Welcome new graduate students!

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.

The "Heart of Economics"

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.

Stiglitz on Democracy Now

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).

Oscar Nomination for Daniel Ellsberg

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.

Keynes-Hayek Smackdown

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.

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

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

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.

Nobel Prize Predictions

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

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

Did Taxes Killed the Beatles?

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 (?)

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)

Latest Salary Information by Major

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.

What Do Charles Plott and I Have In Common?

What do Charles Plott and I have in common?

Two articles in the most recent issue of Economic Inquiry.

Economics and Inner Peace

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.

An Interview With Paul Samuelson

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

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

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.

The Economics of The Big Label Record Deal

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.

Job Loss in the U.S.: the movie

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:

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

The Economics of Bat S*#%

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.