Wednesday, March 31, 2004

What do sushi and Howard Dean have in common?

For an ECO110 homework assignment in which students need to find economics in their everyday lives, one student wrote about how there are an inordinate amount of subway-type sandwich shops in downtown La Crosse.

The student showed sparks of genius, anticipating an article written by Harold Hotelling in 1929 ("Stability in Competition," The Economic Journal vol. 39: 41-57).

In the article, Hotelling developed a spatial model of monopolistic competition by talking about hot dog vendors on the beach. Check out the following website for a complete description of the model. Basically it predicts that two vendors on a mile-long beach have an incentive to locate smack-dab in the middle... That is, right next to each other! Essentailly the idea is that each vendor is attempting to get the other vendor's business, and so have an incentive to move closer together.

This explains not only why businesses selling similar products tend to locate near each other, but also why politicians in national elections tend to be more centrist. In an election containing only Democrats (the primary) you would tend to see politicians that are more liberal or "left". They aren't trying to get the support of conservative votors, so in Hotelling's language, they don't have to move closer to the other side of the beach. However, in the national election, they need to court the lefty-conservatives, and hence need to move (politically speaking) toward the center.

Unfortunately for me, that means, that for lunch I can choose between Subway, Erberts and Gerberts, or Jimmy Johns (rather than my true preference, sushi), and in November, I can choose between "Tweedledum and Tweedledee" (in the words of former Alabama Governor George Corely Wallace, the third-party candidate for president in the 1968 election against Nixon and Humphrey).

Key Words: ECO110, ECO308

Tuesday, March 30, 2004

Ben Folds Five Minus 4

Last night at the Heads versus Feds Debate the Campus Activities Board announced that it has landed Ben Folds for a May 3rd concert.

Saturday, March 27, 2004

National Gas Out Day

If you want to understand the reasons behind the recent increase in gas prices, first get a handle on the ideas behind supply and demand, then check out this post by Lynne Kiesling

Now lets turn to an email chain letter, one which purports to be more successful than the "National Gas Out Day". Can you explain why this too is nonsense?

I know most of you usually wouldn't take the time to read this, but please take the time for this one.

Dear friends & family,

I hear we are going to hit close to $3.00 a gallon by the summer. Want gasoline prices to come down? We need to take some intelligent, united action. Phillip Hollsworth, offered this good idea: This makes MUCH MORE SENSE than the "don't buy gas on a certain day" campaign that was going around last April or May! The oil companies just laughed at that because they knew we wouldn't continue to "hurt" ourselves by refusing to buy gas. It was more of an inconvenience to us than it was a problem for them. BUT, whoever thought of this idea, has come up with a plan that can really work. Please read it and join with us!

By now you're probably thinking gasoline priced at about $1.50 is super cheap. Me too! It is currently $1.82 for regular unleaded gas in Norwich, CT. We all know that we're being screwed by the oil companies. Does everyone remember how they drove up the prices way past a dollar and got the gas prices to where they wanted them, claiming there was a shortage of oil. Well, there isn't any shortage now, and the oil is more abundant than it was 35 years ago when the
price of a gallon of gas was 29 cents!!!

Now that the oil companies and the OPEC nations have conditioned us to think that the cost of a gallon of gas is CHEAP at $1.50- $1.75, we need to take aggressive action to teach them that BUYERS control the marketplace.....not sellers. With the price of gasoline going up more each day, we consumers need to take action. The only way we are going to see the price of gas come down is if we hit someone in the pocketbook by not purchasing their gas! And we can do that WITHOUT hurting ourselves. How? Since we all rely on our cars, we can't just stop buying gas. But we CAN have an impact on gas prices if we all act together to force a price war.

Here's the idea: For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies (which now are one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the other companies will have to follow suit. But to have an impact, we need to reach literally millions of Exxon and Mobil gas buyers. It's really simple to do!!

Keywords: ECO120

Thursday, March 25, 2004

Bathroom Graffiti

Normally I enjoy a good bathroom stall filled with graffiti, it passes the time if you've forgotten to bring the paper. This morning I was in the bathroom thinking about lecture, when I turned to look at an otherwise barren stall wall to see the words:


That's it, absolutely nothing else on the walls...I had to laugh.

Wednesday, March 24, 2004

Economics of Standing in Line

The other day I was standing in line at my favorite restaurant, Chipotle. I realize its 80 miles away, but that's not too far to go for a burrito that brings you so close to heaven.

Anyhow, it was the dinner rush, so I knew there would be a wait involved. I walked in the door, and the line extended from the counter all the way to the spot I just filled immediately inside the front door. The next person to enter behind me would have had to stand outside. This is often the case at the Chipotle restaurants I've been to during the lunch/dinner rush. I began to wonder why the line rarely goes out the door, but rarely gets shorter then it is now? Even at Chipotles where they have more room for their lines, it still always seems to extend to the door, but no further. To be fair I have seen it extend out the door on occasion, but generally only on very pleasant days. So why is the equilibrium line length to the door, but doesn't extend past it?

Economics helps us analyze this problem. Clearly the marginal cost of spending even a small amount of time waiting outside in the cold changes the calculus sufficiently to deter people from waiting. I'm sure there are other dynamics involved, when the line extends outside, people's perception of the wait may increase versus if they do not see the line. Or maybe people that open the door and enter are afraid to leave for fear of feeling embarrassed. Therefore if you see the line out the door, you never approach.

Lots of possible explanations. Sounds like a dissertation topic. My testable hypothesis would be that in extremely cold or hot locales lines rarely extend outside, but they do much more frequently when the temperature is mild, and therefore the marginal cost of waiting outside is smaller.

Monday, March 08, 2004

Pareto Optimality Revisited

Here's a great article that lays out in regular English (i.e. non Econ-speak) the notion of Pareto optimality and gay marriage. The question is, can we make some people better off by extending the right to marriage to committed gay couples without making other people worse off? If we can, then by changing the policy to allow same-sex marriage, we will be making a Pareto efficient move. In this New York Times article (29 FEB 04) Nathaniel Frank does a great job laying out the argument.

February 29, 2004, Sunday

Joining the Debate But Missing the Point

By Nathaniel Frank ( Op-Ed ) 760 words
"By declaring his support for a constitutional amendment to ban gay marriage, President Bush has taken sides in an energetic national debate. Unfortunately, thus far the debate has often obscured more than it has illuminated.

Supporters and opponents of gay marriage are talking past each other. Social conservatives argue from the premise that marriage is important to society -- the president called it ''the most fundamental institution of civilization'' -- and must be protected. Letting gays wed will undermine marriage, they say, but they are seldom able to explain how.

Proponents of same-sex marriage, meanwhile, make a rights-based argument, insisting that gays deserve the freedom to marry -- but they don't address the possible impact of gay marriage on society. As a result, they are open to the valid retort that if marriage is an individual right (instead of a social good), why not polygamous, incestuous or child marriages?

For a productive dialogue, we should be asking the question this way: is giving gays the right to marry good for society? And to answer that, we must ask what larger social purpose marriage serves.

The main reason marriage is considered good for society is that committed relationships help settle individuals into stable homes and families. Marriage does this by establishing collective rules of conduct that strengthen obligations to a spouse and often to children.

This is why the word itself is so important. The power of ''marriage'' lies in its symbolic authority to reinforce monogamy and stability when temptation calls. The hope is that, having taken vows before family and friends, people will think twice before breaking them. It is this shared meaning of marriage that is central to the success of so many individual unions.

Yet it is precisely this shared definition that causes many Americans to worry that legalizing gay marriages would undermine straight ones. By sharing the institution with couples whose union they don't trust or respect, they fear, the sanctity of their own bonds could be compromised.

The argument is not so much that individual straight couples are threatened by gay marriage, but that the collective rules that define marriage are being undermined. Instead of feeling part of a greater social project that demands respect, people will feel that breaking their vows offends only their spouse, not the whole community. Knowing that their friends and neighbors no longer hold marriage sacred can make it easier for people to wander.

Thus it is inadequate to argue that marriage is a basic civil right because it cannot be extended to all unions -- to the brother who wants to marry his sister, to the man who wants two wives, to the 10-year-old who wants to marry her teacher. Marriage could indeed lose some of its current meaning and power if society legalized unions between relatives, groups or children.

What about gays? While marriage may not be a universal civil right, it is a social institution that gays deserve to join. The best argument for gay marriage is that it serves the same social function as all other marriages.

It is silly to argue that broadening the definition of marriage will have no impact on the institution; it will. But no generalization about the nature and durability of same-sex unions can justify banning them. After all, society does not deny marriage rights to divorced, infertile or impotent people -- so long as they are straight. We offer that right because society generally tries to encourage as many people as possible to live stable and productive lives. Marriage -- gay or straight -- helps society achieve that goal.

After identifying the social function that marriage serves, it is easy to allay the fears of those worried about a slippery slope to an ''anything goes'' definition of marriage. Marriages between brother and sister? Incestuous marriages strike at the core of the bonds of trust and the functions of care that a family requires. Polygamy? One husband and numerous wives invites increased jealousy, deception and subjugation, and mocks the importance of ''forsaking all others,'' essential components of the stabilizing function of marriage.

The traditionalists may well be right that a monogamous relationship between two unrelated, consenting adults makes a strong foundation for a stable family, and thus for a vigorous social order. They're just wrong that those two people have to be of different genders."

Manufacturing Jobs

I like Bill Maher. I think he got a raw deal after September 11th, and I'm glad he is back on the air. Where? HBO of course.

New Rule: A hamburger is not the same thing as a car. The Bush Administration wants to reclassify fast-food jobs as manufacturing jobs. [laughter] Talk about parsing the language. Bill Clinton may have finessed the definition of sex, but he never claimed his penis was actually a glass of lemonade. [laughter] [applause] A Quarter Pounder may spend a week in your colon, but that doesn't make it a 'durable good.' [laughter] [applause]

It is a poor understanding of economics that makes this joke funny. Why should we ever care how a job is classified? All we should ever care about is what it pays. If flipping burgers paid $20 an hour it would be a good gig. Remember the only reason to work, is so that you can consume now, and through savings consume later.

So which job would you rather have? Working in a manufacturing job in 1913 for Henry Ford for $5 per day or work in retail for $10 an hour at WalMart? Check this out. The point is that in terms of purchasing power the jobs are nearly identical, in terms of the skills and dare I say effort required, WalMart is far easier. So who cares how we classify jobs...

Keywords: ECO120, ECO301, ECO305, Employment

Thursday, March 04, 2004

Greenspan the Politician

So in Money and Banking we just finished talking about the theory of bureaucratic behavior, and its ability to explain some of the actions of the Federal Reserve. Well it looks as though Greenspan continues to obfuscate some of his earlier thinking, in an attempt to avoid affecting the election, or raising the ire of Bush and Rove. Read this:

March 2 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said last week that big federal budget deficits eventually would lead to increases in long-term interest rates large enough to undermine U.S. economic growth.

However, Greenspan skipped over the possibility that ``eventually'' could arrive as soon as next year, leaving Fed policy makers with a potentially serious problem on their hands.

Perhaps the chairman didn't want to spook the markets. Perhaps he didn't want to go nose-to-nose with President George W. Bush over tax cuts, though Greenspan himself wants taxes to be as low as possible.

Thanks to Brad Delong for the pointer.

Of course this is another piece of evidence in a mounting pile which suggests Greenspan is not being intellectually consistent. His recent comments on Social Security indicate he has either changed his mind, or he is making a political calculation. Delong points to this Washington Post article:

Does Alan Greenspan have amnesia ["Fed Chief Urges Cut in Social Security," front page, Feb. 26]? More than 20 years ago he co-chaired a commission to ensure the solvency of Social Security. That commission recommended stiff increases in the payroll tax to create a surplus that would help fund the retirement of baby boomers down the road. The higher payroll taxes, which put a heavy burden on lower-to-middle income taxpayers, were signed into law and remain in effect to this day.

But in 2001 Mr. Greenspan endorsed a fiscally irresponsible income tax cut that effectively gives away the Social Security surplus he created primarily to high-income taxpayers. Now he suggests that those tax cuts be made permanent, while we reduce the enormous deficits that they've created only through cuts in spending, especially on Social Security.

Of course, Mr. Greenspan is right that we have tough choices to make on Social Security and Medicare. But he seems oblivious to the inconsistencies in his own position and to the huge inequities that these tax policies have created.

Keywords: ECO301, Federal Reserve

Government Gone Wrong Part I

Why do local governments think they can predict the successful development projects better than the market? And why do they insist on subsidizing them? What is truly really amazing is doing this with a developer who has a history of problems and has routinely failed to deliver on his promises. From the Tribune:

The Oak Grove project was proposed to the Village of Necedah in 1999 by developer Conrad Seymour and his company, MPC Systems.

The village created a TIF district and borrowed $4.9 million to assist with the project. Infrastructure costs for sewer and water hook-ups were to be repaid with special property assessments.

But the project has been riddled with problems since its inception. The golf course and home sites — few of which sold — have accrued hundreds of thousands of dollars in back taxes, and many of the assisted living units remain empty.

Monday, March 01, 2004

Monetarists vs. Keynesians

In class we often make a big deal about the ideological and theoretical arguments between Monetarists and Keynesians, but the truth is the divide has eroded considerably. Time and data has a way of sorting things out. Read Delong for a great discussion of the important Modern versions of these schools of thought.

Keywords: ECO301, ECO120, Keynesians, Monetarists

The Yield Curve for Booze

In the bond market, bonds mature (come due) at different points in time, and this often means their implied yields are also different. A simple plot of the yields of bonds with differing times to maturity is kown as the yield curve. An interesting animated version can be found here.

Well it turns out that we can derive the same thing for malt whisky. It is after all only a matter of time which differentiates the individual batches. Read about it from Daniel Davies over at Crooked Timber

Keywords: ECO301, Yield Curve