Monday, August 31, 2009

Human capital and unemployment

Can too much unemployment insurance have severe long-run consequences? That's one of the underlying questions in a famous paper by Sargeant and Ljundquist entitled The European Unemployment Dilemma. In the paper, their task was to explain why European unemployment was so persistently higher than unemployment in the United States. As a second leg to the paper, they identified the long-run consequences of long-lasting high unemployment.

Their paper uses a dynamic search model, and therefore, is highly mathematical. But, for an intuitive flavor of what they do, here's the general thrust of their argument:
  1. Europe had much more generous unemployment insurance (and stronger union power), which led to a persistently higher unemployment rate.
  2. The high unemployment rate means that people spend longer periods of time out of work. During these bouts of unemployment, people lose skills. When working, people acquire skills from learning by doing. In economic lingo, a person's human capital declines when out of work, and rises when the person has a job. Therefore, a society with enduring high unemployment becomes relatively less productive over time.
The paper is a cautionary tale about the long-run consequences of unemployment. In an American economy that is struggling with a long bout of persistent unemployment, Sargeant and Ljundquist's paper warns us that we will feel the consequences of the current recession for some time.

To the extent that being unemployed leads us to lose our ability to work productively, this is a forboding tale. On the other hand, some people might use their time out of work to invest in education or training programs. For this group, being out of work has a silver lining. It can be an opportunity to improve.

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This is the second post in unemployment week on This Young Economist. Economists view unemployed individuals' labor as an idle resource. With this idea in mind, tomorrow's post tackles the question "What does it mean to be idle?"

Sunday, August 30, 2009

Unemployment Week

The unemployment rate is almost surely going to rise above 10 percent if not this year, next year. Looking for a job in the United States has not been this difficult in a long time. The unemployment rate is on everyone's mind, and for good reason. The unemployment rate tells us a great deal about the health of our macroeconomy.

Because of its centrality to public debate on economics, I am writing about unemployment this week. Here's a roadmap for the posts this week, which is subject to change:

Sunday: What is the unemployment rate, anyway?
Monday: Human capital and unemployment.
Tuesday: Unemployment and "idle resources."
Wednesday: Structural, frictional, and cyclical unemployment.
Thursday: How do mandatory employee rights affect unemployment?
Friday: Unemployment and health care

Please come back to check out my thoughts on these topics.

What is the unemployment rate, anyway?

To kick off unemployment week, I start by defining what we mean by the unemployment rate:

From the Bureau of Labor Statistics,

People with jobs are employed.
People who are jobless, looking for jobs, and available to work are unemployed.
If you are employed or unemployed, you are in the labor force. Other people (not looking for jobs) are not in the labor force. The unemployment rate is the percent of people in the labor force who are unemployed.

How does the government know enough to compute the unemployment rate every month? The short answer is that the government does not have enough information about every individual in the United States to compute the unemployment rate.

The long answer is that the government uses a representative sample of the population to estimate the true unemployment rate. The Bureau of Labor Statistics surveys 60,000 households on labor force activities to gather data for a precise estimate of employment, unemployment and the unemployment rate.

If you have taken introductory statistics, you know that this method is great. In fact, after 1000 households are sampled, you should feel comfortable that the number is about right... just so long as the sample is representative of American workers in the labor force. That's just the law of large numbers at work.

Are there any problems with the unemployment rate?
In computing the unemployment rate, we would really like to know the percentage of people who who would like to work, but who are unable to find a job. But, that's not quite what the unemployment rate is.

To be unemployed, you have to be looking for employment. If you are without a job, but you gave up looking because of bad prospects, you're not unemployed (at least according to government statistics). There's a term for workers who gave up looking: discouraged workers.

Discouraged workers are part of what the Bureau of Labor Statistics calls marginally attached to the labor force. These are people who would work if they had a job offer, but they're not looking because looking for a job is costly and they don't expect much payoff to looking for a job.

So, the unemployment rate does not account for discouraged workers. Therefore, the unemployment rate is an underestimate of "fraction of people who want to work, but aren't working." So, what does the unemployment rate look like nationwide, in Illinois, and in Montana?



According to Google's public data, the unemployment rate is 9.7 percent nationwide, 10.5 percent in Illinois, and 6.1 percent in Montana. Now, there's another reason to move to Montana!

At 9.7 percent, the national unemployment rate is a cause for concern. Nearly one in ten labor force participants are jobless. Those aren't good odds. Throw in discouraged workers, and we have a dismal start to unemployment week. But don't let that discourage you from coming back.

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This is the first post in unemployment week on This Young Economist. When you lose your job, what happens to your skills? That's the question I tackle in tomorrow's post.

Saturday, August 29, 2009

Poll: What do you do when a friend asks for help moving?

In a piece entitled The Economics of Doing What You Love, Justin Wolfers talks about the high opportunity cost of training for and running a marathon. He laments that because he makes so much money per hour as an economist, running is especially expensive for him.

Note: Running is expensive because the wages he must forgo for each hour running is exceptionally high... i.e., he has a high opportunity cost.

His article at the Freakonomics blog is a summary of an interview in which he says this:
It's only because I'm both slow and an economist that I fret that the world's cheapest sport is actually incredibly expensive.

He goes on to say:
By sticking to economics, I make time for running. [...] When a friend asks me to help them move, I write them a check to pay professional movers instead. It's just more efficient.

He's right. It is more efficient to let muscular mover men do the moving for your friend, rather than volunteering to help out. Certainly, the job gets done more quickly, but I have to wonder how Mr. Wolfers' friends respond when he writes them a check.

That leads me to the poll question of the week:

If a friend asks you to help him move, how do you respond?

(a) Roll up your sleeves, and help him move some boxes.
(b) Make up an excuse for why you can't help.
(c) Cut your friend a check, so he can save both of your time.
(d) Stop being friends with your "friend" because he obviously doesn't understand economics.
(e) Explain the economics of comparative advantage, opportunity cost and gains from trade to your friend. Keep explaining why he should hire movers until he finally breaks down and hires movers himself.

The poll is open for a week. I am eager to hear what you have to say. Vote on the sidebar (---->), and tell your friends and "friends" to vote. As always, if you have any thoughts on the issue, feel free to comment.

A question for speculation: A friend of mine recently asked for help moving. How do you think I responded?

Friday, August 28, 2009

When setting a price won't do, use a sign...

This week is Picture Week on This Young Economist. Every post tells a story, and every story begins with a picture.

Today's post wraps up Picture Week with several pictures of zany signs.

What do you do when the City of Chicago places a seemingly-permanent construction zone on top of your business? Potbelly Sandwich Works on State Street has a creative solution:



I love it. This sign turns a liability ("we're covered in construction") into an asset ("come to our unique sandwich shop. We disguised it a construction site... with the help of some city employees.").

Speaking of doing two things at once, this sign on the Springfield public bus is like two signs in one



Before reading this one, I would not have identified the common link between a soda cup and a to-go coffee cup as being "paper cups with plastic lids." Now, I will.

On that same bus, there was also an interesting pricing scheme:



The sign is confusing (if you want it to be). If I have eight kids with me, do I pay $0.50 total because I have more than 2 children? Or, do I pay $0.50 for every child after my second one? Or, if I have 3 or more, do I pay $0.50 per child?

The sign's wording doesn't clarify that for me.

Here's another sign that was posted to deal with a very specific problem:


The sign is posted at the McDonalds at Navy Pier. People like to rollerblade on the pier, which creates a very special problem for the Navy Pier McDonalds. The sign is odd out of context, but it probably does the trick.

Lastly, I love a sign that incorporates humor. I found this one in the restroom at Lincoln's Law Offices in Springfield. I think it speaks for itself:


Or, maybe it isn't the sign that's doing the talking.

Thursday, August 27, 2009

The Power of Mankiw

This week is Picture Week on This Young Economist. Every post tells a story, and every story begins with a picture.

Here is a partial screenshot from my Google Analytics account:




This graph displays the number of pageviews of my Mankiw versus Krugman poll for each day for the month after Greg Mankiw linked to it.

The graphic tells two stories:

1. Links from popular blogs (Greg Mankiw's blog, Marginal Revolution, and Paul Krugman's blog) bring in a lot of visitors. As the graphic demonstrates, one link from Mankiw's blog brought approximately 7,500 pageviews to my little corner of the blog-o-sphere in one month. For a blog as small as mine, that's huge. I am grateful for the additional exposure.

2. On a more economic/mathematical note, the shape of the distribution of visits is interesting. For the first couple of days, the number of new pageviews declined (but slowly). After about day three, the number of pageviews declined more rapidly. The result is what looks like the right hand side of a bell curve (but a little fatter in the middle, or platykurtic for you math nerds).

To me, the graph looks like one of my favorite statistical distributions, the Weibull distribution, which according to Wikipedia:

[... was] named after Waloddi Weibull who described it in detail in 1951, although it was first identified by Fréchet (1927) and first applied by Rosin & Rammler (1933) to describe the size distribution of particles.

This is interesting because one common application of Weibull distributions is in "survival analysis," or to put it more bluntly, the statistical analysis of how long it takes for something to die. Usually, people use Weibulls to ask how long one can really expect that lightbulb to last, or in a more econometric setting, how long someone's unemployment will last.

The case of Mankiw versus Krugman similarly asks how long it takes for something to die. In this case, that something is interest in a jousting match between Mankiw and Krugman. Based on the graph, it took longer than a week for collective interest in the topic to die, which is great given that my poll only lasted a week.

More generally, I expect the distribution of pageviews for posts on popular topics to look similar to the Mankiw post on my blog. That is, there's a period of discovery, but after most people have read the post, new pageviews decline rapidly.

Here's a question to ponder/discuss:

If I wrote a more timeless post, such as some great tips for aspiring economists, or an excellent piece on how to write well, how would the distribution of visits/pageviews be different?

Wednesday, August 26, 2009

How to get to the top quickly

This week is Picture Week on This Young Economist. Every post tells a story, and every story begins with a picture.

Here's a picture we took on the first floor of the Willis Tower (or the Sears Tower) when we visited last month:




When I saw the advertising on the wall, I was thinking: "Yeah. I'll get to the top a couple of minutes faster, but how long could it really take?" Fortunately, we never had to wait in line because we had access to the fast lane.

In the fast lane, we were allowed to cut several large rooms full of people. We probably cut at least 200 people, and every one of them us dirty looks as we sped by. The fast lane experience was so wonderful that I almost felt like I was doing something illegal. But, it was perfectly legit.

So, how do you get access to this mysterious fast lane? As the sign says, get a FastPass or a CityPass. The FastPass is just a coupon to cut the regular admission people. The CityPass has more great features, including access to four must-see museums (Shedd Aquarium, Museum of Science and Industry, Adler Planetarium, and Field Museum), and it is only $69.

The FastPass is a somewhat hefty $30, which sounds expensive. But, when regular admission is $15, buying the FastPass amounts to paying $15 to avoid the long lines, which are typically two hours. With the CityPass, it took us about 15 minutes to get to the top, and we had a wonderful experience.

Based on our experience, I'd strongly suggest getting a FastPass to visit the Willis Tower Skydeck. If you also enjoy the many Chicago museums, get a CityPass. There are plenty of great ways to explore Chicago, and if you know what to do, you can avoid the lines.

And, in case you were wondering, this is what an economist looks like when he knows he is about to avoid a long line:



Now, that's one happy economist. It's too bad I didn't take pictures of the long lines. I guess we sped too quickly past them to get a snapshot!

Here's a question to ponder: How should we interpret the fact that most people are willing to stand in line for two hours instead of paying an extra $15?

(1) These people value their time at less than $7.50 per hour.
(2) These people "misunderestimated" the expected time in line.
(3) These people are irrational.
(4) These people love standing in lines.

I am interested in hearing what you have to say.

Tuesday, August 25, 2009

Vote Early and Vote Often

Here's something I didn't realize about the phrase "Vote Early and Vote Often."
The cynical phrases "Vote early -- and often" and "Vote early -- and vote often" are variously attributed to three different Chicagoans: Al Capone, the famous gangster; Richard J. Daley, mayor from 1955 to 1976; and William Hale Thompson, mayor from 1915-1923 and 1931-1935. All three were notorious for their corruption and their manipulation of the democratic process. It is most likely that Thompson invented the phrase, and Capone and Daley later repeated it.

Maybe it's Chicago rubbing off on me. I'm not corrupt... I swear.

Political allegiance through pictures

This week is Picture Week on This Young Economist. Every post tells a story, and every story begins with a picture.

Here's a picture I created using my Facebook account:


I used a Facebook application called Obama-ize yourself to create the image. And, if you have a Facebook account, you can too. Yes, you can.

But, there's something about this that concerns me. I mean... There's a Facebook application that allows you to show your allegiance to a sitting President, merely by adding some blue and red hues.

Moreover, I think this shows the power of Obama's political campaign. It is adaptable and customizable in a way that relates to almost everyone. During the campaign, there was something about Obama that got people excited, and I think it shows in his brand (and his Facebook applications).

Despite the political undertones and hint of propaganda, I like the Facebook application. It is fun, and it can help ordinary Americans connect to a political figure in a new, previously unimagined way. Best of all, if you are unwilling to "Obama-ize" yourself, you can always make the opposite political statement.

For example:


A question to the readers: If you could create an "Obama-ized" picture, what would your tagline read?

Monday, August 24, 2009

What this economist sees in line at the grocery store

This week is Picture Week on This Young Economist. Every post tells a story, and every story begins with a picture.

Here's a picture of the line as it was when I arrived with my cart full of frozen Tombstones and black beans. As you glance at this picture, what do you see?




Sure, you see the milk in the shopping cart, but your eyes are drawn to the butts, aren't they? If so, I don't blame you. After all, there is the saying, "Unless you're the lead dog, the view never changes." I expect that's what a normal person would see in this photograph, but it isn't what convinced me to take the picture.

When I took this picture, I saw an interesting economic question, bundled in four observations:
  1. There's a collection of magazines, candy, and soft drinks waiting at the checkout counter. These products are especially prone to impulse purchases.
  2. Someone installed miniature flat screen televisions, which are continuously playing Jewel-Osco advertisements.
  3. There is a lengthy line, even though there are several registers that are not open.
  4. The woman on the right is reading the headlines on the magazines, and I suspect the man on the left is contemplating buying a Snickers.
Taken together, these facts suggest to me that Jewel-Osco does not mind having a line at the registers. That way, their advertising for impulse buys is more effective. Moreover, the checkout is designed for a line. If you arrive at the counter without having to wait, you're much less likely to seriously consider buying the Snickers.

Don't get me wrong. Jewel pays a price for consistently having too long of a line. That's why they sometimes open additional registers, but it would be foolish for Jewel to open enough registers to serve each customer immediately: some wait time for each customer is optimal from Jewel's perspective.

Now, there's something to chew on the next time you buy a Snickers from the checkout stand.

Sunday, August 23, 2009

Update II on Magazine Subscription Math

This week is Picture Week on This Young Economist. Every post tells a story, and every story begins with a picture.

Remember this crazy advertisement?


And, remember how we received this exact same advertisement, not once, but twice? You'll be happy to hear that Money Magazine is at it again. We received yet another edition of the magazine, wrapped in "subscription alert" advertising. But this time, Money changed its tune and its color. What was the message this time?

Now, I know to not expect any more issues of Money in the mailbox. And, for good measure, here's the back cover:

The persistence of Money's ALERT advertising puzzles me. A couple of questions to ponder:

  1. Does scare-tactic advertising like this really work for personal finance magazines?
  2. Even if it does work, is it really worth all the red and green ink to print resubscription announcements on the final three issues (3 of 12)?

Introducing... Picture Week

This week on This Young Economist, each post focuses on a picture I took sometime during the past month. Generally, these pictures illustrate situations that arise in everyday life. I'll try to keep the pictures both entertaining and educational.

I am changing my format for a week to shed a more tangible light on everyday economics. In so doing, I hope that my posts this week convey my sense that economics is everywhere. So, sit back, relax, and keep coming back. I hope you enjoy Picture Week.

Saturday, August 22, 2009

Poll: What would you do?

Suppose you go to a department store to purchase some clothing. You have a coupon for 20 percent off the purchase you chose to make that day. After waiting in line for 15 minutes, you place your item on the counter with the coupon. First, the associate rings your item and quotes you the full price ($250), but then you point to the coupon, again.

The associate fiddles with the register, and finally after some number crunching, quotes you a price of $175 (30 percent off, instead of the posted 20 percent off). You notice the math error.

Do you tell the employee that she made a mistake in applying the discount?

(a) Yes
(b) No

Please vote early, and tell your friends to vote. The poll is on the sidebar (----->). Also, here's a question for discussion in the comments: How should an employee be disciplined (if at all) for making such a mistake? And, what about a customer who doesn't speak up? Is the customer always right, even if the math isn't?

Friday, August 21, 2009

Why don't supermarkets adopt more pleasant queuing?

In an article entitled "The Waiting Game, and Why Supermarkets Haven't Caught Up," The Numbers Guy (Carl Bialik) puzzles about why supermarkets have not adopted a more pleasant experience for those who line up. Here's his logic:

1. It angers people enough to commit murder if they see someone who arrived later served earlier.
2. The serpentine line format (one line forms and the first person goes to the next available register) is more pleasant psychologically than separate lines for separate registers because it is first-come-first-served.
3. Therefore, supermarkets must be "lagging behind" or missing opportunities to serve customers.

If you're missing opportunities, you're missing money.

The argument has appeal. After all, you remember especially long wait times. And, the next time you choose the grocery store for the week, you might switch to avoid a long line. Given this reasoning, long lines drive customers away. If the grocery store would rather keep customers, what gives? Why do grocery stores stick with the anger-inducing separate-lines-for-separate-registers system? Can grocery store managers really be that stupid?

These are all good questions, but they're based on an implicit assumption: The grocery store's goal is to minimize queuing time (or minimize bad feelings from queuing). Under this assumption, we get a radical solution like this:
Dilip Soman: I have a radical solution. Once a shopper is ready to check out, she wheels her cart into an area where she gets a number, and is directed to a lounge. Staff members scan and generate ‘invoices’ and once ready, the numbers are called out into the lounge area so that the customer can pay. The one thing that I don’t know is whether customers will feel some anxiety about not being in front of their groceries when they are being scanned, but if they don’t, I think this will be the most efficient solution! (Jeff Ely's favorite solution, given in the text of the article)

I agree that the solution would be best for the consumer (who wouldn't love to kick back in a lounge while everything is handled?). But, in the spirit of the article, you've got to ask why the "Supermarkets Haven't Caught On." The article presumes is that it is obvious to provide such a lounge, or any other consumer-welfare enhancing change to the current system. In other words, the article presumes that grocery stores maximize consumer happiness.

That's not what we learned in introductory economics. In Econ101, we learned that it's useful to assume grocery stores maximize their own profit (just like any firm does). Profit maximization may or may not lead to observably-happy consumers. For that matter, a grocery store that is good at obtaining profits may deliberately increase the length of the line.

Why? Think about your experience when you're waiting in line at the supermarket checkout. You see magazines, piles of candy bars, breath mints, the extreme value buy, etc. At a Jewel-Osco I frequent, they've even started installing miniature TVs that continuously play advertisements.

Maybe you have a weakness for Kit-Kats; Maybe, People gets you excited. Regardless, it looks like the grocery store uses your queuing time to reach into your wallet one last time. They use it for inducing impulse buys.

Moreover, it's in their interest that you wait some amount of time. After all, you get maximum exposure to the in-line advertising if you have to wait. Otherwise, you're just busy paying for the products in your grocery cart. I have a feeling that the supermarket wouldn't mind if you added to your cart.

Thursday, August 20, 2009

Define price ... using pictures

Today, we explore some fun introductory economics through pictures, but first, some background:

In an introduction to economics, the first concept to discuss is scarcity. Scarcity gives rise to opportunity cost (If you can't do everything you want, there must be a next best opportunity; the value of that opportunity is opportunity cost.).

Next up? Price. Fundamentally, price is what you give up to get something. But, one source of confusion about price is that it isn't just measured in dollars (or whatever unit of currency you choose). It is measured in dollars per unit of the good. If you change how much of the good you buy, the price changes too.

That's completely obvious, I know. But, it's entertaining to see stores struggle to post prices in an informative way. To see what I mean, let me introduce you to a picture that conveys my point:


This is a price tag at our local CVS Pharmacy. The item is a pen-shaped container of minty breath spray. As the price tag conveys, this container will set you back $1.99. But, if you want to buy a quart of it (that's 145 breath pens), you pay $289.45. Upon seeing this price tag, I had several questions:

Does anyone actually pay attention to the per quart price?
If so, are people actually buying these breath pens 145 at a time?
Is that why there's only one remaining in the store?

Here's a more mundane example: the pricetag on a package of Kit-Kats:


Each package, it seems, is 1/4 of a pound because the red price is the price per pound. At this level, the red price tag conveys useful information. After all, if you go to a candy store, they often sell chocolate by the pound.

So, we have one reasonable example and one unreasonable example. How about a shocking example?


I don't know what is more shocking: the $200 price tag, or the fact that someone thought that 200 condoms was the appropriate reference quantity for consumers.

One thing is for sure: the CVS employees would look at me strangely if I arrived at the counter with 145 minty breath pens, 200 condoms, and a pound of Kit Kats. Then again, they printed the labels.

Wednesday, August 19, 2009

The Carnival of Economic Fun #1





Welcome to The Carnival of Economic Fun: Edition I. Thanks to everyone who submitted an article to this carnival. In total, there were 35 submissions to the carnival. To keep this sane, I present to you the top 10 submissions.

In no particular order, here they are:

1. Did you ever think it would be cool to be someone's apprentice? Don't want to be a Jedi or on that TV show (you know, The Apprentice)? No problem says this submission to the carinval.

Chris McClelland presents Apprenticeships aren't Just for Jedis and Electricians posted at Lucrative Investing.

2. Clothing can get expensive, especially if you go to Macy*s every day to check out the deals. Especially when times are tough, people look to cut back on clothing expenditures. This next submission helps with ten tips for getting by with your old clothes:

Wise_Bread presents 10 Ways to Get More Wear Out of Your Clothing posted at Wisebread.

3. We're all tempted to purchase things we don't need. Sometimes those things are fun, but often, we don't need them. For large purchases, the next submission is good advice. For small purchases, ask yourself how much you want to fret over your finances.

MatthewPaulson presents 5 Questions to Ask Yourself Before Every Purchase posted at Fine-Tuned Finances.

4. Next, here's an interesting perspective on the Cash for Clunkers program. Key point: If you take the clunkers off the road, you reduce the supply (and hence increase the price) of cars that poor people would buy. Ouch. That hurts:

Steve Faber presents Cash For Clunkers: What it is and How it Hurts the Poor posted at super gas saver.

5. I love these top ten lists. It's interesting to see what degrees that famous people earned (or at least, started):

Linda Jones presents » Blog Archive » 10 Celebs with Truly Ridiculous College Majors posted at Online Courses.org.

6. Here's a perspective on the macroeconomy. I don't know. Velocity feels like a symptom to me, but have a read:

nickel presents Velocity: The “Speed” of Money posted at fivecentnickel.com.


7. Kids say the darn'dest things. And, they teach us about incentives. This post comes from January, but the story about the kids is timeless:

Jeremy R. Shown presents Rhymes With Clown: Home Economics: Perverse Incentives & Unintended Consequences posted at Rhymes With Clown

8. How sweet it is. Is there a sugar bubble? Sounds like speculation to me:

Jimmy Atkinson presents Sugar ETF Surges On Supply Concerns posted at ETF Database.

9. Do baseball teams hold onto players for an unreasonably long time on account of big signing bonuses? In this next submission, an insider says that it's more about potential and low marginal costs. Neat:

Brian Akin presents Dear (Tommy) John Letters: Sunk Costs and Signing Bonuses posted at Dear (Tommy) John Letters.

10. Have a hankering for recession poetry? Here's a limerick and a haiku on bad economic times. Cute.

Madeleine Begun Kane presents Wall Street Woes posted at Mad Kane's Humor Blog.

That concludes this edition. I hope you had as much fun reading these articles as I have. Join us next month for another edition of economic fun. Until next time...

Submit your blog article to the next edition of the carnival of economic fun using the carnival submission form. Past posts and future hosts can be found on the blog carnival index page.

Technorati tags: , .

Tuesday, August 18, 2009

Clunkers: How much would they be worth, anyway?

There has been a lot of talk about the Cash for Clunkers program. Recently, Jodi Beggs wrote a piece on the economic effects of the Cash for Clunkers program. The article is a nice introduction to how an economist initially thinks about the effects of subsidy programs like Clunkers. It's worth a read.

In her article, Beggs (rightly or wrongly) couches her analysis in a standard supply-demand-subsidy framework, and then concludes with the comment:
On a sidenote, does it bother anyone else that the government can be paying out $4500 for a combined benefit to consumers and producers of at most $2500? Technically, the value to the consumer and producer is even lower than what is stated above if the consumer wouldn’t have purchased the vehicle without the subsidy. Either the government must be getting some decent cash for the recycled car parts or there must be one hell of an environmental benefit to having a smaller SUV as opposed to a larger one.

To see why the combined benefit is "at most $2500," note that Beggs assumes that the minimum price for a consumer to part with his/her car is $2000. Under the clunkers program, the car is destroyed (i.e., scapped and recycled). That's $2000 in value that neither the producer, nor the consumer see. Then, Beggs argues that we have to net out the value of the trade.

That's got the right spirit. To determine how much dealers and buyers value the program, we need to net out the value of the car, but the trade-in price is not a good substitute for the value of the car. Savvy used car salesmen often make the trade-in price seem high, but they might give fewer breaks on other aspects of the sale price.

With these savvy salesmen hiding the price, how do we figure out what value the car-to-be-destroyed is? It turns out that it is easier than one might think: Just subtract the resale value of the used car (net of the clunker-to-used-car conversion costs). When the dealer and buyer negotiate a trade-in, each tries to extract their maximum portion of the resale price. Haggle how they will, they're essentially splitting the resale price.

It's often difficult to figure out how much of an advantage you really got from trading in your car. Just checking the sticker a month later when the car is actually sold by the dealer tells you exactly what number you want to use.

When I was 15, the lowest price used car at the dealership was $1000 (my parents just about bought it for me). Now, it's probably more like $1500 -- though I have to admit I am not in that market anymore. The fact remains, most used cars that would qualify for the clunker program go for at least $2000. Beggs' first approximation is about right.

In fact, for many transactions, the dealer-buyer combined benefit of the $4500 Clunker subsidy is no more than $1500. In terms of other benefits (i.e., less emissions, lighter, and shorter vehicles), Beggs is right. We had better get a good bang for our buck. Otherwise, we just wasted $1.5 billion.

Monday, August 17, 2009

Too Big To Fail

This song is excellent.



Hat Tips: Jodi Beggs (via EconJeff (http://econjeff.blogspot.com/) who himself hat-tips Dimitriy Masterov ). Enjoy!

As I had to edit the embedded YouTube video (because it was Too Big To Fit), I'd suggest viewing on fullscreen.

Tales of a houseplant: Bob has a friend

Previously, I wrote two metaphoric posts (I and II) about our houseplant, Bob. It has been a while since I have written about Bob because he's been healthy, happy and cheery. There haven't been any terrifying incidents to report.

Now, we have reason to give a Bob update: Bob has a friend:




We picked up that beautiful bouquet in preparation for family visitors. We named her May. She definitely cheers up our apartment. Plus, as you can see from the pictures, Bob is doing great. He's got all sorts of new growth, and he seems happy to have some company on our dining room table.




You may (ha!) be wondering: Where's the economics in all of this? As you can see, May is a cut bouquet. As such, she will whither and die soon. On the other hand, Bob has been with us since last November. Without consulting a price guide, do you care to guess the relative prices of the two types of household foliage?


I'll reveal the answer in a future post on the topic, but for now, I'd like to see what the readers think.

Sunday, August 16, 2009

Companies Tony Loves: A summary

Throughout the series of posts on companies I love, I fleshed out what precisely it is that is worthy of love in a market economy. Though the companies differed drastically, the principles behind being each loved company remain clear: innovation, good ideas, competition, and customer-orientation.

Here's an informal summary of how I classify the companies I love.

Innovation: Pandora, Google, Y Combinator, Mr. Ellie Pooh, The Windy Citizen

Good ideas: Young House Love, Extreme Makeover: Home Edition, Groupon, Lulu

Competition: Apple, Walmart, ING Direct

Customer-Orientation: Leonas, Taste of Home, The Leaf N Bean

Of course, these are just a few companies that exemplify these ideas. There are plenty more -- many more than I can exhibit in this space. At the same time, these companies do a good job speaking for the unmentioned ones. Despite all of the controversy that inevitably encumbers a specific case, these companies provide concrete examples of the good principles at work in the market. That's worth some attention and some praise. And, that was my intention with this series.

When some especially fresh inspiration comes to me, I'll write more, but I'm drawing the regular Sunday posts for now. I hope you enjoyed the Companies Tony Loves series.

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In the next month, I plan to put these posts together in an edited, professionally-printed form. With the assistance of Lulu, I'll publish the whole collection and make it available at a reasonable price (say $5). I'll update you on this project when I make it available.

Saturday, August 15, 2009

Poll: Willis or Sears Tower?

Over the past week, we did some sightseeing in Chicago as my wife's family visited us. The week was great, and it was a memorable experience. As one of the coolest parts of the week, we visited the Sears tower. It was my first time visiting the Sears, almost exactly a year after moving to Chicago. Now, I can finally say that I visited the Sears Tower. Or, can I?

Here's an excerpt from an article at CNN from last month:
Sears Tower is history. As of Thursday, the iconic Chicago, Illinois, skyscraper is now named Willis Tower.

At least that's what the owners of the 110-story skyscraper now call it after its new main tenant, the London, England-based insurance broker Willis Group Holdings. However, there are plenty of people who refuse to call it that. More than 90,000 people have joined the group "People Against the Sears Tower Name Change," on the social networking Web site Facebook.

So, it turns out that I never got to see the top of the Sears Tower, but I saw the top of the Willis Tower. Sure, it's a technicality, but it's the truth.

That leads me to the question of the week:

If you were to go to the Sears/Willis Tower, what would you tell your friends?

(a) "I just went to the Sears Tower"
(b) "I just went to the Willis Tower"
(c) "I just went to the tallest building in North America"
(d) "I dropped my glasses down a crack at the top floor. Oops!"

The poll is on the sidebar. Please vote early, and tell all of your friends to vote. And, if you're looking in a crack at the top floor and see some glasses, you know who to notify.

Friday, August 14, 2009

Wisdom from Wikipedia: Avoid Weasel Words

I found this bit of wisdom on Wikipedia: It's helpful, and not just for writing Wikipedia articles:

Avoid Weasel Words

Weasel words are words or statements that seemingly support statements without attributing opinions to verifiable sources. They give the force of authority to a phrase or a sentence without letting the reader decide whether the source of the opinion is reliable. If a statement can't stand without weasel words, it lacks neutral point of view; either a source for the statement should be found, or the statement should be removed. If a statement can stand without weasel words, they may be undermining its neutrality and the statement may be better off standing without them.

For example, "Vancouver, BC is the nicest city in the world," is a biased or normative statement. Application of a weasel word can give the illusion of neutral point of view: "Some people say Vancouver, BC is the nicest city in the world."

Although this is an improvement since it no longer states the opinion as fact, it remains uninformative:


In other words, you should avoid weasel words if you hope to write effectively. This is important because, as the Wikipedia article stipulates:
Weasel words do not really give a neutral point of view; they just spread hearsay, or couch personal opinion in vague, indirect syntax. It is better to put a name and a face on an opinion than to assign an opinion to an anonymous source.

Not only is this good practice for contributing to Wikipedia, but it's a good practice for good writing. If you want to know more and read some examples of weasel words, check out the Wikipedia article.

Thursday, August 13, 2009

What did a Nobel Prize do for you?

Gary Becker has a wonderful answer in an interview with Chicago Booth Magazine:

Of course you become a lot more famous and well-known and invited to a lot of things. But in terms of what it does or what you do, it varies from Nobel winner to Nobel winner. I speak for myself. You get some more money, so you have more financial independence. I never did much consulting so I never had any big source of income. So that was, of course, useful.

The other thing is that it legitimized some of what used to be called “oddball” areas that I was working in—the family, crime, addiction. And it legitimized these areas not only for me, but also for all of my students and others in the profession who were doing that. I got plenty of comments from people I knew who were working on these problems. That was very gratifying. Before, I was worried that I got them into this area that was always under attack and wasn’t so accepted. Now I feel I helped them out a little bit, so I made up for it, to some extent.

Expensive Textbooks: Part II

In my last post, I described some reasons for why college textbooks are so expensive. Basically, it comes down to marketing, and I don't blame textbook companies for pursuing the marketing strategy. It is probably profit maximizing.

But, my objective is not to maximize profit. My objective is to spread the good word of economics (I'm a utility maximizer). From my perspective, it would be great if we could offer the same material (perhaps without the expensive sheen) for free. Is such a thing possible? Would that destroy textbook innovation as we know it? Maybe, but let's consider the alternative.

Free textbooks sound like a crazy idea, but some people have written introductory economics textbooks that are priced at zero for full access to the information. For printed versions, these authors charge some money for a bound copy of the textbook, and that's how they capitalize on producing quality content. The information is free, but the printing is not.

As an example, R. Preston McAfee at Caltech has a wonderful (somewhat technical) introduction to economics textbook that is available for free. He works with Flatworld Publishing, which sells interested parties a printed version of the textbook for $11.10 (plus shipping).

Following in McAfee's footsteps (but still going a different direction), I developed my course notes into my own textbook. The full text pdf version is available here; And, if you want a bound copy, I have self-published the book at Lulu (on-demand publishing), where you can get my book for $25.

There's another way to publish textbooks cheaply: financing the textbooks with advertising. A company called Textbook Media publishes textbooks using this concept; I think it's worth checking out. In fact, Tim Taylor used Textbook Media to publish his textbook; It is being used at 150 universities. The book is free if you don't mind looking at advertisements. If you want it to be ad-free, it sells for $30 (comparable to my $25 price).

Maybe you think we're crazy in publishing our full content for free, but I think the idea has some promise. Yes, the free model has to obtain editorial support on the cheap, and that's bound to lead to some compromises, but I don't think that much will be lost in terms of quality content. From my perspective, the chief advantage of the textbook company is that they produce nice color graphics. The textbook companies are masters of formatting. They really do a great job of packaging.

If you want editorial support without paying, here's an idea: Pass your manuscript around to your colleagues, use it for a class that you teach, and frequently ask for feedback from people. Moreover, using the book for a class is a great way to work out some of the kinks in the presentation of material. The most useful editorial support comes from students anyway, and students are good at complaining about things that are confusing. The best part? They do so without paying.

Perhaps, you're skeptical. You may think that this cannot work. How can you get someone to give a good review of the material without paying them for the review? Take a parallel example. Academic economists get great feedback on their original research from other people who are interested in their work. Friends and colleagues are usually more than willing to take a careful read of an article, and they do so without charging.

In fact, the worst review of academic work I have seen was a paid review. I think the problem is that it is hard to be critical when someone is paying you. Subconsciously, most people think "Why bite the hand that feeds you, especially when it's easy to give a soft review?" And, it pays the same too. I suspect this philosophy infects textbook reviews, just as it infected the not-mentioned-by-name review. I'm not so sure that the culture of paying for reviews produces much value beyond just passing your manuscript around.

Most good economic research utiltizes "free" reviews from respected colleagues. Moreover, these academic articles and the culture behind them formed the basis for the knowledge that is ultimately assembled into textbooks. Why not try out the same model -- or a similar one -- when it comes to communicating your ideas to students who are new to the subject?

That's the idea with "free textbooks." In that context, it's not so radical after all.

Wednesday, August 12, 2009

Expensive textbooks: Part I

This post is the first in a two-post sequence on expensive textbooks. In this post, I offer my explanation for why college textbooks are so expensive. In my next post on the topic, I'll suggest an alternative: "free." Read on, and tune in next time.

Textbooks are a significant hidden expense to obtaining a college degree. No matter how good the textbook is, the price is usually high enough so that few students are grateful that they had to buy the book. That was my experience when I taught intro-mediate microeconomics at Montana State, and I suspect that sentiment is felt by a sizeable fraction of college students.

Moreover, it's not a great introduction to the subject to say, "Hello. I'm thick and shiny. I'm also required. Fork over $150." On account of the steep price tag, textbooks are perceived as an expense, rather than a resource. And, that puts students off.

As someone who loves spreading the good word of economics, my first temptation is to shout, "These textbooks are too expensive. Something must be done." After all, the high cost deters people from listening. On the other hand, shouting first and asking questions later goes against my economist instinct to focus on positive questions (i.e., questions about "what is" rather than "what should be").

So, let's go through this line of reasoning. Why are textbooks so gal-dern expensive?

1. Materials. Of course, there are inputs and those inputs have cost. But, if you paid $150 for a shiny textbook, $20 of that would come from the printing and binding costs. How do I know? Using printing on demand services (which cost more per unit than the standard printing press run), my own textbook has materials cost of around $13. More on this later.

2. Author compensation. The textbook author has to be incentivized to put the work into writing the book; perhaps, developing some graphics, writing exercises, coming up with examples, etc. On the other hand, one great motivator for these activities is to be forced to teach a class. If you're meticulous about your examples and course notes, teaching a course for a couple of years can lead to most of the raw material for a textbook.

Therefore, authors need to be compensated less than one might think to write a textbook. Mostly, you just need to compensate the author to be meticulous enough to catch grammar errors. The fact that he or she is obliged to teach a class anyway means that we could probably get away with paying the author $5 or $10 per textbook sold. Suppose you sell 10,000 copies. That's $50,000 to $100,000, and keep in mind that this is supplemental income.

3. Editorial review and fluff. The first two chunks comprise approximately $25 to $30 of your $150 textbook. So, where does the rest of the expense come from? Textbook companies employ all sorts of specialists: editors, marketing experts, graphic designers, etc.

Moreover, the employees of the textbook publishing companies are not by-and-large subject matter experts. Therefore, they need to solicit expert opinion, and what better way to do this than to send free copies of the book to professors who could teach out of the book? And, that's what textbook companies do. Not only do they send free copies of the book to professors, but they compensate instructors for reading and critiquing segments of the book.

In one year of working as an adjunct professor, I received five to seven of these free textbooks and three to five requests to review parts of textbooks. Sometimes, I would only be asked to review a Table of Contents and Preface. Other times, I would be asked to read up to one chapter of a textbook on the presentation of the material.

How much did it pay? $25 to $300 per review. Now, if you look in the front of your economics textbook, you'll see a list of names. The list of names is usually a couple of pages long. Those are the people who were paid for reviewing a portion of the textbook, and they're the ones who agreed to have their name printed.

That's a lot of expense, and I do wonder if it is duplication of effort. At the same time, how else is the textbook company going to market the book? From their perspective, contacting and paying a set of professors who teach the target class is good advertising. It is targeted marketing that's worth the expense of printing a trial copy of the book and writing a check for $250.

After all, when professors adopt a textbook, they bring a bunch of (un)willing consumers of that book with them. From the perspective of a pseudo-insider, that's the primary reason for why textbooks are so expensive. We might get sparkly textbooks that are easy on the eyes, but is the sheen worth the expense? Maybe it is.

Tuesday, August 11, 2009

New features on This Young Economist

If you have been following the blog for a while, you've likely noticed some changes recently. I've been tinkering with the blog's design in hopes of offering more with less clutter. Here are some new features you might enjoy.

1. Custom Search Box. If you want to find something specific, this is your go-to spot. I encourage you to search the blog for things you're interested in searching. Just the other day, a friend of mine told me that he searched "mesothelioma," and found no results. Now, he'll find this post.

2. Five Things I Read. I moved my daily five-things-I-read post to a different blog: http://fivethingsiread.blogspot.com/. On account of those posts, the blog was beginning to look cluttered. Clutter is hard to filter, so I chose to split those posts into their own space. For those of you who like the series, you'll still find reminders of five things I read.

3. Amazon Wheel and Wishlist. On the sidebar, you'll see a nifty wheel with some of my favorite books, and a list of things I'm looking to buy. Make no mistake. These are ads, but I wouldn't recomend the books if I didn't love them, and I wouldn't put something on the wishlist if I wasn't intrigued. If you're like me, you might want to give the wheel a spin (so to speak).

4. Other Decluttering.
  • I changed some of the ad placement and colors. Now, the ads don't stand out nearly as much, but maybe they're still tempting?
  • I moved the weekly poll to the top of the sidebar. This more prominent location reflects my priorities. I think the weekly polls are a fun component of the blog, and I'd like to encourage fun wherever possible.

5. Other Features.

  • I added a section of the sidebar with some of my favorite quotes at the moment.
  • I added a list of some of my favorite blogs. Frequent them if you don't already. There's good stuff in that list.
  • I added a list of the most viewed posts, the most viewed posts (lately), and my favorite posts.

6. Subscriptions. I have expanded the number of ways for you to subscribe to this blog. Of course, there's the feed and there's following me on Twitter, but now, there are two new options. You can

subscribe for updates via e-mail. Just enter your e-mail address in the subscription box on the sidebar and click Subscribe.

subscribe for my biweekly newsletter. Just send me an e-mail (thisyoungeconomist@gmail.com) with the word subscribe in the title.

I hope these features make my blog easier and more enjoyable to read. If you have any further suggestions, I appreciate hearing them.

Monday, August 10, 2009

Free Lunch Winner

Now's the moment that 20 of you have been waiting for...

As promised, I organized all of your Free Lunch Contest submissions into a numbered list (#1 through #20), and then I went to www.random.org, which generates a random integer between any two integers you specify.

The randomness gods selected #6, which belongs to "show me da money." A free lunch is heading his way!

Be on the lookout for more great giveaways. Next time, I'll probably give away something less fungible.

How a sandwich becomes lunch

Last week, I wrote an article entitled Is free ice cream free? where I demonstrated a surprising implication for the time you spend waiting in line for a rationed good like an ice cream cone on a "free" ice cream day: it doesn't matter how efficient your server is. This insight -- from a theory called rationing by waiting -- came from a famous paper by Yoram Barzel.

The idea of rationing by waiting is that for goods that are rationed without a market price mechanism, something other than money fills the gap. It turns out that even with well-functioning markets, market goods are not fit to be consumed until something other than money (namely, time needed to consume the good) fills the gap. In a nutshell, this is the intuition for Gary Becker's theory of household production.

To see this more concretely, consider an example of a zero marginal cost good. Every year, Montana State and Montana square off in one of the longest-lasting rivalries in all of college football (You Michigain and Ohio State fans think you've got the monopoly on college rivalry, not so). Students at Montana State are given "free" tickets to the game, but there are only so many available.

Understandably, a line forms. Some students even wait for hours to get their tickets for The Brawl of the Wild. But, is the time waiting in line the only cost that people pay for watching the annual rivalry game? Definitely not. You get a ticket, but you also have to forego an afternoon to actually watch the game. That's not even mentioning the travel time to the stadium.

How do we value such time? Does this time go into the cost of the thing we consume? What's the deal? How do we think about this? Fortunately, Gary Becker came to the rescue with his household production model. He came up with the concept that households use inputs to produce things called commodities. Then, the household consumes what it produces.

Of course, households don't use factories, but they are producers nonetheless, using time and market goods as inputs to what they really want. In the context of our example, to enjoy a rivalry football game (a commodity), the student buys market goods (tickets, hot dogs, gasoline, tailgate materials, beverages, etc.) and spends some of his own time to actually enjoy the football game.

Using the math of economics, it's most natural to model this mixing of time and goods as production (just as factories mix labor and capital, households mix time and market goods). Hence, we call Becker's model household production. And, this model gives us a great way to understand time-intensive commodities like golf and football, but it may also shed some light on more commonplace commodities like lunch.

Viewed through the lens of household production, we can consume a commodity only when we combine our time with market goods. In other words, it's impossible to consume a good from the marketplace without some form of household production.

You might be skeptical. Perhaps, you're thinking Surely, you could buy a lunch without producing it. Right? It turns out, that's wrong. Try buying a sandwich, and then enjoying that sandwich as lunch without allocating any time. Even if you are a hot-dog-eating champion, I'll guarantee that you'll have to allocate some time to converting that sandwich into lunch.

This process is known as eating to most people, but now you can call it by an economic name: household production.

Sunday, August 9, 2009

Companies Tony Loves: Y Combinator

Imagine you have an idea for a new program that will revolutionize the way people use the Internet, but you have no experience with running a business. Your idea is a great one, but you have no money and no connections. Without some financial assistance and some good advice, your idea is doomed.

Now, let's switch it up: imagine that you're a manager at a venture capital (VC) firm. You're looking for a company that is both very likely to do well and in need of some start up funds. By financing this company through some of its initial stages of development, your VC firm can buy a large stake in a successful business.

Naturally, one would think that the idea holder in the first paragraph is the perfect fit for the VC firm in the second paragraph. Provided that the idea is a good one, the firm should be happy to finance the young innovator to help bring that idea to fruition. Why not bring the two together?

There's just one problem. A good idea does not make a company. A good idea does not automatically bestow credibility. In short, a good idea is not enough. Without a credible track record, the person with the idea is going to have a hard time convincing the VC firm to invest. With no investment, the idea dies, and the innovator does something less innovative.

Enter this week's company I love, Y Combinator (YC). I heard about YC on last week's EconTalk podcast, where Russ Roberts interviewed Paul Graham, one of the partners in Y Combinator. It's a fascinating podcast, worth a listen. Among other things, the podcast convinced me that the world is a better place because of Y Combinator.

So what does Y Combinator do?
YC is a new kind of venture firm. Instead of taking on companies that are already companies and bestowing boatloads of money upon their likely success, YC takes on innovators who have ideas. Because they enter earlier in the process, their anticipated success rate is much smaller than a VC firm, but as the story of the dead idea above illustrates, YC can do some real good by helping an idea become VC-worthy.

In doing so, YC get to take their cut, but they also help innovators be innovative. From your perspective at home, you get to enjoy more cool stuff because YC helps bring it into existence. Now, that's a reason to give them love.

So, what's so special about Y Combinator?
Not only does YC provide seed funding for these innovators to turn their ideas into a business, but YC trains the innovators in the art of entrepeneurship. Their monetary investment is much smaller than a VC firm, but their time investment is substantial. YC works with startups, giving them advice on their innovations and hosting dinners with established entrepeneurs.

In the process, they empower innovators with good advice. Cheering on innovation is YC's comparative advantage. Innovation is a difficult and discouraging thing to do. It's hard work, and because it is something new, there are many disbelievers. In a world where too many people ask why, Y Combinator encourages new ideas with the simple question: why not?

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Notes and links:
1. To be fair, Y Combinator asks a lot of other questions than "why not?" They're careful about investing, but they also recognize that they're in a business where they take a lot of risk. And, more importantly, they see a particular type of risk that other firms are not taking, so they take it. Here's an interesting fireside chat with Paul Graham (one of the partners in Y Combinator) and a representative from a competing firm Sequoia.

2. Here's a link to the Y Combinator application form, including what they look for in a startup.

3. In the Y Combinator FAQ, there's a nice summary of the firms they've financed. Among them? Reddit, Scribd and Justin.TV

4. Paul Graham is a fascinating person, and a great advocate for Y Combinator. See his podcast on EconTalk, and a list of his essays. He has an interesting perspective on life.

Saturday, August 8, 2009

Poll: What's your favorite popular economics book?

As it is finally summer, I have time to start in on my reading list. I'm currently reading Nudge by Thaler and Sunstein and Create Your Own Economy by Tyler Cowen. From reading the introductions of each, I can tell that these books are both going to be engaging. I'll update you on my experience with these books later.

But, this poll is about your experiences reading popular economics books. Namely,

What is your favorite popular economics book?

For the poll, your options are

(a) More Sex is Safer Sex by Landsburg
(b) The Logic of Life by Harford
(c) Freakonomics by Levitt and Dubner
(d) Nudge by Thaler and Sunstein
(e) Create Your Own Economy by Cowen
(f) Free by Anderson

The poll is open for a week (vote on the sidebar ---->). As I left off numerous popular economics books, feel free to submit votes by commenting on the post. I'd love to add your suggestions to my reading list. Please vote, tell your friends to vote, tell your relatives to vote, and tell any economist you see to vote.

I look forward to seeing what you have to say.

Friday, August 7, 2009

When publishing online, is space free?

This week is "Free Week" on This Young Economist. That is, every post this week pertains to the notion of "free." If you haven't caught it, I'm giving away a free lunch for this week's poll. Vote on the poll and sign up for your chance at a free lunch. [link here: if you want to enter, there's a form] If anything else, it will be fun. And yes, I really am giving away $5 (I'll put everyone's entries into a numbered list, and then use Random.org's True Random Number Generator to select the winner). Now, onto today's post.

Newspapers are struggling in the face of online competition. It's tempting to claim that an important competitive advantage for online media is that they are not constrained to word limits like traditional newsprint media. Because storing bits and bytes is much cheaper than printing words, online journalists are free to write as much as they want.

That feels like an advantage for online media, but it's not. Traditional newsprint media outlets struggle to retain customers' attention much more than than they struggle to fit the news between the margins. The fundamental scarcity in the media business is time, not paper or storage for words and ideas.

Therefore, I don't think the additional space is a competitive advantage at all. To the contrary, filling additional space is a temptation to be avoided. It's costly to write too much because people have short attention spans. If you incessantly write five-page rants, no one will read past your first page. Cut the five-page post to two pages and readers will return more often.

Regardless of where you publish, this is good writing advice. Don't bombard your readers with too much information. Write straight to the point. Instead of writing a list of principles to follow, I provide three pairs of examples of what to do and what to avoid.

#1: Who wants to read this, when you can read this?
Krugman's greatest asset is that he writes exceptionally. DeLong's biggest weakness is that you can't see his first post without scrolling down.

#2: Wouldn't you rather read this than this?
Greg Mankiw does not waste words. Becker and Posner do. Both are good sources of information, but B&P require more concentration.

#3: Isn't reading this easier than reading this?
Cowen and Tabarrok keep it simple and quote excerpts. Thoma often quotes entire posts from other blogs, supplementing with additional commentary.

These are six of the most popular economics blogs on the Internet. The fact that some succeed and others fail suggests to me that we all have a temptation to write too much. But, readers respect brevity because brevity respects readers. Your audience's time is not free. Keep that in mind the next time you compose an e-mail or write a report.

Thursday, August 6, 2009

From my parents: There really is a free lunch!

This week is "Free Week" on This Young Economist. That is, every post this week pertains to the notion of "free." If you haven't caught it, I'm giving away a free lunch for this week's poll. Vote on the poll and sign up for your chance at a free lunch. [link here: if you want to enter, there's a form] If anything else, it will be fun. And yes, I really am giving away $5 (I'll put everyone's entries into a numbered list, and then use Random.org's True Random Number Generator to select the winner). Now, onto today's post.

Today, I'd like to share with you a story that my parents told me. After reading the story, you might think that there is such thing as a free lunch after all (if you're willing to ignore opportunity cost...).

Ever since my parents recently bought a new car from the Ford dealership, they have received numerous calls from telemarketers, and they have been the recipients of an inordinate amount of junk mail. Most of these calls or mailings are surveys. It turns out that Ford really wants to know what worked on my parents. Why did they buy the car? How much did they pay? What magazines do they read? What products do they buy frequently?

Obviously, this market research is trying to figure out what advertising would work best to attract more people like my parents. It makes sense to want this information, and I bet that such information would be worth buying. In fact, some of the survey companies have -- quite literally -- tried to buy the information from my parents. The trouble is that they did it wrong: One survey organization sent the survey with a $5 bill (a free lunch so to speak) and no conditions on the money.

As you can imagine, my parents like money and dislike spending an hour to fill out a survey. The rational response? Money goes in pocket, survey goes in trash. Later at Wendy's, the money buys a Spicy Chicken Sandwich with cheese, lettuce and tomato.

mmmmm... Don't those market research dollars taste good?

Wednesday, August 5, 2009

Is free ice cream free?

This week is "Free Week" on This Young Economist. That is, every post this week pertains to the notion of "free." If you haven't caught it, I'm giving away a free lunch for this week's poll. Vote on the poll and sign up for your chance at a free lunch. [link here: if you want to enter, there's a form] If anything else, it will be fun. And yes, I really am giving away $5 (I'll put everyone's entries into a numbered list, and then use Random.org's True Random Number Generator to select the winner). Now, onto today's post.

In May, Jodi Beggs wrote an interesting article about rationing free goods. A local Baskin Robbins gave away free ice cream. Understandably, lots of people showed up, among them Jodi Beggs who snapped these pictures.



Beggs concluded, "that's a damn long line for a $4 item." Beggs then gave the standard opportunity cost story: If you value your time at $10 per hour -- as you would if you had a job that paid $10 per hour -- each hour in line would cost $10 because that's what you could otherwise earn while waiting in line.

In this post, I want to take this reasoning further:

If everyone values their time at $10 per hour, the equilibrium wait time for a "free" $4 cone would have to be 0.4 hours or 24 minutes. Then, how many people should we expect to see standing in line? That depends on the efficiency of the Baskin Robbins workers:
  • What if each person adds two minutes to the wait time? Then, we'd expect the line to have 12 people in it.
  • What if each person adds 30 seconds to the wait time? Then, we should see 48 people standing in line.
This is an important insight into the effect of line efficiency. In the absence of economic reasoning, we might expect customers to spend less time in line if the workers process each customer more quickly. But, if that's the case, more people will queue up, and it takes longer to get through the line.

This idea came from an economist named Yoram Barzel in a 1974 academic paper entitled "A Theory of Rationing by Waiting," which was published in The Journal of Law and Economics. There's a whole lot more to the Barzel paper: namely, he covers the case where people have different costs of waiting in line, the case where people can buy as much as they want when they get to the front of the line, and other cases.

But, without going into the messy heterogeneous details, the point is: Depending on how long it took for the Baskin Robbins employees to dispense each ice cream cone, that horrendously long line actually might be the "right" length.

Tuesday, August 4, 2009

A free economy

This week is "Free Week" on This Young Economist. That is, every post this week pertains to the notion of "free." If you haven't caught it, I'm giving away a free lunch for this week's poll. Vote on the poll and sign up for your chance at a free lunch. [link here: if you want to enter, there's a form] If anything else, it will be fun. And yes, I really am giving away $5 (I'll put everyone's entries into a numbered list, and then use Random.org's True Random Number Generator to select the winner). Now, onto today's post.

One of the books on my summer reading list is Chris Anderson's Free. I'm reluctant to endorse the book until I read it for myself, but the concept has some promise.

I first heard about Free through a short Freakonomics post that quipped, "Anderson’s book on the subject, Free: the Future of a Radical Price, goes on sale next week for the decidedly un-radical price of $26.99." This post at Freakonomics linked me to a very negative review of the book by Malcolm Gladwell. Here's the conclusion of his review:

And there’s plenty of other information out there that has chosen to run in the opposite direction from Free. The Times gives away its content on its Web site. But the Wall Street Journal has found that more than a million subscribers are quite happy to pay for the privilege of reading online. Broadcast television—the original practitioner of Free—is struggling. But premium cable, with its stiff monthly charges for specialty content, is doing just fine. Apple may soon make more money selling iPhone downloads (ideas) than it does from the iPhone itself (stuff). The company could one day give away the iPhone to boost downloads; it could give away the downloads to boost iPhone sales; or it could continue to do what it does now, and charge for both. Who knows? The only iron law here is the one too obvious to write a book about, which is that the digital age has so transformed the ways in which things are made and sold that there are no iron laws.
Based on this quote, I had a dismal first impression of Free. The book had to be too simplistic to offer anything useful to learn, but Chris Anderson's marketing got to me. I started noticing other places where Free was being promoted. When viewed in the appropriate light, the Free notion isn't so bad after all.

Namely, I was searching the archives at EconTalk, and I noticed that there was a podcast where Russ Roberts interviewed Chris Anderson on Free. As I have a great deal of respect for the podcasts at EconTalk, I had to listen in. I planned on listening to just the introduction, but I found myself listening to the entire podcast. The topic really had some grab. And, just last week I saw this interview of Chris Anderson on The Colbert Report:


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Chris Anderson
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Anderson is a good salesman for his idea. Furthermore, he's reduced the price of his ideas to free if you're willing to read the book online.

As I gathered from the podcast (and my non-Gladwell readings), the most interesting aspect of Free has nothing to do with iron laws of describing behavior; Rather, Free (as the business model) has everything to do with a strategy that is being used ever more frequently, especially in the online economy. That is, companies like Google and The New York Times are giving away great services at a zero marginal cost to their audience. Then, they turn around and market the fact that they have a large attentive audience.

As the audience, we get a myriad of great products at the cost of viewing a few advertisements along the way. That's awfully close to free, and being so close to free, it's such a great deal that the business model is transforming our world.

So, now you see why the book is on my reading list. It's a compelling idea, but on the other hand, there are points in the argument worth resisting. One thing is for sure: The idea is controversial, but that's more of a reason to read the book than to leave it on the shelf at the bookstore.

Monday, August 3, 2009

Was it worth it? Yes. Was it free? No.

This week is "Free Week" on This Young Economist. That is, every post this week pertains to the notion of "free." If you haven't caught it, I'm giving away a free lunch for this week's poll. Vote on the poll and sign up for your chance at a free lunch. [link here: if you want to enter, there's a form] If anything else, it will be fun. And yes, I really am giving away $5 (I'll put everyone's entries into a numbered list, and then use Random.org's True Random Number Generator to select the winner). Now, onto today's post.

The free lunch concept dates back to the mid-19th century when saloons used them as a marketing gimmick:

Free lunches, often cold food but sometimes quite elaborate affairs, were provided for anyone who bought drink. This inducement wasn't popular with the temperance lobby and was also criticized for the same reason that others in the 20th century later introduced the TANSTAAFL idea to economic thinking, i.e. saloon customers always ended up paying for the food in the price of the drinks they were obliged to consume. Indeed, some saloon keepers were prosecuted for false advertising of free lunch as customers couldn't partake of it without first paying money to the saloon.

Indeed, even the original free lunches were not actually free. Patrons paid for the lunch through having some drinks at the saloon. That's one big reason that economists like to say that "there ain't no such thing as a free lunch." And, it's reason number one (of two) I like to give for why lunches ain't free:

1. With many zero marginal price schemes, there is often a catch. Take a personal example. When my wife and I went to Las Vegas, we were approached by a 6 ft 2 inch, 300-pound man in a bright red pin-striped suit. He had red shiny leather shoes to match. He offered us a free lunch, a gondola ride and a trip to the wax museum... if only he could talk to us about purchasing a timeshare condo. No obligation to buy.

Two hours later, after saying no 80 times, we got our coupons for lunch, the gondola ride, and the wax museum. We felt like paid for it.

2. Our time can always be put to a different use. And, that use has value. The idea is that we live in a world of tradeoffs. We simply do not have enough time to do all of the things we want to do in life. Therefore, everything we do has a cost. That cost is the value of the next best alternative. That's because if I don't partake in one activity, there's always my second best activity (and therein lies the opportunity cost).

Back to the Vegas gondola ride example. If we hadn't spent two hours listening to Mr. Red's sales pitch, we would have found something else to do. What's the value of that next best option? Given my inclination for playing blackjack and exploring strange places, the value we placed on that time was definitely not zero.

Nevertheless, we probably walked away from that sales table with more stories than if we played blackjack for two hours. And, the next time I see someone wearing a red pin-striped suit, I'll think of Vegas. That memory has to be worth something.

So, how did I feel about our "free lunch"? Was it worth it? Yes. Was it free? No.

Sunday, August 2, 2009

Companies Tony Loves: Extreme Makeover Home Edition

On account of illness or a bad economy or a natural disaster, people can experience real hardship. There are always deserving families who had bad luck who could use a helping hand. Most people derive value from knowing that such deserving families were given a helping hand.

At the same time, it's often difficult for any single person to get the motivation to help a family or a community out. That's because it takes hard work to lend a helping hand. At the same time, we still get to know that the family was helped out if someone else does the heavy lifting.

In economic terminology, "giving a deserving family a helping hand" is a public good. And, as I discussed in my Chicago fireworks article, public goods are notoriously difficult to provide. On account of seeing this problem, some would immediately advocate involving the government, but this week's Company I Love gets around the public good problem with no government help needed.

In honor of Free Week, today's Company I Love is a company that gives away free home makeovers to deserving families. That's right. This week I'm loving on the television show, Extreme Makeover: Home Edition.

If you haven't seen the show before, each episode focuses on the story of one family that could use some help improving their living conditions. Families featured on the show have inspirational stories or have experienced a great hardship that they're struggling to overcome. They're families that any reasonable person would want to help.

Each episode begins by chronicling the family's story and meeting the family. Headed by Ty Pennington, the show's team and an army of local contractors undertake a complete demolition and rebuilding of the family's house. While the house is under construction, the family gets to go on an amazing vacation.

Sometimes the designs are over the top. Sometimes the materials are expensive. Sometimes the family cries on television. But, it is amazing how much one crew, spurred on by the purposeful willpower of pleasing a national television audience, can accomplish in a week.

From an economic standpoint, it's inspiring that the television show spectacularly provides the public good of lending a needy family a helping hand. On account of a national television audience and eager advertisers, the show can make goodwill and a helping hand a profitable endeavor.

The end result is that deserving and needy families get spectacular homes, we get to know that people who deserved it were helped out, and Ty Pennington is rich and famous. I think we're all better off. Now, that's a reason to give Extreme Makeover: Home Edition your love.