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• I Get Writers’ Block, You Get Econ Videos…

  Posted: Thu, 11 Mar 2010 21:26:33 +0000

  See, I upload videos on elasticity to YouTube and I get rewarded with things like this:

  I can’t possibly understand why people think economists are nerdy.

     

  

  

• Videos: More Than You Ever Wanted To Know About Elasticity…

  Posted: Wed, 10 Mar 2010 21:08:28 +0000

  I suppose an alternate title could be “A Lesson on Elasticity in Four Parts.” Elasticity is an important concept, since it’s used extensively throughout both microeconomics and macroeconomics, so I guess you can’t learn too much about it, right?

  The first video introduces the concept of price elasticity of demand and shows how it’s calculated (hint: it’s NOT just the slope of the demand curve).

  The second video continues on and gives some general rules about price elasticity of demand.

  The third video compares two methods of calculating elasticity.

  The fourth video briefly introduces other elasticities, such as price elasticity of supply, income elasticity of demand and cross-price elasticity.

  See, you would think that this would complete the discussion on elasticity. But no, I have one more video coming on an application of elasticity. And also a funny one that I found while posting these, so stay tuned…

  See here for the Micro 101 videos page, or here for econgirl’s YouTube channel.

     

  

  

• Homer Economicus?

  Posted: Tue, 09 Mar 2010 21:39:00 +0000

  Oh, The Simpsons…so a couple of months ago I was approached with the idea of writing about the economics to be found in the Simpsons…I figured that this would be fruitful, since if the Harvard stereotypes regarding the writers are true, it stands to reason that a number of the writers have taken the class that I (used to) teach.

  This all started with a paper written by Joshua Hall at West Virginia University- the paper is, in fact, titled Homer Economicus: Using The Simpsons
  to Teach Economics. As it turns out, I got much more than I bargained for. First of all, there are over 400 episodes of the show…and yes, I could have done the math to figure this out beforehand, given that the show has been on the air for 20 years. In addition, there are references to economic concepts in over 90 percent of the episodes I have gone through thus far (116 as of about a half hour ago). I have way more material than I need for the book chapter that this was supposed to be for, and I’m too much of an OCD researcher to stop partway through, so I’m probably going to turn my notes into a database of some sort so that people can look up references by topic and use them as teaching tools in their classes. But, as usual, I digress…

  My chapter is supposed to be about behavioral economics, so I was very amused to see the following on the Nudge Blog:

  

  (There is actually empirical evidence that this nudge would work. Brian Wansink shows in Mindless Eating that even something as simple as putting candy out of sight or a few steps away can have a big impact on consumption.)

  If you are not familiar, Nudge: Improving Decisions About Health, Wealth, and Happiness describes how small changes in the way that choices are presented (choice architectures) can have big effects on the choices that people make. For example, authors Richard Thaler and Cass Sunstein talk about the effect of defaults on 401k savings behavior and give evidence that a simple opt-out versus opt-in scenario increases participation by a factor of four without actually limiting the underlying choices that people have available to them. (The concept is generally referred to as libertarian paternalism, which I have mentioned before.) Their stance is that it’s pretty much impossible to design a choice architecture that doesn’t nudge you in some sort of direction, so we might as well be smart about presenting options in ways that maximize people’s long term happiness (at least as best as outside observers can understand it).

  I suppose in some way I am trying to nudge people into wanting to learn economics.

     

  

  

• What The Fed Does, Now With Pictures…

  Posted: Mon, 08 Mar 2010 20:01:57 +0000

  I enjoyed this video about the workings of the Federal Reserve, courtesy of the Federal Reserve Bank of Cleveland. (HT to Tim Schilling)

  Cute. It’s also worth noting that it’s potentially just as important to understand what the Fed *doesn’t* do. More specifically…repeat it with me, people, THE FED DOES NOT PRINT MONEY. Trust me, this is true…unless of course Ben Bernanke has an underground counterfeiting operation that I don’t know about. In case you were wondering, the Treasury department prints money, either via the United States Mint (for coins) or the United States Bureau of Engraving and Printing (for paper money).

  But, but…we hear all the time that the Fed controls the money supply. How is this possible if it doesn’t have the printing presses? Well, as stated briefly in the video, the Fed engages in what is called open market operations. This basically entails the buying and selling of government bonds.

  You can picture the Fed as sitting on a pile of some combination of cash and bonds. If it were to sell some of the bonds, it would take in money and give out bonds. This would lead to less money in circulation, since it’s now in the Fed’s pile. Conversely, the Fed could buy bonds from people, in which case it would give out money and take in bonds. This leads to more money in circulation. Therefore, the Fed can increase or decrease the amount of money in the hands of the public by buying and selling government bonds. (Technically, it could buy and sell any number of non-perishable products, since the only logistical requirement is that the item can be easily kept on the pile. It just decided that bonds were the way to go.)

  The Fed conducts open market operations because what it really wants is to control interest rates. (As you saw in the video, the Fed controls the discount rate directly, but direct control is not really an option for interest rates overall.) When the supply of money goes up, interest rates go down and vice versa. That seems random…so why does it work? The fact of the matter is that, like any other market, demand and supply are pushed to equalize. We just saw how the Fed controls the supply of money, but how do you get people to demand more or less money?

  Note that money is just that- currency. (And checking account deposits, technically.) In other words, money is not synonymous with wealth. There are many ways to store wealth, and money is just one of them. The upside of money is that it can always be exchanged for goods and services- in contrast, I’d like to see someone walk into Bloomingdale’s with some gold bars and try to buy stuff with them. Given that people have a number of different ways to store their wealth- cash, gold bars, houses (though nowadays that seems a little funny), vintage beanie babies, whatever- they face a tradeoff between cash and non cash assets. If you hold cash, you can buy stuff with it directly, so cash is a very liquid asset. The downside of cash is that it doesn’t pay any interest, whereas other stores of wealth generally provide some (expected) positive rate of return. This rate of return moves with interest rates. If interest rates are high, there is a big opportunity cost to holding cash (or alternatively to spend rather than save), since I would be foregoing a big return if I were to stuff cash under my mattress as opposed to buy a treasury note or something. On the other hand, if interest rates were low, it might not be worth my while to fish the cash out from under the mattress and go to the bank. (Or you might start eyeing that big-screen TV, since it’s not like the money you used to buy it was going to grow in the bank anyway.) In this way, the demand for money is a function of the interest rate- higher interest rates go with less demand and vice versa, so the demand for money is downward-sloping like the demand curves for virtually all other goods and services.

  I feel like I’m a donkey chasing a carrot on a stick with this argument, since now you’re just wondering why the Fed even cares about interest rates. The theory (note the use of that word) is that lower interest rates stimulate the economy by making it cheaper to borrow money in order to invest in business and also because it lowers the opportunity cost of consuming as opposed to saving. In other words, lower interest rates make people want to buy and produce stuff, at least in the short term. In the long run, increases in the money supply generally result in correspondingly higher prices for stuff rather than more stuff. So when the Fed tries to smooth out business cycles by stimulating the economy when it’s down and reining it in when it’s booming, it has to consider the long-run implications on prices and such.

  Now that you understand what the Fed does, you are in a better position to evaluate what those “abolish the Fed” people are all about. From what I can tell, their argument is that monetary policy is harmful because it creates bubbles and results in inflation. (That and the fact that the Constitution doesn’t explicitly allow for the Fed in the first place.) I suppose I’ll have to follow up at some point with a lesson on whether inflation is an inherently bad thing. (Preview: not necessarily bad in theory, bad in practice.)

  Ugh. Isn’t macroeconomics fun? But seriously, if you take one thing from this, let it be the fact that the Fed doesn’t control the money supply via a printing press. Please.

     

  

  

• On Auctions And Sunspots, Sort Of…

  Posted: Fri, 05 Mar 2010 21:42:49 +0000

  This has been going around the Internet for the past couple of days…(HT to Gizmodo and others…)

  

  My first thought was “the guy on the right must be an economist.” Also, I’m surprised that no one popped up to offer $52. The comments on the sites that were running this, however, got me thinking a little more. Some observations:

  • I initially thought that this was a very low reward offer, but then I noticed that it was for a lost iPod Touch rather than a lost iPhone. I would probably offer a reward higher than MSRP if I lost my iPhone, since I am terrible at backing up phone numbers and such. (Ah, the value of information. I also get confused when people offer rewards for lost dogs that are lower than what it would cost to buy a new dog. Aren’t you people willing to pay more to specifically get YOUR dog back???)
  • This is a good example of what social scientists sometimes refer to as “sunspots” - why do people usually pick such round numbers? I mean, there’s little stopping someone from offering a reward of $68.24. The Internet has pointed out that, as such, people for the most part assume that the $50 offer is the real one, both because it’s a round number and it’s the lower of the two bids. But how do we know that the real person didn’t offer $51 and the imposter offered $50 to try to make it seem like she was the real iPod owner? (Note that if people were solely going for the reward rather than being nice people, this would be a non issue, since the highest bid would win and undercutting would be pointless.)
  • I conjecture that the $50 reward is the real one because it has a name attached and the other does not.

  For the record, this is my iPhone (and my living room rug):

  

  It has been like this since last April- I ran the entire Boston Marathon without dropping the thing and then faceplanted it on Clarendon Street 10 minutes after I finished. Luckily, I was too tired to care. (And yes, it still works just fine.) As an economist, I point out to people that I am happy with this setup because it doesn’t bother me much and it greatly reduces the likelihood that anyone is going to try to steal my phone. Perhaps if the thieves understood more economics, they would realize that I would probably pay a decent amount to get the information back if nothing else. I think this is the first time I’ve ever been glad that some people don’t understand economics.

     

  

  

• How The Foxes Run the Henhouse (Or Why Goldman Sachs Hates Greece?)…

  Posted: Thu, 04 Mar 2010 19:44:05 +0000

  You know, I was previously worried that Goldman Sachs had Washington just a tad too much in its back pocket…good thing then, I suppose, that Greece has allowed me to take an “at least I’m not THAT guy” stance and feel much better.

  If you’ve been paying attention to the news, you at the very least know that Greece is pretty much up a creek financially right now. If you aren’t familiar, here’s some background:
  

  
  

  The Colbert Report	Mon - Thurs 11:30pm / 10:30c
  Greece’s Economic Downfall - Scheherazade Rehman
  www.colbertnation.com
  Colbert Report Full Episodes Political Humor Skate Expectations

  For the record, I do not get all of my news from Comedy Central…I’ll have you know that I also read The Onion. And I really want to be friends with Prof. Rehman. In addition to what you just saw, here’s what you need to know: In order to be able to join the European Union back in the early 2000’s, Greece had to agree to face fines if its yearly deficit ran more than 3 percent of the country’s Gross Domestic Product (read, value of output) or if its total amount of debt ran more than 60 percent of GDP. (I’m not sure how fining an entity for being in debt is productive, but I suppose there aren’t a whole lot of sanctioning options available. Maybe they’ll borrow the money to pay the fine.) Paying fines isn’t particularly appealing, but neither is only spending money that one actually has, so Greece entered into an agreement with Goldman Sachs to essentially put off some of its debt obligation via a product that was commonly used for other purposes. Because the type of agreement that they used looked like a transaction that a lot of other countries did just to logistically deal with the fact that there are multiple currencies in the world, people didn’t really notice that Greece was effectively borrowing from Goldman to make its deficit look smaller. (For more detail on this part of the matter, there is a decent article here.)

  The bottom line here is that Goldman Sachs knows that Greece owes it money, and other parties don’t seem to be aware of this fact. As such, Goldman gets screwed if Greece does the governmental equivalent of declaring bankruptcy and doesn’t fulfill its obligation. So what does Goldman do? It enters into agreements with other, completely non-related entities that say Goldman gets a payout if Greece defaults on its debt. Because of this, the New York Times and other entities are really sniffing around in hopes of finding a scandal. Before we jump to conclusions, however, it’s helpful to actually understand what’s going on.

  Allow me make an analogy…people generally like sports more than they like economics, so let’s talk about football. Let’s say, for the sake of good rivalry, that the New England Patriots are playing the Indianapolis Colts. I live in Cambridge, so it’s not surprising that I am happy if the Patriots win and sad if the Colts win. (I hate Peyton Manning. Eli sucks too. Or so the t-shirts sold in Kenmore Square after Red Sox games tell me.) It’s not uncommon for people to bet on the outcomes of football games, so I have the option of either putting my money on the Patriots to win or on the Colts to win. At first glance, it seems to make perfect sense for me to bet on the Patriots- they’re the team I like! (Just assume for the moment that the teams are evenly matched or that the bet is based on a spread or whatever.) But is that really the right thing to do? Consider the following outcomes with a $20 bet:

  

  Granted, the happiness numbers are a tad contrived (though consistent with prospect theory in that I dislike losing $20 twice as much as I like winning $20), but they illustrate an important concept. If I bet on the Patriots, my happiness either goes up by 35 or down by 25. If the teams are evenly matched (or the underlying bet is even odds), my happiness goes up by 5 on average (read, in expected value terms). But, if I bet on the Colts, my happiness is guaranteed to go up by 5. If I am at all risk averse, I prefer the guaranteed bump of 5 units to the possibility of increasing by 5 units on average but at any given time being either 35 units happier or 25 units sadder.

  This type of setup is called a hedging strategy- you are offsetting one swing of happiness (the game outcome) with a gamble that pays off when you are sad and costs you money when you are happy so that your overall result is more stable. (And yes, this is at least loosely related to what hedge funds do, but that is a conversation for another time.) Hopefully you feel that, in this context, the hedge that I described is a perfectly reasonable transaction. (You may have even entered into the bet with a Colts fan who was doing the same thing that you were!)

  The above set of actions, taken back to the financial realm, is pretty much exactly what Goldman Sachs did. Yes, it was a little sketchy for Goldman to make agreements that would help hide Greece’s true debt level, I will acknowledge that. But once that is done, it makes perfect sense to want to take an opposing bet to avoid big losses. In the analogy, the side bet on the football game plays exactly the same role as the credit default swap that Goldman entered into, since this enables Goldman to get paid at least in part if Greece defaults on its original obligation (i.e. loses the game). It is important to note that the credit default swaps have nothing to do with Greece directly, and the swap contract is between two parties that are just watching the game of the Greek financial system to see how things play out. (Yes, these financial products actually exist.) So where is the problem?

  Coming back to the football analogy, I really doubt that my bet on the game has any effect on the game’s outcome- I’m not exactly Pete Rose here. (There I go, mixing my sports…also, Pete Rose contends that he only ever bet for his team and not against it, so he was more of a speculator than a hedger.) However, I am not as important as Goldman Sachs. The claim by the media and some finance professionals is that people see Goldman buying what is essentially insurance against a Greek bust and they think “uh oh, what does Goldman know that I don’t?” and then they are more hesitant to lend to Greece. Then more people see the reluctance to lend to Greece and say the same thing. It then becomes very hard (or at least much more expensive) for Greece to borrow money, and the whole Greek bust thing becomes a self-fulfilling prophecy. This is an unfortunate scenario, but is it Goldman’s problem that the finance world really pays attention to the signals that it sends?

  Like I said before, the media is sniffing around for a scandal. From the New York Times:

  “It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

  (I can only imagine what this guy says about people who take out life insurance policies on family members.) So people are now implying that Goldman Sachs is deliberately trying to crush the Greek financial system so it can profit? This reminds me of the scandal and lawsuits that broke out because Wal-Mart took out life insurance policies on its employees. The important question underlying this accusation is whether Goldman profits or loses overall (not just on the secondary bet) when Greece ends up in the toilet. If Goldman on net wins when Greece stays solvent, then there isn’t really incentive to try to crush an entire foreign country. (Though I have a suspicion the folks at Goldman could make it happen if they tried.) I did some digging (here, for example), and I couldn’t find anyone who was actually accusing Goldman of being “net short” on Greece, which would have meant that Goldman profits when Greece loses. Even if Goldman was net short on Greece, it has an incentive to not deliberately harm the country, since I’m guessing it wouldn’t get a lot of follow on business if it adopted a “here’s some money now, but we will probably use it to crush you later” strategy. Therefore, while it might be fair to criticize Goldman for the original deal it made with Greece, can you really blame it for covering its own behind?

  For the record, the same is true for Wal-Mart- the life insurance policies partially covered the cost of training a new employee in the event that something bad (in or out of work) happened to an existing employee. So no, the policies didn’t actually give Wal-Mart the incentive to trample its employees with forklifts or whatever. As far as I know, Wal-Mart employees only get trampled by customers.

     

  

  

• When Economics And Politics Collide, Crowding Out Edition…

  Posted: Tue, 02 Mar 2010 20:59:38 +0000

  In addition to teaching economics, I often find myself having to make a pitch for why it’s important to understand economics in the first place. One of the reasons I usually give is something along the lines of “so you don’t have to take on faith what politicians have to say about policy choices.” I mean, how many times have politicians tried to say that they were going to save consumers from the evil oil companies by imposing taxes on the oil companies rather than on consumers?* People who paid attention in their economics classes know better.

  * In case you don’t remember, the burden of a tax ends up getting shared by consumers (in the form of higher prices inclusive of the tax) and producers (in the form of lower prices net of the tax) regardless of who the tax is placed on from a logistical perspective. In practice, there may not be perfect equivalence, but it’s not really possible to have taxes affect one side and not the other.

  Nowadays, I feel like I have to take that argument one step further and say that people need to understand economics so that they are aware of economists’ lack of consensus, at least in macroeconomics, and calibrate what they read and hear appropriately. (If you are not familiar with the ideological divides in macroeconomics, Paul Krugman does a decent job of getting people up to speed. And yes, I get that Krugman is not the most objective writer ever, but his description in this case seems to be reasonably fair.) At the heart of the current debate is whether government spending can actually stimulate the economy out of the recession that it’s currently in. (To the best of my knowledge, it is merely a coincidence that the sides of this debate roughly line up with the ideologies of the major political parties in the United States.) More specifically, some economists believe that government spending does result in more jobs overall, and others believe that government spending is wasteful in that it crowds out jobs that would otherwise be offered by the private sector, thus creating few, if any, new jobs overall and artificially diverting resources from their best uses. (The way that this crowding out could happen is via interest rates, and it’s a tad more complicated that I would like to get into here.)

  For example, consider the cartoon posted a few days ago on (the appropriately named) Cafe Hayek:

  

  (For the record, I do love the comments on that post that suggest how the cartoon could be made more accurate. For example, one commenter suggests that Obama’s blanket should be smaller than the part that is missing from the other dude’s sweater.) Economist Dave Prychitko even calls this “One of the best economics cartoons I’ve seen in years.” So where’s the problem?

  The problem lies in the fact that the economists on the other side of this ideological divide don’t seem to be finding evidence of this crowding out phenomenon. At least Brad DeLong and Menzie Chinn don’t:

  Crowding out has a strong hold on many people’s imagination. Some equate crowding out in the financial market with crowding out in the real side of the economy. Let me make a couple observations on why this simplistic equation need not hold. First, the empirical magnitude of investment crowding out depends critically on the interest sensitivity of investment expenditures. Second, if investment depends upon the change in GDP, as in a simple accelerator model (see a discussion of competing investment models here), then government spending that induces an increase in GDP can result in higher investment, despite an increase in interest rates.

  (Prof. Chinn’s original article can be found here. It’s a bit more technical than I would like for this sort of forum, but it has some nice graphs.) So far I would give the advantage to DeLong/Chinn, for using actual data if nothing else. But wait, there’s more…

  Steve Landsburg summarizes Robert Barro’s analysis of the stimulus effects in the Wall Street Journal in a handy table:

  

  Hm. So the negative impact on private spending indicates crowding out…but the fact that the negative impact is less than the government spending implies that there isn’t total crowding out…but in the long run it’s a different story, since over time the negative impact on private spending is larger than the positive amount of government spending. Landsburg is very clear about what he supports about this analysis and what gives him pause, so his is a particularly good article to read.

  So this leaves me at advantage…confusion? I think Barro’s analysis is very solid, but it’s still based on a lot of assumptions that may or may not be accurate. (When you assume, you make an ass out of u and…ok, I will stop now.) It’s also a little convenient that all of these analyses line up with their authors’ previously held ideologies. Nevertheless, I think I’ve made my point that issues such as these are not open and shut cases and thus shouldn’t be treated as such. I remember one year on the first day of teaching undergraduate macroeconomics, Greg Mankiw pointed out to his students that he found macroeconomics to be more interesting than microeconomics because there were more unanswered questions to be had. Well, he’s at least right about the latter part.

     

  

  

• Things Economists Do When No One’s Looking, Olympics Edition…

  Posted: Mon, 01 Mar 2010 18:14:14 +0000

  Well here’s a model for ya…economist Daniel Johnson is getting a lot of press for a model that predicts Winter Olympic medal counts by country. A friend sent me the story about it that appeared in Forbes, and even the Freakonomics blog has taken up the cause. From the article:

  Over the past five Olympics, from the 2000 Summer Games in Sydney through the 2008 Summer Games in Beijing, Johnson’s model demonstrated 94% accuracy between predicted and actual national medal counts. For gold medal wins, the correlation is 87%.

  Sounds impressive! But is it really? I mean, this guy is just basically running a regression to fit medal counts to a function of some available macroeconomic variables, and the reported accuracy refers to how well the model fits the data. I would say that the impressive part is not so much in the analysis itself but rather in the choice of what variables to look at.

  His forecast model predicts a country’s Olympic performance using per-capita income (the economic output per person), the nation’s population, its political structure, its climate and the home-field advantage for hosting the Games or living nearby. “It’s just pure economics,” Johnson says. “I know nothing about the athletes. And even if I did, I didn’t include it.”

  Spoken like a true economist, for better or for worse. So how did he do this time around? His predictions, from the article:

  Johnson, 40, grew up in the Vancouver area and says he’s looking forward to attending the upcoming Games, with the opening ceremonies scheduled for Friday, Feb. 12. But he points out that sentimental attachment has no bearing on his prediction that Canada will lead the medals table when the Olympic flame is extinguished at the conclusion of the 2010 Games. If events play out as his economic model predicts, it would be the first time for Canada to be atop the final medals scoreboard at an Olympic venue. Johnson’s forecast calls for Canadian athletes to collect 27 medals altogether, five of them gold.

  The U.S. team, according to Johnson’s economic crystal ball, will hear “The Star-Spangled Banner” played five times at the medal ceremonies in British Columbia, compared with nine times in Torino. Johnson thinks the U.S. contingent will accumulate 26 medals in total at the Vancouver Games, one more than the team’s haul in Torino.

  The professor’s forecast also has Norway tying the U.S. at 26 medals overall, with the Norwegians earning four golds, double their Torino take. Among the nations Johnson looked at this time in his calculations, Finland is the only other country he predicts will win more golds in Vancouver (four) than in Torino (none).

  Germany, if Johnson’s predictions unfold correctly, won’t lead the Vancouver medal tables as its athletes did in Italy four years ago. German athletes this time around, according to the model, will win 20 medals, seven of them gold (compared with 29 and 11, respectively, in 2006).

  And the actual medal counts? Drumroll please…

  Hm. In fairness, Johnson was pretty spot on about Canada’s medal count, but since he vastly underpredicted the number of gold medals going to each of the top countries, I have to wonder where he thought all of those gold medals were going to go. (On that note, I am curious as to whether the model is restricted in such a way that the combined predictions actually add up to the total number of medals available.) More importantly, however, Johnson has inadvertently illustrated an important point: Just because you can come up with a model that describes the past accurately doesn’t mean that you can predict the future. Predicting the future is a form of extrapolation, which is something I’ve written about before. (That post is getting a lot of mileage nowadays.) To refresh your memory:

  

  There is nothing actually wrong with Johnson’s analysis- his only problem is that he isn’t in possession of the all important crystal ball. Using his model to predict the future implicitly assumes that the future is going to look like the past. Since we don’t know what the future is going to look like, I would argue that the whole continuing the status quo thing is the best guess we can make, but that guess often turns out to be incorrect.

  I doubt that the world is going to implode because this guy’s medal predictions were less than stellar, but this concept of extrapolation is present in a lot of more serious and economically-relevant contexts. (Financial crisis, anyone?) Economic models that describe past behavior are not useless, but their limitations should be understood and acknowledged. On a related note, the next time someone says “oh, you’re an economist…so when is the economy going to turn around?” (this actually happens a lot) they are getting punched in the face. Oh, and yes, I studied computer science, but no, I cannot fix your slow Internet or your busted hard drive.

  P.S. I could not resist including the following photo in an Olympic-themed post. I would like to think that I would celebrate in a similar fashion, given the opportunity.

  

     

  

  

• Money Is An Important Thing, Demetri Martin Edition…

  Posted: Sat, 27 Feb 2010 20:59:42 +0000

  I *heart* Demetri Martin. I mean, come on…Yale grad who dropped out of law school because he decided that (nerdy) stand up comedy was his calling? (I will admit that this setup would be much less appealing were he not actually successful at the comedy thing.) So when I heard that his show, appropriately titled Important Things with Demetri Martin, had an episode with money as the important thing, I was very psyched. After all, money *is* an important thing, and there’s so much possibility for econ-y jokes that I can’t even stand it.

  Not shockingly, I think my expectations were a little high. It’s not that the show wasn’t good, I guess, it just wasn’t as literally money-oriented as I would have liked. Money is a great topic since it can create a lot of socially-awkward situations. For example, he could have done a sketch illustrating the game theory involved in splitting the bill at a restaurant. Or a sketch based on this cartoon:

  

  Maybe I’ll just have to take matters into my own hands with this. In the meantime, here’s a clip from the money episode of Important Things:

  
  

  Important Things with Demetri Martin	Thursday, 10:00pm / 9:00c
  Money - New Expressions
  www.comedycentral.com
  Joke of the Day Stand-Up Comedy Free Online Games

  The full episode is still in rotation on Comedy Central, and you can see more clips here. In addition, here are two of my favorite clips from the series:

  “Greater than or equal to” isn’t just for math anymore…

  
  

  Important Things with Demetri Martin	Thursday, 10:00pm / 9:00c
  Games - Greater Than or Equal To
  www.comedycentral.com
  Joke of the Day Stand-Up Comedy Free Online Games

  My favorite, however, is the “Emotional Escape Artist”…

  
  

  Important Things with Demetri Martin	Thursday, 10:00pm / 9:00c
  Games - Emotional Escape Artist
  www.comedycentral.com
  Joke of the Day Stand-Up Comedy Free Online Games

  
  Finally, while we’re on the subject of money being an important thing, you will notice that I am playing around with some Amazon.com widgets. I’m trying to figure out how to get them to effectively deliver relevant good deals for you, which ultimately helps me as well. (I think I will have to resort to manually adding things that are interesting to me, which isn’t the end of the world, just a little labor intensive.) In economics, we call that a Pareto improvement, which is a change that makes some people better off without making any others worse off.

     

  

  

• $90,000 Or A Piece Of Marzipan Cake? Opportunity Cost and Interest, Wedding Edition…

  Posted: Fri, 26 Feb 2010 21:57:34 +0000

  Hey kids! Guess what…I have my first guest poster! Not poster like the one of Justin Timberlake I have on my wall (I kid…maybe), poster like one who posts…oh never mind, you get what I mean. Anyway, here is Vicki, a fellow blogger and tweeter who is in some small way my nerd soulmate. She tweeted me on the subject below and said I should write about it, so I offered to let her do my job for me. (I’m nice like that.) Without further ado…

  It’s almost spring, which means it’s almost wedding season, which Jodi’s written about in the past (bear with me here until I get to the connection to economics that, sadly, has very little to do with XKCD or Wedding Crashers). Weddings today cost an average of $20,398, depending on the geographic location and a number of other factors that can totally make you want to make you stab yourself with a chafing dish. In addition to having to decide between buttercream or marzipan or rainbow skittles marshmallows ponies for your wedding cake, you also have to decide whether you want to spend the money on your wedding in the first place.

  According to a recent article in the Wall Street Journal (hat tip: Jezebel), your $18,000 wedding today could cost at least $90,000 in the long-run because you could, theoretically, put the money into savings, which the very scientifically accurate figure below shows:

  

  As the author of the article writes:

  The biggest cost of every dollar you spend is invisible. It’s all the money you’d accumulate if you saved it instead. Over long periods, this cost dwarfs the mere sticker price, often by a factor of several times.

  Which brings me to opportunity cost, or what you give up to get something else in exchange, or, there is no such thing as a free lunch. Usually, opportunity cost is framed in terms of money and time. For example, if you go to work for 8 hours a day, you make a certain amount of money, but you give up the time you would have been doing something else like playing air guitar or seeing if you can throw Corn Pops into your husband’s mouth from 5 feet away. You are making a tradeoff.

  The same goes for the wedding money, but now we get into a special kind of time/money value trade off known as compounding interest. You can spend the $18,000 now. But in the future, that money is much more valuable because of the idea of compound interest and time value of money. There’s a couple ways to figure out how much your money now will be worth in the future if you sock it away. The most basic equation is this one, where Future Value=Present value*(1+the interest rate in percent) to the power
  of n, which is the periods of time you plan to put it away for-can be months or years.

  

  The article assumes the average woman is 26 when she gets married, giving her 40 years to accrue this interest on the $18,000 she socked away instead of getting a gorgeous Vera Wang dress. If she puts it away at 4% interest, she could make $86,400. It gets even more interesting if the, er, interest is compounded at different rates (every day, every minute, or constantly.)

  But that brings us back to the question of opportunity cost. Would you rather have a wedding now, or a lot of money later? Maybe you really want a wedding, which is fine, as long as you are basing your decision on the correct tradeoff. The best way to solve this question is obviously to ask for money for your wedding so you don’t have to make the tradeoff in the first place.

  Vicki Boykis blogs about how nerdy she was as an econ undergrad, her traumatic childhood as the child of Russian immigrants, and Nutella, on her personal blog.

  Editors notes:
  1. Marzipan is disgusting. I think I am particularly put off by the fact that it is often shaped into strawberries and bananas and whatnot and yet tastes like none of those things. As a result, my mouth feels cheated.
  2. People often (read, sometimes) think about this tradeoff when considering borrowing money to pay for a wedding, since it is clear in that case that they will be paying interest on the cost of the event. It’s important to remember that the opportunity tradeoff is still there even if you write one big check for your wedding. At least the foregone interest in the latter case is less than the credit card interest in the first case…
  3. While it’s clear that Vicki has drunk quite a bit of the economist Kool-Aid, her words at the end suggest that she may, in fact, be a little human after all. She said it herself earlier- there’s no thing as a free lunch…so isn’t it the case that even if you ask for money for your wedding you still have an opportunity cost in that a. you could have squirreled the money away once it was in your hot little hands, or b. the gifts to pay for your wedding would probably make people less willing or able to give you money for other things? When we say no free lunches (or weddings), we really do mean it, as much as we would like to believe otherwise.

     

  

  

• A Lesson In “I Shouldn’t Be Surprised That This Exists,” LOLFed Edition…

  Posted: Thu, 25 Feb 2010 22:10:58 +0000

  My friend Jeff is organizing a series of “lightning talks,” which are two minute presentations (complete with a PowerPoint deck set to autoadvance in order to enforce the 2 minute rule) about something (hopefully) interesting. He asked me what the title of my talk is going to be, and I told him that I didn’t know yet, since I wasn’t sure what I could talk about that would fit into two minutes and be interesting to the audience. He then pointed out that often it’s the presentation of the material that makes it interesting, and the conversation proceeded to go as follows:

  Jeff: like, teach the tragedy of the commons using LOLcats
  me: ha. I can haz grazing space plz??
  Jeff: call it IM IN YR TERRITORY, CONSUMIN YR PUBLIC GOOD

  As I hope you would have learned in my last post, the tragedy of the commons refers to common resources rather than public goods, but “IM IN YR TERRITORY, CONSUMIN YR COMMON RESOURCE” just doesn’t have the same ring to it. (Note that consuming someone else’s public good isn’t technically a problem, since it doesn’t take away from the ability of others to consume the good.)

  I thought this exchange was funny, so I posted it to my Facebook page. Shortly thereafter, lovely reader Naomi Kennedy pointed me to the best thing I’ve seen today. (In fairness, consider that its main competition was the health care summit on C-SPAN.) As such, I present to you…drumroll please…LOLfed.com. (Sidenote: hmmm, that blog format looks strangely familiar…)

  I like that the site provides commentary and “more on this topic” links and not just pictures. My favorite so far:

  

  A close second, since I like to give proper credit for wordplay:

  

  Well, now you know what I’ll be doing this evening…at least until the Olympic figure skating starts that is…

     

  

  

• The Dumbest Words I Read Today, And A Lesson On Public Goods…

  Posted: Wed, 24 Feb 2010 00:13:24 +0000

  Apparently the town of Tracy, California has decided that its revenue shortfall should be relieved by charging people for making medical 911 calls. Before I get into the absurdity of this particular plan, let me give you a refresher:

  Goods and services can be classified along two dimensions: excludability and rivalry in consumption. A product is excludable (or has high excludability) if its consumption is limited to paying customers. For example, an ice cream cone has high excludability since I can’t get one unless I pay for it. (ignore the possibility of me batting my eyelashes and asking nicely for the sake of this example) A (non-toll) road has low excludability, since I can drive on it whether I’ve paid my taxes for the year or not. A product is rival (or has high rivalry in consumption) if my consumption of a particular unit of the product inhibits your ability to consume that same unit. Again, if I am consuming an ice cream cone, this pretty clearly prevents you from consuming that same ice cream cone. (My dad used to share ice cream cones with the dog- gross, I know- but even then they weren’t both consuming the entire ice cream cone, so high rivalry in consumption was still present.) On the other hand, if I am consuming (watching, in non-econ speak) a fireworks display, this doesn’t really impede the ability of the person next to me to watch the same fireworks.

  This gives us four possibilities:

  

  Most goods that we typically buy and sell each day fall into the private goods category, and these are the sort of items that we talk about in our supply and demand diagrams. This is because markets by themselves typically work well for private goods. But what happens in the markets for the other types of goods?

  Consider public goods and common resources, where consumption isn’t restricted to paying customers. These goods suffer from a free rider problem where people who want the public good wait around for others to pay for it (so they can enjoy it for free) rather than paying for it themselves. However, because everyone is waiting around for someone else to pay, the item never gets purchased. You can think of these types of goods as the market equivalent of people waiting awkwardly around a restaurant table at the end of the meal for someone to be generous and pick up the entire check- rather than getting out of the restaurant on time, the people upset the restaurant and might even end up washing dishes for a night.

  The moral of the story is that, because of the free rider problem, markets are bad at providing enough of public goods. Since most of us would rather be driving on roads than cowpaths, for example, the government can organize the provision of public goods and common resources and make everyone better off than they would be otherwise. (This is true since the taxes that people pay to get the public good can be made less than the value they get from the good.)

  This solves the coordination problem that surrounds public goods, but common resources have another issue to contend with called the tragedy of the commons. (Commons, common resource, get it?) Orignally, this problem very literally referred to cows grazing on a common green (like Boston Common, for example), where people would let their cows graze more than was socially optimal because it didn’t cost them anything to do so even though it imparted a cost to the system. There are two solutions that are typically proposed for such a problem:

  • Charge a fee for use of the green equal to the cost that the grazer imposes on the system. Note that charging a fee would require the green to be made excludable, so a gate or something would have to be installed.
  • Divide up the common into individually owned plots to better align the incentives of the grazers and the system.

  (Sidenote: Elinor Ostrom won the 2009 Nobel Prize in Economics for her work in analyzing how organizations mitigate the tragedy of the commons.)

  Coming back to the motivating example…what box does medical 911 service fit into? The service is generally not restricted to paying customers, but, since calling 911 for a medical emergency sends an ambulance and such out to your house and ties up resources, it has high rivalry in consumption. These characteristics put it in the common resource category. As described above, it’s likely that people overutilize this service because it doesn’t cost them anything, even though it costs local government money to have the ambulances running and such. (Perhaps they call 911 when they have a weird rash on their arm or soemthing.) The government of Tracy has chosen to turn 911 service into a private good by granting access to paying customers only. I said above that this was one of the ways to solve the tragedy of the commons, so what’s the big deal?

  The plan is to allow people to opt in to 911 service for a fee of $48 per year, or to charge them $300 per call if they have not opted in. (Out-of-towners will be charged a flat $400. I am curious as to how this is going to be determined in the land of call phones with out-of-state area codes and such.) The $48 acts as an insurance premium in that it safeguards against any of the $300 charges. That said, which of these options is a better deal? It depends on how often you think you’re going to call 911. For example, I don’t think I’ve ever called 911 for a medical emergency in my…er, enough years on the planet to tip the tradeoff in favor of the $300 gamble. However, when people are posed with this option, they are likely to see the possibility of the $300 as much more scary than the guaranteed $48 per year and are even likely to overestimate how often they will need medical 911 services. Let’s say that the average person calls 911 once every 10 years- in this setup, they will have given the town of tracy an extra $180 in revenue if they choose the $48 per year option. Some economists would likely argue that the town was smart in their framing of the two options in terms of revenue generation, but it’s not necessarily in the consumers’ best interests. Furthermore, there is evidence that people use goods and services more when they’ve explicitly paid for them ahead of time than when they appear to be free, so this could even be counterproductive from a cost control side. (Think “Dammit, I prepaid for my 911. If I want to have them come out to help me with this splinter I’ve got in my hand, that’s how it’s gonna be.”)

  The larger problem in all of this comes in the fine print, wherever that may be found. I don’t know about you, but if I’m having a heart attack or getting hit by a bus, I’m not likely to be the one making the 911 call. Furthermore, in this day and age of cell phones, whoever makes the call on my behalf is not even likely to be doing so from my phone account. In economic terms, we say that the consumer and the purchaser of the item are not necessarily the same person, which leads to misalignment of incentives. Personally, I don’t really want whoever would be making that potentially life-saving 911 call to be sitting there and wondering whether it’s worth $300 to them to do so. I would certainly prefer that my lifeline receive a fruit basket as opposed to a $300 bill for helping me out.

  I don’t see the details here, so maybe it is the case that the receiver of medical treatment also receives the bill, though this seems complicated to implement. I can also envision people being too stubborn about the cost to do what is ultimately best for themselves in the long term. More importantly, can you imagine the potential for prank calls that this opens up????

  My guess is that this town opened up a whole can of worms that they did not anticipate ahead of time, but that a little thoughfulness coupled with an understanding of basic economcs could have easily prevented.

  Update: This issue reminds me of something that Alex Tabarrok wrote about a couple of years ago:

  “Over the weekend a crew came round my neighborhood offering to paint house numbers on the curb. Large bold curb numbers, they pointed out, make it easier for emergency service workers to find houses in the dark. Good argument. The price was good too. Then I noticed my neighbors were having their numbers painted. So of course, I declined.”

  In a similar fashion, the 911 charge replaces one form of free riding wth another. I mean, I could just wait for my neighbors to sign up for the service and then yell really loudly if I have a heart attack, right?

     

  

  

• Videos: A Couple On Market Equilibrium…

  Posted: Fri, 19 Feb 2010 21:55:40 +0000

  So we’ve talked about demand, we’ve talked about supply, now I show how the two fit together. The first video explains why markets reach equilibrium at the point that they do (spoiler alert: it’s where supply and demand intersect), and the second goes through the algebra of solving for market equilibrium. (If you are studying econ just for fun, the first video is probably more interesting to you than the second.)
  

  (I apologize that my shirt in the first video probably makes people dizzy. My bad.)

  See here for the Micro 101 videos page, or here for econgirl’s YouTube channel.

     

  

  

• More Econgirl Photos, Now With Dinosaurs…

  Posted: Thu, 18 Feb 2010 18:47:26 +0000

  If you are amused by the pictures in the left sidebar, perhaps you will like the ones here that I took during my trip to the annual meeting of the American Economic Association last month. In honor of this fine organization, the book used in this series is the latest edition of the American Economic Review. (Hindsight observation: Not the most photogenic book ever.)

  A preview:

  

     

  

  

• Before You Go Locking Up All Of Those “Crazy” People…

  Posted: Wed, 17 Feb 2010 20:27:21 +0000

  I decided a long time ago that I didn’t want an academic career, at least in part because I didn’t want to deal with the whole tenure process. (For the record, academia may look all relaxed and thoughtful and tweed-jackety from the outside, but a lot of departments are way more cutthroat and political than they at first appear.) Apparently the tenure process makes people do strange things. (Unless you’ve been living under a rock for the last few weeks, you should have an idea of what that link is going to go to.)

  Put aside the fact that just because some crazy lady shot people after she was denied tenure doesn’t necessarily mean that she shot people BECAUSE she was denied tenure for now and focus on a different issue. Let’s analyze some logic here. Crazy woman shoots some people, and the media jumps all over the fact that the woman had exhibited sketchy behavior in the past. For example, from Fox News:

  I will ackowledge that the warning signs being talked about here are more extreme than usual. Nonetheless, let’s think about this notion of “people should have known” or “this should have been preventable.” It’s easy to see that people who commit violent crimes very often have things in their pasts that could be seen as warning signs. However, it’s also the case that plenty of people who exhibit these same warning signs turn out to be perfectly safe. This brings us to an important lesson in statistics.

  Let’s say hypothetically that you take a pregnancy test. (Yep, even the guys. Just get on board here, ok?) From the test itself, there are two outcomes- negative and positive, meaning “not pregnant” and “pregnant,” respectively. In the larger scheme of things, however, there are actually four possibilities:

  • You’re not pregnant and the test comes back negative
  • You’re not pregnant and the test comes back positive
  • You’re pregnant and the test comes back negative
  • You’re pregnant and the test comes back positive

  It’s easy to see that the test only gives a correct prediction in the first and last case, and the middle two cases represent different types of errors. In statistics terms, these errors are referred to as Type I and Type II errors. They can be summarized by the table below:

  

  When the accuracy of a test is reported, it generally refers to the fraction of times that the outcome falls into one of the “correct” squares. So, for example, if a pregnancy test claims 99% accuracy, then you will get either a Type I or Type II error only 1% of the time. However, you don’t know how that 1% breaks down into the two error categories.

  Let’s bring the conversation back to the crazy people and guns scenario. Suppose we listened to all of those people saying that this shooting was preventable because warning signs were there. The only way that we could take action (since I don’t know about you, but my crystal ball is on the fritz nowadays) would be to implement a policy that would affect ALL people who exhibit these warning signs. This is problematic, since, while most of the people who commit violent crimes exhibit some sort of warning signs (especially since it’s easy to find said signs once you go looking for them), it is not the case that most people who exhibit these warning signs go on to commit violent crimes. Again, let’s think about the four possibilities, this time with examples of people who made each type of error:

  

  If we were to start locking up all of the people who exhibit warning signs for violent behavior, we would be committing a lot of Type I error, not to mention trouncing on people’s civil liberties. We’re then faced with a tradeoff- is it worth infringing on the rights of many people in order to prevent the few that turn out to be crazy from acting on their craziness? Given the often-made point that we all probably exhibit some sort of warning sign at one point or another, I’m guessing that that answer is a no. That said, the Huntsville woman shot her brother and wasn’t charged because her mom said it was an accident. Next time, maybe we’ll have a lesson on credibility and conflict of interest.

  Derek Sivers made a similar point a few weeks ago when he wrote about the foolishness of punishing everyone for one person’s mistakes. The visual that he uses in the post pretty much says it all:

  

  Something to think about next time you take off your shoes in the airport security line.

     

  

  

• The Obligatory Valentine’s Day Post…

  Posted: Sun, 14 Feb 2010 21:14:29 +0000

  Happy Valentine’s Day…I guess??? Every year, this holiday really forces any sort of preference for romance to compete with my economic sensibilities. Let me give you a lesson illustrated by my friend Noah: Noah has recently started a tradition of having a “New Years Eve Eve” party”…he figures that because New Years Eve is a contrived holiday anyway, he can do better by celebrating it a day early. He realized that since people by default plan parties on New Years Eve, it’s very expensive to rent out a bar on that night, especially in New York. He also realized that, because people are for the most part planning New Years festivities, people aren’t generally looking to have parties on December 30th, even though they are often on vacation on that day just as on New Years Eve. Therefore, he uses the mechanism of supply and demand to his advantage and negotiates a really good deal for his party. (In case you were curious, his parties are very well-attended, and I think people are about evenly split with regard to whether they also go to parties on New Years Eve.)

  See, now you get a bit of a window into my inner monologue. My parents must be so proud, since they’ve set a similar example with their behavior- the only holiday they celebrate in lovey-dovey fashion is Groundhog Day. Not even kidding. And in case you are curious, yes, Hallmark makes cards for the occasion. (Sometimes they even send me a card.) As a result, I am pretty sure that the last overpriced romantic Valentine’s Day dinner I had was with a friend of mine’s boyfriend (now husband) who was in town for grad school interviews and had to go back home that night. For the record, the chocolate fondue for two was a little awkward to say the least.

  While we’re on the subject of hearts, however, I would like to remind you that today is not only Valentine’s Day but also National Organ Donor Day. Economist Al Roth does a lot of research on the market for organs and organ donation, and he would like to remind you of the following:

  “February 14 is the 10th National Donor Day — a day to give the gift of life.
  Fill out an organ and tissue donation card, register with your State Donor Registry and make sure your family knows you want to be a donor.
  Join the National Registry of potential volunteer marrow and blood stem cell donors.
  Learn how you can donate your baby’s umbilical cord blood stem cells at birth.
  Donate blood.
  Why be a Donor?
  The need is great and growing.
  Almost 95,000 people are in need of an organ for transplant.
  Approximately 35,000 children and adults in our country have life-threatening blood diseases that could be treated by a marrow/blood stem cell or cord blood transplant.
  Every two seconds someone in America needs blood, more than 39,000 units each day, according to the American Red Cross.
  Why do it Today?
  Valentine’s Day is the day of love and donation is the gift of life. Can you think of a more loving gesture than making February 14 the day you join thousands of Americans in making the donation decision?

  National Donor Day was started in 1998 by the Saturn Corporation and its United Auto Workers partners with the support of the U.S. Department of Health and Human Services and many nonprofit health organizations. “

  So Happy Organ Donor Day!

  Fiiiiiiine…if you really insist on having Valentine’s Day-related material, check out Ben’s Stein’s Lessons in Love, By Way of Economics from a couple of years ago. Or perhaps you would like some pictures, courtesy of someecards:

  My favorite…

  

  This one is even econ-related…

  

  Here’s one I have a sneaking suspicion that my readership will appreciate…

  

  Here’s one for Sarah Palin…

  

  I may have sent this one to my mother…

  

  You can see the whole collection here. Or, if you’re even further along the cynical end of the spectrum, might I suggest the oldie-but-goodie Craigslist post about relationships in finance terms.

     

  

  

• The Economics Of The Big Bang Theory…

  Posted: Thu, 11 Feb 2010 18:26:17 +0000

  Oh, hi there. You probably thought I was going to be writing about the nuanced interplay between economics and physics, but no, I am instead talking about the TV show. (Sidenote: I am a little disheartened to see that the top Google results for “the big bang theory” are in fact for the TV show.) If you really want to read about the interplay between economics and physics, here’s a Scientific American article that discusses whether economic growth models are at odds with the laws of physics. Furthermore, in Googling “economics physics” to find that for you, I was intrigued/amused that Google’s autocomplete suggested “economics physics envy” for me. (I’m like a Google Superbowl ad here.) Apparently economists suffer from physics envy because economists like to dress up like physicists and pretend that their field has the same level of laws and hard science that physics does.

  But I digress, so I will take off my Marie Curie costume and get back to the point. My mom and I go back and forth over The Big Bang Theory (again, the TV show, not the universe thing)- she loves the show and I really want to hate it. I really want to hate it because it presents such a narrow nerd stereotype- I went to MIT and thus know full well that there are many different varieties of nerd. And no, we aren’t all obsessed with Star Trek. That said, things like the following make it difficult for me to hate on the show too much:

  Awww, Sheldon is explaining the concept of positional goods! (The humor in the fact that I had to watch a Mercedes ad before that clip does not escape me.) I think I’m in love…and I also want to see the phrase “neener-neener” work its way into an economics paper.

  I’ve written about similar concepts before, such as the idea that people care about their incomes relative to others around them in addition to just the absolute dollar amount. But the ideas are all related, since it’s easier to do the “neener-neener” boasting when your neighbors are poorer. And don’t even get me started on Marx and his commodity fetishism stuff…

  (HT to reader Keenan Robert, via my Facebook page.)

     

  

  

• I Can’t Believe That I Wasn’t Invited…

  Posted: Wed, 10 Feb 2010 18:18:54 +0000

  Hmph. Yes, I have a Google alert set up for “Economists Do It With Models,” and yes, sometimes it yields interesting and unexpected results. From the University of Essex Economics Society:

  

  What I wouldn’t have given for the opportunity to be a fly on the wall at that shindig…

     

  

  

• Apparently This Is What Economics Does To People…

  Posted: Mon, 08 Feb 2010 18:39:51 +0000

  This video made me happy…and a little nostalgic. I would have to guess that these are the sorts of things that people say behind my back…

  Very cute. But you didn’t really think that you were going to get away without some sort of edumacation, right? So the professor mentions comparative advantage (not to be confused with competitive advantage) as the rationale for labor specialization. You can learn more about comparative advantage and the gains from trade here:

  And here…

  Another choice excerpt from the video is the quote “What the heck is marginal utiltity anyway?” Well…marginal utility is the additional happiness you get from consuming one more of something. Let’s take an example from the Superbowl party I was at last night. I had had three slices of pizza, and the marginal utility of the fourth slice of pizza was the additional happiness that the fourth slice gave me above and beyond what the first three had provided. (In my case, I would argue that the fourth slice had negative marginal utility, since it just made me feel too full rather than any happier.)

  The second half of the video gets into a bit of a grey area with the globalization bit…now, it is true from an economic standpoint that, under certain assumptions, free trade is efficient (where “efficient” means “creating the biggest economic pie”), but it’s not necessarily an equitable outcome for everyone, since less competitive domestic producers lose while consumers win (when free trade leads to foreign imports) or vice versa (when free trade leads to domestic exports). Economists make the argument that, because the winners in this scenario win more than the losers lose, it’s possible for the winners to somehow compensate the losers and make everyone better off. Unfortunately, I have yet to see that part be accomplished in practice. So when the girl in the zebra tank top argues that it’s unfair that jobs are outsourced, she’s not necessarily wrong, she’s just arguing a different point than the one that economists typically make.

  In case you were curious, you can find the Economic Freedom of the World report here, and yes, the Smoot-Hawley tariff was kind of a debacle, largely because it caused other countries to put retaliatory tariffs in place. Who would’ve thought that other countries wouldn’t just be okay with us taxing their goods and them not taxing ours? Hmph.

  By the end, the video drifts off into a bit of unsubstantiated libertarianism territory- for the record, there are benefits to licensing that may outweigh the costs, and you can ponder this next time your upstairs neighbor hires an unlicensed plumber. There is also mixed evidence on the effect of a minimum wage, which I find to be particularly surprising. (The most well-known counterintuitive evidence is from a study by David Card and Alan Krueger- you can find a summary here.) The takeaways at the end are a bit of a bastardization of what economists actually have to say about the role of government, since very few economists would argue that less government is ALWAYS better. (If you don’t believe me, see public goods, externalities, etc.) That said, I don’t see economists heading up the Progressive Club any time soon, either.

     

  

  

• Two Economists Walk Into A Bar…And I Have No Idea What Happens Next…

  Posted: Sun, 07 Feb 2010 21:25:56 +0000

  I’ve posted before about esoteric cartoons, and I will do you the favor of recounting one of my favorite Seinfeld dialogues on the topic:

  Elaine: Look at this cartoon in the New Yorker, I don’t get this.
  Jerry: I don’t either.
  Elaine: And you’re on the fringe of the humor business.
  (George comes in)
  George: Hey!
  Elaine: Hey! George look at this.
  George: That’s cute.
  Elaine: You got it?
  George: No , never mind.
  Elaine: Come on , We’re two intelligent people here. We can figure this out. Now we got a dog and a cat in an office.
  Jerry: It looks like my accountant’s office but there’s no pets working there.
  Elaine: The cat is saying ” I’ve enjoyed reading your E-mail”.
  George: Maybe it’s got something to do with that 42 in the corner.
  Elaine: It’s a page number.
  George: Well, I can’t crack this one.
  Elaine: Aahh! this has got to be a mistake.
  George: Try shaking it…

  So now consider the following that I saw on Greg Mankiw’s blog the other day:

  

  (For the record, I tried shaking my laptop, to no avail…) I am very curious as to whether the average Wall Street Journal reader gets the joke- I mean, I’m sure the politics of different Washington think tanks is really top of mind for finance guys, right?

  Basically, the cartoon is a play on the recurring liberal-conservative divide. In the red corner, we have The Heritage Foundation, which is well-known to be a think tank focused on formulating and promoting conservative public policies. On the other hand, we have the Brookings Institution. Brookings, according to Wikipedia, is a non-partisan organization whose views are largely directed by the attitudes and viewpoints of its researchers. For the purposes of this cartoon, we will put Brookings by default in the blue corner.

  I am guessing that this cartoon came after reading about the disagreements between Brookings and Heritage over cap and trade, among other things. But…(comes to senses)…wait, what? I thought that think tanks were just there to do (reasonably) impartial research in order to provide support for whatever “type” of policies make the most sense. Now I know better…and so do you, so keep this in mind when reading about any “unbiased” research coming out of these organizations.

     

  

  

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