Saturday, October 31, 2009

Poll: What would you choose?

It is October 31st. There is one light on in the mansion up the street. You and your friends get the courage to ring the doorbell. An old man wearing a goblin mask comes to the door. You yell "Trick or treat!" and the old man remarks on how spooky your costumes are.

He presents a bowl of candy with three different varieties: Snickers, Kit Kat, and Smarties. Just as you reach for the bowl, the old man says, "Not so fast! You have another choice." You and your friends look at each other in bewilderment, and then to the goblin-faced old man. What could this choice be?

The old man says to you, "Well... you said trick, or treat. Don't you want a trick?" He then invites you in, as you fourth option, for a mysterious magic trick. The halls inside are dimly lit, as is the sidewalk leading up to the mansion. The old man lives alone.

This week's poll question is:

What do you choose?

(a) Trick
(b) Snickers
(c) Kit-Kat
(d) Smarties

Please vote early and often. The poll is open for a week, but don't wait too long. There are many other houses to visit.

Wednesday, October 28, 2009

Videos versus blog posts

As a couple of my previous posts have called to attention, I recently started a YouTube channel with short educational videos on microeconomics. Thus far, I have posted over 20 videos, and by most accounts, the channel has been quite successful.

Even though it is early, my YouTube channel is averaging more than three times the daily traffic of my blog. I told these daily statistics to a friend. He responded, "People don't read anymore; They would rather sit and watch someone tell them something than read it on some webpage."

Despite the fact that I am not much of a reader myself, this comment surprised me. The explanation has some appeal, but I'm not sure I buy that "distaste for reading" tells the whole story. Here are some alternative explanations, which are more to arouse curiosity than to state an opinion.

Maybe I'm not as bad at making videos as I am at writing. If so, it's not surprising that my (relative) talent is being rewarded with more views.

Maybe it's all about competition. In the blog-o-sphere, there are widely-recognized economists who write much more frequently on similar topics to the topics I discuss. In the YouTube-sphere, there's not so much competition, especially in intro-to-intermediate microeconomics (i.e., just a smidge above principles level).

Or, maybe I'm just that attractive.... No. That can't be it.

The more I think about it, I think it is the competition story: As of right now, there's not much good economics content that is published to YouTube. Hence, it isn't difficult to ascend to the top of the search results for my particular topics. To me, what's most surprising is that there appears to be significant demand despite the low average quality.

Given this early experience with my channel, I wouldn't be surprised if YouTube soon became a viable academic resource. There's certainly work to be done, but the potential is there.

Monday, October 26, 2009

Learning Economics on a Budget: Part II

A couple of months ago, I started a YouTube channel with short videos on basic to intermediate microeconomics. In some ways, this project is designed to promote my textbook, but the project is mostly designed to expose people to economic reasoning and some basic economic theory without the typical barriers to entry.

I embedded my first unit of videos in a previous post. This post has my second unit of videos on Foundations of Consumer Behavior.

Unit II: Foundations of Consumer Behavior

In this first video, I discuss the assumptions on preferences that standard economic theory requires. These assumptions are very general, and can accommodate all sorts of economic decisions.



This second video fleshes out our characterization of preferences with the concepts of marginal utility and marginal rate of substitution.



If you prefer calculus-based derivations of formulas, you might like this video better than the previous one:



After fully characterizing the assumptions and geometry of preferences, it's natural to study constraints and how constraints interact with individual preferences.



Here's an example of how to apply the tools of budget constraints, indifference curves, and utility maximization to a problem from my book.



The previous example was fun, but it wasn't especially generalizable. This next video graphically demonstrates how indifference curves and budget constraints relate to demand curves.



If you prefer calculus, you may prefer this video to the previous one for demonstrating where demand curves come from.



This next video demonstrates one way (Hicks decomposition) of decomposing a price change into income and substitution effects.



You might ask, "Why do we care about income and substitution effects?" It turns out that decomposing price changes into these two effects can help us understand the Giffen Good Puzzle. Here's an explanation:



If you prefer calculus, this video mathematically decomposes income and substitution effects. This mathematical decomposition is called the Slutsky Equation.



This most recent video describes the role of diminishing marginal utility in establishing the law of demand. It turns out that most people mean to say that marginal rate of substitution diminishes (not marginal utility).


I am about to begin on my next unit on producer behavior. In the meantime, you should log into (or create) your YouTube account, rate my videos, comment on the progress of the channel, and subscribe to new videos. I am always uploading new videos. Enjoy!

Sunday, October 25, 2009

Some perspective on stimulus debate

Upon reading this column in Time, I had to comment.
The next counter came in a memo to House Republicans from economist and former John McCain adviser Douglas Holtz-Eakin, who wrote, "Jobs keep disappearing ... and the Obama Administration's only apparent plan is to double down on a failed strategy for economic stimulus." The next day, the White House went on offense, hailing a preliminary report on stimulus job creation (30,000 jobs directly created or saved by the first $16 billion in spending). House minority leader John Boehner retorted that such exulting was "beyond the pale" because "3 million private-sector jobs have been lost since it became law."
Let's wipe the Republican attacks off the table, and just take the White House defense of the stimulus at its word. If 30,000 jobs were created or saved by the first $16 billion in spending, how much is that per job manufactured? $533,333. Sometimes, it is worth taking a step back from the political melee to get some perspective.

Saturday, October 24, 2009

Poll: How much cash do you carry?

I stumbled upon an interesting question last night, even though I wish I hadn't.

When I lived in Montana, I used to carry $40 to $60 on my person. As there were always a few places that only accepted cash, it was always worth keeping my personal cash balance high to avoid frequent trips to the ATM. On the other hand, there was little cost to keeping more money on me. The interest was inconsequential, and no one even fathoms of robbing you in Montana.

Chicago is different. As with Montana, there are still a few places that only accept cash. Thus, I still keep some cash on me, but there's much higher risk that you'll be robbed in Chicago. Accordingly, I keep my cash balances lower (usually less than $20).

Unfortunately, this cash-management strategy paid off for me last night. On my walk home, a young (and strong) poor man grabbed me by the coat and said "Where tha' money at?" I gave him all I had on me ($5), and he left.

Terror aside, that brings me to the poll question of the week:

What number is closest to how much cash you keep on your person?

$5
$25
$75
$200
$1000

I have a feeling that my assailant was disappointed to walk away with only $5, but that's just a hunch. As always, the poll is open for a week. Vote early and often. I'm interested in hearing what you have to say.

Wednesday, October 21, 2009

How I feel about economics seminars

Attending an economics seminar can be a surreal experience for the uninitiated. In one word, economics seminars are intense. Because my first academic love is economics, I have "grown up" thinking that
  • Arguing with the presenter about his introduction is appropriate seminar decorum.
  • If the presenter is not interrupted in the first five minutes with a question, no one is interested.
  • You present your work at a seminar to have people tear it to shreds so you can see what level of criticism your ideas can withstand.
On top of these basic economics seminar rules, I discovered that there's another seminar rule at University of Chicago: No clapping. Clapping at the end of the presentation is the second worst thing you can do. What's worse? Clapping at the beginning.

As strange as this sounds, I like this set of rules. I believe that serious work takes place at economics seminars. And, the point of presenting a seminar is to get feedback from smart people. After all, when you frame the task of the presenter as eliciting feedback from a very smart group of audience members, why should the audience members clap? They're the ones working.

On the other hand, I am aware that this is not how seminars work everywhere or in every department. I attended seminars when I was pursuing a master's in statistics. Those seminars were so different that I felt like I woke up in a foreign land at my first statistics seminar.

At statistics seminars (at least the ones I attended), there is time reserved at the end of the seminar for questions. Presenters are very rarely interrupted, and if they are, everyone recognizes that the presenter is the smartest person in the room on the topic. And, as nearly as I can tell, the main purpose for presenting a seminar in statistics is to disseminate ideas. Subjecting one's ideas to sharp criticism is secondary (if it is important at all).

Coming from a different background, you may think that economists are crude for perpetuating such a hostile incentive environment. You may think that those economists who present are insane for subjecting themselves to such harsh criticism. But I believe it works, at least for economics, and more strongly, I think there are very good reasons for the differences in seminar styles across disciplines.

Although it is quantitative, economics is not straightforward. At the frontier, economics involves balancing the competing demands of simplicity and realism (even if your paper has theorems and proofs). A completely realistic characterization of the world is going to be intractable (and therefore, it's subject to criticism). An overly simplified analysis will leave out important aspects of the problem (and therefore, it's subject to criticism).

Viewed in this light, the trick with economics is to strike the right balance: Your paper has to be interesting and right, and even if it is, it's subject to criticism.

On this dimension, statistics is different. As a presenter, you have theorems and lemmas (with proofs). Your papers are a system of logic unto themselves. They're correct by the time you present, but you're using the seminar to gauge interest. If you get a big audience who is still awake at the end of your presentation, you're on the right track.

But that's not the right way to go with economics because good economics is not about theorems and proofs; it is about understanding human behavior in a rigorous framework. Economic research is fueled by candid criticism, and seminars are an outstanding way to produce good economic research.

Saturday, October 17, 2009

Poll: What will be the effect of the Making Home Affordable Program?

Jeffrey Miron has been posting frequently on his blog about the U.S. Government response to the housing bubble. Here's Miron in a recent post.
No one should object if a lender, without subsidy and without pressure, negotiates a mortgage loan. That can make sense for both lender and borrower because the foreclosure process is costly.

But Treasury's attempt to subsidize and coerce loan modifications is fundamentally misguided. It means many homeowners will stay in homes, for now, that they cannot really afford, merely postponing the day of reckoning.

Treasury's policy is also misguided because it presumes that everyone who owned a house before the meltdown should remain a homeowner. Likewise, Treasury's view assumes that all the housing construction over the past decade made good economic sense.

Both presumptions are wrong. U.S. policy exerted enormous pressure for increased mortgage lending in the years leading up to the crisis, thereby generating too much housing construction, too much homeownership and inflated housing prices.

The right policy for the U.S. economy is to stop preventing foreclosures, to stop subsidizing mortgages, and to let the housing market adjust on its own. Otherwise, we will soon see a repeat of the fall of 2008.
So, how do prices look when they're inflated? Here's a graph of the price-to-rent ratio that I borrowed from Calculated Risk.



That brings me to my poll question of the week.

What do you think will be the effect of additional home subsidies and programs like the Making Home Affordable Program?

(a) Another bubble
(b) Stimulate the economy
(c) Save hard-working Americans' homes
(d) No effect

As with all polls, this one will be open for a week. So, in the Chicago tradition, vote early and often. Tell your friends and homeowners to vote. I look forward to seeing what you have to say.

Wednesday, October 14, 2009

Carnival of Economic Fun #3



Welcome to edition three of the carnival of economic fun. This month, I have 7 fabulous articles for you. They say 7 is the number that signifies perfection. I don't know if these articles are perfect, but they were definitely the freshest of this month's crop.

1. Have you ever wanted to buy a house that needed a lot of work? Here are some things to ponder. The part about needing a permit seems especially worth noting.

Emily Moser presents Buying to Renovate? Read This First posted at Construction Management Degrees.

2. We all know the story that being healthy can make you more productive, and therefore, lead you to be wealthier. But this article has a more direct link between his health club and wealth. Instant savings.

Wise_Bread presents Being Healthy Can Have Big Cash Rewards posted at Wisebread.

3. The next article makes a simple point. Do what you love. Love what you do. I love economics. How about you?

debt kid presents How to make your hobby work for you posted at Debt Kid.

4. My favorite quote from the next article is "If you were ever in the market for a mortgage, would you ever get it from those gyrating silhouettes that have been stalking you online?" My answer is NO. What's yours?

Silicon Valley Blogger presents Of Loan Refinancing, Debt Consolidation And LowerMyBills’ Dancing Cowboys posted at The Digerati Life"

5. Are some people underpaid? I think that question confuses value for marginal value. That said, this list is an interesting one. Some of the more interesting people I have met are janitors.

Len Penzo presents The 10 Most Underpaid Jobs posted at Len Penzo . Com.

6. This article gives a good reason for why casinos have buffets, shows, restaurants, and other non-gambling activities. Those are the parts of casinos I like the most anyway.

Case Ernsting presents Casino Economics: 5 Lessons on Diversification in Business posted at FinditLocal411 Blog

7. The next article is about awesome ideas as the wave of the future. Definitely true. It isn't much of a stretch to say "making awesome stuff" is the only true ingredient for success.

Anna Callahan presents The Awesomeness Economy posted at Indie Times


That concludes this awesome edition of the carnival of economic fun. Submit your blog article to the next edition of the carnival of economic fun using the carnival submission form. Until next time, be fun with the dismal science.

Past posts can be found on the blog carnival index page.

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Saturday, October 10, 2009

Poll: What is your reaction to President Obama's Prize?

Yesterday, I awoke eager to read the paper. A friend of mine told me that he had been interviewed for a story that would appear in yesterday's Chicago Tribune, and the story was a candidate for page one. Needless to say, I immediately checked the front page of the Chicago Tribune yesterday. If no big news happened, I was expecting to see my friend's article near the top of the Tribune webside.

But big news happened: President Obama won the Nobel Peace Prize.

As this Washington Post article points out, people had very different reactions to the news that President Obama was awarded the Nobel Peace Prize. There was Greg Mankiw's cynicism, Barack Obama's apparent surprise, unwavering support and pride in Obama's new honor. Moreover, people wrote articles about the prize being an incentive (negative, positive), and Obama himself said it is a "call to action."

That brings me to the timely question of the week.

How does Obama's Peace Prize make you feel?

(a) Proud
(b) Confused
(c) Hopeful
(d) Angry

The poll is open for a week, so please vote and tell your friends to vote. I look forward to seeing the results.

Note: If you care to comment, feel free to use the comment box below, but keep in mind that comments are moderated, and I moderate hostile comments.

Wednesday, October 7, 2009

The evolution of sleeping and the economics of naps

In a recent blog post, Jeff Ely at Cheap Talk calls attention to a paper entitled Sleep viewed as a state of adaptive inactivity by Jerome M. Siegel. Here's the abstract:
Sleep is often viewed as a vulnerable state that is incompatible with behaviours that nourish and propagate species. This has led to the hypothesis that sleep has survived because it fulfills some universal, but as yet unknown, vital function. I propose that sleep is best understood as a variant of dormant states seen throughout the plant and animal kingdoms and that it is itself highly adaptive because it optimizes the timing and duration of behaviour. Current evidence indicates that ecological variables are the main determinants of sleep duration and intensity across species.

Siegel goes on to argue that sleep helps animals conserve on energy at times when expending energy is wasteful. By sticking to sleeping habits, an animal transfers its use of energy to more effective times. Viewed in this light, it's not surprising that developing a regular sleeping habit is a survival trait. More energy at the right time means more successful hunting, which in turn, means more energy. And for animals, more energy is the key to survival.

In my mind, sleeping in low productivity hours is more than just an evolved trait in animals. It is also a good tip for humans. People who develop good sleeping habits (i.e., napping when productivity falls) tend to make the best use of their time. I have used this strategy for survival in graduate school, and I stand by it.

When my productivity sags around 2 pm, I take a mid-afternoon nap (provided that I am not in class). I wake up refreshed and eager to tackle the next problem. If you find that your productivity sags in the afternoon, try a nap. It might be the best thing for you.

Saturday, October 3, 2009

Poll: What do you trust?

A comment from a reader of Paul Krugman's blog caught my attention the other day,
You are right Professor; inexorably, irrefutably right to anyone who is logical - any adult who understands it is better to keep capacity and output from disappearing because trying to replace it if it collapses is so much more expensive.

Our problem is: Many on the other side of the argument don’t believe in the system - there is no amount of logic and no number of experts who will change their mind, partly ‘freshwater school’ influence but largely a fatalistice [sic] belief in ‘end times’ psychology. The only way to have an honest argument is to ask, upfront, ‘ do you believe in the system ?’, ‘ do you believe in government ?’

Time is of the essence, and we cannot waste it on people who fundamentally do not believe in government functions, AND live out those beliefs through their economic behaviours and the way they vote in Congress - it is the true essence of behavioural economics.

The comment reminded me of a blog article by Greg Mankiw from several months ago. Here are the final four paragraphs:

Most private organizations have some competitors, and this fact makes me more comfortable interacting with them. If Harvard is a bad employer, I can move to Princeton or Yale, and this knowledge keeps Harvard in line. To be sure, we need a government-run court system to enforce contracts, prevent fraud, and preserve honest competition. But it is fundamentally competition among private organizations that I trust.

This philosophical inclination most likely influences my views of the healthcare debate. The more power a centralized government authority asserts, the more worried I am that the power will be misused either purposefully or, more likely, because of some well-intentioned but mistaken social theory. I prefer reforms that set up rules of the game but end up with power over key decisions as decentralized as possible.

What puzzles me is that Paul seems so ready to trust solutions that give a large role to the federal government. (In the past, for instance, he has advocated a single payer for healthcare.) I understand that trust of centralized authority is common among liberals. But here is the part that puzzles me: Over the past eight years, Paul has tried to convince his readers that Republicans are stupid and venal. History suggests that Republicans will run the government about half the time. Does he really want to turn control of healthcare half the time over to a group that he considers stupid and venal?

These thoughts, I appreciate, are broad generalizations. They don't immediately lead to a specific set of reform proposals. But I wanted to give Paul credit for a key insight: A central question in this and perhaps other debates is, Whom do you trust?

That brings me to the poll question of the week.

What do you trust the most?

(a) Individuals
(b) Government
(c) Incentives
(d) The media

The poll is open for a week. Vote early and tell your friends to vote. The poll is on the sidebar (--->). I look forward to what you have to say.