Social Econ Blog

From Free Exchange:

So, the question: are colleges selling an information-based product or an aura-based product (or something else altogether)?

There is no question that much of what counts as the educational part of college is digitisable and nearly endlessly duplicable. Texts and papers fall into this category, as do lectures and demonstrations. In the past, the economics of universities were based on provision of these things; books and experts were scarce, and so it made sense to gather students in one place, in proximity to those things, in order to learn from them. If this is all that underpins the modern institute of higher education, then it is only a matter of time until it vanishes.

But it may be the case that aura is more important than pieces of information where colleges are concerned. It could be that the key value is in being in a room with an expert and other interested students, in participating in dorm-room bull sessions, in napping on a pile of texts in a musty old library, and in running naked across the quad at three in the morning. These things can't be digitised and infinitely replicated. If the primary benefit from a university education is to be found somewhere in that aura, then many colleges will do just fine.

In fact, there are aspects of both that are important, in different contexts and to different students (and employers). Potentially, things could go either way for institutes of higher education. Of course, there are powerful lobbies waiting to do what's necessary to support the traditional university. Among them are alumni, who cherish their college experience and who control hiring practices, for the most part. There are university employees, who are often wealthy and influential. And there are television stations who make millions of dollars off of collegiate athletics. These groups may be every bit as committed to maintaining the status quo as have been record labels in the music industry, and more effective.

One other thing to think about; it could be that a key value of universities has nothing at all to do with what a student does while enrolled, and instead stems from the filtering mechanism of the admissions process. College degrees may be useful because the admissions department has done the difficult background work of identifying promising candidates for employment. They act as ratings agencies, in a sense, screening products and declaring them "safe" or "risky". It would be interesting if in the future there are organisations which play this role more explicitly, offering to investigate a candidate's history and skillset for a fee, and certifying qualified candidates, all in a fraction of the time and at a fraction of the cost of an actual university education.

But one way or another, the digital and internet revolution should ultimately reveal just what everyone is paying for when they write that tuition cheque.

A post from a previous course:

Today, we discussed whether or not attending selective colleges was worth it. We focused primarily on ways in which selective colleges provided different consumption and investment opportunities than non-selective colleges and tried to relate these differences to differences in outcomes that individuals care about (e.g., more income or more happiness). But ultimately, whether or not attending a selective college causally changes individual outcomes is an empirical question.

Caroline Hoxby examined the returns to selective colleges for students entering college in 1960, 1972, and 1982. She finds substantial returns to attending more selective colleges. E.g., moving from a rank 3 to a rank 1 college increases earnings by 129 times the difference in tuition costs (controlling for aptitude). Further, she argues the rate of return has increased over time. A four page summary can be found here.

The Hoxby study, however, includes very few controls for unobserved differences in ability, motivation, etc. which may explain both attendance at selective colleges and higher earnings. Stacy Dale and Alan Krueger attempt to solve at least some of this problem by comparing people were accepted and rejected by similar colleges but chose to attend more or less selective colleges. Using this method, they find that incomes are not increased by attending more selective colleges. However, there are returns to attending more expensive colleges. Finally, regardless of what measure of college quality is used the returns to attending "higher quality" colleges are highest for those from disadvantaged backgrounds. A one page summary of this research can be found here.

This article takes a look at the potential for internet competitors to draw students away from traditional colleges and universities. The economic story it tells is fairly compelling. If college is essentially about learning material in courses (and demonstrating some mastery of that material), there really is no logical reason that a cheap, "mass produced" online education (consisting of lecture videos, independent study, and 24/7 interactive on-line tutor access) shouldn't work (at least for a non-trivial fraction of students). The main challenge is whether or not on-line schools can overcome the accreditation and stigma hurdles that may reduce the value of student's investments in online classes (by preventing other schools or employers from recognizing the work completed online).

Of course, online education is not a clear substitute for all aspects of a college education (e.g., peer effects, social activities, etc.), but online schools are, in theory, sufficiently substitutable that it is not hard to imagine a very different higher education sector emerging. E.g., one where high school students apply to a college rating agency which rates students based on their "applications" providing students with external validation of their high school performance that they can use to impress employers (this is essentially what the Harvard admissions committee does). Meanwhile, they complete some basic foundational courses online (perhaps while still in high school). Then, is desired, they apply to spend a few years (depending on their field of interest) at a "college" where they participate in college social activities, get away from home while still living in a semi-structured setting, and participate in seminar classes (and labs for the sciences) on the topics of greatest interest to them. Maybe not everyone would choose this path, but I can imagine that variants on this path would appeal to many people.

Here's a small piece of the article:

In recent years, Americans have grown accustomed to living amid the smoking wreckage of various once-proud industries—automakers bankrupt, brand-name Wall Street banks in ruins, newspapers dying by the dozen. It’s tempting in such circumstances to take comfort in the seeming permanency of our colleges and universities, in the notion that our world-beating higher education system will reliably produce research and knowledge workers for decades to come. But this is an illusion. Colleges are caught in the same kind of debt-fueled price spiral that just blew up the real estate market. They’re also in the information business in a time when technology is driving down the cost of selling information to record, destabilizing lows.

In combination, these two trends threaten to shake the foundation of the modern university, in much the same way that other seemingly impregnable institutions have been torn apart. In some ways, the upheaval will be a welcome one. Students will benefit enormously from radically lower prices—particularly people like Solvig who lack disposable income and need higher learning to compete in an ever-more treacherous economy. But these huge changes will also seriously threaten the ability of universities to provide all the things beyond teaching on which society depends: science, culture, the transmission of our civilization from one generation to the next.

Tim Harford provides the history behind the engagement ring. The conditions that he says explain the practice no longer seem relevant, and yet, now the the engagement ring is a well-established cultural norm. Norms can change, though, should we start trying to change this one? The engagement ring seems to violate one of the principals of optimal relationship gift-giving I discussed in this old post.

Q: It doesn’t seem rational for a young man to give his girlfriend an expensive engagement ring when he proposes. My thought is that the most efficient use of that dollar is to invest it into something that a young couple would value most e.g. a down payment on a first house, etc. The diamond market is a monopoly and diamond prices are manipulated so that prices are always high. Can you construct a concise and logical argument that young men across the world can use to not buy diamond rings? After all, you already are offering the most valuable thing that you have (your heart) to your soon-to-be bride. In this age, why is a token like an overpriced rock still needed? — Hollins

A.

You have a point. Engagement rings took off in the U.S. when the courts refused to hear “breach of promise” lawsuits. These suits were brought by women who had slept with their fiancés and then been abandoned. These women were then less attractive marriage prospects for anyone else.

Naturally, such lawsuits were sensational fun for the newspapers, and eventually the courts put a stop to the whole thing. The problem then became: how could a young affianced couple have sex with each other when she had no recourse to the law if he changed his mind? Both of them might well want to, but for the lady the risks were pretty high. And so the institution of the engagement ring came about. Such rings are non-returnable, meaning that if the man breaks off the engagement he doesn’t get the ring back. The system discourages him from running off and provides automatic compensation if he does. Very clever.

Given all this history, I tend to agree with you. Tell your girlfriend that you doubt she is a virgin and don’t care much either way, and you will thus be spending the engagement ring money on something more useful. Be sure to let me know how it works out for you.

Ed Glaeser offers his thoughts on soda taxes (note the clear application of economic theory to the issue leads to a clear set of empirical questions). Here's the beginning click the link to read the rest:

Over the past 30 years, Americans have gotten a lot heavier thanks primarily to technological progress in the food industry, which has provided an abundance of tasty, caloric treats. The champions of public health are now fighting fat with the same tools that helped turn the smoky city of the Mad Men-era into the clean-aired boroughs of Bloomberg.

New York City is running anti-soda ads where a brown liquid streaming out of a bottle turns into fat in a glass. The New York Times editorial page wants sterner stuff. They suggest that these ads are distinctly inferior to “the best move when it comes to soft drinks — a tax on sodas and other sugary beverages.”

Many public interventions can be readily dismissed because they are costly and ineffective. Yet the battle against cigarettes has taught us that taxes and advertising can together dramatically reduce an unhealthy habit. The public sector could indeed dramatically drive down the consumption of sugary sodas, but should it? Is public paternalism appropriate? If the state wants to champion health, should it use stomach-churning public service messages or sin taxes?

The economist’s perspective differs from the perspective of the public health advocate.

Public health advocates champion health. Economists don’t exactly champion illness, but they don’t usually think that health trumps all. For die-hard cola lovers, the pleasure of sugary soda may just be more important than the health consequences of a few extra calories. That perspective, combined with a respect for individual decision-making, leads many economists to question the merits of public paternalism.

As noted previously, the presence of long lines for a variety of goods strikes economists as bizarre. Why don't firms raise prices to reduce the excess demand?

There are a number of explanations ranging from the sales of related products (discussed below in the world cup post) to dodging taxes (by having some off the book side payments) to concerns about consumer reaction to price increases (if consumers think that price increases are unfair they might punish producers) to the fact the individual demand is a function of aggregate demand.

This last explanation is outlined by Gary Becker in his brief "A Note on Restaurant Pricing and Other Examples of Social Influence on Price" in the Oct. 1991 Journal of Political Economy.

Becker argues that these phenomena frequently occur for products (like eating meals in restaurants, watching concerts or games, talking about books, movies, TV shows, or even actors, models, or musicians) which are, at least partially, social activities. If the pleasure of consuming a good increases if lots of others consume it (because people want to fit in or because confidence in the quality of the good increases), then demand increases with aggregate demand. And, with strong enough social interaction effects, demand may increase with price.

Becker goes on to describe a side-ways "S" shaped demand curve that falls, rises, and then falls again. This produces two profit-maximizing equilibria. One has a low price and excess capacity and the other a high price an excess demand. The trick for producers getting to the high price, excess demand equilibria. This involves coordinating demand and explains why firms in these types of industries spend alot of effort and money on advertising and publicity.

This approach also helps to explain why popular restaurants are very small (that is, why places which regularly draw crowds don't increase their supply). Because the market has multiple equilibria and because consumer coordination determines which equilibrium is reached, producers have to worry about consumers deciding that something else is "so hot right now" and disappearing. This fickleness in consumer tastes makes expansion a risky investment. (Suppliers may also not want to increase supply if the size of the line matters. That is, without the long line demand starts to fall.)

Below is a cute video of a marshmallow test. Kids are offered a marshmallow and told if they wait to eat it they'll get a second one. It is an interesting examination of kids intertemporal decision making.

Oh, The Temptation from Steve V on Vimeo.

While the video is cute, it turns out that this experiment can reveal a great deal about who these kids become later in life. The original version was conducted in the 1960s and the researchers have continued follow the subjects over time and found some interesting stuff:

But occasionally Mischel would ask his three daughters, all of whom attended the Bing, about their friends from nursery school. “It was really just idle dinnertime conversation,” he says. “I’d ask them, ‘How’s Jane? How’s Eric? How are they doing in school?’ ” Mischel began to notice a link between the children’s academic performance as teen-agers and their ability to wait for the second marshmallow. He asked his daughters to assess their friends academically on a scale of zero to five. Comparing these ratings with the original data set, he saw a correlation. “That’s when I realized I had to do this seriously,” he says. Starting in 1981, Mischel sent out a questionnaire to all the reachable parents, teachers, and academic advisers of the six hundred and fifty-three subjects who had participated in the marshmallow task, who were by then in high school. He asked about every trait he could think of, from their capacity to plan and think ahead to their ability to “cope well with problems” and get along with their peers. He also requested their S.A.T. scores.

Once Mischel began analyzing the results, he noticed that low delayers, the children who rang the bell quickly, seemed more likely to have behavioral problems, both in school and at home. They got lower S.A.T. scores. They struggled in stressful situations, often had trouble paying attention, and found it difficult to maintain friendships. The child who could wait fifteen minutes had an S.A.T. score that was, on average, two hundred and ten points higher than that of the kid who could wait only thirty seconds.

I forgot to mention and discuss the quiz scheduled for this Friday in class yesterday. As such, I'll discuss the quiz on Friday, and I'll administer it on Monday. Sorry.

Here's the paper I mentioned in my office today:

Game theory makes strong predictions about how individuals should behave in two player, zero sum games. When players follow a mixed strategy, equilibrium payoffs should be equalized across actions, and choices should be serially uncorrelated. Laboratory experiments have generated large and systematic deviations from the minimax predictions. Data gleaned from real-world settings have been more consistent with minimax, but these latter studies have often been based on small samples with low power to reject. In this paper, we explore minimax play in two high stakes, real world settings that are data rich: choice of pitch type in Major League Baseball and whether to run or pass in the National Football League. We observe more than three million pitches in baseball and 125,000 play choices for football. We find systematic deviations from minimax play in both data sets. Pitchers appear to throw too many fastballs; football teams pass less than they should. In both sports, there is negative serial correlation in play calling. Back of the envelope calculations suggest that correcting these decision making errors could be worth as many as two additional victories a year to a Major League Baseball franchise, and more than a half win per season for a professional football team.

Height (which is frequently not captured in beauty variables) also produces returns in the labor market. An extra inch of height is estimated to be worth approximately $1000 a year in wages. While that's great (at least if you are me), one can't really invest in their height so who cares?

Well, it turns out one's current height doesn't appear to generate these returns. Economists Nicola Persico, Andy Postlewaite, and Dan Silverman show that it is not height today that generates higher incomes, but rather height at age 16. Boys who were tall at 16 earn more money, but boys who were short at 16 but tall at 33 don't. This suggests that height itself does not matter. Rather, adolescent experiences differ for those who are tall and these different experiences generate self-esteem, confidence, or some set of skills that are valuable in the labor market.

Steven Landsburg provides a one page summary of the paper here.

Here's some additional material on the topic of discussed in Metrics today.

Why Beauty Matters

In class yesterday, we discussed that your appearance is an important part of your social capital. For many years, economists have known that more attractive people earn more money. Steven Landsburg summarizes several of the key findings in this slate column.

Here's the highlight:

In their published research, Professors Daniel Hamermesh and Jeff Biddle
estimate that if you're perceived as beautiful, you probably earn about 5
percent more than your ordinary-looking counterparts. As beauty is rewarded, so
ugliness is penalized. Ugly women earn about 5 percent less than other women,
and ugly men earn about 10 percent less than other men. That's right; the market
punishes men more than women for being unattractive. Moreover, men's looks haunt
them at every stage of their careers: Better-looking men get more job offers,
higher starting salaries, and better raises. For women, good looks will get you
better raises but usually not better job offers or starting salaries. (A note on
Hamermesh and Biddle's methodology: Beauty was assessed by panels of people who
judged photographs of the study's subjects.)

But why is beauty rewarded? Do employers "pay" because they just like to have pretty people around? Do employer's know that customers prefer to work with pretty people? Are pretty people more productive? Or do employers (and the pretty people themselves) just think that they are?

Spiffy research by Harvard's Markus Mobius and Wesleyen's Tonya Rosenblat addresses these questions using an experimental labor market. Berkeley professor Hal Varian conveniently summarized this paper in yesterday's NYTimes:

Armed with the data from these experiments and surveys, the economists found
several interesting results. It turned out that beautiful people were no better
than ordinary people in solving mazes. But despite having the same productivity
as others in this task, beautiful people were a lot more confident about their
own abilities. Being good looking seems to be strongly associated with
self-confidence, a trait that is apparently attractive to employers. When
employers evaluated employees only on the basis of resumes, physical appearance
had no impact on their estimates, as one would expect. But all of the other
treatments showed higher productivity estimates for beautiful people, with the
face-to-face interviews yielding the largest numbers. Interestingly, employers
thought beautiful people were more productive even when their only interaction
was via a telephone interview. It appears that the confidence that beautiful
people have in themselves comes across over the phone as well as in person. But
even when the experimenters controlled for self-confidence, they found that
employers overestimated the productivity of beautiful people. The economists
estimated that about 15 to 20 percent of the beauty premium is a result of the
self-confidence effect, while oral and visual communication each contribute
about 40 percent. It seems that good-looking people are good communicators as
well, and their oral communication skills contribute about as much to employers'
perceptions as their looks. As the researchers put it, "Employers (wrongly)
expect good-looking workers to perform better than their less-attractive
counterparts under both visual and oral interaction, even after controlling for
individual worker characteristics and worker confidence."

This is a little premature for where we are in Micro, but I'll forget to post it later if I try and wait.

Chris Blattman points to an interesting new paper by Abhijit Banerjee and Sendhil Mullainathan on discount rates and temptations:

Some people are impulsive and impatient; they prefer a dollar or a donut today far more than a dollar or a donut tomorrow, so much so that they’re willing to give up shocking amounts of dollars and donuts tomorrow for just one today. This is one reason, some say, that we see such high interest rates for short-term borrowing, from New York to Calcutta.

Some people are not only impulsive and impatient, but inconsistently so. they care a lot about a dollar today versus tomorrow, but could care less between getting a dollar either 10 or 11 days from now. Economists call this ‘hyperbolic discounting’.

Both behaviors–impatience and time inconsistency–could be a source of persistent poverty.

Or not. Abhijit Banerjee presented a new paper here yesterday, written with MIT colleague Sendhil Mullainathan. They look at a number of seemingly unusual behaviors by the very poor–from exorbitant rates of short-term borrowing to the low take-up of small, high-return investments. Impatience cannot explain the patterns, they say. The impatience approach also requires the poor think differently than the rest of the population.

Another view: we’re all impulsive and impatient in the same way, but over a narrow range of goods that are quickly and cheaply satisfied. If you’re poor, these temptations are a big fraction of your income. If you’re even somewhat wealthy, they are not. Temptations are declining in income.

Over the past 30 years, Gallup has occasionally asked people the following questions, "of every dollar that goes to [the Federal government; state government, or local government] how many cents would you say are wasted?" How would you respond to these questions? Also, how would you respond to the questions, "of every dollar earned in revenue by private businesses what share do you think is wasted?" or "of every dollar raised by non-profit organizations what share do you think is wasted?" Finally, provide some context for your answers by discussing how you define waste?

Jeff Atwood builds on the book Predictably Irrational in order to try and offers 9 ways to help prevent marketers from taking advantage of you, e.g.:

1. Encourage false comparisons

When Williams-Sonoma introduced bread machines, sales were slow. When they added a "deluxe" version that was 50% more expensive, they started flying off the shelves; the first bread machine now appeared to be a bargain

When contemplating the purchase of a $25 pen, the majority of subjects would drive to another store 15 minutes away to save $7. When contemplating the purchase of a $455 suit, the majority of subjects would not drive to another store 15 minutes away to save $7. The amount saved and time involved are the same, but people make very different choices. Watch out for relative thinking; it comes naturally to all of us.

• Realize that some premium options exist as decoys -- that is, they are there only to make the less expensive options look more appealing, because they're easy to compare. Don't make binding decisions solely based on how easy it is to compare two side-by-side options from the same vendor. Try comparing all the alternatives, even those from other vendors.
• Don't be swayed by relative percentages for small dollar amounts. Yes, you saved 25%, but how much effort and time did you expend on that seven bucks?

Awhile back, I posted about whether or not parents today are more worried:

Frequently, when I look at my young cousins and reflect back on my own childhood, I am shocked at how much independence I had growing up. As a young child (3-4 year old), I tagged along with the “older” (i.e., 6-9 year olds) in the neighborhood as we roamed the small area around my house. By the time I was 5, I was walking unaccompanied further away to meet up with friends from school, and most of my weekends and summers from age 7-11 were spent climbing the mountain behind my house for hours on end, again, only with other kids my age. When I look at my cousins or other kids at these ages growing up in the same town I did, I cannot imagine them being allowed the same amount of unsupervised activity.

Over the weekend, I was discussing this phenomenon with a friend who grew up half-a-world away in Portugal, and he felt the same way. Together we reminisced about the long list of activities that were common kid behaviors that are typically unacceptable today (many of which were clearly stupid); e.g., riding in the front seat of cars (without seatbelts) or in the back of pickup trucks, riding bicycles without helmets, playing (particularly swimming) far from the watchful eyes of trusted adults, playing with things like BB guns or wrist-rockets, and on and on.

Now, the NYTimes has an article describing the fact that parents basically don't let their children walk to school anymore:

Certain realities also shape these procedures, such as the schedules of working parents, unsafe neighborhoods and school transportation cuts.

But when these constraints are mixed with anxiety over transferring children from the private world of family to the public world of school, the new normal can look increasingly baroque. Now, in some suburbs, parents and children sit in their cars at the end of driveways, waiting for the bus. Some school buses now have been fitted with surveillance cameras, watching for beatings and bullying.

Children are driven to schools two blocks away. At some schools, parents drive up with their children’s names displayed on their dashboards, a school official radios to the building, and eachchild is escorted out.

When to detach the parental leash? The trip to and from school has become emblematic of the conflict parents feel between teaching children autonomy and keeping them safe. In parenting blogs and books, the school-bus stop itself is shorthand for the turmoil of contemporary parents over when to relinquish control.

...

The fear of abduction by strangers “has become a norm within middle-class parental circles,” said Paula S. Fass, a history professor at the University of California, Berkeley, and author of “Kidnapped: Child Abduction in America.” “We try to control our fears to the nth degree, so we drop our children off right at school. It’s a confirmation that ‘I’m a good parent.’ ”

In 1969, 41 percent of children either walked or biked to school; by 2001, only 13 percent still did, according to data from the National Household Travel Survey. In many low-income neighborhoods, children have no choice but to walk. During the same period, children either being driven or driving themselves to school rose to 55 percent from 20 percent. Experts say the transition has not only contributed to the rise in pollution, traffic congestion and childhood obesity, but has also hampered children’s ability to navigate the world.

In a study of San Francisco Bay Area parents who drove children ages 10 to 14 to school, published this summer in the Journal of the American Planning Association, half would not allow them to walk without supervision, and 30 percent said fear of strangers governed their decision.

In recent years, parents like Katie have begun to push back. They often encounter disapproval by other parents, scoldings by school administrators, even visits from local constabularies.

I really don't get this. Parents seem to believe that they are somehow "bad parents" if they allow their children some freedom and something bad happens. Yet, parents actively encourage their kids to do far more dangerous activities than walking to school (e.g., they put them in cars and drive them around):

Critics say fears that children will be abducted by strangers are at a level unjustified by reality. About 115 children are kidnapped by strangers each year, according to federal statistics; 250,000 are injured in auto accidents.

Mark Thoma posts about correlation not implying causation and points to this gem from the Simpsons:

Homer: Not a bear in sight. The "Bear Patrol" is working like a
charm!

Lisa: That's specious reasoning, Dad.

Homer: [uncomprehendingly] Thanks, honey.

Lisa: By your logic, I could claim that this rock keeps tigers away.

Homer: Hmm. How does it work?

Lisa: It doesn't work; it's just a stupid rock!

Homer: Uh-huh.

Lisa: But I don't see any tigers around, do you?

Homer: (pause) Lisa, I want to buy your rock.

I posted this a few months ago:

Conventional wisdom holds that breastfeeding is vastly superior to bottle feeding. The superiority of breast milk is supposedly supported by scientific evidence. Upon closer examination, though, the evidence does not appear that overwhelming. Why?

most of the claims about breast-feeding’s benefits lean on research conducted outside the lab: comparing one group of infants being breast-fed against another being breast-fed less, or not at all. Thousands of such studies have been published, linking breast-feeding with healthier, happier, smarter children. But they all share one glaring flaw.

An ideal study would randomly divide a group of mothers, tell one half to breast-feed and the other not to, and then measure the outcomes. But researchers cannot ethically tell mothers what to feed their babies. Instead they have to settle for “observational” studies. These simply look for differences in two populations, one breast-fed and one not. The problem is, breast-fed infants are typically brought up in very different families from those raised on the bottle. In the U.S., breast-feeding is on the rise—69 percent of mothers initiate the practice at the hospital, and 17 percent nurse exclusively for at least six months. But the numbers are much higher among women who are white, older, and educated; a woman who attended college, for instance, is roughly twice as likely to nurse for six months. Researchers try to factor out all these “confounding variables” that might affect the babies’ health and development. But they still can’t know if they’ve missed some critical factor. “Studies about the benefits of breast-feeding are extremely difficult and complex because of who breast-feeds and who doesn’t,” says Michael Kramer, a highly respected researcher at McGill University. “There have been claims that it prevents everything—cancer, diabetes. A reasonable person would be cautious about every new amazing discovery.”

The article continues to describe some very clever ways researchers have attempted to tease out the "true" effects of breastfeeding. Economists call these types of clever approaches "identification strategies", and a significant share of graduate training in labor economics consists of learning how to come up with these kinds of clever strategies.

We found an metrics textbook in class. Let me know if you lost one. I have it.

Some times movies are actually about math, but lots of time movies incorporate math. This article explores some uses in movies like Dark Knight and Reservoir Dogs:

The math of zombies

You think you know what zombie flicks are about: the undead’s insatiable desire for human flesh. True, but they’re also about epidemiology. One zombie bite infects a healthy person, who infects others, and so on until the few healthy humans left are holed up in Wal-Mart with a shotgun, aiming for the head.

The problem of zombies intrigued Philip Munz of Carleton University and his colleagues at the University of Ottawa, who recently wrote a scientific paper quantifying various properties of zombie epidemics. Standard modeling techniques for disease outbreaks weren’t quite sufficient, the authors found. “The key difference between the models presented here and other models of infectious disease,” they wrote, “is that the dead can come back to life.”

After a thorough, if tongue-in-cheek, analysis, the authors found that the optimal method for halting such epidemics involves killing zombies early and often - the rare scientific paper that satisfies both the splatter-film aficionado and the Centers for Disease Control.

The Census Bureau released its latest description of income, poverty, and health insurance coverage. These data provide important description about what's going on in the economy. You should click this link and look at all the slides, or this link for a summary of a few. While there ask yourself, are these patterns acceptable? If not, what outcomes would you prefer? What is impeding us from reaching the better outcome (that is, what explains the deviation of actual economic performance from the ideal), and what policies might help bridge the gap between where we are and where we'd like to be?

One of the big roles for government in the economy is the provision of social insurance. Approximately 50% of spending by the federal government goes toward social insurance programs -- like Social Security and Medicare. Government provided social insurance is frequently controversial, in this post, Uwe Reinhardt uses last year's Lehman collapse in an attempt to get Americans to appreciate social insurance:

A year ago, century-old Lehman Brothers lapsed into bankruptcy, completely spooking the oligarchy that runs our nation’s financial sector.

The oligarchs had fully expected to see Lehman bailed out by the federal government that serves them, especially after the government had dutifully bailed out Bear Stearns earlier in the year. When Lehman was not so served, panic set in, unleashing global economic turmoil and pain.

Devastating as this calamity has been to many individuals and institutions, it should have served Americans also as a great teaching moment, reminding them of the important and highly productive role government risk management plays in their daily lives.

...

In the end, like teenagers who hate Mother’s strictures when all is well, but run to Mommy whenever they get in trouble, the swashbuckling oligarchs of the financial sector ran to government for cover, owning up once again to the time-honored mantra of this country’s legendary rugged individualists:

When the going gets tough, the tough run to the government.

Another term for “government risk management,” of course, is “social insurance.”

It is a social contract with government that Americans quietly love, but in the shouting matches that now pass for our “national conversation” on public policy so often profess to hate — as when they cry for government to stay out of Medicare, or when they sit on their beachfronts in the Hamptons waxing worried about government intrusion in the economy, all the while basking in the security of federal flood insurance.

In the rest of the post, Reinhardt reminds readers that social insurance does more than simply help those who find themselves poor or sick (which is apparently a very controversial idea). Social insurance extends to government supported flood insurance and the limited liability corporation (oddly, you seldom hear people complain about these -- although, some of the flood insurance stuff stupidly allows/encourages people to build big expensive houses that are fairly likely to be destroyed by floods or hurricanes).

Paul Krugman (following up on the article I linked to a few days ago) discusses the role of mathematics in economic theory:

Math in economics can be extremely useful. I should know! Most of my own work over the years has relied on sometimes finicky math — I spent quite a few years of my life doing tricks with constant-elasticity-of-substitution utility functions. And the mathematical grinding served an essential function — that of clarifying thought. In the economic geography stuff, for example, I started with some vague ideas; it wasn’t until I’d managed to write down full models that the ideas came clear. After the math I was able to express most of those ideas in plain English, but it really took the math to get there, and you still can’t quite get it all without the equations.

What I objected to in the mag article was the tendency to identify good math with good work. CAPM is a beautiful model; that doesn’t mean it’s right. The math of real business cycle models is much more elegant than that of New Keynesian models, let alone the kind of models that make room for crises like the one we’re in; that makes RBC models seductive, but it doesn’t make them any less silly.

In intermediate micro, we won't get too sophisticated with our math, but Krugman's right, the part of the value of writing down and solving mathematical models for economic phenomena, is that such models occasionally yield results that were not intuitively obvious (but ultimately make lots of sense).

Examining data in only useful if the data provide accurate reliable information. Many surveys and polls provide "bad" information. Polling on health care has been all over the place. In part, this reflects poor survey design. This article describes some of the problems with health care polling, e.g.,:

Indeed, questions that have asked about "Obama's plan" are particularly egregious violators of the tenets of good polling: As of yet, no such thing as an "Obama plan" exists. So when CNN asked respondents whether or not they "favor or oppose Obama's plan to reform health care" and the NBC/Wall Street Journal polling team asked whether "Barack Obama's health care plan" is a good idea, they were asking respondents to voice an opinion on an imaginary concept.

I am working on a longer series of posts about health reform, but in the meantime -- READ THIS.

This article (or a similar article) should be running every day on the front page of every newspaper in the country (modified only as the bills change). TV news should also regularly repeat a story which walks through the substance of the legistlation. The media is too focused on reporting news -- what happened today? As such, they fail to inform the public about the substance of the debate, and the public ends up completely clueless about what is actually going on and easily manipulated by those wishing to scare them (death panels anyone).

This week we will be working through Varian chapters 2-4.

Please complete the following questions from Workouts to turn in by next Monday (9/14): 2.1, 2.7, 2.11, 3,1, 3.3, 3.12, 4.1, 4.6

Please complete the following questions on your own: 2.2, 2.9, 2.12, 2.13, 3.2, 3.4, 4.0, 4.2, 4.4

This week we will be review probability and statistics in class. These are discussed in chapters 2 and 3 of Stock and Watson (SW).

Please complete the following exercises from SW to turn in next Wednesday (9/16): 2.6, 2.8, 2.14, 3.3, 3.4, 3.12.

Please complete the following exercises on your own (these will not be turned in, but solutions will be provided): 2.2, 2,5, 2,12, 2.17, 2,22, 3.1, 3.2, 3.11, 3.13, 3.17

It's mostly about macroeconomics and finance (so not really relevant for Micro and Metrics classes), but, in this article, Paul Krugman does a great job describing the the big debates about the macroeconomy and the implications of recent events for these debates.

I really wish someone would have handed me this at the start of my graduate macro class. I think things would have made a lot more sense.

I alluded to this relationship in class yesterday, if you want to learn more. This post includes a number of links to the basic facts about the relationship between money and happiness.

This post offers up one of the main ways I think that money can buy happiness -- buy memories (although I think people frequently neglect these opportunities).

Fact: students in the Midwest have higher SAT scores than students on the coasts.

Does this mean the students or schools in the Midwest are superior to the schools on the coasts?

Read here to find out more.

Please read Stock and Watson Chp 1 and this document (which I wrote to help students in my sophomore tutorial at Harvard write their term papers) before class on Friday:

970_papermanual

The NYTimes recently ran an article on the growing demand for workers capable of using computers to analyze the growing mounds of electronic data. This class is an important step in acquiring such skills:

“I keep saying that the sexy job in the next 10 years will be statisticians,” said Hal Varian, chief economist at Google. “And I’m not kidding.”

The rising stature of statisticians, who can earn $125,000 at top companies in their first year after getting a doctorate, is a byproduct of the recent explosion of digital data. In field after field, computing and the Web are creating new realms of data to explore — sensor signals, surveillance tapes, social network chatter, public records and more. And the digital data surge only promises to accelerate, rising fivefold by 2012, according to a projection by IDC, a research firm.

...

Though at the fore, statisticians are only a small part of an army of experts using modern statistical techniques for data analysis. Computing and numerical skills, experts say, matter far more than degrees. So the new data sleuths come from backgrounds like economics, computer science and mathematics.

Please think about the following questions and come to class prepared to discuss your responses to them.

How would you expect to respond if placed in the following situations:

A. Assume you have $100 in spending money. Further assume that you have a date on Friday night. On the date, you have the choice to spend money on food, entertainment, or gifts. Any money you don't spend on the date you can keep to buy whatever else you like.
(1) How much money would you allocate to the date and how much would you keep for other stuff?
(2) Of the money you allocated to your date, how much would you spend on food, entertainment, or gifts?
(3) If the price of entertainment increased, how would your choices change?
(4) If you had $200 instead of $100, how would your choices change?

B. Assume you have a part-time job that pays you $15/hour. If you were given a raise so you earned $17/hour, would you change the number of hours that you worked? If so, would you increase or decrease the number of hours you worked?

C. Assume I offered you the following bet:

I will flip a coin. If it comes up heads, I will give you an A for this class. If it comes up tails I will fail you? Would you take the bet? What if heads got you an A and tails got you a C? Heads A, tails B? What if I let you pick a card from a standard deck of playing cards and any heart got you an A, any diamond got you a B, any spade a C, and any club a D, would you take this bet?

D. Assume you have $6000, if I offered you the chance to invest the $6000 and get paid $10,000 in 10 years, would you make this investment?

Please email me or post in the comments below a brief description of a debate/argument/discussion you find interesting. Any topic or subject is fine (that is, it needn't be something obviously economic -- economics, politics, public policy, sports, entertainment, social norms or customs, etc. are all fine).