A Controversial Idea

UGA Economist Dwight Lee has an idea that he claims would help the immigration controversy in the United States, and the homeless/panhandling problem: allow US citizens to sell their citizenship to non-Americans. The American selling their citizenship would have to leave the country, and the buyer would be a US citizen.

Here is part of his explanation:

First consider the fact that America's homeless and panhandlers (who are often different people—some homeless don't panhandle and some panhandlers aren't homeless) are actually quite wealthy. Almost all own an asset—their United States citizenship—that is worth several hundred thousand dollars. The problem is that they are denied the right to sell that asset.

Citizenship in the United States is a highly valuable asset because it gives its owner enormous productive potential. American citizens are able to take advantage of the
opportunities to combine their ambition, ingenuity and labor with an unparalleled capital base and other hard-working and talented people to create wealth. The homeless and panhandlers in America have clearly failed to use their citizenships as productively as many non-U.S citizens could, and would, if they became citizens.

What do you think of this idea? Do you think it would work at its stated purpose (with restrictions on selling citizenship to terrorists, etc.)?

Minimum Wage Issues

An interesting political issue is whether to apply any minimum wage increases to the islands that belong to the United States, like American Samoa and the Northern Mariana Islands.

Under the new proposal before Congress to increase the minimum wage, the Northern Mariana Islands would now be subject to the minimum wage. The reason why that is so important is because the average wage in the islands is half of the proposed minimum wage. There is a lot of debate amongst economists as to how much an increase in the minimum wage affects employment, but I think most would say that doubling the average wage would have a significant impact.

To add to the interesting situation, right now, American Samoa would still be exempt from the minimum wage, offering a possible comparison of the effect of the minimum wage if instituted.

(Source: Marginal Revolution)

Christmas Break

The Walker Economics Blog is currently taking a Christmas break of its own, and will return the second week of January. In the meantime, here is some reading material:

1. A paper by two prominent development economists at MIT that describes how the poor in developing nations live (by poor, they mostly document people that live on $1/day). Here is a summary of their conclusions on Marginal Revolution.

2. Richard Posner discussing the ban placed by NYC on using trans fats in food sold in restaurants. His blogging partner, economist Gary Becker, will add his two cents next week.

3. The blog for the magazine The Economist, called Free exchange.

Have a happy holidays!

Why Is College Tuition So High?

Economist Greg Mankiw has a great post on his blog about why college tuition has risen so much in the pst few decades. He gives 3 possible explanations:

1. Increasing costs due to Baumol's cost disease (which I explained in this earlier post).
2. Higher demand for a college degree since the wage gap between college-educated and non-college educated workers has been increasing.
3. Price discrimination means that the published tuition is not really the price that most students are paying. So the average price that a student is paying is much lower. And the increase is due to increasing skill at price discriminating

This topic is very relevant to you guys since you and your family will start paying these tuition fees in about a year. Any other possible reasons you can think of? Which one of these reasons do you think explains most of the increase?

Another Example of the Peltzman Effect

At the beginning of the year, we read an article about how when seat belts became mandatory in cars, people started to drive more dangerously, countering the effect of seat belts. Here is another example of that so-called Peltzman Effect: the NY Times magazine reporting on research that motorists drive closer to people on bicycles when they are wearing a helmet.

(Source: Newmark's Door)

The Economics of Hidden Fees

The NY Times has an article on hidden fees, where the stated price of the good does not reflect the full cost. Examples are ATM surcharges that you may not know about when you open your bank account, expensive minibars in hotels where you don't know that you are paying $4 for a Coke until you get the hotel bill, or expensive printer cartridges you have to buy every month for a printer that you got on sale.

The main question the article asks is: why don't firms compete to offer low ATM surcharges or low printer cartridge prices? A firm could offer their printer cartridges or minibars at lower prices and advertise those lower prices to increase their business.

The article references a paper by two economists that argue that it is a form of price discrimination (even though they don't use that term in the article):

Their argument assumes the existence of two kinds of consumers — sophisticates and “myopes.” Sophisticates play the hidden-fee game well. They seek out low advertised rates and whenever possible avoid or find substitutes for the hidden fees, using cellphones at hotels, steering clear of the minibar and setting their printers to draft mode. Myopes, by contrast, obliviously sip $5 Cokes.

Now ask yourself: what would happen if some business tried to blow the whistle on hidden fees in its sector? Consider a hotel chain that wants to expose the use of hidden fees by, say, the Hilton chain. Because Hilton makes so much on the extras, it can charge a low, even a loss-leader, price (say, $80) for its rooms. The other chain might charge more (say, $100) as it hits the airwaves with ads saying: “Watch out for our competitor’s hidden fees. We charge fairly for breakfast and local phone calls.”

But now ask yourself: whose behavior would such an ad change? Sophisticates already know about the hidden fees. All that the ads will do, Laibson and Gabaix contend, is turn some myopic consumers into sophisticates. And in turn these newly wised-up consumers will spend less on extras at both hotels — indeed, at any hotel they use from then on. Unshrouding hidden fees is “good for the consumer and bad for both firms,” Laibson and Gabaix conclude. “Neither firm has an incentive to do it.” Multiply the hotel example by a thousand, across all sorts of industries, they say, and you see how we got the countless deceptive price structures we have today.

Any other examples of hidden fees? What do you think of the author's argument? Are you a "myope" or a "sophisticate"?

(Source: Marginal Revolution)

Marginal Tax Rates in the US

Here is a graph of the top marginal tax rate in the US tax system over the past century or so.

A couple of things to notice:

- the decrease of the highest marginal tax rate during the 1920s and the subsequent increase of that rate during the Great Depression

- the decline in the highest marginal tax rate over the past few decades

Richard Posner argues that this decrease in the highest marginal tax rate helps explain the increasing income inequality in the United States:

What are the causes, and what are the effects, of this trend in the income (and of course wealth) of the highest-earning segment of the distribution? Part of it is reduced marginal tax rates, because high marginal tax rates discourage risk-taking. Consider two individuals: one is a salaried worker with an annual income of $100,000 and good job security, and the other is an entrepreneur with a 10 percent chance of earning $1 million in a given year and a 90 percent chance of earning nothing that year. Their average annual incomes are the same, but a highly progressive tax will make the entrepreneur's expected after-tax income much lower than the salaried worker's. Many of the people at the top of the income distribution are risk takers who turned out to be lucky; the unlucky risk takers fell into a lower part of the distribution.

Economist Greg Mankiw adds:

Has the fall in top marginal tax rates over the past several decades in fact encouraged people to pursue higher-risk career paths, thereby exacerbating inequality in ex post incomes? As far as I know, this hypothesis has not received much attention in the empirical literature on income inequality.

(Source: Greg Mankiw's Blog)

Is Student Debt Too High?

Economist Gary Becker asks that question on his blog. He concludes that student is not too high, especially considering:

On the other side of the ledger, higher tuition over time was related to sharply higher financial benefits from a college education. The typical college graduate earned per hour about 50 per cent more than the typical high school graduate in 1980, and the gap is now about 95 per cent. Earnings of graduates with a professional degree or other post-graduate education grew even faster over time than did earnings of college graduates.

His main conclusion is that interest rates on student loans should be determined by the amount of income you make after graduating from college:

Within any category of graduates, earnings vary considerably by type of job-- teachers and clergymen earn a lot less than investment bankers--and by degree of success within jobs. Fixed interest loans are not the best way to borrow when loans are used for risky activities. Returns on higher education are rather risky, even after adjusting for how they co-vary with returns on assets. Businesses often borrow with the equivalent of equity to finance start-ups and other risky activities, where the equity pays off well if the venture is successful, and pays little if the venture fails.

This suggests that student loans should not have fixed interest rates that require a fixed amount to be repaid per $1.000 borrowed, but rather should have the equivalent of an "equity" repayment system. That would mean that persons who earn very little repay little, while those who earn a lot repay a lot (per $1,000 borrowed). Requiring individuals who are repaying student loans to submit their income tax statements each year, so that lenders could document what the borrowers earned, could enforce such an income-contingent repayment system.

(Source: Becker-Posner Blog)

Economics of Procrastination

Marginal Revolution links to an article that looks for reasons why procrastination may be rational from an economic perspective:

But is it possible that there is also a rational component to our procrastination habits? There are at least three reasons why this might be the case. The first is that there are fixed costs to doing homework. Suppose that in order to do homework you have to run to Kohlberg for a mocha latté...and check your favorite five media outlets as a preemptive distraction. In that case, it makes sense to have longer homework sessions in order to reduce the total number of sessions (and number of fixed costs to pay). Thus, putting things off in order to concentrate the work for a paper in one epic block means that you don’t have to waste time setting up to write again and again.

The second reason is that there may be decreasing marginal costs to doing homework. Suppose that the second hour of doing homework is much easier than the first, and the third easier yet and so on. You get in the homework zone. Then it makes sense to make your homework sessions as long as possible in order to take advantage of these returns to scale in doing homework...

The third reason is that there might be “thick-market externalities” in doing homework. The idea is that if everyone else is doing the same thing that you are, it gets easier and more enjoyable. If all of your friends are procrastinating at the same time, then the opportunity cost of doing work is that you miss an excruciatingly funny episode of “Curb Your Enthusiasm”... Similarly, when everyone is doing work, the opportunity cost of work is very low. After all, “Curb” is far less excruciatingly funny when watched alone. So it makes sense to do work when your friends do work, and avoid work when your friends avoid work.

It is fitting to make this post now because I am cramming several posts into one post-wrestling match evening, after neglecting this blog for the past several days...

Any other possible reasons why procrastination could be rational?

(Source: Marginal Revolution)

Interesting eBay Price

Here is a gift card selling on eBay for more than face value. Why?

(Source: Marginal Revolution)

Why a Free Gift Bag?

A question from Austin:

Why do you always get free gifts with perfume, cologne, and makeup?

The answer cannot just be: "because it encourages people to buy more." Why is giving free gifts with a purchase very common with those products, but not others? What is it about those goods or the consumers that they are targeting that makes the companies provide free gifts?

(Source: Austin L.)

Why Blockbuster Advertises Movies in Theaters

A question from Nicole:

I happened to be at Blockbuster the other day renting a movie for the weekend and I noticed that all over the walls and windows of the store were posters advertising the new movie Happy Feet, which came out last weekend. "Only in theaters!" the posters and huge dancing penguin display proclaimed, and I was left wondering why a store which specializes in renting movies to consumers would want to encourage them to visit the movie theaters instead.

So the question is:

Does the revenue that Blockbuster gains from selling advertising space so much greater that it negates the possible loss of business from people who decide to go to the movies instead (because, at least from my personal experience, people tend to do one or the other in a given period of time, and not both)? Or do Blockbuster executives figure that they don't stand to lose much business because it takes too much extra effort to leave Blockbuster and go to the theater instead, and since people are already in the store, they will just rent a movie anyway?

Another possibility that I would throw out there before you guys offer possibilities is that Blockbuster may have deals with movie studios that require them to have advertising for movies in theaters in exchange for deals on DVD releases, etc.

(Source: Nicole O.)

Playstation 3

With the recent chaos over the release of Playstation 3, a question arises: why are there long lines and sell-outs of the new game system? Instead of people selling the new game consoles on eBay for thousands, why wouldn't Sony either produce enough to meet the initial demand or raise the price? How is their current strategy of selling out profitable? They knew this was likely to happen because the exact same thing happened last year with the XBox 360.

Some of the examples of the extremes of the launch:

1. Long lines waiting to get the PS3.
2. People were robbed and a man was shot while standing in line to buy the game system in Connecticut.
3. People are selling consoles for thousands on eBay (and in this case, the people who bought the system initially are getting profit that Sony could have gotten by charging a higher price).
4. One person even sold merely the information of someone who was willing to sell a PS3, not the actual game system, for $1,100.

When you offer a possible answer, it should be from the perspective of Sony: why would they go against the basic principles of economics by not meeting the demand for the game consoles?

(Source: James C.)

Luxury Car Dealerships

An article in USA Today describes the luxury car market and the lengths that dealerships go to get people into the dealerships:

At Fletcher Jones Motorcars, customers stroll through a gallery of Mercedes-Benzes, linger at the cappuccino bar, tap balls on the putting green or go for a pedicure. A couple of blocks away, Newport Lexus boasts marble fireplaces, Oakley and Tommy Bahama beachwear boutiques — and a flat-screen television, tuned to ESPN, of course, mounted above the urinal in the men's room. . .

Built at a cost of $75 million, Newport Lexus didn't hold back when it opened in July. It has lounges with big-screen TVs, a sandwich counter, video game room and boutiques all aimed at making customers want to stick around. "When people have their car in for servicing, I don't want them to leave," says sales general manager Scott Brewer.

Why would these dealerships go to such lengths? What is interesting is how much the dealerships are spending on all of these amenities that aren't directly related to their main product, which is cars. Also, what do all of these attempts at differentiation tell you about the market structure in the car dealership market?

(Source: Sarah O.)

Applying Economics to Artistic Masterpieces

In Wednesday's NY Times, there is an article discussing whether there is a pattern to how works of art are priced. The article discusses the work of economist David Galenson who has found that great artists usually fall into one of two categories:

1. "Young Geniuses:" like Picasso, Van Gogh, or Gauguin, who create their most valuable works early in their career and are innovators who spend little time on their artwork.

2. "Old Masters:" like Jackson Pollock or Paul Cezanne, who create their most valuable works of art late in their career and spend a lot of time perfecting and experimenting with their artwork.

Galenson then uses these two categories to explain patterns in the creation of artwork and to predict the prices that the works of art will sell for.

One of the main topics of the article is how there is a lot of resistance to applying these economic and statistical techniques to the field of art. So my question would be, what do you think of Galenson's ideas? Is it an example of trying to bring everything under the economics/statistics umbrella without regard to whether it fits? Why do you think there is so much resistance to Galenson's work?

Another Couple Thoughts on Friedman

To add to Kroger's well-put post, Milton Friedman is the father of the author of Hidden Order, which we are currently using in class, and I will add one link: a tribute written about 10 years ago by economist Greg Mankiw. The reason I am linking to that article is that is has a quote from Milton and his wife summarizing their views on policy:

The Friedmans are best known for their articulate and unwavering defense of the free market. Their policy objective is, simply, "the promotion of human freedom." This goal, they tell us, "underlies our opposition to rent control and general wage and price controls, our support for educational choice, privatizing radio and television channels, an all-volunteer army, limitation of government spending, legalization of drugs, privatizing Social Security, free trade, and the deregulation of industry and private life to the fullest extent possible." Milton and Rose were libertarians--aggressively vocal libertarians--before libertarians were cool.

IKEA Doesn't Follow the Textbook Example

Here is an article that discusses IKEA's unique policy on selling umbrellas:

The umbrellas are huge (3 people can fit underneath), colorful (in IKEA's signature blue and yellow with a big company logo), and made of good quality materials (strong cloth, steel shaft, large wooden handle). Exactly the kind of umbrella you want to carry when it's raining.

A small sign hangs nearby:
IKEA UMBRELLAS
Sunny Day .............. $ 10.
Rainy Day .............. $ 3.

This strategy is contrary to one of the most basic examples in supply and demand analysis: when it is raining and the demand for umbrellas is high, firms can charge a higher price to make higher profits.

The author of the article thinks that IKEA's strategy is a good one (though he does not give any empirical evidence). What do you think? Is IKEA's policy leaving money on the table? Or can you think of reasons why it would be a good idea for them to go against the textbook example?

(Source: Newmark's Door)

Finding Underpriced Goods on eBay

There is a business called eBooBoos whose sole business model is to find auction items on eBay that are misspelled (eBay does not have a spell checker). The idea is that when items are misspelled, people will not be able to find them, and therefore, they will be priced too low.

Another example of the ridiculous range of businesses that exist.

(Source: Marginal Revolution)

No Such Thing as a Free Drug

Marginal Revolution links to an NBER paper that compares the pharmaceutical industry in Europe to the pharmaceutical industry in the US. In Europe, phramaceutical prices are regulated by the government and are therefore lower. An unsurprising consequence:

Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

The abstract of the article also discusses how US firms spend 15% more on research and development than European pharmaceutical companies.

The main point is not that the regulations are bad necessarily (you then get into an equity vs. efficiency argument), but that you can't lower prices on drugs without knowing that this action will have negative consequences somewhere else.

Burrito = Sandwich?

In this unit, we have talked about how companies try to set up barriers to entry in their markets. Apparently, a Panera Bread bakery in a Massachusetts mall wrote into their contract that no other sandwich shop could open in that mall. They then used that clause to try and stop a Mexican burrito place from opening in the mall.

This leads into a court having to rule whether a burrito is a sandwich. The court ruled in favor of the burrito place saying that a burrito is not a sandwich.

(Source: Greg Mankiw's Blog)