When I go to the gym in the evening (which I don't do nearly as often as I should), I somehow always end up at one of the elliptical trainers in front of the television showing CNBC. This means that I am reasonably familiar with Jim Cramer's show Mad Money. Stock picking isn't really my thing, but I find the show overall to be pretty entertaining. (Okay fine, I suppose I wouldn't mind taking over for Maria Bartiromo as the "Money Honey".) Apparently the show is also a topic of interest to behavioral finance people- Joey Engelberg, one of my fellow graduate students at Kellogg, recently presented a paper that shows a short-term spike in stock price and trading volume for those stocks recommended during Jim Cramer's "Lightning Round". Luckily, we have hedge funds to keep our markets efficient (mild sarcasm), and Engelberg and his co-authors find that the effect dissipates quickly. So Jim Cramer can drive the market, or at least he could before people caught on to this effect, but can he pick stocks?
Apparently Reuters has taken up the issue, and it's analysts show that Jim Cramer's picks haven't beaten the market over the last two years. Hmph...and here I thought I was being at least a little smart for not watching Friends reruns.
Monday, August 20, 2007
Friday, August 17, 2007
More on College Rankings...
So some university officials are still up in arms about the U.S. News College Rankings, but most seem to still be playing along. There is another article in the NYT today. My guess is that there are some interesting questions to be answered by picking through the historical rankings data, but I'm going to have to think about that some more...
Thursday, August 16, 2007
The Best of Intentions?
So perhaps there really is no such thing as a free lunch. According to today's NYT, CARE is turning down in-kind funds for food aid. Why would they ever do this? Well, this is the lowdown, as I get my head around it:
1. The American government buys agricultural products from American farmers. However, the government pays above market prices to the farmers as a form of subsidy. (This creates allocative inefficiency in that too much of the agricultural products are being produced in the U.S.)
2. The government then ships said agricultural products to Africa using American shipping companies. This again creates inefficiency, since now not only are the farm products being produced where it's more expensive to produce, but resources are being spent to ship them almost halfway around the world when they could be grown in Africa.
3. The government gives these agricultural products to CARE, which sells the farm products to people in Africa and uses the proceeds to finance antipoverty programs.
My head is not around this yet, since as an economist I think my brain might explode as a result of reading the article. My problems with it, in order of descending ease of explanation: (Note that the problems don't even have to start with the fact that the gifts are making life more difficult for African farmers.)
1. Mental accounting issues aside, economists would argue that cash gifts are always better, since the giver in that case doesn't have to know anything about what the receiver needs or wants. Therefore, in order for this in-kind gift to be efficient, there must be some cost advantage to providing agricultural products rather than direct monetary funding. Looking, looking...nope, don't see a cost advantage. It is worth noting, however, that giving a subsidy of $100 is better in terms of U.S. surplus than just giving $100 to CARE directly, since domestic farmers and shippers do see a bump in surplus from the subsidy. The caveat is that the $100 subsidy to $100 cash gift is not the relevant comparison- $100 worth of U.S. agricultural products could be grown (and thus purchased) in Africa for much less than $100.
2. This plan seems like a sneaky way of making subsidies look good...how can people get mad about agricultural subsidies and business being thrown to the shipping companies when the output of this is going to feed poor people in Africa? Unfortunately, there is friction in this process, since $100 in subsidy for the farmer or shipper results in less than $100 of extra profit, or surplus, for them. The difference goes to cover marginal costs, obviously, so the government is subsidizing an entire value chain, the extent of which it may or may not be aware of. (Maybe subsidizing shovel manufacturers doesn't sound so bad, but what about the fuel that goes to power the ships?) Furthermore, the government is giving farmers a disincentive to find an industry where their labor and capital could be better used.
3. Giving the farm products to CARE essentially means that CARE's marginal cost of "production" is constant at zero, so it can sell the product at any positive price and be happy (or at least be sustainable). So CARE is basically the Wal-Mart of Africa, and has a difficult decision to make: does it charge low prices so that people can eat more cheaply, and undercut local production in the process? Even if it doesn't specifically undercut, one can visualize a supply and demand diagram to understand that the increased supply from the U.S. drives down market prices, which hurts African producers. This is where the article focuses, but it's not the whole story.
Taking the subsidy process as given, it is unclear why this free gift is automatically detrimental to the African people- how can a product that is useful and free be harmful? By definition, if you are endowed with something that provides positive marginal utility, you are better off than you were without the endowment. I hate to say it, since I know that CARE means well, but they really need to be smarter about their operations, at least in this case. Let's examine the situation economically to see what the organization could do:
In Africa, there are both poor producers and poor consumers to think about. The consumers are better off with the agricultural gifts, since they are getting more product at a lower market price. The African producers are worse off, since they are getting a lower price (because of the increased supply) and selling a lower quantity (since the gift is flooding the market and satisfying part of demand). CARE is better off, since it's collecting money to put back to the African people. In this way, the African producers and consumers are the ultimate beneficiaries of CARE's surplus. As long as the gains to African consumers and CARE are larger than the losses to producers (which they are, and I have the diagram to prove it!), one can devise a transfer system that ends in everyone being better off. This seems to be the piece that CARE is missing- if it compensated the producers for their losses, then everyone could be happy. Essentially, the African farmers could be getting the same profit that they were before, inclusive of the transfer from CARE, and not having to grow as much as before to get it. In fact, this is easier to implement than a transfer from consumers to producers, since CARE inherently has the coordinating mechanism to make it happen. (Counterintuitive as it may be, CARE could be doing good for Africa even if it just hands its revenue 100% back to the farmers, since the consumers still benefit from lower prices.)
Final note: it is important to think about these issues in a dynamic context, since the free farm products probably won't last forever. The above transfer would allow the African farmers to stay in business so that their societies wouldn't be left in the lurch when the aid goes away.
1. The American government buys agricultural products from American farmers. However, the government pays above market prices to the farmers as a form of subsidy. (This creates allocative inefficiency in that too much of the agricultural products are being produced in the U.S.)
2. The government then ships said agricultural products to Africa using American shipping companies. This again creates inefficiency, since now not only are the farm products being produced where it's more expensive to produce, but resources are being spent to ship them almost halfway around the world when they could be grown in Africa.
3. The government gives these agricultural products to CARE, which sells the farm products to people in Africa and uses the proceeds to finance antipoverty programs.
My head is not around this yet, since as an economist I think my brain might explode as a result of reading the article. My problems with it, in order of descending ease of explanation: (Note that the problems don't even have to start with the fact that the gifts are making life more difficult for African farmers.)
1. Mental accounting issues aside, economists would argue that cash gifts are always better, since the giver in that case doesn't have to know anything about what the receiver needs or wants. Therefore, in order for this in-kind gift to be efficient, there must be some cost advantage to providing agricultural products rather than direct monetary funding. Looking, looking...nope, don't see a cost advantage. It is worth noting, however, that giving a subsidy of $100 is better in terms of U.S. surplus than just giving $100 to CARE directly, since domestic farmers and shippers do see a bump in surplus from the subsidy. The caveat is that the $100 subsidy to $100 cash gift is not the relevant comparison- $100 worth of U.S. agricultural products could be grown (and thus purchased) in Africa for much less than $100.
2. This plan seems like a sneaky way of making subsidies look good...how can people get mad about agricultural subsidies and business being thrown to the shipping companies when the output of this is going to feed poor people in Africa? Unfortunately, there is friction in this process, since $100 in subsidy for the farmer or shipper results in less than $100 of extra profit, or surplus, for them. The difference goes to cover marginal costs, obviously, so the government is subsidizing an entire value chain, the extent of which it may or may not be aware of. (Maybe subsidizing shovel manufacturers doesn't sound so bad, but what about the fuel that goes to power the ships?) Furthermore, the government is giving farmers a disincentive to find an industry where their labor and capital could be better used.
3. Giving the farm products to CARE essentially means that CARE's marginal cost of "production" is constant at zero, so it can sell the product at any positive price and be happy (or at least be sustainable). So CARE is basically the Wal-Mart of Africa, and has a difficult decision to make: does it charge low prices so that people can eat more cheaply, and undercut local production in the process? Even if it doesn't specifically undercut, one can visualize a supply and demand diagram to understand that the increased supply from the U.S. drives down market prices, which hurts African producers. This is where the article focuses, but it's not the whole story.
Taking the subsidy process as given, it is unclear why this free gift is automatically detrimental to the African people- how can a product that is useful and free be harmful? By definition, if you are endowed with something that provides positive marginal utility, you are better off than you were without the endowment. I hate to say it, since I know that CARE means well, but they really need to be smarter about their operations, at least in this case. Let's examine the situation economically to see what the organization could do:
In Africa, there are both poor producers and poor consumers to think about. The consumers are better off with the agricultural gifts, since they are getting more product at a lower market price. The African producers are worse off, since they are getting a lower price (because of the increased supply) and selling a lower quantity (since the gift is flooding the market and satisfying part of demand). CARE is better off, since it's collecting money to put back to the African people. In this way, the African producers and consumers are the ultimate beneficiaries of CARE's surplus. As long as the gains to African consumers and CARE are larger than the losses to producers (which they are, and I have the diagram to prove it!), one can devise a transfer system that ends in everyone being better off. This seems to be the piece that CARE is missing- if it compensated the producers for their losses, then everyone could be happy. Essentially, the African farmers could be getting the same profit that they were before, inclusive of the transfer from CARE, and not having to grow as much as before to get it. In fact, this is easier to implement than a transfer from consumers to producers, since CARE inherently has the coordinating mechanism to make it happen. (Counterintuitive as it may be, CARE could be doing good for Africa even if it just hands its revenue 100% back to the farmers, since the consumers still benefit from lower prices.)
Final note: it is important to think about these issues in a dynamic context, since the free farm products probably won't last forever. The above transfer would allow the African farmers to stay in business so that their societies wouldn't be left in the lurch when the aid goes away.
Wednesday, August 15, 2007
Economics Really is Everywhere...
Okay, so I'm sitting here minding my own business and reading the NYT style section...I get to an article titled "Buy Low, Divorce High", and as anyone even mildly cynical about relationships would do, I begin reading. The general gist of the article is that the rising values of homes/condos for married couples is tending to lead to divorce, since the people involved recognize that they could live comfortably by themselves as a result of the large profit on their real estate. I can't help but think that it's a bit sad that financial insecurity is what keeps a lot of relationships together, but I digress. Anyway, I get to about the middle of the first page of the article only to find that the author starts referring to the work of Gary Becker. In the style section? Apparently Becker is trendy and I didn't know it.
To quote the article:
"Economists are familiar with this phenomenon. Even though divorce rates are declining over all, as far back as 1977 the economist Gary Becker showed that couples experiencing any unexpected, drastic rise in net worth are at risk of divorce. (The same holds true for a drastic decline in net worth.)
Extrapolating from survey data, Dr. Becker concluded in The Journal of Political Economy that “a greater deviation between actual and expected earnings increases the probability” of divorce.
Although couples who see their incomes rise steadily generally stay together, those who make more money than they ever expected are vulnerable to divorce. They realize that they are less financially dependent on each other and that they might have chosen different spouses if they had more choices at the time, said Dr. Becker, who teaches at the University of Chicago.
Dr. Becker, who won the Nobel Prize in 1992, also explored in his divorce study the economic argument for what many people today call trading up, or finding a trophy spouse."
I try hard to respect people's preferences, but really?
To quote the article:
"Economists are familiar with this phenomenon. Even though divorce rates are declining over all, as far back as 1977 the economist Gary Becker showed that couples experiencing any unexpected, drastic rise in net worth are at risk of divorce. (The same holds true for a drastic decline in net worth.)
Extrapolating from survey data, Dr. Becker concluded in The Journal of Political Economy that “a greater deviation between actual and expected earnings increases the probability” of divorce.
Although couples who see their incomes rise steadily generally stay together, those who make more money than they ever expected are vulnerable to divorce. They realize that they are less financially dependent on each other and that they might have chosen different spouses if they had more choices at the time, said Dr. Becker, who teaches at the University of Chicago.
Dr. Becker, who won the Nobel Prize in 1992, also explored in his divorce study the economic argument for what many people today call trading up, or finding a trophy spouse."
I try hard to respect people's preferences, but really?
Monday, August 13, 2007
Even Ezra Gets Economics...Sort Of...
For those of you that don't live in the Boston area, Ezra Dyer is a humor colunmist in a popular free magazine called The Improper Bostonian. I read this magazine regularly to find out what is going on about town, and I was happy to see that even Ezra uses economics to explain real-life events. In a (mostly sarcastic) article about the dodgy reputations of Red Sox ticket scaplers, he concludes with the following paragraph:
"The problem isn't opportunistic scalpers or the Red Sox's popularity. The problem is that Fenway Park needs 20,000 more seats- maybe the Yankees will let us take some from their old stadium, which they have the good sense to abandon. When standing room goes for $100 a ticket, something's seriously wrong with the supply/demand relationship. I write this on a Monday, and tonight Kason Gabbard pitches against the mighty Kansas City Royals. Of course, the game is sold out. Dude, it's the Royals."
Now, I applaud the effort, and Ezra is certainly correct in that the high prices are caused by market forces. However, it is important to understand that prices are never determined by supply or demand alone! (In other words, if the Red Sox weren't so damn popular then the ticket prices would be much less of an issue, even taking the small stadium as given.) In fact, the ticket prices have to do with all three of the things he mentions- the park size restricts supply, the popularity leads to high demand, and the scalpers provide a resale market so that the artificially low prices set by the Red Sox organization (probably for image reasons) cannot be maintained.
I really do love being able to combine my interest in economics with my other main interests...go Sox. :)
"The problem isn't opportunistic scalpers or the Red Sox's popularity. The problem is that Fenway Park needs 20,000 more seats- maybe the Yankees will let us take some from their old stadium, which they have the good sense to abandon. When standing room goes for $100 a ticket, something's seriously wrong with the supply/demand relationship. I write this on a Monday, and tonight Kason Gabbard pitches against the mighty Kansas City Royals. Of course, the game is sold out. Dude, it's the Royals."
Now, I applaud the effort, and Ezra is certainly correct in that the high prices are caused by market forces. However, it is important to understand that prices are never determined by supply or demand alone! (In other words, if the Red Sox weren't so damn popular then the ticket prices would be much less of an issue, even taking the small stadium as given.) In fact, the ticket prices have to do with all three of the things he mentions- the park size restricts supply, the popularity leads to high demand, and the scalpers provide a resale market so that the artificially low prices set by the Red Sox organization (probably for image reasons) cannot be maintained.
I really do love being able to combine my interest in economics with my other main interests...go Sox. :)
Sunday, August 12, 2007
It's Been a Long Time Coming...
Finally, I get to combine two of my main interests: economics and fashion. :) I've wondered for a while now why clothing designs (and handbag designs and so on as well) don't enjoy intellectual property protection. Actually, I just figured that most intellectual property protection was a bit irrelevant for the fashion industry, since by the time a designer gets a patent or copyright on the books, she will have already moved on to the next (hopefully) hot design. If people have a short attention span for designer fashion items, then those that buy the real items right away and those that buy the knockoffs later (or at all, out of principle) would likely not be the same people. If this is true, then the knockoffs are not taking significant sales away from the original items, and may even be bringing positive attention to the designers.
I will acknowledge that the key to the above argument is the time lag between the introduction of the original designer items and the appearance of the knockoffs. As this time lag gets shorter, more substitution may occur. According to the Washington Post, legislators recognize this and are giving some attention to the issue. Bills have been introduced in the House and Senate that would give 3 years of copyright protection to clothing designs. (Why not patent protection, I wonder?) I am pleased to see this move, since I think the analogy to R&D that the article alludes to is a valid one. We understand this concept in the context of the pharmaceutical industry, for example- without legal protection, research and development of new compounds is a public good and thus is likely to be underproduced in a free market. Similarly, designers have less of an incentive to "invest" in developing novel clothing designs if they know that they are just going to get copied and the profits are going to be competed away.
On a random note, I am surprised how often the aricle refers to counterfeit logo goods, since designer trademarks are already protected under intellectual property law.
I will acknowledge that the key to the above argument is the time lag between the introduction of the original designer items and the appearance of the knockoffs. As this time lag gets shorter, more substitution may occur. According to the Washington Post, legislators recognize this and are giving some attention to the issue. Bills have been introduced in the House and Senate that would give 3 years of copyright protection to clothing designs. (Why not patent protection, I wonder?) I am pleased to see this move, since I think the analogy to R&D that the article alludes to is a valid one. We understand this concept in the context of the pharmaceutical industry, for example- without legal protection, research and development of new compounds is a public good and thus is likely to be underproduced in a free market. Similarly, designers have less of an incentive to "invest" in developing novel clothing designs if they know that they are just going to get copied and the profits are going to be competed away.
On a random note, I am surprised how often the aricle refers to counterfeit logo goods, since designer trademarks are already protected under intellectual property law.
Wednesday, August 08, 2007
They Start 'Em Young Nowadays...
An article in the NYT reports on the economics knowledge of high school students: "The nation’s high school seniors performed significantly better on the first nationwide economics test than they did on other recent national exams in history and science, and demonstrated a better understanding of basic market forces like supply and demand than officials expected."
I am happy about this for a number of reasons, but not entirely surprised- even teenagers buy stuff and have jobs of various sorts nowadays, so it stands to reason that they would have an intuitive understanding of market forces. But I digress...back to why I am happy: First, I am obviously happy that high school students have at least a basic understanding of economics, since this knowledge is necessary to participate effectively in a capitalist society, understand public policy (how can people vote intelligently if they don't understand policy consequences?), and so on. Second, I am happy they they are, at least in some cases, having it taught to them rather than having to figure it out on their own or wait until college. If I remember correctly, only something around 50 percent of college-age Americans are graduating from 4-year colleges/universities, so a lot of people get left out if economics is not addressed at a lower level. The article states that about one-third of states require economics for graduation, which is actually higher than what I would have guessed. (As a sidenote, a particular Harvard professor said once that it would be hard to teach good economics at the high school level since the average high school teacher barely scored 1000 on the SAT. This statement did not make me happy of course, but unfortunately isn't entirely factually inaccurate- according to the data I found, the mean SAT score for high school teachers is somewhere between 1000 and 1100...disappointing!) Third, I am happy that the effects of teaching economics is being studied, since it's hard to learn what is effective without a feedback mechanism. Apparently educators have a lot of work to do on the curriculum side: "The test scores of students who had taken economics courses were not necessarily higher than those who had not. On average, students who had taken Advanced Placement, International Baccalaureate or honors courses in economics scored marginally higher than students who had taken no economics at all. But students who had taken 'consumer economics' or business courses tended to score lower."
Based on the questions that the student could and could not answer, I hazard a guess that, like me, they are much better at micro than macro. :)
I am happy about this for a number of reasons, but not entirely surprised- even teenagers buy stuff and have jobs of various sorts nowadays, so it stands to reason that they would have an intuitive understanding of market forces. But I digress...back to why I am happy: First, I am obviously happy that high school students have at least a basic understanding of economics, since this knowledge is necessary to participate effectively in a capitalist society, understand public policy (how can people vote intelligently if they don't understand policy consequences?), and so on. Second, I am happy they they are, at least in some cases, having it taught to them rather than having to figure it out on their own or wait until college. If I remember correctly, only something around 50 percent of college-age Americans are graduating from 4-year colleges/universities, so a lot of people get left out if economics is not addressed at a lower level. The article states that about one-third of states require economics for graduation, which is actually higher than what I would have guessed. (As a sidenote, a particular Harvard professor said once that it would be hard to teach good economics at the high school level since the average high school teacher barely scored 1000 on the SAT. This statement did not make me happy of course, but unfortunately isn't entirely factually inaccurate- according to the data I found, the mean SAT score for high school teachers is somewhere between 1000 and 1100...disappointing!) Third, I am happy that the effects of teaching economics is being studied, since it's hard to learn what is effective without a feedback mechanism. Apparently educators have a lot of work to do on the curriculum side: "The test scores of students who had taken economics courses were not necessarily higher than those who had not. On average, students who had taken Advanced Placement, International Baccalaureate or honors courses in economics scored marginally higher than students who had taken no economics at all. But students who had taken 'consumer economics' or business courses tended to score lower."
Based on the questions that the student could and could not answer, I hazard a guess that, like me, they are much better at micro than macro. :)
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