ECalgary

Recent news on labor market discrimination

2012-01-12T07:53:00.000-08:00

High Unemployment Linked To Increasing Number Of Face Tattoos

In response to “Economics has met the enemy, and it is economics”

2011-10-18T07:30:00.000-07:00

(The article this post refers to was published in the Globe and Mail, Saturday, Oct. 15, 2011 6:00AM EDT, Last updated Sunday, Oct. 16, 2011 12:13AM EDT)

I was puzzled by the impression this article gives that there is “one” economic theory. Perhaps it is worth to remind the readers that although economic theory dares to predict some events, this predictions are done under very specific sets of assumptions. And, as we keep reminding our students, departures from those assumptions dramatically change those predictions. Stating that "the" (one and only?) economic theory only upholds efficient markets and frowns upon all forms of government interventions, only tells me that these people are very selective in their economic readings and that they missed the lecture on externalities and market failures. The article provides a partial view of the theory of rational expectations, but it fails to mention that this theory only provides a benchmark for how markets function (or rather should function) when, among other things, there is full information, agents are all identical and there all the costs and benefits of a transaction can be accounted for. Most economists, theorists and interested citizens with common sense recognize the theory of rational expectation for what it is, a useful tool. And the job of many theoretical economists has to do with learning what happens when these assumptions are not true.

It is childish and naive to blame "math" for the economic crises. Abstraction is not, it just cannot, be the culprit here. The problem does not lie with rationality or math, but with the way models are interpreted and used in politics and public life. As in all other sciences (natural or social) economics has "good" theory and "bad" theory, the good and the bad having nothing to do with the morality of the results or their mathematical complexity but with the transparency of the logical link between assumptions and propositions. Good theories provides a framework for thinking about a problem, outlining the plausible main forces behind it. It gives direction and provides its own limitations. It may or may not use math, although it will almost always use abstraction - how else can you reduce the complexity of society to a tractable problem? All the other disciplines mentioned in the article (sociology, statistics, psychologists or anthropologists) and a few of the new branches of economics the article mentions use abstraction, and some of them even use math. “Bad” theory, on the other hand, fails to uncover the main issues behind the problem, hides the assumptions leading to the conclusions and present logical failures, regardless of the degree of mathematical sophistication employed (which can be plenty as well).

Blaming economic theory for the recent market collapse is like blaming Einstein for the bombing of Hiroshima, or thinking that we would be better off without any of the physics development that could have led to nuclear bombs. Despite what the article wants to imply, neither natural sciences, nor social sciences have a moral dimension. Knowledge is just knowledge. What we chose to do with that knowledge is up to all of us.

Left and Right together

2011-10-12T15:52:00.000-07:00

Sometimes it seems, especially in the US, as if left and right can't find common ground. In a surprising exception to this rule, the Health Impact Fund recently added to its advisory board Ken Arrow, a Nobel Laureate in economics, and a key contributor to our understanding of the operations of the market mechanism, and Noam Chomsky, one of the most cited academics in the world, whose perspective is much more focused on the abuses of those who dominate markets.

Economic growth and development can take the simplest forms

2011-10-04T14:20:00.001-07:00

Welcome new graduate students!

2011-09-13T08:54:00.000-07:00

Yesterday, Frank Atkins and I made teaching and research assistant assignments for our graduate students. In doing so, I am reminded of the lessons taught by the Simpsons on graduate education.

Canadian Income Inequality on the Rise

2011-07-13T20:25:00.000-07:00

A recent report from the Conference Board of Canada has found that income inequality in Canada has increased over the last 20 years (see the video on the page). The general argument is that increased trade in commodities boosted the Canadian economy to the primary benefit of those in the upper quintiles of the income distribution.

While not as skewed as the income distribution in the U.S., Canada's Gini Coefficient is now at 0.32 (realtive to the U.S. at 0.38). As reported by the Wall Street Journal,

On an inflation-adjusted basis, the average Canadian income has climbed 17% to C$59,700 (US$61,788) over a 33-year period to 2009. Yet, the board noted median income — or the level that divides Canadian income earners into two equal parts and is said to be a better indicator on how the majority of households are doing — rose just 5.5% in the same time period.

Yet, inequality is not the be all and end all: while incomes for everyone may rise, inequality can rise if the rate of increase varies across income group. That said (again from the WSJ):

It said the average income level of the poorest group of Canadians — excluding government benefits, after-tax and adjusted for inflation — rose marginally from $12,400 in 1976 to $14,500 in 2009. As a result, the gap between the real average income of the top quintile of Canadian earners and the poorest group, or the lowest quintile, grew from C$92,300 in 1976 to C$117,500 in 2009.

Voting (or lack thereof) in May election.

2011-07-05T07:57:00.000-07:00

As recent article by Statscan suggests that 7.5 million people didn't vote in the May federal election.The reasons are summarized by the following graphic:

If you do the math and read between the lines (amalgamating "not interested," "didn't like candidates/issues," and "forgot"), this suggests that almost 40% or 3 million voters didn't vote because they were uninterested.

Some interesting differences across Canada emerge in the Statscan analysis:

Lack of interest as a reason for not voting was highest in Quebec;
Lack of interest didn't seem to differ across age groups;
Lack of interest was lower among voters with university education;
Among immigrants with Canadian citizenship who didn't vote, only 13% cited lack of interest.

I know that there are all sorts of analysis we'd like to do on this data to really get at the heart of the matter (Any grad. students interested in working on a paper?) but I think the results point to some interesting questions regarding voter behavior.

Addiction, Stress and Poverty

2011-05-27T07:45:00.000-07:00

Last term, I taught Economics 349 "The Economics of Social Problems." In that class we discuss a host of topics, including the inter-relation between stress and addictions (and how these relations are potentially magnified among the poor). Today's episode of Democracy Now features Dr. Gabor Mate discussing many of these issues. Dr. Mate is best know for his research and books on the relationship between physical and mental health.

Take Back Your Vacations

2011-05-10T07:18:00.000-07:00

I was forwarded this by and old friend of mine who thought that I, as an economist, would appreciate it. With summer and vacation season upon us, I thought it was worth sharing.

Jon Bon Jovi on Technological Change

2011-04-19T15:52:00.000-07:00

...well, sort of.

In a recent article, Jon Bon Jovi lashed out at Steve Jobs for ruining the music industry. Basically, the move to a new technology has so changed the process of "record buying" so as to have killed the music industry and changed the culture of music appreciation:

Kids today have missed the whole experience of putting the headphones on, turning it up to 10, holding the jacket, closing their eyes and getting lost in an album.

Next thing you know Mr. Bon Jovi will be complaining about the clothes young people are wearing these days, shaking his fist at clouds, and telling those kids to "Stay off my lawn!"

The First Step Towards Taxing Religion?

2011-04-18T07:23:00.001-07:00

I'm a little late to the table on learning about this, but Romania has introduced a new tax, adding "witch" to the existing list of labor codes:

Those charging clients for tarot readings, curses, and blessings must now pay a 16 percent income tax and make contributions to health and pension programs.

As has happened with other previously-considered "cultural groups," as they enter or adapt to market institutions they find themselves subject to conditions that face all market participants.

Witches adapted to a free market quickly. Emerging businesses sought their aide, creating a growing clientele for witchcraft. In 1997, there was an attempt to form a “witches’ union,” in part to counter the claims of dozens of upstart witches that they were descendants of Mama Omida. In 1999, there was even a plan to build a thirty-five room “national center of witchcraft” on the outskirts of Bucharest. However, the witches appear to have become victims of their own success. The idea of taxing witchcraft was first put forward in 2001.

HT: @acrofish

Police versus Education, War versus Hospitals

2011-04-11T08:56:00.000-07:00

The 2011 World Development Report has been released. Here's a bit form its web site:

More than 1.5 billion people live in countries affected by violent conflict.
The World Development Report 2011: Conflict, Security, and Development examines the changing nature of violence in the 21st century, and underlines the negative impact of repeated cycles of violence on a country or region’s development prospects. Preventing violence and building peaceful states that respond to the aspirations of their citizens requires strong leadership and concerted national and international efforts. The Report is based on new research, case studies and extensive consultations with leaders and development practitioners throughout the world.

Some are arguing that this report represents a major change in the way the World Bank is advocating aid resources be allocated. Indeed, it appears that the Bank is advocating resources be used in building stable governments, justice and police... rather than emphasizing education and health. From the BBC:

The report says if there is not a major refocusing of aid in this direction, then other targets on poverty, health and education will not be reached.
There is far more spent on alleviating the effects of conflict than preventing it from breaking out, and conflicts tend to be repeated.

The "Heart of Economics"

2011-01-26T07:55:00.001-08:00

I'm currently teaching a course on "the economics of social problems." It can be a tricky course because I need to communicate to students that, for example, poverty is about more than low income. Its also about opportunities, happiness or well-being, cognitive adaptations (i.e., beliefs) and more.

With this in mind, I found today's piece in the NY Times by Ed Glaeser interesting. He writes:

Teachers of first-year graduate courses in economic theory, like me, often begin by discussing the assumption that individuals can rank their preferred outcomes. We then propose a measure — a ranking mechanism called a utility function — that follows people’s preferences.
But then we turn to welfare, and that’s where we make our great leap.

Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices.

When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice.

Economists’ fondness for freedom rarely implies any particular policy program. A fondness for freedom is perfectly compatible with favoring redistribution, which can be seen as increasing one person’s choices at the expense of the choices of another, or with Keynesianism and its emphasis on anticyclical public spending.

Is John List the new Chuck Norris?

2010-12-14T13:08:00.001-08:00

Is John List the new Chuck Norris? I think so.

Lectures from the 2010 Nobel Prize in Economic Sciences

2010-12-09T13:44:00.000-08:00

From Mark Thoma at Economist's View, here are links to the Nobel lectures by Peter Diamond, Dale Mortenson, and Christopher Pissarides.

Taxation for Cultural Change

2010-12-09T09:58:00.000-08:00

Now that the month of Movember is over, I thought I would post some interesting evidence on the use of taxation to achieve cultural change.

In 1705, Peter I of Russia implemented a tax on beards: Individuals who wore beards were required to pay a levy and, as evidence of having paid the tax, had to wear

a copper or silver token with a Russian Eagle on one side and on the other, the lower part of a face with nose, mouth, whiskers, and beard. It was inscribed with two phrases: "the beard tax has been taken" and "the beard is a superfluous burden".

Whatever you may think of beards and mustaches as aesthetic facial hair, Peter had his reasons. He was particularly interested in increasing trade and political interactions with the rest of Europe, much of whom viewed Russia as archaic. To try and change this perception:

Peter ordered his noblemen to wear fashionable Western clothes instead of their archaic long costumes. To add insult to injury, Peter personally cut off the beards of his noblemen. All men except the peasants and priests had to pay Peter's yearly beard tax and wear a medal proclaiming, "Beards are a ridiculous ornament."

E-Commerce in Africa

2010-12-09T09:44:00.000-08:00

CBC's radio show Spark had a recent discussion of African E-Commerce (episode 130). Basically, individuals are increasingly using cel phones to conduct business transactions using texting services whereby they are able to communicate their inventories of goods, their demands for goods, and transfer funds between banks and individuals. Without cel phones, these transactions involved individuals traveling from village to village with their goods, incurring significant time costs while traveling between. These can be particularly high given that traveling to purchase some goods may require an individual to miss a day's wages. As such, cel phones serve the role of infrastructure in reducing the opportunity costs of engaging in transactions.

There are a lot of digital conveniences we take for granted in the Western world. Ok, let’s be honest and say we take most of them for granted. If we want something –anything– it is available at our fingertips. So what’s it like in places where the infrastructure still doesn’t exist to make those digital conveniences viable? Femi Akinde is the founder and CEO of Slimtrader, a company that is looking to change the way people in sub-Saharan Africa do business…all through their cell phones.

Keynesian versus Kenyan

2010-11-02T11:29:00.000-07:00

Today is (mid-term) election day in the U.S.

2010-11-01T09:26:00.001-07:00

Today, we have a guest post from UofC Economics PhD student Kent Fellows:

My Dad recently forwarded this link from the Globe and Mail. The article discusses a working paper by Anindya Sen, Marcel Voia and Frances Woolley in which data from www.ratemyprofessors.com is used to estimate the returns to physical attractiveness or "Hotness" among professors. Their conclusion is that more attractive professors not only earn more, but that their attractiveness is also highly correlated with their teaching productivity, and not their research productivity.

Dad is a recently retired professor emeritus, so I am not exactly sure of his interest in this topic. I have yet to ask him weather he feels that the family genes with respect to appearance improved his earnings or not.

From the Abstract:
"Although a relatively small proportion of our sample is rated “hot” by students, hotness generates, for some, a significant earnings premium, even with comprehensive controls for productivity. We find a strong relationship between hotness and teaching productivity, but a much weaker relationship between hotness and research productivity. The unique contribution of this paper is the use of data on actual productivity, which is generally unavailable in papers assessing the returns to appearance."

The main results suggest that for economics professors, being male and attractive is the best combination to improve earnings. Does this suggest that professional development resources in the department could be better spent on trips to the tropics to get a better tan and in house image consultants?

Economics and Art History

2010-10-27T11:39:00.000-07:00

I'm currently reading Sassoon's Becoming Mona Lisa, a book about how Leonado Da Vinci's most famous painting became... well... his most famous painting, and likely the most famous painting in the world. Aside from the art history component of the Mona Lisa's story, there's a fair amount on the economics of art, production, and re-production:

The unique work of art is, by definition, in a position of monopoly. There is after all, only one Mona Lisa; there will never be another one. In a world dominated by reproducible commodities whose value plummet as technology lowers production costs and makes them available to an ever expanding mass of consumers, to be the “one and only” becomes a major selling point. For this to happen, it is necessary that the producer should be exceptional; better still, a certified artistic genius. A painting by an unaccredited artists, an amateur, someone not previously authenticated, is of little or no met value. Past masters have the advantage over their contemporary rivals of having had their fame repeatedly endorsed by a succession of arbiters of taste. ...

It is, of course, a tautological circle. A museum masterpiece can only have been painted by an established master; an established master is ones whose works are to be found in a major museum. (p. 78)

Do Incentives Affect Fertility? The Case of Quebec

2010-10-25T10:24:00.001-07:00

Quebec has been experiencing lower-than-average birthrates for some time. Going back to 1997, the porvincial government has attempted to increase birthrates, the number of monthers returning to the labor force and fathers' involvement in child rearing through a set of policies grouped under the rubric of "Family Policy." A recent episode of the Current discusses these policies and their effects. From the episode:

The Quebec Government is pulling out all the stops for parents these days. If you're a working couple with two children in Ottawa, you'll probably pay 80 to 100 dollars-a-day for childcare. Across the river in Gatineau, Quebec ... you'd pay 14-dollars-a-day. You'd get better parental leave too. There's even a special leave just for Dads. And as of last month, if you're infertile, the Quebec Government will cover the cost of In Vitro Fertilization.
The Quebec Government has spent 13 years overhauling its Family Policy. The goal has been to boost two demographics ... new births and working women. As part of our project Shift, our Quebec Producer Susan McKenzie decided to take a look at whether the program has worked and whether it's sustainable. We aired her documentary, Baby Bump.

Joe Siglitz on a foreclosure moratorium

2010-10-20T10:21:00.000-07:00

Here's an interview with Columbia University economics professor and Nobel Laureate Joesph Stiglitz on, among other things, creating a moratorium on housing foreclosures in the U.S. While I found the whole interview interesting, I was particularly intrigued by his arguments regarding the role of fairness in policy. It's one of the few times I've seen direct incorporation of "social preferences" directly into policy discussions (outside of purely academic circles).

Countersignalling and the genius of John Cage

2010-10-19T09:55:00.000-07:00

There's a paper by Kim-Sau Chung and Peter Eso on signaling when an individual has career concerns. This paper has been around for a couple of years, but this is the first time I saw it applied to music and particularly John Cage's 4'33". From Jeff Ely's Cheap Talk blog on economics and more:

Which type of artist debuts with obscure experimental work, the genius or the fraud? Kim-Sau Chung and Peter Eso have a new paper which answers the question: it’s both of these types.
Suppose that a new composer is choosing a debut project and he can try a composition in a conventional style or he can write 4’33″, the infamous John Cage composition consisting of three movements of total silence. Critics understand the conventional style well enough to assess the talent of a composer who goes that route. Nobody understands 4’33″ and so the experimental composer generates no public information about his talent.

There are three types of composer. Those that know they are talented enough to have a long career, those that know they are not talented enough and will soon drop out, and then the middle type: those that don’t know yet whether they are talented enough and will learn more from the success of their debut. In the Chung-Eso model, the first two types go the experimental route and only the middle type debuts with a conventional work.

The reason is intuitive. First, the average talent of experimental artists must be higher than conventional artists. Because if it were the other way around, i.e. conventional debuts signaled talent then all types would choose a conventional debut, making it not a signal at all. The middle types would because they want that positive signal and they want the more informative project. The high and low types would because the positive signal is all they care about.

Then, once we see that the experimental project signals higher than average talent, we can infer that it’s the high types and the low types that go experimental. Both of these types are willing to take the positive signal from the style of work in exchange for generating less information by the actual composition. The middle types on the other hand are willing to forego the buzz they would generate by going experimental in return for the chance to learn about their talent. So they debut conventionally.

Now, as the economics PhD job market approaches, which fields in economics are the experimental ones (generates buzz but nobody understands it, populated by the geniuses as well as the frauds) and which ones are conventional (easy to assess, but generally dull and signals a middling type) ?

If you're not familiar with John cage's famous piece, here's a rendition of it:

If you haven't read the Cheap Talk blog before, its worth checking out. Also, Jeff Ely's web page has a great version of the classic Asteroids game.

University funding through industry contracts

2010-10-18T12:18:00.000-07:00

Lately, I've found myself in conversations with various people here at the University regarding providing university funding via contracts/agreements with industry partners wherein some of the projects are directed by industry interests and questions.

Today, there is an interview with Jennifer Washburn on Democracy Now on just this topic. From the interview:

Nine of the ten agreements allow the industry sponsor to basically control the overall governance of the research alliance on campus. The reason that’s important is because these alliances are long-term alliances that last anywhere from five to eight to ten years. So they really institutionalize the relationship between the outside oil company sponsors and the university. In eight of the ten agreements, the industry sponsors control the evaluation and selection of research proposals. None of the agreements that I looked at require any kind of independent expert peer review of faculty research.

Emmanuel Saez wins MacArthur Genius Award

2010-09-28T08:03:00.000-07:00

UC Berkeley Professor Emmanuel Saez is the latest economist to win a MacArthur Genius Award.

Haskayne prof revolutionizes economy

2010-09-23T21:35:00.000-07:00

I was delighted to read today that a professor at the Haskayne School, Dr Piers Steel, has developed a "conceptual framework" to match workers to jobs better. He is proposing a system called "synthetic validity." You will understand why I am so excited about this when you learn, as I did with astonishment, that "This new selection tool would also be incredibly valuable, generating worldwide benefits worth trillions of dollars per year—more than $100 billion to the Canadian economy alone—says Steel." Wow!!! Canada's GDP is around $1500 billion, so Steel's conceptual framework, for which a working system apparently still needs to be built, will boost our GDP by 7% on a perpetual basis!!! Not to mention the global effects!!! This is the single most important finding of the last hundred years, at least. While I haven't had time to read the materials in detail, I am really pleased to know that a simple tool in which the precise demands of each job are fully described, matched up with workers who systematically describe their true traits, can achieve such great efficiencies. This will blow the whole recession thing out of the water, globally! And I like that the name of the system is synthetic validity.

Economics Society of Calgary to host Mayoral Debate

2010-09-17T08:24:00.000-07:00

ECONOMICS SOCIETY OF CALGARY MAYORALTY CANDIDATE DEBATE
For the first time since 2000, the City of Calgary will elect a new mayor and there are many candidates, both incumbent alderman and newcomers vying for the job. With the end of the Bronconnier era, these candidates will present divergent views on where to take the city moving forward from social, economic and other perspectives.

The Economics Society of Calgary is kicking off its 2010-2011 season with a candidates’ debate on September 24, 2010 that will focus on three key issues:

· Balancing Urban Development
· Diversifying Calgary’s Economy
· Combating Homelessness

The debate will be moderated by Todd Hirsch, Senior Economist for Alberta Treasury Branches (ATB). Event details are as follows:

· Registration opens at 7:00 am
· Candidate Debate: 8:00-9:30 am
· Questions from the Audience: 9:30-10:00 am

The cost of the event is $30.00 for non-members and $25.00 for members, and includes the Chamber's buffet breakfast. Proceeds from this event will be put towards the ESC scholarship programs at the University of Calgary.

Please RSVP by September 20, 2010 by clicking on the following link:

Members: $25 ~ Non-members: $30 ~ Student Members: $25
To register click here.
To purchase/renew your membership click here.

The ESC is now on LinkedIn and on Facebook. Please join us!

About Todd Hirsch
Todd Hirsch received his BA Honors in Economics from the University of Alberta, and an MA in Economics from the University of Calgary.

Since completing his education in 2003, he has held a series of economist positions at a variety of for-profit and public sector organizations, including the Canada West Foundation, the Canadian Pacific Railway, and the Bank of Canada. He has also served as a two-term President of the Economics Society of Calgary.

Todd joined ATB Financial in May 2007 as Senior Economist where he provides economic information and intelligence to the various lines of business at ATB. He also tracks current developments in Alberta’s and North America's economy and delivers presentations to both internal and external audiences.

Behavioral Economics iPhone App

2010-09-09T07:39:00.000-07:00

Duke University Professor Dan Ariely (personal page, TED lecture) runs the Center for Behavioral Economics at Duke. I recently came across one of their iPhone Apps called "At a Boy". The general idea of the app is to give you a compliment when you need one. In that way, it gives you something to smile about or boost your self-esteem. I added this to my phone and indeed it gives you something to smile about: aside from getting a nice (albeit vacuous) compliment, some of the compliments (which users can submit) are hilarious. I just tried it and got the following:

You know, on anyone else that hat would look ridiculous. Somehow, you can pull it off.

Yes, I'm currently wearing a hat.

Matt Ridley and the "Sex of Ideas"

2010-08-26T14:56:00.000-07:00

Matt Ridley combines Ricardo's theory of Comparative Advantage with Romer's theory of Endogenous Growth

You-Tube Video (16 minutes)

Marshmallows and kid's will power

2010-08-26T14:42:00.000-07:00

Some cool video of kids, marshmallows, and a test of the time rate of preference!

You-Tube

Wiki

Sleep and Recessions... at least in Canada

2010-03-20T15:45:00.001-07:00

The abstract from a working paper a friend of mine forwarded me:

Using Canadian time use data, we exploit exogenous variation in local unemployment rates to investigate the cyclical nature of sleep time and show that for both men and women, sleep time decreases when the economy is doing relatively better. Our results suggest that in a recession Canadians sleep an average of 2 hours and 34 minutes more per week, or 22 minutes more per day. Given the importance of even small changes in sleep time on measures of cognitive functioning such as reaction time and concentration, our findings may help explain the countercyclical nature of mortality. Further, as we find that sleep is affected by the same economic variables (notably the unemployment rate) that affect market work time, our results also contribute to the limited literature that shows that sleep time should not be treated as exogenously determined, but, like any other resource, determined by its relative cost.

The friend who forwarded me this has been telling me I'm not sleeping enough for the last 20 years. I tell him I'll sleep when I'm dead. Plus, I point out the evidence on excess sleep and mortality.

Is a preference for equality hardwired?

2010-02-24T14:37:00.000-08:00

In my classes (particularly Economics 349) I've talked about inequality and, to a small extent, concerns over fairness. Now, there is new neuroeconomics research out showing that individuals may have an innate preference for equality:

Caltech scientists find first physiological evidence of brain's response to inequality: Brain images during money-transfer experiments show "rich" participants prefer to see others get financial windfall

PASADENA, Calif.—The human brain is a big believer in equality—and a team of scientists from the California Institute of Technology (Caltech) and Trinity College in Dublin, Ireland, has become the first to gather the images to prove it.

Specifically, the team found that the reward centers in the human brain respond more strongly when a poor person receives a financial reward than when a rich person does. The surprising thing? This activity pattern holds true even if the brain being looked at is in the rich person's head, rather than the poor person's.

These conclusions, and the functional magnetic resonance imaging (fMRI) studies that led to them, are described in the February 25 issue of the journal Nature.

"This is the latest picture in our gallery of human nature," says Colin Camerer, the Robert Kirby Professor of Behavioral Economics at Caltech and one of the paper's coauthors. "It's an exciting area of research; we now have so many tools with which to study how the brain is reacting."

It's long been known that we humans don't like inequality, especially when it comes to money. Tell two people working the same job that their salaries are different, and there's going to be trouble, notes John O'Doherty, professor of psychology at Caltech, Thomas N. Mitchell Professor of Cognitive Neuroscience at the Trinity College Institute of Neuroscience, and the principal investigator on the Nature paper.

But what was unknown was just how hardwired that dislike really is. "In this study, we're starting to get an idea of where this inequality aversion comes from," he says. "It's not just the application of a social rule or convention; there's really something about the basic processing of rewards in the brain that reflects these considerations."

The brain processes "rewards"—things like food, money, and even pleasant music, which create positive responses in the body—in areas such as the ventromedial prefrontal cortex (VMPFC) and ventral striatum.

In a series of experiments, former Caltech postdoctoral scholar Elizabeth Tricomi (now an assistant professor of psychology at Rutgers University)—along with O'Doherty, Camerer, and Antonio Rangel, associate professor of economics at Caltech—watched how the VMPFC and ventral striatum reacted in 40 volunteers who were presented with a series of potential money-transfer scenarios while lying in an fMRI machine.

For instance, a participant might be told that he could be given $50 while another person could be given $20; in a second scenario, the student might have a potential gain of only $5 and the other person, $50. The fMRI images allowed the researchers to see how each volunteer's brain responded to each proposed money allocation.

But there was a twist. Before the imaging began, each participant in a pair was randomly assigned to one of two conditions: One participant was given what the researchers called "a large monetary endowment" ($50) at the beginning of the experiment; the other participant started from scratch, with no money in his or her pocket.

As it turned out, the way the volunteers—or, to be more precise, the reward centers in the volunteers' brains—reacted to the various scenarios depended strongly upon whether they started the experiment with a financial advantage over their peers.

"People who started out poor had a stronger brain reaction to things that gave them money, and essentially no reaction to money going to another person," Camerer says. "By itself, that wasn't too surprising."

What was surprising was the other side of the coin. "In the experiment, people who started out rich had a stronger reaction to other people getting money than to themselves getting money," Camerer explains. "In other words, their brains liked it when others got money more than they liked it when they themselves got money."

"We now know that these areas are not just self-interested," adds O'Doherty. "They don't exclusively respond to the rewards that one gets as an individual, but also respond to the prospect of other individuals obtaining a reward."

What was especially interesting about the finding, he says, is that the brain responds "very differently to rewards obtained by others under conditions of disadvantageous inequality versus advantageous inequality. It shows that the basic reward structures in the human brain are sensitive to even subtle differences in social context."

This, O'Doherty notes, is somewhat contrary to the prevailing views about human nature. "As a psychologist and cognitive neuroscientist who works on reward and motivation, I very much view the brain as a device designed to maximize one's own self interest," says O'Doherty. "The fact that these basic brain structures appear to be so readily modulated in response to rewards obtained by others highlights the idea that even the basic reward structures in the human brain are not purely self-oriented."

Camerer, too, found the results thought provoking. "We economists have a widespread view that most people are basically self-interested, and won't try to help other people," he says. "But if that were true, you wouldn't see these sort of reactions to other people getting money."

Still, he says, it's likely that the reactions of the "rich" participants were at least partly motivated by self-interest—or a reduction of their own discomfort. "We think that, for the people who start out rich, seeing another person get money reduces their guilt over having more than the others."

Having watched the brain react to inequality, O'Doherty says, the next step is to "try to understand how these changes in valuation actually translate into changes in behavior. For example, the person who finds out they're being paid less than someone else for doing the same job might end up working less hard and being less motivated as a consequence. It will be interesting to try to understand the brain mechanisms that underlie such changes."

Joseph Stiglitz on CBC's The Current

2010-02-24T08:03:00.000-08:00

As part of the promotions for his new book, Joseph Stiglitz appeared on CBC's The Current.

Nobel-Prize-winning economist Joseph Stiglitz argues in his new book, "Free Fall: America, Free Markets and The Sinking of The World Economy", that the global economic crisis the world is still recovering from could happen again.

Well worth the 15 minutes of listening time. (This is only part 1 of the interview.)

Stiglitz on Democracy Now

2010-02-18T06:48:00.000-08:00

Nobel prize winning economist Joseph Stiglitz appeared on Democracy Now this morning. Among other things, he discusses his new book his views of the U.S.economy on the one-year anniversary of the stimulus package. I was particularly intrigued by his views on "ersatz capitalism" that have resulted in the privatization of gains and socialization of losses (via the stimulus).

Tyler Cowen on Temple Grandin

2010-02-05T08:46:00.000-08:00

In a recent blog post, Tyler Cowen (GMU website) discusses his interview with Temple Grandin and his thoughts on autism. I have a vested interest in autism therapies and research and liked the post. I particularly agree with Tyler's ideas on therapy:

Grandin supports some varieties of intensive behavioral therapy for autistics. Many research papers support those same therapies but those papers do not generally conduct an RCT (randomized controlled trial) and furthermore many of the said researchers have a commercial stake in what they are studying and promoting. In my view we don't know "what works" but my (non-RCT-tested) opinion is that giving autistic children a lot of fun things to do -- fun by their standards -- and a lot of information to study and manipulate, gives the best chance of good outcomes. (In any case "spontaneous improvement" is considerable, so anecdotally many therapies will appear to work when they do not; nor is there a common control for placebos.) Many of the behavioral therapies seem quite oppressive to me and if we don't know they work I am worried that they are being overpromoted. Grandin has in some ways the intellectual temperament of an engineer and I am worried that she has not absorbed the lessons of Hayek's The Counterrevolution of Science.

There is an HBO movie coming out on Temple Grandin later this week.

Picture This Film Festival

2010-02-05T07:56:00.000-08:00

The Picture This Film Festival is taking place in Calgary February 8-10.

Picture this…film festival is an international disability film festival. It is a non-profit annual event initiated by the Community Development department of Calgary Scope Society, a registered non-profit society.

The Calgary Scope Society provides services to adults with disabilities and is one of the charities recently in the news regarding the budget cuts to service providers for people with disabilities.

Oscar Nomination for Daniel Ellsberg

2010-02-03T07:22:00.000-08:00

A documentary film about Daniel Ellsberg (the Most Dangerous Man in America) has been nominated for an academy award in the documentary category. Ellsberg is best known to economists for his work in decision theory and the Ellsberg Paradox.

Canada's Growth Rate

2010-02-03T07:14:00.000-08:00

Last week, Statistics Canada reported the Canadian GDP growth rate for November 2009:

Real gross domestic product advanced 0.4% in November, a third consecutive monthly increase. As was the case in September and October, most major industrial sectors increased their production.

This rate falls significantly below that of the US for the same period.

I haven't seen the numbers by region, but the following suggests that things in Alberta are improving ahead of other provinces:

The mining sector increased 1.8% in November, largely on the strength of oil and gas extraction. Natural gas production rose as prices, while remaining low compared with a year ago, increased recently. Oil extraction went up as foreign demand increased. Support activities for mining, oil and gas extraction advanced for a fourth month in a row.

Keynes-Hayek Smackdown

2010-01-26T09:39:00.000-08:00

Here's a new video from Russ Roberts explaining the differences between the ideas of J.M. Keynes and F.A. Hayek... in a manner the kids can understand.

Copyright law and the most famous 6 seconds of contemporary music

2010-01-21T10:15:00.000-08:00

I'm working on some research regarding copyright laws in the music industry, with a focus on genres when they are emerging (i.e., considered underground). Copyright laws are all about providing incentives for creative development and productive research. One of the big questions about copyright laws, particularly in the arts, is whether they have any retroactive power regarding things created (and not copyrighted) in the past that are being currently adopted and used (often without remuneration).

One of the people I'm working with on this sent me the video below regarding what is likely the most famous 6 second drum break in contemporary music. Its originally by a band called the Winstons and was written in 1969. This 6 seconds made its way through rap and hip-hop, helped found drum & bass and jungle music, and has made its way into advertising.

Health Codes Violations, Single Motherhood, and the Breakfast I had Last Week

2010-01-19T08:02:00.000-08:00

I'm currently teaching Economics 349: the Economics of Social Problems. I thought I'd use our department blog to help raise some examples of the types of issues that arise in the Calgary area which relate (even tangentially) to the course. (To those students in the course, some of this stuff may serve as fodder for term papers.)

Last week, some friends and I had breakfast at Nellie's Cosmic Cafe on 17th Ave SW in Calgary. We were pretty shocked to learn a day or so later that the restaurant chain had been fined $60,000 for health code violations. We all had the same thoughts: Eww! This was one of our favorite restaurants. (Note: In the sense of fairness, I want to mention that according to news reports nobody reported getting sick from the food at Nellie's and no personal claims were filed. The fines were based on the findings of health inspectors.)

Among my friends we talked quite a bit about this case (waiting a requisite 48 hours before making any jokes about it). When we thought about the problem, there are a number of things that struck us.

Basically, the health code protects "the public" from the externalities associated with poor workplace practices in a restaurant. However, we had a couple of questions about the chain of events. I'm sure there are others, but these jump to mind as worthy of discussion.

First, the restaurant had apparently been warned for over a decade. Why did it take so long for investigators to act? It raises the issue as to whether the law is being equally applied to all. A local eatery in my neighborhood received a fine after one visit by an inspector last year, and for something more innocuous than what Nellie's was apparently fined for. What does this say about the application of these laws?

Second, in her statement the owner of Nellie's mentioned "she was devastated by the charges and that it was difficult for her, a single mother, to keep proper monitoring of all the locations." I know of several single-mothers who were somewhat insulted by this statement. At the risk of sounding like a real jerk (which I probably am), it suggests that single mothers are less able to, in this case, manage a business than other individuals i different circumstances (e.g., married mothers). We often see examples of certain groups (here, single mothers) being stereotyped by more salient and visible examples of individuals of their "type" (e.g., the single-mother owner of Nellie's). In making this statement, what information is communicated and what inferences might others make about single mothers writ large?

Discuss.

Canada's Music Industry

2009-12-16T10:09:00.000-08:00

According to a recent report by the Martin Prosperity Institute:

On a per capita basis, Canada’s music industry dramatically outperforms the US when it comes to the presence of music business establishments (this category includes record labels, distributors, recording studios, and music publishers). Canada has 5.9 recording industry establishments per 100,000 residents, about five times the US figure of 1.2.

However, this appears to really be only on a per capita basis:

Recording industry establishments in the US are slightly larger – they have an average of 5.9 employees each, compared to only 5.7 in Canada. But the difference is dramatically more pronounced when it comes to revenue. US establishments earn average receipts of $4.1 million per establishment, compared to only US$540,000 in Canada.

So Canada has considerably greater per capita musical activity than the United States in terms of record labels, recording studios, and licensing houses. But the data tell us that the United States has much higher-earning businesses that are more heavily clustered in fewer places – especially Nashville, Los Angeles, and to a lesser extent, New York.

While this research is preliminary, we can speculate about what drives these differences. Economic geographers, from Jane Jacobs to Allen Scott to the Martin Prosperity Institute’s own recent analysis, have long noted that growth in creative industries like music tends to be driven by clustering and economies of scope and scale. The concentration of the American music business in a few key cities likely encourages these forces. In Canada, the fact that the music business is more evenly distributed is certainly a positive thing for musicians looking for opportunities in smaller cities. But failure to cluster in a few key centres may be discouraging the Canadian music industry from growing larger and more internationally competitive.

Alberta Oilsands on Democracy Now

2009-12-15T08:17:00.001-08:00

Coinciding with the Copenhagen meetings on climate change, the news program Democracy Now had a special on the Alberta Oilsands and a discussion on cap-and-trade programs.

Canadian Olympians and Social Values

2009-10-14T12:07:00.000-07:00

"Athletes Should Get the First Jab", 14 Oct 2009, Calgary Herald, Page A8.

In today's Calgary Herald there is a report that the medical officer for the Canadian Olympic Committee is calling for Canada's Olympic Athletes to be at the front of the line for H1N1 vaccination.

"Dr. Bob McCormack, chief medical officer for Canadian Olympic Committee, said Tuesday that, although the policy may seem unfair to other at-risk groups for the flu, including pregnant women, the elderly and aboriginals, the country’s elite athletes should be safeguarded from sickness during their time on the international stage. ..
The example that will make most sense to Canadians is, what if the men’s hockey team got swine flu and were unable to achieve their goal of a gold medal? Canadians would be very disappointed,” said McCormack. "

I am not a fan of having public monies spent to host the Olympic Games at the best of times but to me, this story highlights how out of whack social values seem to be when it comes to the Olympics. This goes beyond the displacement of vulnerable low income groups during the construction period, the diversion of public money away from other less sexy spending categories like education, and the legacy of public debt that all Canadians will inevitably be saddled with after Vancouver. It goes beyond the affront to social justice encountered by female ski jumpers who are legally appealing their exclusion from the Vancouver games.

I guess what I am left wondering is exactly what value do Canadians put on Olympic medals. Is a gold medal in Men's hockey at the Olympics really a higher priority than preventing deaths amongst vulnerable members of our society?

Elinor Ostrom presents her analysis of the commons

2009-10-13T07:20:00.000-07:00

Elinor Ostrom won the Nobel prize in economics yesterday (along with Oliver Williamson). Here is a video by Prof. Ostrom explaining her take on the commons.

U of C's Miraculous Faculty

2009-10-08T07:56:00.001-07:00

The Times Higher Education supplement has published its world university rankings. Hard to know what to make of it. Calgary moved up to around 150th place. There are several "reputation" measures which one might think are soft; and there are also some harder numbers that might be meaningful. Our university has the lowest rank out of all 200 universities listed for staff/student ratio -- i.e. the fewest staff per student. But it also ranks at the very top for citations per staff member (along with Harvard and Stanford). If true, then faculty here apparently teach very heavy loads and yet are exceedingly productive in research.

While the obvious explanation is that the faculty of this university are remarkable in every way, cynics may suspect that the rankings authors input an incorrectly low faculty number, which would explain both our extraordinarily high citations/faculty and our extraordinarily low staff/student ratio.

In any case, at least for showing progress, U of C has done remarkably. In 2006, it ranked 266. In 2007, 166. In 2008, 170. In 2009, 149.

Zombie Economics (John Quiggin)

2009-10-06T07:35:00.000-07:00

Economist John Quiggin has a new book (in progress) entitled Zombie Economics. Now, don't think its about a microeconomic analysis of the undead's behavior or the costs and benefits of eating brains. Rather,

Before the global financial crisis ideas like the Efficient Markets Hypothesis and the Great Moderation were very much alive. Their advocates dominated mainstream economics and their influence, acknowledged or not, guided the thinking of the practical men and women whose decisions created a financial system in which tens of trillions of dollars of interlinked obligations were built on a foundation of speculative, or entirely spurious investments, and a global economy in which both households and nations lived far beyond their means.

Today these ideas appear to be defunct. Commentators who were proclaiming, a year or two ago, that the business cycle had been tamed, and replaced by a Great Moderation in economic activity, have admitted their error or, more commonly, moved on to talk of other things. The claim that financial markets make the best possible use of economic information, and can never be subject to irrational bubbles, is rarely made, and usually hedged with all kinds of qualifications and escape clauses.

But habits of mind and thought are hard to change, especially when there is no ready-made alternative. The ideas that brought the global financial system to the brink of meltdown, and have already caused thousands of firms to fail and cost millions of workers their jobs, still underlie the thinking of those who are trying to respond to the crisis and, to a large extent, of the commentators and analysts who assess those responses. These ideas are neither alive nor dead; rather, they are undead, or zombie ideas. Hence the title of this book.

Its worth reading. His analysis and the resulting implications of the efficient market hypothesis (and other theories) are insightful and well-written.

Narayana Kocherlakota on the state of macroeconomics

2009-10-04T09:36:00.000-07:00

I was recently asked by a student in my intermediate micro class about whether she should take a course in macroeconomics. Her concern was that she hadn't found the information in her introductory macro class to be... well... interesting. I tried to explain that there is more to macro economics than what she read in her introductory textbook and encouraged her to look into taking an intermediate macro class.

Below is a recent piece by Narayana Kocherlakota documenting his thoughts on macroeconomics. I thought the last point he makes is particularly germane to the discussion I had with my student.

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Nobel Prize Predictions

2009-09-24T12:50:00.000-07:00

Here's the listing of predictions from Thomson-Reuters for the Nobel Prize in Economics:

ERNST FEHR (University of Zurich)
MATTHEW J. RABIN (University of California Berkeley)
WILLIAM D. NORDHAUS (Yale University)

MARTIN L. WEITZMAN (Harvard University)

JOHN B. TAYLOR (Stanford University)

JORDI GALI (Pompeu Fabra University)
MARK L. GERTLER (New York University)

This year, I have no strong picks. That said, I would like to see Prof. Fehr or Prof. Gali win.

2009 MacArthur Foundation Genius Awards

2009-09-22T10:20:00.000-07:00

The MacArthur Foundation announced its genius awards today. MIT economist Esther Duflo was one of the winners.

Daniel Ellsberg on Democracy Now

2009-09-16T11:33:00.000-07:00

Today, Democracy Now aired an interview with Daniel Ellsberg to discuss the new movie The Most Dangerous Man in America regarding Dr. Ellseberg's work during the Nixon administration and his leaking of Pentagon papers regarding the Vietnam war.

Dr. Ellsberg is know to graduate microeconomics students for his popularizing of what is known as the Ellsberg paradox:

Suppose you have an urn containing 30 red balls and 60 other balls that are either black or yellow. You don't know how many black or yellow balls there are, but that the total number of black balls plus the total number of yellow equals 60. The balls are well mixed so that each individual ball is as likely to be drawn as any other. You are now given a choice between two gambles:

Gamble A Gamble B

You receive $100 if you draw a red ball You receive $100 if you draw a black ball

Also you are given the choice between these two gambles (about a different draw from the same urn):

Gamble C Gamble D

You receive $100 if you draw a red or yellow ball You receive $100 if you draw a black or yellow ball

Since the prizes are exactly the same, it follows that you will prefer Gamble A to Gamble B if, and only if, you believe that drawing a red ball is more likely than drawing a black ball (according to expected utility theory). Also, there would be no clear preference between the choices if you thought that a red ball was as likely as a black ball. Similarly it follows that you will prefer Gamble C to Gamble D if, and only if, you believe that drawing a red or yellow ball is more likely than drawing a black or yellow ball. If drawing a red ball is more likely than drawing a black ball, then drawing a red or yellow ball is also more likely than drawing a black or yellow ball. So, supposing you prefer Gamble A to Gamble B, it follows that you will also prefer Gamble C to Gamble D. And, supposing instead that you prefer Gamble D to Gamble C, it follows that you will also prefer Gamble B to Gamble A.

When surveyed, however, most people strictly prefer Gamble A to Gamble B and Gamble D to Gamble C. Therefore, some assumptions of the expected utility theory are violated.

Gamble A	Gamble B
You receive $100 if you draw a red ball	You receive $100 if you draw a black ball

Gamble C	Gamble D
You receive $100 if you draw a red or yellow ball	You receive $100 if you draw a black or yellow ball

Did Taxes Killed the Beatles?

2009-09-15T15:42:00.000-07:00

The Beatles are in the news (again). On 9.9.09 their Rock Band game was issued and the 40th anniversary of their break-up is approaching. In a new article, Daniel Finkelstein discusses the Beatles as a "triumph of capitalism." He argues that Brian Epstein's management of the band, and particularly the management of how and when the Beatles name was used in association with a product, made the band a huge commercial success.

After Epstein's death in 1967, many believe the band started on the road towards their break-up fueled by disagreements on management and financial issues. One way in which the financial stress of the Beatles was magnified was by the existing tax system. Quoting Finkeslstein (who is paraphrasing Tony Bramwell):

Bramwell was friends with all the group, present when Paul met John; he was Brian Epstein’s right-hand man, fixing gigs for Jimi Hendrix and mixing drinks with the Rolling Stones; and was still there when Phil Spector produced Let It Be. In his recent book Magical Mystery Tours (a wonderful insider memoir) Bramwell argues that it was penal tax rates that helped to destroy the group’s cohesion.
First told to give away vast amounts to avoid tax bills — which they did in a series of madcap ventures, offering money to any old person who dropped by with a demo tape — then told they had to make £120,000 in order to keep just £10,000. Soon their finances were in chaos and their energy sapped, as nutters beseiged Apple HQ pressing tapes on them. They also ran a clothes shop as a tax dodge.

Bramwell blames Harold Wilson, the Prime Minister, directly. “There were enough new regulations and red tape to tie up free enterprise for years ... One minute Swinging London was like a giant theme park, the envy of the world, then they — Wilson and his gang — closed it down. It was as if they went out and stamped on it.”

The following video provides a re-enactment (sort of) of Bramwell's account of the band

For the record, and given my last post, I'm not a Beatles fan.

The Economic History of Acting Black (?)

2009-09-15T07:50:00.000-07:00

Roland Fryer and David Austen-Smith have a very intriguing article entitled "An Economic Analysis of Acting White" (QJE, 2005). In the article, they document the tension between signaling to the job market and signaling to peers. The simple story is that, for example, you may feel ostracized by peers for doing well on an exam even though this type of good performance may help you in the labor market down the road. When I was in high school, this was an important phenomenon which kept a lot of talented people from doing their best. (My high school had, in my opinion, a very low graduation rate.)

I'm currently reading Elijah Wald's How the Beatles Destroyed Rock and Roll. Wald documents American of popular music in the U.S. (I haven't got to the part where the Beatles wreck things.)

During the ragtime period (ranging from the 1880's through the 1920's depending on what source you look at) composers like Scott Joplin and Kerry Mills wrote dance music that became the foundation of many social dances of the period. This was also an important time for immigration to the U.S. and presented many moves by immigrants to assimilate into American culture. Since European immigrants were coming from a culture that emphasized folk music/dances and had less in common with the white upperclass in the U.S., acting black became a means for new immigrants to fit in socially and become parts of the communities in which they lived. Citing Wald,

Acting black became an ethnic lever, a way for Jews, Irish, and Central and Southern Europeans to assimilate into the white mainstream. (p. 30)

Understanding Neuroeconomics

2009-09-11T14:32:00.001-07:00

A friend of mine forwarded me the following video. It features Colin Camerer and Steven Quartz of CalTech explaining the methods and implications of neuroeconomics for our understanding of the emotions, risk taking behavior and our understanding of markets.

Latest Salary Information by Major

2009-09-08T07:30:00.000-07:00

Here's the latest data from PayScale.com on the salaries by major. In the ranking on their page, economics ranks 5th (out of 75, behind the engineering degrees). English (my brother's major) ranks 47th. The business degrees (international business and business administration) rank 28th and 35th.

Best Undergrad College Degrees By Salary

Methodology
Annual pay for Bachelors graduates without higher degrees. Typical starting graduates have 2 years of experience; mid-career have 15 years. See full methodology for more.

Krugman on the desperate state of macro

2009-09-04T08:18:00.000-07:00

Paul Krugman has a lengthy article in the NYTimes explaining "what went wrong" with macroeconomics. "As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth." Obviously, he has decided that the approval of his academic colleagues isn't important to him anymore... Any views from the macroeconomists among us?

A little humor as classes are set to begin

2009-09-03T07:57:00.000-07:00

Classes start next Tuesday. My wife has this comic hanging on our 'fridge.

The Ultimate Veblen Good

2009-09-01T11:13:00.000-07:00

Curtis Eaton (here), myself, (here and here) and many others have written on Veblen goods: goods that are valued largely as symbols of social status. Perhaps this is the ultimate Veblen good:

Los Angeles Times (Aug 25, 2009): It was a day of ups and downs when the online bidding ended Monday for the crypt above Marilyn Monroe.
Elsie Poncher, whose husband Richard Poncher is entombed in the crypt at Pierce Brothers Westwood Village Memorial Park, said she wanted to sell it to pay off the more than $1-million mortgage on her Beverly Hills home.
A bidder from Japan appeared to be the winner of the EBay auction, with an offer of $4,602,100 -- $100 more than the next highest bid.

In addition to being above Marilyn Monroe, it was once owned by Joe DiMaggio and the tomb next to it is owned by Hugh Hefner. My favorite quote from the article:

Elsie Poncher, who is in her 70s, plans to move her husband's remains to the crypt designated for her, and when the time comes, she'll be cremated. She said that when her husband was dying, he made a request. "He said, 'If I croak, if you don't put me upside down over Marilyn, I'll haunt you the rest of my life.' "

Econ salaries

2009-07-24T08:55:00.000-07:00

Students who are wondering about whether to major in Econ might be interested in finding out how salaries in the US differ by university major. It turns out that there is some compensating differential for economics...

What Do Charles Plott and I Have In Common?

2009-07-22T11:01:00.000-07:00

What do Charles Plott and I have in common?

Two articles in the most recent issue of Economic Inquiry.

Darwin v. Smith

2009-07-12T07:47:00.000-07:00

Robert Frank, in a short, powerful article, argues that Darwin is destined to be seen as the "intellectual founder" of modern economics, replacing Adam Smith. This should be required summer reading. And it is only a few paragraphs.

AB economic council without economists

2009-07-03T10:48:00.000-07:00

The Alberta Premier's Council for Economic Strategy has been announced. Twelve members, of whom one is an economist. Presumably the idea is that anyone is an expert in economics. Either that, or economists have not much to add.

No academics from Alberta. Two Oxford professors, one an expert in the ethics of post-conflict reconstruction, and another an immunologist. They are so smart at Oxford, that even their immunologists are experts in economics. I guess our immunologists and ethicists here in Alberta aren't so good in economics. I find this surprising, because most economists I know here have a pretty deep understanding of immunology, ethics, and all other subjects. In fact, I am prepared to advise the UK government on directions for cell biology research anytime. Or even the ethics of cell biology research, but that would cost a little more.

I wonder, if we can't trust local university academics to advise the government, how can we possibly rely on Albertans to lead the government? This, to me, raises the novel idea of requiring that our provincial politicians must be resident abroad -- sort of like Michael Ignatieff -- in order to qualify for a responsible position in Alberta.

The message I hear from our government is this: "If you're so smart, why are you at a university in Alberta?"

Natural gas and AB fiscal situation

2009-07-02T10:45:00.000-07:00

The economic exploitation of shale gas is likely to result in a long-term downward revision of natural gas prices. In turn, this will likely result in a significant long-term reduction in natural gas royalties for Alberta. In 2008, natural gas royalties contributed about $6bn to the Alberta treasury, in addition to indirect contributions through corporate and personal income taxes. This year, the figure will be maybe $3.5bn. And there seems little prospect of a return to higher revenues -- indeed, revenues will probably trend down with a drop in drilling.

I am not an expert in this area, but would like to hear your views on what this means for Alberta and perhaps for U of C. It looks to me like the province, the city, and the university should be considering a permanent reduction in expenditures to match the reduction in revenues. This is not related to the recession, so we can't just aim for stimulus spending: it really relates to the improvement in technologies enabling economic access to shale gas and is a permanent feature of our economy.

Economics and Inner Peace

2009-06-19T09:35:00.001-07:00

My wife is a yoga instructor and has introduced me to a number of books regarding finding inner peace. I've also recently read a number of music books on finding inner peace while performing and through the writing of music. Now, there is a way to find inner peace using the economic way of thinking:

"The optimal number of lifetime speeding tickets is greater than zero."
One of the great things about being an economist is that you get inner peace by using the EWOT in this way.

A shameless plug for economic history...

2009-06-18T07:52:00.000-07:00

In a recent post, Rob brought an interview with Paul Samuelson to our attention. Part 2 of the interview is now posted and it ended with an interesting question for students entering graduate study in Economics:

Conor Clarke: "Very last thing. What would you say to someone starting graduate study in economics? ... Where does it go from here and how does the current crisis change it?"

Paul Samuelson: "Well, I'd say, and this is probably a change from what I would have said when I was younger: Have a very healthy respect for the study of economic history, because that's the raw material out of which any of your conjectures or testings will come. "

An Interview With Paul Samuelson

2009-06-17T13:54:00.000-07:00

A few days ago I wrote about Paul Samuelson's view about the economic recovery and the strength of the U.S. dollar. Today, a new interview with Professor Samuelson has been published in the Atlancis. Professor Samuleson won the John Bates Clark Award (1947) and the Nobel prize (1970) and made important contributions to the fields of welfare economics, public economics/finance, and consumer/utility theory.

In other news about Nobel laureates, today is George Akerlof's birthday. Professor Akerlof will be in Calgary next week for a meeting of the Canadian Institute for Advanced Research.

Ticket Pricing in the Age of the Internet

2009-06-15T13:24:00.001-07:00

Peter Tracey recently directed me to a column by Terrance Corcoran. Apparently, Industry Minister Tony Clement is looking into ways to address ticket retailers who are engaged in uncompetitive practices.

In Ottawa, Industry Minister Tony Clement declared himself to be a "regular concert goer," making him therefore qualified to take action against Ticketmaster and its associated resale arm, TicketsNow. "The government won't stand idly by when there is potential that companies may be engaged in uncompetitive practices that are hurting consumers," he said. Mr. Clement dispatched the Competition Bureau to investigate.
In Ontario, no slouch in maintaining high farm prices, Premier Dalton McGuinty is preparing legislation to protect Britney Spears consumers by going after Ticketmaster and setting up an apparently beefier anti-scalping law than the existing one. Ontario's Attorney General, Chris Bentley, said "What Ontarians want is fair access. This is about consumer protection." Various class-action lawyers and U. S. politicians are also getting into the concert pricing regulation business.
Even the performers are restless, with old boy lefties like Bruce Springsteen reportedly "furious" that tickets for his welfare-state priced concerts -- $90 to $250 -- were being sold at higher prices on the TicketsNow resale site before the regular sales process had run its course.

Corcoran argues that there is no need to regulate this market as the internet has taken over the position once held by scalpers, in doing so imposing some market discipline on ticket pricing.

Almost overnight, the buying and selling of tickets for sports, concerts, theatre and other live events has gone from the moribund paper era to the electronic era. The market took over scalping, bringing market prices to tickets that in the past were sold only once at what the concert promoters thought and hoped would be the right profit-maximizing price. If not, if the price was set too low, too bad. The market died with the first sale, except for a few scalped tickets at the door on the day of the event.

There is no need for politicians to attempt to control this market. In fact, that would be the worst approach. The rise of online market sales makes it possible for performers, promoters, ticket sellers and resellers to capture top market value. The major beneficiaries will be the performers, who for the first time will be able use auctions and other pricing mechanisms to get the most out of their performances.

I wonder if Tony Clement has thought about Trent Reznor's suggestions for stopping scalping.

Paul Samuelson on The U.S. Dollar

2009-06-15T08:26:00.000-07:00

I came across this post from Paul Samuelson, a name known to all economist and economics students from his textbook and contributions to economic theory. His view is that, even with the optimism of the Federal Reserve, the current economic crisis may be nothing compared to the what happens when the Asian nations turn pessimistic against the U.S. dollar:

Up until now, China has been willing to hold her recycled resources in the form of lowest-yield U.S. Treasury bills. That's still good news. But almost certainly it cannot and will not last.
Some day -- maybe even soon -- China will turn pessimistic on the U.S. dollar.
That means lethal troubles for the future U.S. economy.
When a disorderly run against the dollar occurs, I believe a truly global financial panic is to be feared. China, Japan and Korea now hold dollars not because they think dollars will stay safe.

Minimum Wage Increases

2009-06-12T08:00:00.000-07:00

The U.S.'s federal minimum wage is set to rise in a few days. This is part of a three step increase passed in 2007. A new editorial by David Neumark in the Wall Street Journal provides some analysis of the minimum age with particular attention to raising it at this time:

Based on 20 years of research, I doubt there is ever a goodtime to raise the minimum wage. However, with the aggregate unemployment rate at 9.4%, the teen unemployment rate exceeding 22%, and the unemployment rate for black teens nearing 40%, next month's increase seems like the worst timing possible.

Despite a few exceptions that are tirelessly (and selectively) cited by advocates of a higher minimum wage, the bulk of the evidence -- from scores of studies, using data mainly from the U.S. but also from many other countries -- clearly shows that minimum wages reduceemployment of young, low-skilled people. The best estimates from studies since the early 1990s suggest that the 11% minimum wage increase scheduled for this summer will lead to the loss of an additional 300,000 jobs among teens and young adults. This is on top of the continuing job losses the recession is likely to throw our way.

The reduction in jobs for youths might be an acceptable price to pay if a higher minimum wage delivered other important benefits. Many people believe, for instance, that it helps low-income families. Here, too, the evidence is discouraging. There is no research supporting the claim that minimum wages reduce the proportion of families living in poverty. Research I've done with William Wascher of the Federal Reserve Board and Mark Schweitzer of the Cleveland Fed indicates that minimum wages increase poverty.

The Economics of The Big Label Record Deal

2009-06-10T08:54:00.000-07:00

I have some friends who recently signed a record deal with a "big player" in music. I was asked a bit about my opinions regarding their advance, their cut on sales (i.e., "points"), etc. Having grown up in the San Francisco music scene, I have had several friends sign these type of deals. As an economist, I've had lots of them ask me these questions. Personally, I find the deals too complicated to give any real advice. However, I always refer people to the famous (or maybe infamous) essay by Steve Albini on the "music industry." In this essay, he comes up with the following rough accounting of a record deal.

Since some of you may not read to the end of the quote from his essay (not quoted below), the last statement in Steve Albini's essay is usually what I tell my friends once they have signed these deals.

These figures are representative of amounts that appear in record contracts daily. There's no need to skew the figures to make the scenario look bad, since real-life examples more than abound. Income is underlined, expenses are not.

Advance: $ 250,000

Manager's cut: $ 37,500

Legal fees: $ 10,000

Recording Budget: $ 155,500

Producer's advance: $ 50,000

Studio fee: $ 52,500

Drum, Amp, Mic and Phase "Doctors": $ 3,000

Recording tape: $ 8,000

Equipment rental: $ 5,000

Cartage and Transportation: $ 5,000

Lodging while in studio: $ 10,000

Catering: $ 3,000

Mastering: $ 10,000

Tape copies, reference CDs, shipping tapes, misc. expenses: $ 2,000

Album Artwork: $ 5,000

Promotional photo shoot and duplication: $ 2,000

Video budget: $ 31,000

Cameras: $ 8,000

Crew: $ 5,000

Processing and transfers: $ 3,000

Off-line: $ 2,000

On-line editing: $ 3,000

Catering: $ 1,000

Stage and construction: $ 3,000

Copies, couriers, transportation: $ 2,000

Director's fee: $ 4,000

Band fund: $ 15,000

New fancy professional drum kit: $ 5,000

New fancy professional guitars [2]: $ 3,000

New fancy professional guitar amp rigs [2]: $ 4,000

New fancy potato-shaped bass guitar: $ 1,000

New fancy bass amp: $ 1,000

Rehearsal space rental: $ 500

Big blowout party for their friends: $ 500

Tour expense [5 weeks]: $ 50,875

Bus: $ 25,000

Crew [3]: $ 7,500

Food and per diems: $ 7,875

Fuel: $ 3,000

Consumable supplies: $ 3,500

Wardrobe: $ 1,000

Promotion: $ 3,000

Tour gross income: $ 50,000

Booking Agent's cut: $ 7,500

Manager's cut: $ 7,500

Merchandising advance: $ 20,000

Manager's cut: $ 3,000

Lawyer's fee: $ 1,000

Publishing advance: $ 20,000

Manager's cut: $ 3,000

Lawyer's fee: $ 1,000

Record sales: 250,000 @ $12: $ 3,000,000

Gross retail revenue Royalty [13% of 90% of retail]: 250,000 @ $12: $ 351,000

Less advance: $ 250,000

Producer's points [3% less $50,000 advance]: $ 40,000

Promotional budget: $ 25,000

Recoupable buyout from previous label: $ 50,000

Net royalty: $ -14,000

Now, on the other hand, let's look at the Record company income:

Record wholesale price $6.50 x 250,000 $ 1,625,000 gross income

Artist Royalties: $ 351,000

Deficit from royalties: $ 14,000

Costs of manufacturing, packaging and distribution @ $2.20 per record: $ 550,000

Label's gross profit: $ 7l0,000

The Balance Sheet: This is how much each player got paid at the end of the game:

Record company: $ 710,000

Producer: $ 90,000

Manager: $ 51,000

Studio: $ 52,500

Previous label: $ 50,000

Booking Agent: $ 7,500

Lawyer: $ 12,000

Band member net income each: $ 781.25

The band is now 1/4 of the way through its contract, has made the music industry more than 3 million dollars richer, but is in the hole $14,000 on royalties. The band members have each earned about 1/20 as much as they would working at a 7-11, but they got to ride in a tour bus for a month.

The next album will be about the same, except that the record company will insist they spend more time and money on it. Since the previous one never "recouped," the band will have no leverage, and will oblige.

The next tour will be about the same, except the merchandising advance will have already been paid, and the band, strangely enough, won't have earned any royalties from their T-shirts yet. Maybe the T-shirt guys have figured out how to count money like record company guys.

Bank of Canada Statistics

2009-06-10T08:49:00.001-07:00

In some work I was doing this morning, I thought the Bank of Canada had some interesting statistics. I'm particularly interested in the numbers regarding expectations:

20% of firms expect price increases of 1-3% over the next six months.
22% of firms expect inflation over the next six months to exceed 2%.

Job Loss in the U.S.: the movie

2009-06-05T16:44:00.001-07:00

Here's an interesting animation of job creation and job loss in the U.S. from the period of 2004 to the present. (Sorry, I wasn't able to figure out how to post the item itself in the blog post. Don't email me or comment with the solution.) The animation was created by TIP Strategies. A couple of things to note:

Note the effect of Hurricane Katrina in late 2005.
Note how quickly the number of lost jobs balloons in late 2008.
Note how relatively unaffected the mid-west is by the crisis.

The Economics of Bat S*#%

2009-06-05T12:26:00.000-07:00

Given the current economic crisis, pundits often turn their attentions to the debts nations carry, the payments on which could be used elsewhere in their struggling economies. In an new article in the Journal of Economic History, former U of C prof Catalina Vizcarra discussed how the use of guano (a.k.a. bird and bat shit) was used to service Peru's debt in the late 1800's. The abstract:

Peru’s experience with sovereign debt during the guano boom is one of the most remarkable in the nineteenth century. Despite the country’s ongoing political instability and poor capital market reputation, the price of Peruvian bonds soared shortly after settlement in 1849, and the country enjoyed relatively low credit risk until the 1870s. This article discusses the incentives Peru and its creditors faced, and explains how Peru’s extraordinary performance in financial markets was founded on its credible commitment to service its debt with the guano proceeds.

Peru was able to service its debt given lucrative trade and its virtual monopoly in guano. As part of this servicing, new institutions and markets (e.g., banks, trade organizations, new financial institutions, investments in new industries) emerged from the trade in guano. In essence, this is a story of how international trade in one sector can transform (even in a relatively short time frame) and entire economy.

Some of the most interesting (to me) parts:

The Peruvian state’s guano monopoly was a revolution for government finance. As is shown in Table 4, guano exceeded customs revenue beginning in the early 1850s, from then until the late 1860s it accounted for two-thirds or more of total government revenue. In the mid-1850s, when guano income exceeded two million pounds sterling per year, Peru reduced import tariffs and abolished the Indian head tax. Tariff revenue still grew because imports were growing rapidly during the period. Government revenues nearly doubled between 1847 and 1852, and doubled again by the early 1860s. (p. 370-71)

At the onset of the guano boom in the early 1850s, Presidents Echenique and Castilla radically reformed the tax system. Some of the key changes included massive reduction in tariffs, commercial treaties with foreign countries, and the abolition of the tribute (Indian head tax). Tariffs and the head tax comprised close to 70 percent of government income in the pre-guano era. Reimposition of the head tax or raising tariffs would have entailed political negotiations that could have been time-consuming and perhaps have unintended political consequences. There is well-documented evidence of major resistance to any tax reforms (reimposition of these measures) in the period. Furthermore, a fall in guano exports would cut into imports, so that even with an increase in tariff rates, positive effects on revenue would be uncertain. This meant that, at least in the short term, there was no alternative to guano. The penalty for default—an interruption of the guano trade—therefore carried with it large financial costs. Historians have typically interpreted Peru’s tax reforms of the 1850s as motivated by domestic political considerations, but the credible commitment problem offers another possible explanation. By increasing dependence on guano, Peru made its commitment to the bondholders more credible because it could not risk interrupting the guano trade. No Peruvian government could take such a risk. Consequently, Peru’s notorious political instability did not weaken the credible commitment to repay its foreign debt. Because of the nature of the guano security, the identity of the government was of secondary concern.

From the conclusion:

The guano windfall ushered in an era of relative prosperity for many in Peru, particularly those among the elite. Those who point to the guano boom’s positive impacts note that access to foreign capital and the flow of guano revenues facilitated the creation of Peru’s first banks, and of investment in cotton, nitrates, and sugar. However, the perception among many Peruvian scholars and citizens alike is that the prosperity of the guano period was ephemeral, and that it did not leave a positive legacy insofar as the Peruvian economy or its political institutions.

Alberta Puts Forth New Rules for Pay Day Loans

2009-06-03T20:48:00.000-07:00

I wrote previously about the ways in which pay-day loans result in individuals paying more for financial services. Now Alberta has put forth a new set of rule for pay-day lenders. Some highlights:

Starting in September, businesses will be prohibited from charging more than $23 in fees and interest for each $100 borrowed.
Giving customers a two-day cooling-off period in which they can return the money and cancel the loan without paying any costs.

Ordering companies to use plain language in contracts.

Requiring them to post their costs prominently in outlets.
Rollover loans — where people with more than one loan pay extra charges — will be banned.

The province will also license any companies that wish to operate in Alberta.

Research of Twitter

2009-06-03T06:23:00.001-07:00

I was forwarded this post by someone who had read my previous comments on Twitter. Although most social networking sites are dominated by women (i.e., women produce most of the content and are followed by men and women):

Although men and women follow a similar number of Twitter users, men have 15% more followers than women. Men also have more reciprocated relationships, in which two users follow each other. This "follower split" suggests that women are driven less by followers than men, or have more stringent thresholds for reciprocating relationships. This is intriguing, especially given that females hold a slight majority on Twitter: we found that men comprise 45% of Twitter users, while women represent 55%. To get this figure, we cross-referenced users' "real names" against a database of 40,000 strongly gendered names.

Even more interesting is who follows whom. We found that an average man is almost twice more likely to follow another man than a woman. Similarly, an average woman is 25% more likely to follow a man than a woman. Finally, an average man is 40% more likely to be followed by another man than by a woman. These results cannot be explained by different tweeting activity - both men and women tweet at the same rate.

What I found more interesting is the "usage distribution" of Twitter:

Twitter's usage patterns are also very different from a typical on-line social network. A typical Twitter user contributes very rarely. Among Twitter users, the median number of lifetime tweets per user is one. This translates into over half of Twitter users tweeting less than once every 74 days. At the same time there is a small contingent of users who are very active. Specifically, the top 10% of prolific Twitter users accounted for over 90% of tweets. On a typical online social network, the top 10% of users account for 30% of all production.... This implies that Twitter's resembles more of a one-way, one-to-many publishing service more than a two-way, peer-to-peer communication network.

Upcoming Fund Raiser in Calgary

2009-06-01T15:53:00.000-07:00

I've been doing some research on charitable giving, not looking at the motives as much as the mechanisms organizations use to raise funds. So its in this respect that I'm posting the following regarding an upcoming event in Calgary to raise funds for Janus Academy, a school specializing in the education of children with autism:

Measuring "Outputs" in Determining Funding for Universities

2009-05-28T11:01:00.000-07:00

At many universities (inclugin the University of Calgary), funding is often decided basedo n inputs: how many grants individuals/institutions have received, how many students are attending, etc. While there are funding decisions based on outputs (number of publications by faculty, donations from alumni (considering graduates as an output form the unversity), funding decisions at the provincial and federal levels are often basedon what I would consider inputs. In the U.S., there are proposals to make funding for universities based on their main output good:

Lawmakers in Ohio appear likely to adopt a plan, introduced this year, that would base 100% of higher education spending on course and degree completion. Indiana is considering a similar but more modest proposal. And in Louisiana, the governor and Legislature have called for plans that tie 25% of higher education funding to student success.

The concept of rewarding institutions that meet certain goals has been around for about 30 years, but the newer proposals focus more on student outcomes and involve more money.
The renewed interest reflects a growing concern that the USA has fallen behind other countries in college completion rates at a time when higher education is more important than ever.

Other states have similar programs:

Strategies vary with state priorities, says Brenda Albright, an education consultant in Franklin, Tenn., who studies enrollment-based funding.
• Ohio and Indiana are targeting degrees in science, technology, engineering and math.

• Missouri's department of higher education has proposed a plan to finance schools based on how students in allied health and other fields fare on state licensing exams.

• Washington state's board of community and technical colleges plans to reward schools when students cross certain hurdles, such as completing 15 credits and passing math, along the way toward earning a credential.

Some early adopters, such as Florida, have seen results. From 1997 to 2007, Florida's community-college completion rates shot up 43% while enrollments rose 18%.

Such policies would imply that universities with low completion rates would experience funding cuts. This may be an appropriate way to help divert resources to better institutions. I am curious what this type of policy would imply for programs within an institution. I don't know what the results look like for other fields, but in economics, the American Economic Association has a study which looked at completion rates in economic graduate programs. As expected, lower ranked universities have lower completion rates in economic graduate programs. (These lower rates may be due to selection, competition for the higher tiered schools, or the smaller programs at some universities.)

As noted earlier, 27 percent of the 2002 entering class had completed work on their Ph.D. within five years of matriculation. Thirty-four percent of the original cohort had dropped out by their fifth anniversary, leaving 39 percent still toiling in the academic vineyard.3 Based on a sample of 1,154 economics Ph.D.s who graduated in 1996-97 and 2001-02 (two cohorts who all completed their degrees during the same years), Siegfried and Stock (1999, 2004) found that 41 percent of those who eventually earn a Ph.D. degree, do so by the end of five years. A similar completion distribution for our 2002 entering class sample, adjusted for likely attrition at our disproportionately higher tier sample programs, implies an eventual completion rate around 60 percent for all 2002 economics Ph.D. program entrants.

Completion falls monotonically as program rank declines, ranging from a five-year completion rate of 33 percent for the three Tier 1 programs in our sample, to only 17 percent of the entrants into programs ranked below 48th (Tier 5). Given their higher completion rates and because Tier 1 and Tier 2 programs appear to better avoid attrition among their students than programs in lower tiers (the Tier 1 and 2 two-year attrition rates average less than 18 percent of entrants, while those of lower tier programs are above 32 percent of entrants), we group Tier 1 and Tier 2 programs together when estimating completion. Because five year completion rates of students in Tier 3 and Tier 4 programs are similar, but those for Tier 5 programs are much lower, we group programs in Tiers 3 and 4 together, and use that large group as a benchmark.

Drinking Behavior and Fraternity Membership

2009-05-28T10:52:00.000-07:00

There's an interesting new paper by Jeff DeSimone in Economic Inquiry. The abstract:

This paper estimates the impact of fraternity and sorority membership on a wide array of drinking outcomes among respondents to four Harvard College Alcohol Study surveys from 1993 to 2001. Identification is achieved by including proxies for specific types of unobserved heterogeneity expected to influence the relationship. These include high school and parental drinking behaviors to account for time-invariant omitted factors and assessed importance of drinking-related activities and reasons for drinking to control for changes in preferences since starting college. Because self-selection is quantitatively important, I further hold constant variables plausibly affected by fraternity membership, such as current alcohol use categorization, ranging from abstainer to heavy drinker, and time spent socializing. Even in the fully saturated model, fraternity membership significantly increases drinking intensity, frequency, and recency, as well as the prevalence of many deleterious drinking consequences that potentially carry negative externalities.

Given my interests in the role of social identities in decision making, I wonder how much joining a fraternity changes one's identity (an identity with the potential behavioral prescription involving heavy (or heavier) drinking). I find it interesting that the results still hold given a full accounting of selection effects (i.e., potential drinkers may be more likely to join a frat). Is it that joining a frat changes fundamental behavior? Is it that a frat just provides more opportunities to drink?

Google's Chief Economist: Internet Searches as Auctions

2009-05-28T07:56:00.000-07:00

Hal Varian is a name familiar to almost every graduate student in microeconomics. He is currently serving as the chief economist for Google. Wired's article discusses the concept of Google's AdWords as an acution:

In the midst of financial apocalypse, the gadflies and gurus of the global marketplace are gathered at the San Francisco Hilton for the annual meeting of the American Economics Association. The mood is similar to a seismologist convention in the wake of the Big One. Yet surprisingly, one of the most popular sessions has nothing to do with toxic assets, derivatives, or unemployment curves.

"I'm going to talk about online auctions," says Hal Varian, the session's first speaker. Varian is a lanky 62-year-old professor at UC Berkeley's Haas School of Business and School of Information, but these days he's best known as Google's chief economist. This morning's crowd hasn't come for predictions about the credit market; they want to hear about Google's secret sauce.

Varian is an expert on what may be the most successful business idea in history: AdWords, Google's unique method for selling online advertising. AdWords analyzes every Google search to determine which advertisers get each of up to 11 "sponsored links" on every results page. It's the world's biggest, fastest auction, a never-ending, automated, self-service version of Tokyo's boisterous Tsukiji fish market, and it takes place, Varian says, "every time you search." He never mentions how much revenue advertising brings in. But Google is a public company, so anyone can find the number: It was $21 billion last year.

His talk quickly becomes technical. There's the difference between the Generalized Second Price auction model and the Vickrey-Clark-Groves alternative. Game theory takes a turn; so does the Nash Equilibrium. Terms involving the c-word—as in clicks—get tossed around like beach balls at a summer rock festival. Clickthrough rate. Cost per click. Supply curve of clicks. The audience is enthralled.

During the question-and-answer period, a man wearing a camel-colored corduroy blazer raises his hand. "Let me understand this," he begins, half skeptical, half unsure. "You say that an auction happens every time a search takes place? That would mean millions of times a day!"

Varian smiles. "Millions," he says, "is actually quite an understatement."

Robert Engel on Volatility

2009-05-27T08:11:00.000-07:00

Robert Engel has a new article in the Financial Times on volatility in financial markets. The crux is on what determines volatility and what we can expect in the current crisis:

Volatility is not yet back to normal primarily because macroeconomic uncertainty is not yet resolved. When the end of the recession becomes more predictable and the recovery is in sight without excessive inflation fears, then volatility should finally return to its normal level just below 20 per cent.

New Economics Blog

2009-05-27T07:50:00.000-07:00

There is a new economics blog: Ecocomics, where the dismal science and comics collide. Great discussions of the equality/efficiency trade-offs inherent in many comic book story lines (something Vulcan's surely must consider) and the role of mutants in the economy (not biological or cultural ones; X-men kinda mutants). Worth reading.

This reminds me of a couple of other forays of economics into the realm of comic books. Many years ago, Shotaro Ishinomori wrote Japan Inc. as an introduction to Japanese economics and the role and effects of international trade. (I have this book in my office if anyone locally wants to borrow it. There is also a volume two, which I haven't read.) Grady Klein and Yoram Bauman have the forthcoming book The Cartoon Introduction to Economics. Finally, there is the recurrent theme in comics, old as comics themselves, on the benefits of competition (see below):

Alberta Oilsands on Democracy Now

2009-05-22T12:12:00.001-07:00

Tom Goldtooth was on Democracy Now today discussing the Alberta oilsands and the new congressional climate change bill in the U.S.

Friday Beer Economics

2009-05-22T12:05:00.001-07:00

Here's a link to the latest on beer prices in various Canadian cities. Alberta put a new series of taxes into effect in April. Now a 12 pack of Labatt Blue (not my favorite; in fact, its pretty foul) in Calgary costs 28% more than in Montreal.

Unconventional Monetary Policy

2009-05-22T08:22:00.000-07:00

The Bank of Canada posted a speech by John Murray (deputy governor) on the need for unconventional monetary policy during the current economic crisis. Three instruments he highlights are the following:

1. Conditional statements about the future path of policy rates. The first mechanism is a conditional commitment regarding the future path of the policy interest rate. In normal times, this type of interest rate guidance is usually kept to a minimum or expressed in very general terms. In extraordinary times – such as we now face – it may be necessary to be more explicit and make a clear conditional commitment to keep the target overnight rate low for an extended period. Using this approach, central banks can influence interest rates well out the yield curve, because long-term rates are largely a reflection of expected future short rates. While it may not be possible to lower the overnight rate any further, expectations at longer maturities can still be shaped by conditionally committing to keep the overnight rate low.

For this mechanism to work, the conditional commitment must be credible, and inflation expectations must remain well anchored. Canada's positive experience over the past 18 years with an inflation targeting framework is especially helpful in this regard. Inflation targeting has reduced the risk of deflationary expectations, permitted aggressive policy action in response to the current crisis, and will no doubt make it easier to exit from any unconventional policies that are introduced.

2. Quantitative Easing. The second unconventional mechanism is quantitative easing. It is sometimes referred to pejoratively, and mistakenly, as "printing money." Quantitative easing occurs whenever a central bank purchases private or public sector securities by expanding its reserve base. These purchases directly affect the yields of the securities that are bought, putting downward pressure on their interest rates and upward pressure on their prices. They also inject additional central bank reserves into the financial system, which deposit-taking institutions can use to generate additional loans.

All quantitative easing is, by definition, "unsterilized." Although this is correctly viewed as unconventional, it closely resembles the way monetary policy is described in most undergraduate textbooks, and is broadly similar to how it was conducted in the heyday of monetarism.

3. Credit Easing. Credit easing is the third mechanism, and is a term reserved exclusively for central bank purchases of private sector assets in segments of the market where dislocations and credit constraints appear to be most severe. It is designed to ease credit conditions by stimulating more active trade in certain assets and through a process of portfolio substitution.

Sterilized purchases of private sector assets can be effected either by selling existing assets on the central bank's balance sheet – essentially swapping "good" assets for "bad" – or by creating additional central bank reserves and then sterilizing, or mopping up, the extra reserves by selling new government securities. Credit easing can also be combined with quantitative easing, in which case the purchase of private assets will remain unsterilized and the reserve base will expand.

I find the first one particularly interesting. It implies the Bank's commitments to future interest rates, thereby reducing much of the speculation we observe around, for example, U.S. Federal Reserve announcements.

The Economics of Star Trek

2009-05-21T16:12:00.000-07:00

Here's the best post on the topic (in my opinion). It looks like Vulcans understand public goods from an early age.

Cellphones and Driving

2009-05-21T15:29:00.000-07:00

Alberta is considering following several other provinces (NS, ON, QC) in banning the use of cellphones while driving. I personally think its a good idea, but my experience involves seeing several friends have accidents while on their phones.

I'm curious as to how such a change in legislation will affect accidents via changes in behavior. With respect to seat belts, some have argued that the reduction in risk presented by a seat belt is compensated for by increases in speed and other increases in risky driving behavior (something called risk compensation). I came up with a couple of (back of the envelope) competing hypotheses on the cellphone ban:

Banning cellphone use may result in people paying closer attention to their driving, thereby reducing accidents.
Banning cellphone may result in people increasing their speed, perhaps driving more recklessly in order to get home or to the office to make their calls.

Any other hypotheses are welcomed. Once I have enough hypotheses, I'll look into setting up a track and renting some go-karts.

The Twitter Market

2009-05-20T07:50:00.001-07:00

I have a Twitter account, but still don't quite "get it."

I've been told by some friends (also academics) that they have found it a useful tool in communicating with their classes (e.g., homework reminders, corrections of typos on assignments, etc.). I'm going to give it a shot in the fall and will let people know how it worked. I'll be joining others at the university (like the University of Calgary library) in using Twitter as a way to pass along information.

I've also heard from some friends of mine involved in marketing and web design that its a useful tool in building web traffic to particular sites. The general statistic I've heard thrown around is that for any link you post on your Twitter update, 4-10% of your followers will visit that site. In this sense, more followers is a good thing.

So an entrepreneur seeing an opportunity has developed a new service: TweepMe will get your "thousands of followers" (4,000+) automatically for a fee of $12.95. (By the way, they currently are offering $2 off on their service.)

Pay Day Loans in Alberta

2009-05-19T14:19:00.000-07:00

In the book Why the Poor Pay More, Gregory Squires discusses how predatory lending occurs via pawnshops and payday loans. Now, it looks like Alberta will begin putting controls on the fees and interest rates that payday lenders charge ("Alberta trgets payday lenders," Calgary Herald, May 18, 2009).

In some cases these lenders charge as much as 60% (once fees and interests are calculated and included into the short-term nature of the loan). While these services are of value to those who use them (many low income people can't access more familiar types of credit), the high rates of interest charged by these lenders impose significant costs on these individuals.

Michael Pollan on Democracy Now

2009-05-14T09:16:00.000-07:00

Given my recent posts on the amount of time people spend eating and Ghent's "Meatless Thursdays," I thought it worthwhile to point out the Michael Pollan was on Democracy Now this morning. My Pollan is the author of, among other books, The Omnivore's Dilemma.

In addition to discussing his book and industrial food production (i.e., industrial pork production and wine flu, pointing out that eating pork is not how the disease is transmitted), he also has some interesting views on the relationships between of free-trade, the environment, and the development of industrial agriculture.

Eating your vegetables and climte change

2009-05-13T14:37:00.000-07:00

The Belgian city of Ghent has adopted a new policy it hopes will help with the health of its population and the problem of climate change: meatless Thursdays. The following explains:

Starting May 13, the Belgian city of Ghent, one of the 370 European climate cities, may very well become the first worldwide to officially promote a weekly meatless day.

According to FAO, livestock is responsible for eighteen percent of global greenhouse gas emissions. That’s why city officials, in cooperation with the vegetarian organisation EVA, are determined to go the extra mile in our common battle against climate change. Other Belgian cities have already shown interest to follow Ghent’s example.

The first Thursday Veggie Day will kick off on Wednesday May 13th with a festive ceremony for the public. Tom Balthazar, councilman for the city’s health and environmental committee, will officially proclaim Thursdays to be vegetarian days.

As an appetizer for the campaign, the city council already had the opportunity to enjoy a gourmet vegetarian lunch at the city hall last week. At the official inauguration everyone will be invited to take part in the Meatless Thursday campaign, and vegetarian goodiebags will be handed out to citizens participating in the campaign. As of September, city schools will serve vegetarian lunches by default on Thursdays. All 5.000 city personnel will receive a free veggie city street map and a free vegetarian cooking brochure for professionals will be sent to all 1.500 restaurants. There will be cooking classes for both professionals and individuals. City run restaurants for Ghent staff have extended their vegetarian menu.

Ghent’s motivation to introduce the ‘Meatless Thursday is twofold:

- Any reduction of meat production and consumption, which leads to greenhouse gas emissions and the degradation of soil, water and air, desertification and deforestation, will bring enormous benefits for the environment.

- Ghent also wants to be a healthy city. A well balanced vegetarian meal is not only sustainable but also healthy. Belgians, and Europeans in general, eat too much meat and not enough vegetables, which has serious consequences for their health. Too much meat heightens cholesterol levels as well as the risk of some cancers, diabetes and obesity.

Canadain Versus U.S. Banking Systems

2009-05-08T07:47:00.000-07:00

Canadian banks have weathered the current economic crisis much better than their U.S. counterparts. Nick Rowe has suggests the following:

But it doesn’t seem to be as simple as “Canadian banks are more tightly-regulated”.

1. We never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada. (So it doesn’t matter if a local housing market goes bust).

2. We don’t have Glass-Steagal. The investment banks joined the retail banks some years ago.

3. We don’t have mortgage interest deductibility from taxes. So paying down your mortgage is a tax-free investment. So most people want to pay down their mortgages.

4. (Except in Alberta), mortgages are fully recourse. You can’t just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.

I wouldn’t describe those differences as “Canada is more regulated”.

But we do have higher capital requirements. And mortgages over 80% must be insured (mostly by the government-owned CMHC).

For more information, see the direct blog post here and the discussion here.

OECD Society at a Glance report : Canada

2009-05-06T08:53:00.000-07:00

The new "Society at a Glance" from the OECD has been released for 2009. I thought it might be worth summarizing some of the findings from their key findings on Canada:

While Canada ranks 8th in terms of life satisfaction for OECD countries, it is one of only five countries that registered a decline between 2000 and 2006, along with Portugal, Hungary, the US and Japan.
Canada has more immigrants than the United States, with 20% of the population foreign-born. The ratio is similar in Luxembourg, Switzerland, Australia and New Zealand.
Nine out of ten Canadians feel that they enjoy good health, as do their neighbours in the US, and farther away, New Zealand, and they live a year longer than the OECD average.
While approximately 25% of 15 year-olds in Canada report having sex, about 80% of these individuals use condoms regularly.
Canada spends about 19% of net national income on public spending, less than the OECD average of 24% and slightly higher than the U.S. at 18%. At the same time, there appears to be an increase in poverty (generally speaking and among children) and income inequality in Canada. These increases are greater than the OECD average.

Time Spent Eating and Obesity

2009-05-06T08:08:00.000-07:00

A new post by Catherine Rampell at the NYT's Economix blog identifies a relationship between obesity rates and the amount of time individuals spend eating. The amount of time spent eating may be a sign of the amount of "fast food" (which is typically high in fats) consumed. Interestingly, it may not be the smoking and the wine drinking that keeps the French so healthy; it may just be the time spent eating (as a signal of the types of food they eat). Before you start changing your lifestyle by taking longer to eat and enjoying a cigarrette, recall the caveats regarding correlation versus causation.

NYT Video Article on the Effect of the Economic Crisis on School Music Programs

2009-04-16T08:25:00.000-07:00

Here's a nice video from the New York Times on the effect of the recession on school music programs. In addition to the "standard" type of pressures the crisis puts on the school (e.g., cutting funds to extracurricular programs like music), there are also pressures on the individual musicians and their families regarding the costs associated with being in the music program. The "standard" cuts force additional expenses on the musicians and their families, like the cost of performing at Lincoln Center. I was particularly struck by the 16 year old who lives in her own apartment, works a job, and participates in the music program.

Robert Merton on the Science of Finance

2009-04-15T07:53:00.001-07:00

Here's a video of a lecture given by Robert Merton entitled "Observations on the Science of Finance in the Practice of Finance." This is part of the video series put out by MIT.

Career Advice from Obama and Bernanke

2009-04-14T13:33:00.000-07:00

Here's something from the Wall Street Journal blog that undergraduates may want to consider, particularly those in business schools at their respective universities:

Both President Barack Obama and Federal Reserve Chairman Ben Bernanke talked Tuesday about the recent attraction of finance as a profession for some of the nation’s brightest young people.

Obama, speaking at Georgetown University in Washington, D.C., appeared to welcome the changing economy that means fewer people will be going into Wall Street jobs: “One of the changes that I would like to see — and I’m going to be talking about in this in weeks to come — is seeing our best and our brightest commit themselves to making things — engineers, scientists, innovators. For so long, we have placed at the top of our pinnacle folks who can manipulate numbers and engage in complex financial calculations. And — and that’s good. We need some of that. But you know what we can really use is some more scientists and some more engineers who are building and making things that we can export to other countries.”

At Morehouse College in Atlanta, Bernanke was asked by a panel of students about job prospects in finance. He answered by emphasizing the value of finance to an economy, mentioning, for instance, venture capital, but made clear that he thought too many recent graduates were lured to Wall Street by outsized salaries.

“It’s clear that some of the compensation and some of the risk taking was excessive and as we go forward there’s going to be a more vigilant regulatory system to make sure compensation systems don’t incentive risky behavior,” he said. “I think that in one way this is healthy…People ought to go into a profession based on what they enjoy” as well as what is valuable to them and valuable to society, he added, urging the students not to seek only “the highest possible income.”

”I’m not saying that smart people, talented people shouldn’t go into finance,” Bernanke said, “but you ought to follow your interest and the direction that you think will give you the most personal satisfaction.”

Art and Economic Crisis (Economic Photo of the Week for April 14th)

2009-04-14T08:22:00.001-07:00

Over the weekend I was talking with several friends about the effects of economic crises on individuals' well-being (both material and psychological). As part of the discussion, we talked about what images are most salient to us when we think of depression and recession. During the oil crisis and recession of the 1970's, my friends and I agreed that the long lines at gas stations were the dominant image. However, this image (in and of itself) is predominantly one of effect of crisis on material well-being.

When we talked about the crisis of the 1930's (although none of us were around during that one), Dorthea Lange's photo was the image we thought captured the effects of economic crisis psychological well-being. Indeed, this is probably one of them most well-known and important images from the 20th century. It made us wonder what image will be in people's minds when they look back on the current economic crisis.

Even Monkeys Use Markets

2009-04-08T11:48:00.001-07:00

This article in the latest issue of Nature find that male chimpanzees exchange food (namely meat) for sex.

Robert Lucas on the Great Depression and the current stimulus package

2009-04-06T08:30:00.000-07:00

Here's a transcript of Robert Lucas' talk at the Council of Foreign Relations (March 30, 2009). This is a great overview of what he (and others form the Chicago school) believe about how the Fed should respond in such situations. In the talk he discusses what we did and should have learned from the Great Depression and discusses his views on the current economic situation, specifically regarding the stimulus packages.

A couple of my favorite parts of the transcript:

And one of the lessons of the Great Depression, which has been discussed in many of the sessions today -- this morning, is that a side effect of depression is a proliferation of ill-conceived, hastily put together policies that serve to postpone the recovery.

So I think this monetary response that we're in the middle of now, I think it is a response to the lessons of the 1930s. It's not the whole problem of the 1930s, because there are all kinds of policies that were crucial to that evolution, that monetary policy's not going to touch, and didn't touch in the 1930s. But, I think the monetary -- in terms of the stimulus response, if you could -- a stimulus to get -- help us accelerate the recovery, I think the current policy we're doing is the right one, and I just hope that we have the nerve to terminate it when it's done its job. Thank you.
(Applause.)
(Mr. Lucas apparently trips on the stairs.)
SCHRAMM: (Off mike.) Are you okay?
LUCAS: Yeah.
SCHRAMM: All right.
LUCAS: It wasn't exactly a subtle step, was it? How the hell did I miss it? (Laughter.)

Harvard's most popular major

2009-04-04T16:16:00.000-07:00

Q: What major do Harvard students choose most frequently?

Hint: It starts with "E"

For the answer, click here

Advance:	$ 250,000
Manager's cut:	$ 37,500
Legal fees:	$ 10,000

Recording Budget:	$ 155,500
Producer's advance:	$ 50,000
Studio fee:	$ 52,500
Drum, Amp, Mic and Phase "Doctors":	$ 3,000
Recording tape:	$ 8,000
Equipment rental:	$ 5,000
Cartage and Transportation:	$ 5,000
Lodging while in studio:	$ 10,000
Catering:	$ 3,000
Mastering:	$ 10,000
Tape copies, reference CDs, shipping tapes, misc. expenses:	$ 2,000
Album Artwork:	$ 5,000
Promotional photo shoot and duplication:	$ 2,000

Video budget:	$ 31,000
Cameras:	$ 8,000
Crew:	$ 5,000
Processing and transfers:	$ 3,000
Off-line:	$ 2,000
On-line editing:	$ 3,000
Catering:	$ 1,000
Stage and construction:	$ 3,000
Copies, couriers, transportation:	$ 2,000
Director's fee:	$ 4,000

Band fund:	$ 15,000
New fancy professional drum kit:	$ 5,000
New fancy professional guitars [2]:	$ 3,000
New fancy professional guitar amp rigs [2]:	$ 4,000
New fancy potato-shaped bass guitar:	$ 1,000
New fancy bass amp:	$ 1,000
Rehearsal space rental:	$ 500
Big blowout party for their friends:	$ 500

Tour expense [5 weeks]:	$ 50,875
Bus:	$ 25,000
Crew [3]:	$ 7,500
Food and per diems:	$ 7,875
Fuel:	$ 3,000
Consumable supplies:	$ 3,500
Wardrobe:	$ 1,000
Promotion:	$ 3,000

Tour gross income:	$ 50,000
Booking Agent's cut:	$ 7,500
Manager's cut:	$ 7,500

Merchandising advance:	$ 20,000
Manager's cut:	$ 3,000
Lawyer's fee:	$ 1,000

Publishing advance:	$ 20,000
Manager's cut:	$ 3,000
Lawyer's fee:	$ 1,000

Record sales: 250,000 @ $12:	$ 3,000,000
Gross retail revenue Royalty [13% of 90% of retail]: 250,000 @ $12:	$ 351,000
Less advance:	$ 250,000
Producer's points [3% less $50,000 advance]:	$ 40,000
Promotional budget:	$ 25,000
Recoupable buyout from previous label:	$ 50,000
Net royalty:	$ -14,000

Record wholesale price $6.50 x 250,000	$ 1,625,000 gross income
Artist Royalties:	$ 351,000
Deficit from royalties:	$ 14,000
Costs of manufacturing, packaging and distribution @ $2.20 per record:	$ 550,000
Label's gross profit:	$ 7l0,000

Record company:	$ 710,000
Producer:	$ 90,000
Manager:	$ 51,000
Studio:	$ 52,500
Previous label:	$ 50,000
Booking Agent:	$ 7,500
Lawyer:	$ 12,000
Band member net income each:	$ 781.25