Tuesday, May 08, 2007


With the AP Exam and Graduation approaching, I will not be posting on the blog for awhile (maybe until August).

Here are links to a few very good economics blogs to read in the meantime:

Marginal Revolution

Greg Mankiw's Blog

Free Exchange

Freakonomics Blog

Friday, April 27, 2007

Why Are There So Many Reality Shows?

Economist Austan Goolsbee has an article in the NY Times that looks at the economics of reality shows. He starts with a question of why there are so many reality shows (in particular, shows like American Idol), and comes up with the following initial answer:

Some say it’s just that people now lack the attention span for old-style television or that our tastes have changed.

Most insiders point out that reality shows cost much less to make than scripted shows, and, they argue, this is just a profit play by the broadcast networks.

However, he astutely points out that if reality shows are popular because they are cheap to make, why weren't they popular 20 years ago. As Goolsbee says, "Surely the broadcast networks wanted to save money back then, too."

Goolsbee then cites Harvard economist Richard Caves, who comes up with the explanation that reality shows are popular because there are so many TV choices with the proliferation of cable and satellite:

He points out that such incentives depend on the size of the potential market. The programming is a fixed cost — networks pay for the programs even if nobody watches. If paying an extra $1 million to get a star onto a show, for example, raises every customer’s love of the show by the equivalent of $1, the investment more than pays off if there are 10 million potential viewers. But the $1 million investment would be a terrible flop if there were 10,000 potential viewers.

So the increase in reality programming is not just a matter of broadcasters wanting to save money. It’s that a shrinking potential market gives the networks less incentive to spend money. They can’t recoup it with enough viewers.

Any opinions on this question of reality show popularity?

(Source: Marginal Revolution)

Thursday, April 26, 2007

Fascinating Predictions

Here is a list of predictions of what the world will be like in the year 2000, made for a magazine in the year 1900. It is a really interesting list. Here are a few of the most interesting to me:

Mosquitoes, house-flies and roaches will have been practically exterminated.

Strawberries as Large as Apples will be eaten by our great-great-grandchildren for their Christmas dinners a hundred years hence.

There will be No C, X or Q in our every-day alphabet. They will be abandoned because unnecessary.

There will be no wild animals except in menageries.

Those are some of the ones that sound ridiculous, but there are actually plenty of others that sound familiar. For instance:
Ready-cooked meals will be bought from establishments similar to our bakeries of today.
Any that you find particularly interesting? Be sure to explain why.

(Source: Marginal Revolution)

Which Countries Supply the Most to Wal-Mart?

Benjamin Edwards spent a day driving to as many Wal-Marts as he could (he went to 8) and writing down where each product he picked up came from (he picked up 727 items).

Here is a map showing where the most goods came from (the relative size of the country on the map indicates how many goods came from that country).

(Source: Marginal Revolution)

Explaining Income Inequality Through Harry Potter

Economist Alex Tabarrok argues that the way to explain why incomes are becoming less equal in the world and in the United States is to look at why some writers, like JK Rowling are making tons of money. Basically, it comes down to the fact that everyone is staying about the same, while a few top-earners are making a lot more than they used to because they have larger global markets than they used to. So Tabarrok's explanation is not that the poor are getting poorer, but rather, the richest few are pulling away from the pack.
I do not disparage Rowling when I say talent is not the explanation for her monetary success. Homer, Shakespeare and Tolkien all earned much less. Why? Consider Homer, he told great stories but could earn no more in a night than say 50 people might pay for an evening's entertainment. Shakespeare did a little better. The Globe theater could hold 3000 and unlike Homer, Shakespeare didn't have to be at the theater to earn. Shakespeare's words were leveraged.
(Source: Marginal Revolution)

Wednesday, April 18, 2007

The Height Tax

Here is the abstract of a new paper by Greg Mankiw:
Should the income tax system include a tax credit for short taxpayers and a tax surcharge for tall ones? This paper shows that the standard utilitarian framework for tax policy analysis answers this question in the affirmative. This result has two possible interpretations. One interpretation is that individual attributes correlated with wages, such as height, should be considered more widely for determining tax liabilities. Alternatively, if policies such as a tax on height are rejected, then the standard utilitarian framework must in some way fail to capture our intuitive notions of distributive justice.
The paper's interesting tax suggestion is due to the well-documented finding that tall people tend to have higher wages. Any ideas on why that correlation may exist? Here is a link to the full paper.

What do you think? Should tall people be taxed more to even out the playing field? I may be biased, but I would be a strong supporter of tax credits for the short...

Tuesday, April 17, 2007

Irrational Taxi Drivers?

There is high demand for taxi cabs in NYC when it is raining, of obvious reasons. However, taxi drivers tend to work fewer hours on rainy days.

The first perspective on this phenomenon is that the taxi drivers are behaving irratioanlly. According to a paper by behavioral economists:
They speculated that cab drivers have a particular income level they target each day. When they hit that target, the cabbies go off duty. The increased cab demand in bad weather increases the number of fares per hour, so cab drivers reach their target sooner, and go off duty. Economists consider such a strategy irrational. After all, if each hour of work is more lucrative, shouldn't cabbies work more hours?
However, on the Free Exchange blog, the author proposes another idea that brings the taxi drivers behavior back into the realm of the rational:
They claimed the reason they stop work early on rainy days is the dangers associated with driving in such conditions. Rain makes the roads slick and encourages irrational behaviour from pedestrians. As one cab driver put it, “The people become crazy; they walk right in front of oncoming traffic to get out of the rain.” Assuming high costs associated with getting into an accident or hitting a pedestrian, it may be very rational to work fewer hours at the higher wage. When you subtract the cost of getting into extra accidents, the wage may not be as high as it seems.
Any thoughts on which side is more likely?

(Source: Free Exchange)

Friday, April 13, 2007

Out-of-Town Speeders

At the beginning of the year, there was a test question that asked you to discuss the economics behind the decision to speed on the highway. Well, a study cited in The Atlantic Monthly reveals another aspect that should be added to the marginal analysis. They confirm what many suspect, which is that people from out-of-town get speeding tickets more often than locals.
An out-of-town driver stopped by a police officer in any given area has a 51 percent chance of getting slapped with a fine, versus 30 percent for a local, and the average fine for an out-of-towner is $5 higher.
In fact,
The poorer the town (in terms of property-tax receipts), the more likely its cops are to target drivers passing through; fines also increase the farther away drivers live, since distance makes them less likely to contest the ticket.
Any guesses at the reasons for this?
(Source: Cafe Hayek)

Thursday, April 12, 2007

Timbaland can teach you Economics

There is a new blog that discusses teaching economics through music. They take music from popular song lyrics and then ask questions on the economics behind the song lyrics.

Here are links to a few interesting ones:
Luxurious by Gwen Stefani
The Way It Is / Changes by Tupac Shakur (sampling Bruce Hornsby)
Taxman by The Beatles (relevant to the Laffer curve discussion to continue with our theme in the last few posts)
And because it's Weezer -- Beverly Hills by Weezer

Are there any songs you're currently listening to on your iPod that include some economics in the lyrics? Bonus points for good song suggestions with the relevant lyrics listed.

(Source: Tim Schilling)

The Current State of Supple-Side Economics

In a recent NY Times article, Bruce Bartlett discusses how the ideas of supply-side economics have become more and more popular. However, he also argues that the ideas are being taken too far:
Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates — the tax on each additional dollar earned — as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity.
A particularly interesting part of the article shows how high the marginal rates were in the 1950s - 1970s:
Kemp-Roth was intended to bring down the top statutory federal income tax rate to 50 percent from 70 percent and the bottom rate to 10 percent from 14 percent. We modeled this proposal on the Kennedy-Johnson tax cut of 1964, which lowered the top rate to 70 percent from 91 percent and the bottom rate to 14 percent from 20 percent.
Another interesting note is that supply-side economists of the 1970s and 1980s did not believe that tax revenue would actually increase when taxes were cut, they just believed that the loss of tax revenue would be smaller because of the greater incentive to work:

Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn’t lose as much revenue as predicted by the standard revenue forecasting models, which were based on Keynesian principles.

Furthermore, our belief that we might get back a third of the revenue loss was always a long-run proposition. Even the most rabid supply-sider knew we would lose $1 of revenue for $1 of tax cut in the short term, because it took time for incentives to work and for people to change their behavior.

(Source: Greg Mankiw's Blog)

Another perspective on CEO pay

There are two posts on Free Exchange that give another perspective on why CEOs are paid so much.

The first discusses how CEOs may not have been paid as much in the 1960s and 1970s, but that was because they gained the benefit of huge expense accounts. So when you account for the lack of the extravagant expense accounts now, the compensation has not gone up, it has just changed forms. As a bonus, the post includes discussion of the Laffer curve, which we just finished talking about.

The second discusses some reasons for the increased CEO pay:
Better explanations have to do with changes in the tax code, the rise of stock-based compensation, foreign competition (which makes the choice of CEO seem much more important), and the massive increase in the market capitalisation of the biggest firms, which roughly tracks the increase in CEO pay.

Make sure you include these considerations in your answer to the previous post.
(Source: Free Exchange)

High CEO Pay

In recent years, there has been a lot of criticism concerning the salaries of Fortune 500 CEOs. The graph below from The Economist shows how much CEO compensation how grown relative to the average wage in the United States:

As you can see, the compensation for executives in major US corporations was around 30-40 times the wages of the average worker up until the late 1980s. Now, executives make over 100 times the average wage. You could also look at the largest compensation packages for US CEOs on this Forbes site, noting that the highest paid CEOs make a couple hundred million dollars for the year (this of course includes bonuses and stock compensation).

Some are particularly aghast at what CEOs make when their performance is poor. For example,
The Corporate Library, an American corporate-governance consultancy, last year identified 11 large and well known but poorly governed companies, including AT&T, Merck and Time Warner, where the chief executive had been paid at least $15m a year for two successive years even as the company's shares had underperformed. Robert Nardelli received a $210m pay-off when he lost his job earlier this month even though the shares of his company, Home Depot, fell slightly during his six years in charge. Carly Fiorina, ejected from Hewlett-Packard almost $180m better off—including a severance payment of $21.6m—after a lacklustre tenure as chief executive
What do you think about the increase in executive pay? Is it an outrage or is it fair? Should there be restrictions on how much a CEO can be paid? You may want to remember our discussion of labor markets and how marginal revenue product was the basis for how much someone should be paid.