Friday, September 30, 2005

Global Imbalances

Governor MacFarlane from the Reserve Bank of Australia, delivers an excellent talk explaining the current global situation. Mark Thoma points to it in his post here, and the latest issue of The Economist surveys much of the same ground.

Keywords: ECO305, ECO301

Equity Premium Puzzle

A great post on the Equity Premium Puzzle can be found here, at the New Economist.

Keywords: ECO301

Wednesday, September 28, 2005

Porn: Giffen Goods vs. Veblen Goods?

So economists often like to talk about things we think don't exist. Such as a free goods. Marginal Revolution has a post entitled Giffen goods, yet another thing we can't seem to find in the real world. From Marshall's Principle of Economics a Giffen good is:
As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.

The MR post quotes Bill Margold:
"As soon as we get a universal or national porn tax, we get what we've always wanted -- that comfort zone of respectability that cigarettes, alcohol and gambling have," said Bill Margold, a former porn performer who now advocates for adult performers.

But what we really have here is probably a Veblen good. A Veblen good is:

if people's preference for buying it increases as a direct function of its price.

The definition does not require that any Veblen goods actually exist. However, it is claimed that some types of high-status goods, such as expensive wines or perfumes are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high status products. The Veblen effect is named after the economist Thorstein Veblen, who invented the concepts of conspicuous consumption and status-seeking.

Marginal Revolution has a more recent post on the Veblen effect in the case of paid sex here.

Keywords: Porn, Giffen Good, Veblen Good

Monday, September 26, 2005

H.R. 3726

I'm just a Bill sitting on Capitol Hill. Remember that School of Rock? Well Bill H.R. 3726 Titled Child Pornography Prevention Act of 2005, has been attached as an amendment to the Child Safety Act of 2005 (H.R. 3132). Apparently it was added without any debate. This bell needs to die a horibble death.

The Free Speech Coalition has a bit here and their press release is here.

Among other provisions, the bill targets adult citizens who record visual images of consensual sexual activity in the privacy of their own homes, adds nudity and clothed images of pubic areas to the definition of “explicit sexual activity” as defined in U.S.C. 18 §2256, and criminalizes the production and distribution of R-rated mainstream motion pictures that fail to comply with the record creation and notice provisions of 2257, and possibly for violation of obscenity laws.

Better not snap any polaroids of the wife, that would be illegal.

Hat Tip to Radley Balko.

Tenure and Porn

Some of my regular readers (who am I kidding, no one reads this) may have noticed a marked change in some of the topics I'm posting. You see I've recently be awarded (or maybe I earned?) tenure. With tenure comes academic freedom, the ability to pursue research that truly interests me. That is not to say that my previous research on exchange rates did not interest me, but I feel as though I need a change of pace. Really, do we actually need another article on PPP? I think my marginal contribution is too small to warrant spendng much more time on the topic. I won't completely give up on it, but I need to make room for my new research agenda.

Strippers and Porn. Thats right, I want to study the Adult Entertainment industry. You may (or may not) be surprised to find that there is almost no work by academic economists on the industry. Sure plenty of sociologists have taken a crack at trying to understand the industry, but when it comes to the important economic questions, they completely drop the ball. It is amazing how socioliologist can report that strippers say the main reason they got into the business was for the money, yet they NEVER ask how much money they make.

In the case of porn can you think of a better way to understand the evolution of contractual relationships, then by comparing Hollywood to Van Nuys?

So A Random Walk will start to track articles I'm reading for my research, I'll try to point out when they are not safe for work, but no guarantees. After all, its just research for me and I can't be fired. I still want to talk about Teaching and Learning and I'll continue to point to macro topics of interest.

Keywords: Tenure

Where are They Now?

The stars of Debbie Does Dallas. Where are they now?

Keywords: Porn

Friday, September 23, 2005

Lynne Lays the Smack Down

Lynne Kiesling of The Knowledge Problem, lays the proverbial smack down on a former professor of mine, Don Nichols.

The WaPO quoted Nichols:

Historically, Nichols said, the markup between the price of a gallon of crude and a gallon of gasoline is about 85 to 90 cents a gallon, including refining, distribution and taxes.

The study estimated that for pump prices to reach $3 a gallon, the price of crude oil would have to be about $95 a barrel, but crude prices have been holding around $65 a barrel, and Katrina has not caused a surge in crude oil prices.

"The disconnect between gasoline and crude oil prices is quite remarkable," Nichols said.

And Lynne said:

On its face I find this statement naive. People who study this industry have known for the past seven or so years that increasingly the refining capacity in the US is a bottleneck. If you are analyzing price effects along a vertical supply chain, and you have a capacity bottleneck in the middle of that chain, how can you expect historic relationships between the price of the initial input and the price of the final product to persist? That is incredibly naive and reflects a lack of understanding of how vertical supply chains work.

Of course the price of crude oil and the price of gasoline are going to become more disconnected as your refining capacity becomes the binding constraint. furthermore, when a natural disaster exacerbates that bottleneck, you should expect a further deviation from that historic relationship.

More work for the FTC, which routinely investigates claims of "price gouging" when one politician or another raises the populist hue and cry. The FTC has studies stretching back for almost two decades that show no evidence of anti-competitive outcomes in gasoline markets.

Is there sufficient political will to just deal with the fact that energy scarcity is going to be more binding? Is there political will to let prices do their jobs?

I'm pretty sure he is a moron. I mean in my intermediate macro class he used to brag about being part of Carter's Council of Economic Advisors. Why would you brag about that?

Keywords: Gas, Gouging

Thursday, September 22, 2005

I Love Her

I love this woman. Here is Ariana Huffington laying the smack down on Bush's new Porn Squad.
So Justin exposing Janet's boob is a sin, but White House staffers exposing Valerie Plame is a win. Profiting from porn is a sin, but Halliburton's wartime profiteering is a win. Two men getting hitched is a sin, but Tom DeLay and Jack Abramoff playing with each other's clubs is a win. And telling students condoms can prevent STDs is a sin, but lying about WMDs is a win.

Google Rules the World

I recently finished the book Wisdom of Crowds, and its great to see the geniuses at google putting the ideas to good use.

And then I read this post. I think it is a great note on the future of medicine. We should all be so instrumental in our own health care. Don't rely on the medical profession, they can't even find google.

Keywords: ECO301, Markets, Wisdom of Crowds

Tuesday, September 20, 2005

Porn Squad

Apparently if you are in the Bush adminitration and you are having trouble winning a war, say in Iraq, or the "War on Drugs" or the "War on Terror", then the only solution is to divert attention by starting another war. So how about the "War on Porn"?

According to this WaPo article the AG Gonzalez has directed the FBI to develop a Porn Squad to pursue obscenity charges. My favorite quotes are from some unnamed FBI agents clearly deminstrating the lack if interest in working in this new squad.

"I guess this means we've won the war on terror," said one exasperated FBI agent, speaking on the condition of anonymity because poking fun at headquarters is not regarded as career-enhancing. "We must not need any more resources for espionage."

Among friends and trusted colleagues, an experienced national security analyst said, "it's a running joke for us."

A few of the printable samples:

"Things I Don't Want On My Resume, Volume Four."

"I already gave at home."

"Honestly, most of the guys would have to recuse themselves."
Keywords: Porn, Obscenity

Tax Reform

Mark Thoma points to a this useful document from the Feds on Tax Reform. Some quick excerpts from it:

Personal consumption taxes: A personal consumption tax would look much like the current individual income tax. Individuals would report their income from wages, interest, dividends, and so on. It would differ in that borrowed funds
would be included in the tax base, and funds that are saved or invested would be
deducted. The base is equivalent to that of other consumption taxes. Rates could
vary based on individual characteristics.

And this one concerning the effects of taxes on the labor/leisure trade-off. Note, marginal rates might not effect the primary earner but they have a big impact on the secondary wage earner.

Work versus leisure: TaxesÂ?both income and consumption taxesÂ?can affect the decisions that people make about how much time to devote to work or leisure in two ways. First, taxes may increase the incentive to work because workers must work more to maintain their after tax income. Second, taxes may reduce the incentive to work because workers earn less from an additional hour of work. The net effect may be no change to the overall supply of labor. However, even in this case, there is still an efficiency cost, which is determined by the second effect. By reducing hourly after tax earnings, income and consumption taxes distort decisions about how many hours to devote to work or leisure. Empirical research generally shows that at least for primary wage earners, decisions about labor force participation are not very responsive to taxes. However, decisions about labor force participation by secondary wage earners have been shown to be more responsive to changes in the tax system.

Keywords: ECO120, ECO305, Taxes, Fiscal Policy

Sunday, September 18, 2005

Your FEMA Dollars at Work

I had thought FEMA decided against giving out debit cards, but according to this news release they have given some out. I was turned on to this by the following story that appeared in my mailbox:

Storm-relief money spent at strip clubs
According to a report by KPRC, Channel 2, in Houston, a manager at Caligula XXI Gentlemen's Club said he has seen at least one debit card used at his club. A bartender at Baby Dolls, identified only as "Abby," said she has seen many of the cards used at her establishment.

"A lot of customers have been coming in from Louisiana and they've been real happy about the $1.75 beers and they're really nice," she said.

She couldn't say for sure whether the cards she has seen were from the Red Cross or from the Federal Emergency Management Agency, but she found no fault in using federal dollars to guzzle beer at a strip club.

"You lost your whole house, then, why not?" she said "You might want some beer in a strip club. There are a lot of guys out there that like to do that."

I guess the latter part of the article clears up the confusion:

On Sept. 7, after criticism about the federal government's slow response to helping the Katrina victims, the Bush administration announced that displaced families of the hurricane would receive the debit cards to spend on clothing and other immediate needs.

Two days later, FEMA scrapped the program after distributing the cards at shelters in Dallas, Houston and San Antonio, where many of the evacuees were moved. FEMA said then that no cards will be issued to victims in other states.

But my favorite quote is:

Meanwhile, in Memphis, Tenn., residents told News Channel 3 they saw Hurricane Katrina survivors purchase designer jeans, high heels and purses with their $2,000 emergency debit cards. According to the report, one Katrina victim was spotted at a Cordova clothier buying stacks of $65 designer jeans. Another viewer reported spotting a survivor buying "over $700 in high heel shoes and purses" at a Memphis department store "while (her) younger children, most of them looked under the age of 3, looked like they haven't showered in weeks."

"If they make an inappropriate decision as to what to purchase, the whole issue of victims' rights comes into play," said Bill Hildebrandt, chief executive officer of the Mid-South chapter of the Red Cross. "They have a right, I guess, to be inappropriate."

It would be funny if it wasn't so sad.

Keywords: Strippers, Katrina Relief

Tuesday, September 13, 2005


Daniel Khaneman is a psychologist who won the nobel prize in Economics for his work on rationality. Hear his description of rationality and his critique of it as an assumption here.

Hat tip Mahalanobis.

Keywords: ECO120, ECO305, ECO301, Rationality

Monday, September 12, 2005

More Notes on Oil

Just a few more quick notes on the economics of oil and gas. This website provides quick access to historical prices by state.

Bryan Caplan talks about the increased variance in gas prices. I think this is an obvious result of the reaction to the hurrricane. News is spotty and people react very differently and markets take time to process new info and adjust their expectations. But Bryan lays out some additional reason, go read it.

Also Victor from the Dead Parrot Society has a nice recap of some of the debate on the price effects of suspending state tax on gas. He also provides some data on Georgia's suspension of the gas tax. Here is another study I found, suggesting some decrease in retail prices, but not nearly the full amount of the state tax.

Finally, my original plan in posting was to discuss why I think students have difficulty understanding supply and demand in the context of gas prices. Let me say briefly I think it is a function of their view of prices. They don't believe prices are the result of an interplay between supply and demand, but rather they believe price reflects some markup over cost. They do not understand the interplay of supply and demand. I think when I teach it I will spend more time on the supply side and emphasize that the determinants of supply include not only current costs, but expectations about costs and future prices.

Lawrence White of the Division of Labour asks this question:

I have a question for those who oppose gasoline price “gouging” …

…where “gouging” is defined as a larger-than-normal markup over the price a gas station paid to fill its tanks two or three weeks ago. Would you mind if I siphon the gas out of your car’s tank, and pay you for it the price you paid last week,
before the price of refilling went up?

Keywords: Oil, Gas, ECO120, ECO305

Sunday, September 11, 2005

Oil Economics

Some of the students in my intermediate macro class have displayed a real interest in trying to understand the recent movements in the price of gas and oil, so I thought I'd gather some links from blogs that have explained it much better than I ever could.

First Wikpedia has a good definition of the price gouging here. While I think it is a vacant, abused, and utterly useless term, Kevin at Truck and Barter believes we still need to take it serious and he sets himself to the task of answering a few questions about it. Lynne agrees with me.

There are a few really good blogs which regularly discuss energy issues that would be worth browsing. Lynne at The Knowledge Problem generally posts on energy and James Hamilton of Econbrowser does as well. His energy posts can be found here.

Hamilton discusses why suspending the state sales tax will have no effect on the price of gas. But then he corrects himself, because in fact there are certain circumstances under which it may reduce prices. Bryan Caplan points thouse out here. However the best part of Bryan's post comes from the discussion in the comments section. Let me summarize the discussion. Ultimately the degree to which price changes (if at all) depends on the short run elasticity of supply. The more inelastic, the less prices will drop. It appears that gasoline supply is fairly inelastic because, we import very little refined gas (<10%), refineries have little spare capacity (particularly after Katrina), and many states requie their own formulation of gas, further reducing the local supply elasticity by preventing inter-state transfers of gasoline. In the end we understand the theory, but we can't exactly quantify the outcome of the policy change becuase there are too many empirical unknowns. We'll have to watch the experiment unfold, but I'm betting prices only fall by a very small amount.

Keywords: ECO120, ECO305, oil, gas, price gouging.

Saturday, September 10, 2005

Thursday, September 08, 2005

Where is my Keg?

Keg registration has come to La this will definitely curb binge drinking. The story is here. At least one person on the council understood the uselessness of the requirement when he said:

The committee's vote for keg registration was 14-2, with Bloedorn and Ranis voting against it and Andrea Richmond abstaining.

It would set a minimum $50 deposit per keg that would not be refunded if the identifying tag is removed. The measure originally called for a $100 deposit.

Member Andy Monfre, who represents the college area, argued that the deposit is too expensive, and Richmond said college students will find a way around it.

The ordinance would place a 48-hour, two-keg limit per person or address or contiguous address.

Calling keg registration a health and safety issue, former La Crosse resident Sheila Garrity supported the limit, recalling she once saw 17 kegs being carried into a house in her neighborhood.

People holding keg parties buy as many kegs as they think they can sell and then sell cups to people who drink as fast as they can, said Charles Weeth of Livable Neighborhoods. "What's the effect on the neighborhood when you find people passed out in their own vomit?"

Opposing the two-keg limit, Bloedorn said he believes in personal freedom and does not want to drive people outside La Crosse to buy kegs. When planning a party, he said a person needs to figure the number kegs of beer based on the number of guests expected, like they figure the amount of food to buy.

One thing is for sure about politicians, they have never found a problem they didn't think they can solve with a new law.

Looks like the kids will be driving to Onalaska for their kegs.
Keywords: Alcohol, Binge Drinking

Thursday, September 01, 2005

Political Hacks

More evidence that the FDA should be eliminated can be found here.

The Washington Post reports Susan F. Wood, an assistant FDA commissioner for women's health since 2000, wrote in her resignation e-mail that FDA ommissioner Lester Crawford's decision Friday to put the approval of the over-the-counter morning after pill" on hold was not scientifically based.

We now have political hacks threatening our health.