Automatically Updated Unemployment Map
By Chris | July 25, 2010
You may have noticed an Unemployment link now appears in the header. Give it a click. I have created a dynamic map of the United States that automatically shows the most recently reported unemployment rate in every state. States are color coded based on their current value. The data comes from the Federal Reserve Bank of St. Louis which makes an API available for free.
The cool thing about the map is that it is always up-to-date. When next month’s figures are released, it will automatically change. Please comment with any suggestions on how to make it better. If you’re interested in building your own state intensity maps, take a look this tool (which I also built). You can also email me for advice on how to make a fully dynamic map. In the future I hope to make a similar map at the county level.
Topics: Economics | 11 Comments »
College Pricing
By Chris | June 21, 2010
Ever wondered why college sticker prices are so high? I have. Part of the explanation is that universities price discriminate and the most palatable way to do so is to charge a high price and offer discounts based on ability and income. But how do universities choose the price that they do? When I was in high school I seriously considered attending Willamette University in Salem, OR. Tuition there is currently $35,000 per year. Over 95% of freshman receive aid. The average need based scholarship is $15,000.
I used to think that high sticker prices were an effort by schools to signal quality. If a school charges $50,000 prospective students may perceive it as high quality and a great value after a $20,000 scholarship. I figured that colleges weighed this quality signal against the real threat of scaring off prospective students with sticker shock.
However, after reading this Econometrica paper on price discrimination in education, I’ve come to an alternative explanation for high tuition. Tuition can be thought of as a price cap on education. Applicants differ in their income and their ability. Because of peer effects, students are both inputs and customers. Colleges want to admit gifted students because they make the school more valuable to other students. However, they are willing to accept lower quality students if those students pay a higher price. This revenue can be used to buy other higher quality students, pay for higher quality teachers, or simply increase the school’s endowment.
A school’s sticker price tells you the extent to which a school will sacrifice student quality for additional revenue. The sticker price is inversely correlated with the quality of the lowest student. A school with a high sticker price is advertising that it will accept really low quality students as long as they pay enough. A school with a low sticker price is constraining itself from admitting low quality, but rich, students. This runs contrary to the price as a signal of quality theory. In this context, a low price actually reflects that a school is unwilling to sacrifice student quality for more money. This explains why Ivy League schools charge tuition that is much lower than what the market would bear.
Topics: College, Economics, Markets | 11 Comments »
Rewarding Motives or Outcomes
By Chris | April 20, 2010
Apparently, the internet is under consideration for the 2010 Nobel Peace Prize. And while it is undoubtedly more deserving than Obama, I don’t have strong feelings on whether it is the best choice. The internet is under consideration because it has done much to facilitate political activism in authoritarian states. Evgeny Morozov, at the Net Effect, argues in this blog post that the internet should not win the prize. This particular passage rubbed me the wrong way:
Reason 3: It would undermine the reputation of the Nobel Peace Prize. Why reward people who were acting solely in commercial interest and it just so happened that their product/invention was used for some noble purpose? Take Twitter: when the “Twitter revolution” in Moldova happened, most of Twitter’s senior executives probably couldn’t place that country on the map….commitment to world peace does not rank high on the list of Twitter’s objectives (for all the good reasons – they are in the business of making money, after all – leave the world peace to Bono). Don’t we want to award this prize to someone who at least WANTS a more democratic and peaceful future and WORKS towards it?
Motives do matter, but they are nearly impossible to know. If I volunteer at the soup kitchen, am I doing it because I care about the homeless or to pad my application for a service scholarship? Should the scholarship committee care? No. Prizes should reward outcomes not motives. No one was denied the Nobel Prize because their academic discovery was in the pursuit of fame or fortune.
Granted, motives are not irrelevant. Suppose a burglar inadvertently sets off an alarm alerting police who upon inspecting the residence discover a dangerous gas leak. The burglar is no hero. There is a strong argument to be made for rewarding only intentional, rather than incidental, outcomes. But, it’s ridiculous to try to ascertain the inner motives of another human. The point of a prize is to create the incentives for things that we want more of. If we want more altruistic-looking people we should reward (or attempt to reward) motives. If we want a better world, we should reward outcomes.
What bothers me about Morozov’s comment is his disdain for commercial interest. The founders of Twitter created something they thought people would value. They created something they thought would improve communication and spread information. Yes, they did so in the hope of being rewarded monetarily for their creation. So what? Is that really any different from a professor pursuing tenure at an elite university? They probably didn’t imagine their product would be used for political activism in remote corners of the world. That’s ok. John Nash didn’t anticipate that his theories would transform economics and political science. It’s futile to reward the best humans. Prizes should reward extraordinary things that make the world a better place. Using those criteria, the internet is most deserving.
Topics: Economics | 6 Comments »
Rent vs. Buy
By Chris | April 17, 2010
I have two friends in the graduate program who were on the market this year and accepted jobs. Both have been house hunting. One has already purchased a home. The other intends to soon. Home ownership is something I’m looking forward to. I’d love to have a library, a fireplace, and maybe even a secret passageway. However, I have no desire to saddle myself with a 30-year mortgage, annual property taxes, and the obligation to pay for maintenance and repairs anytime soon. When my toilet breaks, the refrigerator stops working, or the water pipes freeze, it’s nice to just call my landlord.
So, I asked my friends why they were so eager to own. Here is the response I got:
- Paying rent is throwing your money down the drain
- A mortgage is forced savings
- The house will appreciate and I will be able to live rent free
I was dismayed. These are economists! In fairness, one of my friends owned a home in graduate school and it did appreciate quite a bit. Nevertheless, after the recent housing bubble, it’s quite clear that housing values don’t always go up.
Anyway, I was pleased to see this article on the Mint.com blog by home ownership critic Matthew Amster-Burton:
We’re not so different, Joe Homeowner and me. I rent property from a landlord. He rents money from a bank.
Every month, I write my landlord a check. The money gets spent on orthodontia for the landlord’s kids, and I will never see it again.Every month, Joe writes his banker a check. The interest portion of the payment–for Joe, that’s well over half the payment, more than I spend on rent for a similar home–gets spent on polishing the banker’s yacht, and Joe will never see it again.
Matthew provides some great evidence that housing prices don’t rise much faster than inflation. I’d like to take a different approach, and start from the assumption that if markets are competitive, it should be equally expensive to rent or own something. Owning things often seems cheaper, but that is because it is easy to ignore depreciation and opportunity cost. When is the last time you gave someone a ride and they offered to offset your opportunity cost of owning the vehicle? By opportunity cost, I mean that if you had $20,000 instead of a car, you would be earning a return on that money. But, I’m getting off track.
In theory, why might renting be more expensive than owning?
1. Asymmetric incentives. Renters don’t have an incentive to maintain property. I live in a college town, and renters trash places. They throw parties and break things and pour grease down the drain. They don’t have an incentive to do otherwise. If I rent a car, I don’t check the oil and I don’t worry about wear and tear on the brake pads. Therefore, it should be cheaper to own. But, this becomes less of an issue the more easily you can vet tenants and and punish those who damage the property.
2. Tax rules that favor buyers. This is only true to the extent that those tax benefits do not also accrue to owners who rent out their properties. The interest deduction for mortgages isn’t relevant for most people because they take the standard deduction anyway. However, it may be cheaper to buy if you qualify for a limited time home ownership credit.
3. Houses are a risky asset and landlords are compensated for carrying that risk. As a renter, you are not subject to the vicissitudes of the market. If most people are risk averse, landlords must be paid a premium for carrying the risk of a mortgage. I don’t find this argument too convincing because landlords can purchase homes across the country diversifying the risk away.
What about the fact that most Americans have a strong desire to own their own home? At first I thought that this should make rentals cheaper. Used furniture and clothing is a bargain because people like new things. But, the same concept does not apply here. In this case, it is the renting, not the house itself, that is considered inferior. The price shouldn’t depend on the popularity of renting. However, since most Americans would prefer to own a home, renters are signaling that they are unable to purchase a home. People that are unable to purchase a home may be more likely to damage property that they don’t own. Or, they may be more likely to use drugs or engage in criminal behavior. Ultimately, the preference for homeownership leads to a selection bias of tenants that exacerbates #1.
Topics: Economics, Markets | 6 Comments »
Status Credit Cards
By Chris | March 22, 2010
In high school, credit cards were alluring. They were a symbol of freedom and adulthood. I couldn’t register a domain name or rent a hotel room without one. So, I convinced my parents to cosign the papers I needed to get a debit/credit card at my local credit union. The credit part of the card only kicked in if my checking account ran out of money. My credit limit was $100.
In college, when I started running out of money I applied for numerous credit cards. I wanted some security in case of a crisis (e.g. if my car broke down in the middle of nowhere; eventually it did). I didn’t have a credit history though, and application after application was rejected until I finally found a company willing to take a chance on a student with no income. Since then, credit cards have lost their luster. Too often I miss the payment deadline by a day and must write customer service begging for a fee waiver.
From an economics perspective, credit cards are fascinating and perplexing. Credit card companies act as a middleman minimizing the transaction costs between merchants and customers unknown to each other. The buyer is protected against a seller who doesn’t provide goods as promised and the seller is (largely) protected against buyers not paying. When you think about it, it truly is amazing that I can type a number on my computer and someone across the country will ship me something very valuable. This is only possible because credit card companies are so good at sniffing out fraud.
On the other hand, credit cards are perplexing in that people use them so irresponsibly. Credit card companies are offering 30-day interest free loans to their customers. Instead of taking advantage of this offer, most customers rack up revolving debt at above market interest rates.
In addition, customers shell out hundreds of dollars in annual fees for prestigious cards with extra perks. One of the bloggers I follow, Tynan, is a big fan of Amex’s Platinum Card. He raves that the card replaced his laptop when he left it in the rain. He praises its concierge service which has served him well during his travels. Maybe the perks are worth the annual fee? Possibly, but it turns out the American Express Gold card has nearly identical benefits with an annual fee that is $300 cheaper. On the other end of the spectrum, Amex offers an invitation only Centurion Card with a $2,500 annual fee. It’s reminiscent of the “I’m Rich” iPhone application. You have to admire American Express’ skill in price discrimination. But other companies are succeeding in the market. There is now a Visa Black Card with mediocre benefits that is made of carbon. It’s wildly popular.
I think credit cards are uniquely suited for status signaling. I’ve come to realize this recently when alternating paying for things with my girlfriend. I’d much prefer to pay for dinner than for gas. Paying for the meal is public and projects status in and of itself. It’s natural to want to augment that emotion by paying with a prestigious card. And yet, in the case of credit cards, the payment for prestige is so obvious. A Mercedes may be higher quality than a Toyota but a metal card has no obvious advantage over its plastic cousin. Status credit cards might just be the most overt form of conspicuous consumption out there. Thorstein Veblen would cringe.
Topics: Behavioral Economics, Economics, Markets, Psychology | 11 Comments »
Denial
By Chris | February 11, 2010
I normally don’t write short posts, but this was too funny (and sad) not to mention. A Chinese court recently upheld an 11-year sentence for a scholar for “inciting to subvert state power.”
Here is what he did:
At the end of 2008, he co-authored a document calling for stronger civil rights and an end to Communist Party political dominance. About 10,000 people have signed it, though a news blackout and Internet censorship left most Chinese unaware that it exists.
Here is the government’s comment:
Asked whether China’s treatment of dissidents might negatively affect its image overseas, Foreign Ministry spokesman Ma Zhaoxu responded, “There are no dissidents in China.”
Topics: Economics, Political Science | No Comments »
Guard Labor: Why is Inequality Bad?
By Chris | February 4, 2010
Inequality is a hot topic these days. But why is inequality undesirable? Does it just violate commonly held ideals like fairness and equality. Or, does it do more and actually shrink the economic pie? Economist Sam Bowles argues the latter. The following article describes Bowles’ beef with inequality. (HT Marginal Revolution).
Bowles offers a key reason why [inequality holds us back]. “Inequality breeds conflict, and conflict breeds wasted resources,” he says.
In short, in a very unequal society, the people at the top have to spend a lot of time and energy keeping the lower classes obedient and productive.
Inequality leads to an excess of what Bowles calls “guard labor.” In a 2007 paper on the subject (working paper here), he and co-author Arjun Jayadev, an assistant professor at the University of Massachusetts, make an astonishing claim: Roughly 1 in 4 Americans is employed to keep fellow citizens in line and protect private wealth from would-be Robin Hoods.
The job descriptions of guard labor range from “imposing work discipline”—think of the corporate IT spies who keep desk jockeys from slacking off online—to enforcing laws, like the officers in the Santa Fe Police Department paddy wagon parked outside of Walmart.
The greater the inequalities in a society, the more guard labor it requires, Bowles finds. This holds true among US states, with relatively unequal states like New Mexico employing a greater share of guard labor than relatively egalitarian states like Wisconsin.
The problem, Bowles argues, is that too much guard labor sustains “illegitimate inequalities,” creating a drag on the economy. All of the people in guard labor jobs could be doing something more productive with their time—perhaps starting their own businesses or helping to reduce the US trade deficit with China.
Guard labor has a nice ring to it (maybe one day I’ll invent my own catchy economics term). But it’s not very meaningful when you consider its largest component is “Supervisory Labor.” See the breakdown here. We’d still need supervisors if the economy was completely egalitarian. In fact, we’d probably need more supervisors if financial incentives disappeared.
Bowles and Javadev realize this. The author of the article profiling Bowles overstates his claims. In their paper, Bowles and Javadev cover their bases. They admit that it is impossible to establish a causal relationship between inequality and guard labor. They also note that much of guard labor is the result of the conflicts of interest that cannot be covered in contracts. Their proposed solution is hardly revolutionary. “Policies that result in more fully and clearly defined property rights and attenuated conflicts of interest would reduce the cost of institutional reproduction.” Later, however, they insinuate that inequality is responsible for lots of wasteful guard labor.
And, they are right on one account. An unequal society will require more guard labor than an equal one. This is exacerbated by racial and class tensions. I just disagree with Bowles over how best to fix this problem. Certainly we should work on improving schools in the inner cities to give more kids a fair shot at life. We could also try to improve opportunities for young black men who are 7 times more likely than their white counterparts to be incarcerated.
However, I don’t think that the rise in inequality in the last 30 years has contributed to more guard labor. The recent rise in inequality in the United States has been caused by enormous gains at the top while the real income of the middle class has grown much more slowly. People feel the need to protect their possessions when the people around them become poorer. Not the other way around. Millionaires who become hundred millionaires don’t radically increase their “guard” spending.
Thus, we shouldn’t expect progressive taxes on the wealth to have a serious impact on “guard labor”. Transfers to the poor will only help the problem if they have a permanent effect. Bowles makes some acute observations, but clouds the issue by including supervisors in the same category as security guards.
Topics: Economics, Education, Political Science | 4 Comments »
Paradox of Choice
By Chris | November 22, 2009
A friend of mine, an aspiring ecologist with a blog of his own, sent me a link to Barry Schwartz’s 2005 TED talk on the paradox of choice. Schwartz, a psychologist, has written a book with the same title that I have not read. The video is entertaining and thought-provoking. Schwartz argues that too much choice paralyzes us and makes us worse off. He focuses on the four main consequences of too much choice.
- Regret and anticipated regret
- Opportunity costs
- Escalation of expectations
- Self-blame
When we have too much choice we regret what could have been, expect more from what we choose, and blame ourselves when our expectations are not met. His talk reminds me of going to buy snow cones in the summer with my sister. There are hundred of flavors to choose from, many whose names provide little indication of their taste. It’s always very difficult to decide. But, as easy as it is to relate to Schwartz examples, I strong disagree with his conclusions. What follows are some of his claims that didn’t sit well with me:
1. “It’s not possible to buy a cell phone without bells and whistles.”This is a minor point, but it bothers me. I use an LG VX3300 that I bought used on eBay for $10. It doesn’t have a camera, it can’t play MP3’s, and it won’t connect to the internet. Secondary markets like eBay expand our choices to products of the past. Moreover, even some new phones are tailored to those with basic needs. A quick search yields a list of no-frills phones. My point is that people who don’t want products with many features (choices) can easily find more basic alternatives.
2. “Escalating expectations means you will never be pleasantly surprised.” It does not follow that more and better choices will lead to consistently high expectations. Eventually, people will be let down and adjust their expectations accordingly. People’s expectations are a function of how surprised they were in the past, not the quality of the product itself. It’s impossible to consistently be surprised or consistently be not surprised. If people are never pleasantly surprised, they will lower their expectations and voila! they will soon be pleasantly surprised again. We should only expect surprise to decrease if the variance of product receptions decrease. If anything, the reception of new products is less predictable than ever.
3. “Income redistribution is a Pareto improvement.” Schwartz implies, but never explicitly shows, that less income means less choice. This appears to be a reasonable assumption because if I have less money I can’t buy as many things. But the problem isn’t choice per se, it is choices that leave us with regret and self-blame. These type of choices are more prevalent among poor. Should I buy food for my family or a mosquito net to protect against malaria? That’s breeds much more regret than “Should I buy an iPhone or a Blackberry?” Even marginally less income means marginally greater regret. The middle class family that buys an unreliable car will lament that a better automobile choice would have left enough money for a vacation to the ocean.
Another concern I have with Schwartz’s argument is that we aren’t willing to apply it to other areas of our lives. For example, would anyone prefer a smaller pool of potential marriage partners? Would you voluntarily confine your potential spouses to those in a specific city, state or country? It would be foolish to do so. The plethora of choice when it comes to marriage is daunting. The abundance of options may destroy the romantic notion that there is only one person out there for you. It may cause you to think back about what might have been after you’re married. But, most of us happily trade the increased likelihood of regret for the additional choices that ultimately match us to a more suitable spouse.
Lastly, people always have the option to voluntarily reduce choice. If you buy Schwartz’s argument, why not voluntarily give away much of your money and live a simpler life. I would applaud you. However, reducing other people’s choice through government coercion isn’t okay just because its done for their own good.
People aren’t completely rational. And choices in the world can be daunting. But, freedom is valuable even if it occasionally leads us astray and unsatisfied. We gather more information, adapt, cope and learn to place less emphasis on what could have been. When I buy snow cones with my sister I get a fuzzy navel (peach) and don’t dwell on whether I should have gone with the Eye of the Tiger (who knows what it tastes like) instead.
Schwartz begins his speech by noting that everyone is familiar with the benefits of choice, so he’ll focus on the disadvantages. However, he never comes full circle to weigh the benefits against the costs. Freedom and variety allows us to create the life we want, with the people we want, doing the things that will make us happy. Sorting that out can be messy, but it’s a burden I’m happy to bear.
Topics: Behavioral Economics, College, Economics, Markets, Psychology | 20 Comments »
Ethics of the Truth
By Chris | November 17, 2009
A video circulating around the internet is disturbing. An aspiring NFL cheerleader had a negative reaction to a season flu shot. It activated dystonia disorder. If you haven’t seen the video you should look it up on YouTube. Note: Video previously embedded was removed from YouTube.
YouTube comments express skepticism, compassion, but most of all — fear. I can’t help but wonder how many of the 1.2 million people who watched the video were persuaded to skip this year’s flu shot. How many mothers vowed not to give their daughter the shot that might render her immobile? About 30,000 people die of the flu each year. Vaccines save countless lives. And, yet facts and figures are no match against an image of a beautiful young women unable to control her muscles.It made me wonder what responsibility researchers have for the interpretation and application of their findings. If I discover that the swine flu vaccine is slightly more dangerous than previously thought, should I broadcast that information to a public who will apply it irrationally? Suppose as an economist I document theoretical cases in which trade makes a nation worse off. Am I responsible for politicians who utilize my researcher to advance harmful protectionism? If I discover that different races have different innate abilities, am I responsible for the actions of bigots who use my findings to justify evil.
These are tough questions, and I know I’m not the first one to ask them. Researchers must consider the consequences of their findings, and yet, they cannot be held responsible for the actions of others. It’s impossible to know the bad or good that may come from one’s research. The best you can do is anticipate and caution against misapplications of your work.
Part of what got me thinking about this topic was the whole hoopla about Levitt and Dubner’s global cooling chapter in their new book. I don’t want to comment on the merits of the chapter itself. However, I was intrigued by one of the biggest concerns of critics. They argue, by lending credence to the idea that geoengineering could reverse global warming, Levitt and Dubner empower skeptics of global warming in their political goals. Are the SuperFreaks responsible for the impact of their chapter on public opinion and policy? What if they lead policymakers to conclusions that Levitt and Dubner never intended? In one chapter, the authors discuss how walking drunk is less safe than driving drunk. Are they responsible when an alcoholic takes this as advice, gets in a car, and kills a pedestrian?
Ultimately, scientists are accountable for the truth of their findings. But, that doesn’t mean they can ignore the practical implications of their arguments. The less certain you are, the more you must qualify your findings. The more irrational your audience, the more you must caution your readers. You may not be responsible for the irrationality of the masses, but you you’re a fool to ignore it. Levitt and Dubner may have had the best of intentions when writing their book. They may make some unique contributions to the discussion on global warming and driving under the influence. So, they probably shouldn’t be burned on the stake for ignoring how others may interpret their findings. But, I can’t help but feel they deserve to take a little heat.
Topics: Behavioral Economics, Blogosphere, Economics, Political Science, Psychology | 2 Comments »
Secret Menus
By Chris | September 24, 2009
As happy as I am with the buzz generated by my last post, I feel the need to update so new visitors are greeted with something a little more upbeat. A post about fast food and cable television (the keys to a good life) seemed to fit the bill.
Tyler Cowen recently blogged about secret menus at Chinese restaurants. Often, items are sold to Chinese patrons that aren’t listed on the menu. (I have enjoyed secret dishes at the premier Chinese restaurant in my town.) Tyler suggests this may be an effort to discourage non-Chinese business. I find it more plausible that the practice allows restaurants to cater their menu to American tastes without alienating ethnic customers. Commenter Scott Summers makes the case for an alternative explanation:
There is also price discrimination. Prices are often cheaper on the Chinese menu, as Chinese patrons are often more price conscious. This is partly reflected in the Chinese language options for tables of 4, 6, or 8. In Chinatown one will often see Western couples dining at small tables, while the Chinese often occupy large tables with family or friends. The Chinese pay a lower price per meal. I don’t recall seeing any English prices for multiple entree options.
I was reminded of secret menus while talking with a fellow graduate student about cable television. He enjoyed a 6-month free trial of basic cable through our local monopolist, Cox Communications. When it ran out, he canceled his service and signed up for it again. Cox ran the promotion as the country was preparing to switch from analog to digital television. It hoped to attract new customers wanting to avoid the hassle of switching to the new technology. The promotion was nearly a year old, but he encouraged me to give them a call and ask for it anyway. A five minute phone conversation later I had 6 months of free basic cable.
I love McDonalds. One of my great fears is that McDonalds will stop selling two apple pies for a dollar. Most McDonalds sell double cheeseburgers for one dollar. However, my local McDonalds charges over two dollars for them. Apparently, cheap double cheeseburgers in a college town cannibalize the sales of more profitable items. The other day, while buying some apple pies, I saw an off-duty employee buy an item that wasn’t listed on the menu: the McDouble (pic). The McDouble is a double cheeseburger with only one slice of cheese. Everything else is the same. McDoubles are only one dollar, if you know they exist.
Secret menus are successful means of price discrimination for two reasons.
1) They conceal price information that only the most price sensitive customers will seek out. If I wasn’t so cheap, I wouldn’t have been so intrigued by the McDonald’s employee’s strange order.
2) They require customers to be assertive to receive the preferential price. Timid and/or price insensitive customers may shy away from inquiries that make them appear cheap. It’s a little intimidating calling to ask for 6-months of free cable, when you’ve seen no evidence of the promotion. A roommate in college hated the process of haggling with street vendors. He overpaid for everything. I think this explains the approach credit card companies take with late fees. If you call the company, they will always forgive the penalty for a late payment. However, many customers just pay the fine rather than make an unpleasant phone call.
As long as we’re on food, I learned in this documentary that most McDonald’s food is a product of corn. The movie is a little slow at times, but interesting nonetheless.
Topics: College, Economics, Food, Markets | 87 Comments »
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