has that animated eagle, though. Keep an eye out for it:

Does the Economics Nobel Need a 'Bailout'?

In a thoughtful piece in the Guardian, Jayati Ghosh ponders the merits of the economics Nobel, as well as the methods used in awarding the prize:

The economics award is usually the last of the Nobel prizes to be announced. Correctly so, for it was also the last to be created – and strictly speaking is not even a real Nobel prize. The five original awards, first given out in 1901 for literature, peace, medicine/physiology, physics and chemistry, were intended by Alfred Nobel to recognise contributions that enhanced the quality of human life, through scientific advance, literary creativity or efforts at bringing about peace.

The economics prize is not a prize of the Nobel Foundation; rather, it was created in 1968 by the Central Bank of Sweden as a "prize in economic sciences in memory of Alfred Nobel". However, it now has the same procedure of selection by the Swedish Academy, and the same cash award presented at a similar ceremony as the Nobel prizes.

There have been recurrent doubts about whether it conforms to the basic goals of the prizes as envisaged by the founder. Is economics a science, on the same lines as physics or chemistry? Does it unambiguously contribute to human wellbeing, like peace or literature? In any case, should economics be privileged over other branches of learning?


Thursday, October 8, 2009

Wednesday, October 7, 2009

Adam Smith Reflects on Obamanomics

Would Adam Smith be a fan of President Obama's economic policies? Using block quotes from Smith's An Inquiry into the Nature and Causes of the Wealth of Nations, Salon's Michael Lind "interviews" Adam Smith to find out.

I'm interested to know your reaction. If you read the short piece and have a thought or two, I'd love to know.

Monday, October 5, 2009

Announcement of the 2009 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel--Watch It LIVE

Watch the live web cast from the Royal Swedish Academy of Sciences, Stockholm, Sweden, on Monday, October 12, 1:00 p.m. CET, 11:00 a.m. GMT at the earliest. Following the announcement, an interview will be held with one of the Committee members about the 2009 Prize in Economic Sciences.

Thomson Reuters forecasts winners each year using citation records of economists' scholarly contributions. (But please, no wagering.)

Tuesday, September 29, 2009

Asset Liquidity and How It Works

CNN's Maggie Lake reports on the basics of asset liquidity:

Europe’s Socialists Suffering--Even in Downturn

From the New York Times:
PARIS — A specter is haunting Europe — the specter of Socialism’s slow collapse.

Kai Pfaffenbach/Reuters

Even in the midst of one of the greatest challenges to capitalism in 75 years, involving a breakdown of the financial system due to “irrational exuberance,” greed and the weakness of regulatory systems, European Socialist parties and their left-wing cousins have not found a compelling response, let alone taken advantage of the right’s failures.

German voters clobbered the Social Democratic Party on Sunday, giving it only 23 percent of the vote, its worst performance since World War II. . . .


Saturday, September 26, 2009

If You Print It, Is It Money?

CNN's Charles Hodson examines one local community's effort to get its own currency off the ground:

Thursday, September 24, 2009

Survivors of Steel in Pittsburgh Give Advice to Autoworkers in Detroit

From American Public Media's Marketplace:
When Pittsburgh's steel industry began to fall apart, steel workers needed to find a new way to survive. Marketplace's Rico Gagliano spoke with former steel workers to see if they had any advice for autoworkers in Detroit.

Who Do You Trust to Track the Stimulus Spending? A dot-gov? Or a dot-com?

Our federal government has a highly-promoted web site designed to track spending of the $787 billion stimulus,

But Onvia offers its own, perhaps more up-to-date version, at

NPR's Morning Edition handicaps the sites:

Creative Ways Around Import Tax Barriers

From NPR's Morning Edition:
As government leaders discuss trade issues, a story in this week's The Wall Street Journal reported on some of the bizarre trade rules that are still on the books. Reporter Matthew Dolan tells Linda Wertheimer about a story he dug up on how Ford Motor Company does some fancy maneuvering to get around an import tax that started in the 1960s with chickens.

Food Producers Do Well in a Down Economy

From American Public Media's Marketplace:
ConAgra and General Mills report earnings this week, and things seem to be looking up. Why? The short answer: it costs less to buy what it takes for companies to make the food. Jeremy Hobson reports.

Friday, September 18, 2009

Hope College Colleagues' Letter in This Weekend's NYT Magazine

This weekend's issue of the New York Times Magazine features a letter to the editor by Hope College colleagues Mr. John Lunn and Ms. Marty LaBarge. Their letter is a response to Paul Krugman's "How Did Economists Get It So Wrong?"

In part, the letter reads:
Paul Krugman cites a concern for mathematical elegance over truth and reliance on efficient market theory as reasons for economists underestimating the instability of markets. But similar arguments could be made about the Keynesianism that Krugman advocates. In its heyday, Keynesianism included elegant mathematical models that demonstrated markets are inherently unstable and had its own version of an efficiency theory, only it was government that was efficient; a wise and good government could fine-tune the economy through appropriate fiscal policy. . . .


Policy Views of Members of the American Economic Association: Results of a New Survey

Interesting study from the American Institute for Economic Research: "The Policy Views of American Economic Association Members: The Results of a New Survey," by Wake Forest's Robert Whaples.

I have pulled out the propositions with which at least seven out of every ten economists broadly agree, simplifying the language in some cases. You should check the original for the exact propositions, as well as the proportions agreeing.

Here are propositions, then, with which at least 7 out of every 10 economists broadly agree:
  • The US should eliminate remaining tariffs and other barriers to trade.
  • The US should not ban genetically-modified crops.
  • Employers in the US should not be required to provide health insurance to ALL their employees.
  • The US should allow payments to organ donors and their families.
  • A Wal-Mart store typically generates more benefits to society than costs.
  • Economic growth in developed countries like the US leads to greater levels of well-being.
(Hat-tip: Michael Kruse)

Thursday, September 17, 2009

Stiglitz Helps Sarkozy Figure Out How to Incorporate Happiness in Measuring Our Economic Health

From the Economist:

HOW well off are Americans? Frenchmen? Indians? Ghanaians? An economist’s simplest answer is the gross domestic product, or GDP, per person of each country. To help you compare the figures, he will convert them into dollars, either at market exchange rates or (better) at purchasing-power-parity rates, which allow for the cheapness of, say, haircuts and taxi rides in poorer parts of the world.

To be sure, this will give you a fair guide to material standards of living: the Americans and the French, on average, are much richer than Indians and Ghanaians. But you may suspect, and the economist should know, that this is not the whole truth. America’s GDP per head is higher than France’s, but the French spend less time at work, so are they really worse off? An Indian may be desperately poor and yet say he is happy; an American may be well fed yet fed up. GDP was designed to measure only the value of goods and services produced in a country, and it does not even do that precisely. How well off people feel also depends on things GDP does not capture, such as their health or whether they have a job. Environmentalists have long complained that GDP treats the despoliation of the planet as a plus (via the resulting economic output) rather than a minus (forests destroyed).

In recent years economists have therefore been looking at other measures of well-being—even “happiness”, a notion that it once seemed absurd to quantify. . . .


Moral Hazard Explained

Okay, one final Paul Solman video today. In this piece from NewsHour, Solman covers the problem of moral hazard--specifically as it relates to the colossal failures of lending institutions last year.

Silver Linings on Dark Economic Stormclouds?

And, completing a trio of Paul Solman NewsHour pieces, Mr. Solman searches for signs of hope and change for the better in a rocky economy.

How Precise Is Our Unemployment Measurement?

From two months ago, Paul Solman gives a guide to what the unemployment rate captures and what it does not.

If you have trouble viewing the embedded video below, here is a direct link.

Calculating the Consumer Price Index (CPI)

From February 2008, NewsHour's Paul Solman gives us an in-the-trenches view of CPI measurement.

We're All Keynesians Now . . . Wait, No We're Not . . Just a Minute . . . Um, Guess We Are Again After All

NPR's Morning Edition lays out the short-term vs. long-term consequences of Keynesian-style stimulus spending.

Tuesday, September 15, 2009

The 'Undercover Economist' Is a Bit Fuzzy on the Definition of Price Discrimination

(Note: Many thanks to my friend and expert in industrial organization, John Lunn, for his input in the post below.)

Remember, I like Tim Harford's work at the Financial Times. I really do. That's why it didn't feel good earlier this week when I critiqued his caricature of how economists think about economic decision-making.

But looking for something totally unrelated the other day on YouTube, I stumbled on this video of Mr. Harford giving a lecture on price discrimination at the Developments in Economics Education conference in Cambridge. And it's pretty clear from the video evidence that he is more than a bit fuzzy on what constitutes price discrimination.

Take a look at the video. Then check out my response beneath it.

Well, I've watched this video over and over the last couple of days, always trying to give dear Mr. Harford the benefit of the doubt. Nevertheless, if this video were Mr. Harford's response to an exam question like, "Define price discrimination. Give examples.", he would probably not receive a passing grade--at least from me in my principles of microeconomics course. Here's why.

Unfortunately, it is not uncommon to find economists--mistakenly--referring to any pricing scheme as discrimination. But the standard definition of price discrimination in economics is this: Price discrimination is said to occur when a firm, owing to at least some monopoly power, charges different prices to different groups of buyers for an identical good or service. Real examples of price discrimination include student discounts, senior discounts, lower airfares with a Saturday-night stayover than without, and movie matinee prices.

Therefore price discrimination is not what Mr. Harford discusses--at all--in his price discrimination talk. His talk is actually about product differentiation: charging different prices for similar--but not identical--goods.

Whenever one starts talking about price discrimination, the first question should be "Where is the monopoly power?" Now Starbucks may have some, but I doubt it is all that great, and probably relates to the unique experience at Starbucks, rather than the coffee quality alone.

There were a few other points in the video that made me scratch my head. For example, I don't know all of the prices at Starbucks, but the price-volume combinations at most shops like it work out so that the per-ounce price is lowest for the venti (big) size and highest for the tall (small). So your best per-ounce value is actually the biggest drink. Yet the talk made it sound like the opposite is true.

In fairness, though, the "short" he talks about is more difficult to explain. It cannot be explained by people merely wanting a greater variety of sizes, since it is not listed on the menu. It's possible Starbucks keeps it available in order to prevent losing a sale, but keeps it off the menu to discourage many orders of that size. But I question whether that is a sufficiently reasonable explanation.

So if you are looking for a cool video about price discrimination--that also gets the economics exactly right--skip Tim Harford's. Instead, check out this one two of my students at Hope College made last year:

Monday, September 14, 2009

This Means War: China Hits Back over Tire Tariffs

It's officially a trade war.

Over the weekend we learned that the United States would impose three years of import tariffs on tires made in China--beginning at an eye-popping 35 percent. In an excellent article this morning, ConsumerAffairs notes that roughly 17 percent of tires sold in the US in 2008 had been made in China.

China is not taking this affront lying down; they are hitting back. Working on Sunday, the Chinese have introduced import tariffs of their own--on US-produced auto parts and chicken products.

Tariffs and other protectionist measures are not good. Yet we fail to learn this lesson. Today it is Chinese tires. In 2002 it was steel made in nations like Ukraine, Russia, Japan, China, and South Korea. You may not remember it, but way back in 1995, then-President Clinton proposed placing a 100-percent import tariff on Japanese luxury automobiles.

Trade wars--just like real ones--hurt people. And the collateral fallout is considerable, and rarely fully accounted for in advance. For example, I'm guessing that the already-staggering US auto parts workers aren't happy to know that (1) tires will cost more the next time they shop for them, and (2) their jobs are now at even greater risk because China slapped a retaliatory tariff on US auto parts.

Read more about the fallout for the US consumer at ConsumerAffairs.

Sunday, September 13, 2009

A Bone to Pick with the "Undercover Economist"

Tim Harford was on NPR's Morning Edition recently, plugging his new book, Dear Undercover Economist, a compendium of the advice columns he regularly writes for the Financial Times, where he serves on the editorial board. Ari Shapiro's interview with Harford is excellent. I enjoyed it so much that my class and I listened to it together during our meeting the same day.

Now I enjoy Harford's work immensely. Some of you may have even noted that his blog is one that has appeared in my blogroll for some time now. But I have a bit of a bone to pick with the way that Harford frames how economists think on things.

To give a backdrop the nature of my disagreement, here are a few snips from the NPR page. (I'd encourage you to listen to the entire interview, though. It really is good!)

Economists aren't known for their softer side. . . .

They should be the last people you ever ask for relationship advice.

"There is a certain irony in economists who have the least developed emotional register of any social scientist, giving dating advice," says economist Tim Harford, who lives that irony every day. . . .

"There's no consideration of morality," says Harford, who channels his pure inner economist when he writes the advice column.

And he sees that pure inner economist almost as an evil twin who doesn't care how rude he is or how much he cuts through the emotional complexities of a situation.

Sorry, but economics is not merely about sorting out the institutional arrangements in play, then pursuing unbridled hedonism with no thought to the social or emotional consequences. (That is, unless some anti-economist--as Harford tells it--should sweep in at the end and nudge us into some relatively moral direction.)

Our emotions, our feelings, our possible guilt, our concern for the well-being of others, and even a consideration of whether we will look ridiculous or not--all of these factors enter directly into our economic decision-making. They are not some mere final consideration before we plunge headfirst into the most opportunistic pool available. Adam Smith knew this, and said as much in both his Theory of Moral Sentiments and the Wealth of Nations.

And the fact that they are not an afterthought is one of the reasons that the same self-interested models of economic behavior that work well in explaining the life and work of Donald Trump work equally well in explaining the life and work of Mother Teresa. Both have lived their lives in the pursuit of their self-interest--in whatever sense "self-interest" has happened to mean to each of them. And for Mother Teresa, the plight of the world's most downtrodden and helpless was one of the primary influences motivating her life's work. Serving them was what she wanted to do.

Now, to be fair, economists--and Harford--often do not fully incorporate such considerations into their economic modeling because emotional and social consequences prove less tractable than, say, expected alternative monetary payoffs from one course of action versus another.

But just because they are less tractable than other factors that influence the choices we make does not mean that they do not matter, or more to the point, that they do not enter directly into our choice framework.

Saturday, September 12, 2009

If Free Trade Is Good, Why Are We Putting a 35 Percent Tariff on Chinese Tire Imports?

In class just yesterday, we were unlocking the powerful conclusion that free trade between nations increases consumption possibilities for all--beyond what each nation would have available if it isolated itself from the rest of the world.

This happens because, with trade, each nation is free to produce goods and services in which it enjoys a comparative advantage--an ability to produce a good at a lower opportunity cost than others can.

So, for example, a nation like Canada can grow a lot of wheat, and then use their silos full of it in trade to buy the computers it needs from nations like Japan. That way both nations have computers, they are fed, and--and this is where it gets really exciting--it's possible for both nations to consume more of both goods than would be possible if they were living in isolation with no trade whatsoever, relying only upon their own workers to make all the goods they need.

Which is why it is so troubling that the United States continues to roll out antiquated trade barriers in an effort to "protect" Americans and their jobs. The last presidential administration committed this sin during its first term, imposing hefty tariffs on imported steel. And today we learned that the current administration will impose three years of tariffs on tires imported from China, in an effort to save American tire jobs. The tariff rates will begin at a whopping 35 percent.

But trade barriers such as tariffs make Americans worse off, because they don't let us enjoy the fundamental benefit of free trade in this case: cheaper tires for all. Instead we settle for propping up industries to benefit a few, at the expense of the rest of us, presumably to help our economy. Yet cheap steel and cheap tires are good for our economy, regardless of where they come from.

So that's the economic argument. But I believe there's also a moral dimension here.

In the case of the 2002 steel tariffs, we were deliberately trying to help domestic steel companies by hurting foreign ones. In effect, we were saying that steel jobs for US workers are more important than jobs for foreigners working hard to make life better for themselves and their families. Specifically, in 2002, we were--through our misguided policy actions--saying that human beings here are more valuable than our fellow human beings in China, Japan, South Korea, Ukraine and Russia. And I have a very hard time with that.

And this time it's even more personal, since we are imposing the tire protections against just one country, in an effort to prop up tire-makers in our own who apparently are "better" somehow. Sorry--I just don't buy that.

So let's not permit an "us vs. them," "USA! USA! USA!," mentality to cloud our economic judgment. Free trade makes life better for all, both domestically and globally. And we should tread lightly when our efforts to help a tiny minority cause harm to the rest of us.

Wednesday, September 9, 2009

Talk about Opportunity Costs at the Margin: Bed-Sharing "Bad for Your Health"

From the BBC:
Couples should consider sleeping apart for the good of their health and relationship, say experts. . . .

One study found that, on average, couples suffered 50% more sleep disturbances if they shared a bed.
Then I'm guessing that letting Malcolm our cat in bed is suicidal.

Monday, August 31, 2009

So You Want to Be Fed Chair After Bernanke? Try Your Hand at This Game!

In case you missed it, President Obama announced the reappointment of Ben Bernanke as chair of the Federal Reserve last week.

Which means you won't be betting the job anytime soon.

Better practice, though. Try your hand at steering our economy by taking charge of our central bank and playing the Fed Chairman Game at the San Francisco Fed's web site.

Saturday, August 22, 2009

Are There Really 46 Million Medically-Uninsured Americans?

In another great feature, NPR's Morning Edition took a closer look at the composition of the estimated 46 million medically-uninsured living in America:
. . . are there really 46 million uninsured? It's the current best guess, but it might be off by several million. . . .

Are Doctors More Like Moms Or Mechanics?

NPR's Morning Edition Friday included two wonderful features. The first considers the principal-agent problem applied to medicine: Are doctors looking out for you? Or for themselves?

That is, is your doctor more like your mom or an auto mechanic?

A 300-year-old Example of Quantitative Easing

From the Economist:

“IF FIVE hundred millions of paper had been of such advantage, five hundred millions additional would be of still greater advantage.” So Charles Mackay, author of Extraordinary Popular Delusions and the Madness of Crowds, described the “quantitative easing” tactics of the French regent and his economic adviser, John Law, at the time of the Mississippi bubble in the early 18th century. The Mississippi scheme was a precursor of modern attempts to reflate the economy with unorthodox monetary policies. It is hard not to be struck by parallels with recent events.

Law was a brilliant mathematician who used his understanding of probability to help his gambling habit. Escaping from his native Scotland after killing a rival in a duel, he made friends with the Duke of Orleans, the regent of the young king Louis XV.

The finances of the French government were in a terrible mess. Louis XIV had spent much of his long reign fighting expensive wars. Tax collection was in the hands of various agents, who were more concerned with enriching themselves than the state. Not only was the monarchy struggling to pay the interest on its debt, there was also a credit crunch in the form of a shortage of the gold and silver coins needed to fund economic activity.

Law’s insight was that economic activity could be boosted by the use of paper money that was not backed by gold and silver. He was well ahead of his time. . . . (more)

Wednesday, August 19, 2009

Wisdom of Crowds? Or Wisdom of Wombats?

A few years ago, New Yorker financial writer James Surowiecki published The Wisdom of Crowds, explaining that often, "under the right circumstances, groups are remarkably intelligent, and are often smarter than the smartest people in them." ABC's 20/20 considered this idea in a recent report, featuring business professor Michael Mauboussin. You can view an excerpt of the report, or read it in its entirety.

But have you heard of a "wisdom of wombats?"

Just like we use special words we already know to describe groups of species--"gaggle" of geese, "pride" of lions, "herd" of cattle--there are plenty of these you may have never heard of:

a murder of crows, a cackle of hyenas, a wisdom of wombats.

You can read even more, courtesy of the San Diego Zoo.

So when a bunch of wombats get together, make way for the wisdom.

Cash for Clunkers "Crowding Out" Mechanics

As this CNN segment illustrates, auto mechanics are nervous that the crushing of all the clunkers in the CARS program will lead to a drop in the demand for their services.

Higher Education's Disinvestment in Faculty

From Mark Perry's Carpe Diem blog:
The chart above is based on data in the American Federation of Teachers study "The State of the Higher Education Workforce 1997-2007," released in May 2009, and college enrollment data available here. The report presents a troubling picture of the higher education teaching profession because colleges and universities have been "disinvesting" in full-time tenured and tenure-track faculty while at the same time "investing" in more and more administrators, and hiring more and more part-time faculty.

Monday, August 10, 2009

Bob Lucas Defends My Profession!

Noble laureate Robert Lucas defends my profession in the Economist:

THERE is widespread disappointment with economists now because we did not forecast or prevent the financial crisis of 2008. . . .

Thursday, August 6, 2009

twitter's Broken

cnet reports that twitter went down this morning. Perhaps a case of negative network externalities.

(I'd tweet this, but, well, . . . ).
Twitter was inaccessible for at least a half hour on Thursday morning, followed by a period of slowness and sporadic timeouts (and more outright downtime). It's not clear what has caused this. My theory is that it was the volume of millions of people tweeting complaints about why it can't be Friday yet. . . .

Monday, August 3, 2009

New Video about Holland, Michigan

There's a new video on the net about lovely Holland, Michigan. (If the link doesn't work, you can view it embedded on this web site.)

Shot last year, the video is designed to describe life in town to anyone thinking about making a move here.

The film includes a segment about our town's intellectual life, found between the 5:00 and 5:30 marks. And if you take a look, you'll see yours truly in action in the classroom.

Friday, July 31, 2009

Blast from the Past: Princeton Economist Alan Blinder the Mind Behind "Cash-for-Clunkers"

Ever wondered whose idea the Car Allowance Rebate System--aka "Cash-for-Clunkers" was?

Cash-for-Clunkers was proposed by Princeton economist Alan S. Blinder.

You can read his initial "humble suggestion," as it appeared in the New York Times almost precisely one year ago.

Taxes on Junk Food: Fat Chance?

The US Congress is currently considering whether or not to begin levying new taxes on junk food. In one proposal, we presumably would use taxes on soft drinks to finance the expansion of health care. The Economist this week ponders the intended and potential unintended consequences:

ECONOMISTS have long recognised the arguments for imposing special taxes on goods and services whose prices do not reflect the true social cost of their consumption. Such taxes are known as “Pigouvian” after Arthur Pigou, a 20th-century English economist. Environmental taxes are an obvious example. There is also a Pigouvian case for duties on cigarettes, alcohol and gambling. Smoking increases the risk of cancer for those in the vicinity of the smoker; alcohol abuse and gambling are strongly associated with violence and family breakdown. Moreover, all three habits lead to higher medical costs. In theory governments can make up these costs, or “externalities”, with a tax that adjusts the prices people pay to puff, booze or punt. Such a tax might also encourage consumers to live healthier lives.

Support for another such tax, on junk food, is now spreading, especially in America. Congress is considering a tax on sugary drinks to help pay for the planned expansion of health-care coverage. Some analysts would like to see broader duties on junk food. On July 27th the Urban Institute, a think-tank in Washington, DC, proposed a 10% tax on “fattening food of little nutritional value” that, it claimed, would raise $500 billion over ten years.

The logic for a tax on fattening food may seem obvious. About one-third of Americans are obese, up from 15% in 1980. Fat people are more prone to heart disease, diabetes, bone disorders and cancer. An obese person’s annual medical costs are more than $700 greater than those of a comparable thin person. The total medical costs of obesity surpass $200 billion a year in America, which is higher than the bill for smoking. These costs are not all borne by the obese. When health-care costs are shared, obesity becomes a burden for everyone. Thanks to government health-care plans such as Medicare half of America’s obesity-related health costs land on taxpayers. In private employer-sponsored health plans the slim pay similar premiums to the overweight.

But would a fat tax affect behaviour?


Thursday, July 30, 2009

Another Local Public School Privatizes Services to Save Money

As reported in the Grand Rapids Press, another local school district found that the obvious way for them to save money in tough economic times is to turn to private provision of services. In this case, the public schools in Jenison decided they could save $425,000 per year by privatizing 17 custodial jobs.

Though teachers protested the action, the district claims it will be able to save nine teaching positions as a result. The decision to privatize janitorial services is part of an effort to cover a $2.2 million deficit.
. . . Superintendent Tom TenBrink said he sees the move as the only option that does not hurt programs and teachers.

Projections show the district will face another $2.6 million shortfall next year, and savings are quickly being depleted.

"We can no longer afford every employee. It's just not feasible," TenBrink said. "This is a sad day in our history and it's probably the hardest thing I've had to do. I quite honestly don't know where else to go. I don't know where to turn."

Liechtenstein Pledges Greater Tax Openness

Earlier this spring, the tiny Principality of Liechtenstein pledged greater tax openness, under growing pressure from the member nations of the G-20. Nestled between the eastern edge of Switzerland and the westernmost tip of Austria, the tiny principality of just 35,000 inhabitants has long served as an international tax haven--much like its European neighbors Switzerland and Luxembourg. Yet Liechtenstein now pledges to follow OECD financial reporting standards, and the G-20 and the EU both hope that Switzerland and Luxembourg will follow suit.

. . . the French newspaper La Tribune reported that the Organization for Economic Cooperation and Development had added Switzerland, Luxembourg, Austria, Singapore and Hong Kong to a list of uncooperative tax havens, which already includes the well-established havens of Liechtenstein, Andorra and Monaco. . . .

Banking secrecy was enshrined in law in Switzerland in the 1930s. . . .

“Switzerland is the big prize,” Willem Buiter, a professor at the London School of Economics and Political Science, wrote on his blog last year, because “unlike the other tax havens, it is a country rather than a dwarf-state and postage-stamp curiosity, and it is outside the E.U.,” therefore out of reach of European Union enforcers.

Wednesday, July 29, 2009

Yale Economist Robert Shiller Warns of UK "Double Recession"

In the Times of London, Yale economist Robert Shiller warned the UK of the possibility of a "double recession:"

One of the world's most influential economists warns today that Britain faces the prospect of two recessions in quick succession.

Robert Shiller, Professor of Economics at Yale University, said that the recent stock market bounce should be treated with caution.

He likened the current sense of optimism to a marital row. “You don't know whether the argument with your wife is really over or not. Is the problem something that your spouse will bring up again, and again?”


Tuesday, July 28, 2009

The Burping of the Lambs: Skip Lamb Chops and Doner Kebabs, UK Climate Panel Urges

From the Sunday Times:

GIVE up lamb roasts and save the planet. Government advisers are developing menus to combat climate change by cutting out “high carbon” food such as meat from sheep, whose burping poses a serious threat to the environment.

Out will go kebabs, greenhouse tomatoes and alcohol. Instead, diners will be encouraged to consume more potatoes and seasonal vegetables, as well as pork and chicken, which generate fewer carbon emissions.

“Changing our lifestyles, including our diets, is going to be one of the crucial elements in cutting carbon emissions,” said David Kennedy, chief executive of the Committee on Climate Change. . . .

The problem is because sheep burp so much methane, a potent greenhouse gas. Cows are only slightly better behaved. . . .

Price Point Too Low (or order too small): Beer Festival Taps Out

Earlier this month the 5th Beer on the Wye Festival in Herefordshire literally tapped out. The festival, designed to be a three-day event, had to call off the final day because the entire supply had been consumed in the first two days.

Organizers say they were surprised when 3800 attended--nearly one-third more than the usual turnout. Organizers plan to order more beer for next year's festival, the BBC reports.

Sunday, July 26, 2009

Oops, Our Bad: UK Economists Apologize to Queen

A group of economists from the London School of Economics have sent a letter to Queen Elizabeth II, apologizing for their failure to anticipate the financial crisis.

(Hat-tip: harryrady)

AP Study: Bankruptcies Lower in States that Do Not Seize Wages

According to Mike Baker, reporting for the Associated Press this month, there are fewer personal bankruptcy filings in states that do not permit garnishment of wages. They also find striking differences along state borders.

States that allow debt collectors to seize consumers' wages have sharply higher bankruptcy rates than neighboring states that prohibit or strictly limit the practice, an Associated Press analysis has found.

This link highlights a dilemma for credit-card companies and other debt chasers: By going after wages — an increasingly popular maneuver since the recession began, lawyers say — they risk pushing consumers into bankruptcy court, where judges can reduce or wipe away all sorts of financial obligations.

The apparent relationship between so-called garnishment laws and states' bankruptcy rates also bolsters the arguments of consumer advocates, who have long said that intercepting someone's wages to pay their debts only increases their financial vulnerability.

After gathering millions of bankruptcy records from 2006 until now, the AP plotted the number of filings for each U.S. county in its Economic Stress Map — a geographic, chronological and visual depiction of economic misery based on unemployment, foreclosure and bankruptcy data.

While bankruptcy rates vary for many reasons, the five states that prohibit or strongly limit wage seizures — North Carolina, Pennsylvania, South Carolina, Florida and Texas — all have drastically lower rates than their neighbors, with particularly striking differences along borders, where economic conditions are similar but bankruptcy rates are not. . . .

Thursday, July 23, 2009

On the Origins of .99 Pricing

"The Straight Dope" covered the history of 99-cent pricing several years ago. It's not really my specific area of expertise in economics, so I'll defer to Mr Adams:

Dear Cecil:

Why do prices end in .99? My father says it started at Bill's Texaco in Waco, Texas during a price war. I say it's a much older management technique to force employees to open cash register drawers for each transaction (making simply pocketing a bill more obvious). Since we're both inveterate bullshitters we've decided to leave it to you.

Dear Richard:

The topic does lend itself to wielders of the big shovel, no question about it. The most elaborate explanation I've seen is in Scot Morris's Book of Strange Facts & Useless Information (1979):

"In 1876, Melville E. Stone decided that what Chicago needed was a penny newspaper to compete with the nickel papers then on the stands. But there was a problem: with no sales tax, and with most goods priced for convenience at even-dollar figures, there weren't many pennies in general circulation. Stone understood the consumer mind, however, and convinced several Chicago merchants to drop their prices--slightly. Impulse buyers, he explained, would more readily purchase a $3.00 item if it cost "only" $2.99. . . .

Private Hydrogen-Powered Train Proposed to Link Grand Rapids and Detroit

From the Grand Rapids Press:

The public gets a chance next week to comment on a plan to build a futuristic high-speed rail system along Michigan's interstates, allowing people and cars to travel from Grand Rapids to Detroit in less than an hour.

The Michigan-meets-"The Jetsons" concept is being studied by a bipartisan state panel holding meetings around the state in an attempt to gauge public support. . . .

The project was proposed by the privately owned Interstate Traveler Company, located just north of Ann Arbor. Company officials are asking the state to provide free use of the right-of-way along Michigan's interstate freeway system.

The railway's cars would levitate on top of an elevated hydrogen-based track and be propelled by energy from magnets. Cars holding people, freight and vehicles would cycle at high speeds, stopping in Grand Rapids, Lansing, Ann Arbor and Detroit. . . .

It is, however, an expensive proposition.

The project is estimated to cost more than $2 billion, or about $17 million a mile.

. . . the company is not asking for any state, federal or local funding.

Company founder Justin Sutton has told state officials he has secured private investors for the project, but needs lawmakers to agree to give him free use of the interstate right-of-way in exchange for revenues that will be shared with the state and local governments after three years of operation.

Wednesday, July 22, 2009

Show-Me-the-Money Train: Debating State-Funded Subsidies for Amtrak

As we ponder the national high-speed rail system, this is a good time to consider the relative merits of our nation's existing passenger rail service, Amtrak.

This week the House Appropriations Committee boosted dramatically the funding President Obama had requested for the high-speed system, raising it from the $1 billion the President had wanted to $4 billion. This money would be above and beyond the $8 billion already included as part of the $787 billion stimulus.

The bill would also contribute an additional $1.5 billion to Amtrak. Though Amtrak has been working toward independent solvency for decades, it has always had to rely upon funding from the federal government to continue operations.

What you may not know, however, is that states often chip in on the subsidies to keep in-state Amtrak lines in operation. Here in Michigan, where our budget woes have corresponded to the poor state economy, we spend $7.3 million of Michiganders' money to keep open our lines that run to Chicago.

And B. Candace Beeke, writing for the Business Review Western Michigan's blog "West Side Story," thinks that's too much money to spend on the few of us (that's right, I do ride the Pere Marquette line from Holland to Chicago) who take the train, especially in these difficult times:

In normal times, one could argue that the $7.3 million the state spends to subsidize two Amtrak rail lines to Chicago is simply the cost of supporting public transportation.

And it just might be a valid argument, if Amtrak could show great value for the money it receives from the taxpayers of Michigan.

We don't argue with the notion that having train service to Chicago is a nice thing. But is it truly a need that requires a public subsidy?

Our issue here is twofold: Is the $7.3 million now spent on Amtrak the best use of dwindling financial resources for a state mired in a persistent fiscal crisis; and who is using the train to Chicago?

Is there a high public good being accomplished through the Amtrak subsidy? Or are we merely providing folks who want to go shopping on the Miracle Mile a taxpayer handout to help pay their way to the Windy City and back?

That's why -- at least from the perspective of triggering a much-needed conversation -- we welcome the efforts of some lawmakers in Lansing who want to trim Amtrak's subsidies. . . .

Russia's Economic Woes

This video segment (below) recently aired on PBS's NewsHour. It summarizes Russia's current economic misfortunes. Owing largely to falling energy prices and a lack of diversification, the heady days of the Putin prosperity seem to have ended as the nation experiences record high inflation and unemployment rates. Is government reform the answer?

Here are a few quotes you will hear in the video:
"We used to work two or three shifts and on Saturdays, also. Now we work only two to four days a week. My job pays only half as much as it used to. But when you're older than 50, it's hard to get a new job." - Alexei Koverigina, Russian worker

"That's just an issue of the diversifying the Russian economy, which should not rely only upon the gas, oil and metals. It should be modern type of economy based on the unique human capital which we have in the country." - Anatoly Chubais, CEO, Russian Corporation of Nanotechnologies

"Current government simply thinks that sooner or later those smart guys in U.S. and Western Europe will do something with the whole situation in the world and oil prices will come back on the same levels. And this government will continue to do nothing, not pursuing any single reform." - Mikhail Kasyanov, Former Prime Minister
And here is the segment:

Tuesday, July 21, 2009

The End of .99 Pricing

Economists have long been interested in the phenomenon of 99-cent pricing: prices that are given so that they end in .99, rather than at the next whole dollar amount. For example, in many contexts it is much more likely that you will see an item selling for $3.99 rather than an even $4.00.

Economists are curious about this real-world phenomenon since the idea that the psychology of a price starting with "3" instead of "4" makes a difference flies in the face of the fairly standard rationality assumptions made on the part of consumers. That is, consumers aren't stupid, so they should recognize immediately that the difference between $3.99 and $4.00 is precisely one cent--the same as the difference between $4.00 and $4.01.

There is a fairly rich, expanding literature on 99-cent pricing. For example, in a 1997 paper appearing in Economics Letters, Kaushik Basu explains the phenomenon without abandoning the assumption of rationality on the part of consumers.

Well, an article in the new issue of the BBC Magazine notes that the UK's top four grocers have been rapidly abandoning prices that end in .99, opting instead to round up to the nearest pound. Its author, Laura Schocker, puts forth three possible explanations.

Despite Years of Price Supports, Dairy Farmers Feeling Pinch

As the PBS NewsHour video (below) illustrates, recent dramatic drops in the price of milk have left many of the nation's farmers hurting--so much so that their cows are becoming more valuable as beef than as part of their dairy stock. So dairy farmers are struggling, and selling off much of their herds for slaughter. And some are getting out of the business altogether.

As a result, many dairy farmers are seeking government relief. Yet America's dairy farmers have been the beneficiaries of the Dairy Price Support Program since 1949. The USDA-administered program has maintained a guaranteed minimum price for milk for dairy farmers by buying up surplus butter, nonfat dry milk, and cheese.

But like any other price floor, dairy price supports have social costs to all of us--in the form of (1) higher prices for milk and milk-related goods, and (2) higher tax bills required to generate the tax revenues required to buy up the surpluses from farmers--that are most likely greater than the benefits that dairy farmers reap as a result. Even the president's own Office of Management & Budget has rated the program as "Not Performing."

In addition, in an effort to help with fluctuations in the market price of milk, the USDA supports the Milk Income Loss Contract (MILC) program. The program makes payments to dairy farmers in times such as these; that is, the programs makes payments to dairy farmers in order to insulate them from fluctuations in the market price of milk. Low milk prices means more money gets paid to farmers.

The two programs are expensive ones. According to the Herkimer Telegram, "The USDA is expected to spend nearly $1 billion in fiscal year 2009 on purchases of dairy products (Dairy Product Price Support Program) and payments to producers (MILC)." And that doesn't even include the higher prices you and I pay as a result of the program.

Nevertheless, facing some of the lowest market prices in three decades, dairy farmers are seeking extended price support benefits. And it should come as no surprise that the lawmakers spearheading the effort hail from key dairy states: In a recent letter to the U.S. Secretary of Agriculture, Wisconsin senators Herb Kohl and Russ Feingold, as well as Patrick Leahy of Vermont, among others, urged temporary increases in the dairy price support program. You can read the full text of the letter here.

Yet according to a spokesman for the International Dairy Foods Association (IDFA), a trade group representing Dean Foods and other producers, the support programs hurt dairy companies over the long term since they reduce incentives for producers to expand and innovate. Paul Kruse, head of Texas-based Blue Bell Creameries and spokesman for IDFA, gave testimony last week before a congressional committee, arguing that such programs distort markets, leaving consumers paying more than they need to for milk and other dairy products.

Here's the NewsHour segment:

Monday, July 20, 2009

Probably Not Any Relation: Claar Cellars

They are probably not any relation, but I do like this photo of the logo for Claar Cellars:

What Good Are Economists, Anyway? The Efficient Market Hypothesis Revisited

Back on March 5, the Economist told a cautionary tale of the efficient market hypothesis, especially in light of the recent drop of asset values in the market.

Well, they are at it again this week:

IN 1978 Michael Jensen, an American economist, boldly declared that “there is no other proposition in economics which has more solid empirical evidence supporting it than the efficient-markets hypothesis” (EMH). That was quite a claim. The theory’s origins went back to the beginning of the century, but it had come to prominence only a decade or so before. Eugene Fama, of the University of Chicago, defined its essence: that the price of a financial asset reflects all available information that is relevant to its value.

From that idea powerful conclusions were drawn, not least on Wall Street. If the EMH held, then markets would price financial assets broadly correctly. Deviations from equilibrium values could not last for long. If the price of a share, say, was too low, well-informed investors would buy it and make a killing. If it looked too dear, they could sell or short it and make money that way. It also followed that bubbles could not form—or, at any rate, could not last: some wise investor would spot them and pop them. And trying to beat the market was a fool’s errand for almost everyone. If the information was out there, it was already in the price. . . .

That is why many people view the financial crisis that began in 2007 as a devastating blow to the credibility not only of banks but also of the entire academic discipline of financial economics. . . .

Sunday, July 19, 2009

If You Are Risk-Averse, Don't Lose Sleep: Insure!

As this ad from TravelersInsurance illustrates, insurance can help the risk-averse -- of all species -- sleep better at night knowing their assets are protected.

What Good Are Economists, Anyway? Not as Good as Catherine Zeta-Jones

This ad from T-mobile shows lots of economists having the door slammed in their faces. Maybe T-mobile just needs to work harder to find the beautiful economists.

(Hat-tip: Steven Levitt)

Saturday, July 18, 2009

New Book: Can Profitable Companies Give Products Away for "Free"?

In Free: The Future of a Radical Price, reviewed in the July 16 issue of the Economist, Wired editor and former Economist writer Chris Anderson probes whether technology and productivity gains have made it possible for goods and services to now be free.

It's an interesting question, especially in light of modern technological advances. For example, one might reasonably wonder why Amazon doesn't simply give away its Kindle or Kindle DX, earning its money through sales of downloadable content.

Similar questions arise in a competitive context. The standard competitive economic model predicts that in the market equilibrium the price of a good will equal the marginal cost of the last unit produced and sold. Yet for goods such as software that has already been written, and is also available for download online, the marginal opportunity cost to the firm of making one more download available is awfully close to zero (especially if server space and bandwidth are sunk costs). Which implies that the market price should also be near zero.

Read the Economist's full review of Chris Anderson's Free. And best of all, you may read Free -- the entire book -- absolutely free (below). Enjoy!

FREE (full book) by Chris Anderson