Economists Do It With Models

Warning: “graphic” content…

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When An Economist Attempts Home Improvements…

May 26th, 2015 · No Comments
Decision Making · Econ 101

Dear Econodiary,

I’m very sorry to have failed you- I know economists have a lot of good points to make, but sometimes those points are difficult to implement, usually for reasons having to do with stubbornness and irrationality. But allow me to explain, since I swear things made sense at the time.

I have a property in Harvard Square that I rent out (a far less economically questionable matter than the scenario at hand, I swear), and, in the course of replacing one of the tenants, I had some plumbing work done on one of the bathrooms. My conversation with Mike the plumber (in between songs on his Sarah McLachlan Pandora station, which was hilarious) went something like this:

Plumber: Um, can you come look at something for a second?
Me: That’s never good…what’s up?
Plumber: Were you aware that you have a hole in your shower?
Me: A what now? No, I think I would have mentioned it. Loudly.
Plumber: Here. *points to spot where tile and backing fell into internal shower structure*
Me: *expletives* Of course I would learn this after renting the room to a new tenant and being committed to having the place in working order.
Plumber: Well, you could get plastic sheeting and duct tape and cover the wall until somebody can redo the shower, but the shower’s going to be out of commission for a while once the tile guy comes in.
Me: Yeah….no.

In fairness, I did try to have the work done and had a couple of contractors/tile people in to look at the situation, but most of them either wanted to redo the whole bathroom (Wouldn’t you rather have the sink over here?) or couldn’t schedule the work for two months. As such, I contend that I am a victim of market failure rather than an economic moron. In any case, off to the Internet I went.

Believe me, I do understand the principles of comparative advantage and gains from trade, and I know that I am better off hiring people to do things for me when I can earn a higher wage than I would be paying the worker. (More on this in a second.) Nonetheless, my logic was the following, which I thought was flawless: Since my spring semester had just ended, the opportunity cost of my time was pretty low…and even if I had other work to do, I just just fix the shower in my free time, again when opportunity cost was low.

So how did this go wrong? First, I obviously underestimated how long everything would take and how much everything would suck. How are we in a world where we can send a man to the moon, I can be typing this on m tablet and beaming it to the Internet from a moving train, and somehow the only reliable way for me to establish a shower wall is to nail cement board to wood, use what is essentially mud to affix ceramic to said cement, and then cover the whole thing with sand and wipe it off (and then use something called an impregnator to seal it? Do you seriously expect me to not giggle at that?)? It’s barbaric- and don’t even get me started on acrylic and other pre-mixed, not going to turn into a bucket full of rock before you wall is done products, since they all say that they aren’t appropriate for high-water areas. You know what doesn’t seem appropriate for high-water areas? Mud and Sand. But I digress.

More interestingly, I did in fact get smacked in the face by bad assumptions about comparative advantage and opportunity cost. See, when the shower project took over my life, I did end up missing work and putting off other projects, so the “I’ll just do this in my free time” logic fell apart. Furthermore, economists are good at talking about wages as the opportunity cost of leisure, but we don’t focus as much on the “the value of leisure is the opportunity cost of work” part…and let me tell you, I would have paid a pretty penny to sit on the couch and watch My Cat From Hell rather than fight with the shower for an 11th consecutive hour. As much as we don’t like to admit it to ourselves, work tends to suck more as we do more of it, or, equivalently, the value of leisure increased as leisure becomes more scarce. In terms of comparative advantage, the econ 101 textbooks have it right when they take into account differences in productivity as a starting point for identifying opportunity cost, whereas my dumb self was all like “well, it’d basically cost me 40 hours worth of my wages (or more, after taxes) to have a tile person work on this for 40 hours, so my project makes sense even if I end up not doing 40 hours of work and spending the time on the shower instead.” On this point, I apologize to all of the professional tile installers out there for insulting your skills, since I obviously cannot do what you can do in 40 hours.

In case you’re curious, I do once again have a functional shower (thanks mostly to YouTube), but I now happily acknowledge that it would have made more sense to hire someone to do pretty much what I did (but probably better) and get my other work done rather than think that I can be a superhero and not have 12-hour days of manual labor impact my other work productivity. In the future, I vow to properly acknowledge the value of leisure and properly calculate opportunity cost.


P.S. I tried to put the leisure principle into practice and took a cab to the train station rather than walking because it was hot out…there was ridiculous traffic and I almost missed my train. Thanks, world.

→ No CommentsTags: Decision Making · Econ 101

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Who Wants To Be A Millionaire, Homer-Economicus Edition…

May 13th, 2015 · 2 Comments
Macroeconomics · The Simpsons

So, this happened…

Let me rephrase…AHHHH I”M TOTALLY FREAKING OUT AND TERRY CREWS IS TOTALLY MY NEW BFF. As a reminder, here’s the book:

You can get your behavioral economics learn on with my my chapter. I also think that the rest of these books should exist, and I’m really curious as to whether the Griffin goods play on Giffen goods was intentional. (I really really want to think that it was.) Actually, I think choice D, for the sake of accuracy given the plot of the original, should have been “It’d the Great Inflation, Charlie Brown.” It could go something like this (courtesy of Wikipedia):

With autumn already in full swing, the Peanuts gang prepares for Halloween. Linus van Pelt writes his annual letter to The Great Pumpkin, despite Charlie Brown’s disbelief, Snoopy’s laughter, Patty’s assurance that the Great Pumpkin is a fake, and even his own sister Lucy’s violent threat to make her brother stop. When Linus goes out to mail the letter but cannot reach the mailbox, Lucy refuses to help him; so he uses his blanket to open the box, and throws in the letter.

On the eve of economic recovery, the gang (including Charlie Brown’s younger sister Sally) goes shopping. On the way, they stop at the Federal Reserve to ridicule Linus’ missing the festivities, just as he did last year. Undeterred, Linus is convinced that the Great Inflation will come, and even persuades Sally to remain with him to wait.

During shopping, the kids receive assorted candy, apples, gum, cookies, money, and popcorn balls — except for Charlie Brown, who for some reason gets a rock at every store they visit. After shopping and another visit to the Federal Reserve, the gang goes to Violet’s dinner party. Meanwhile, Snoopy, wearing his World War I flying ace costume, climbs aboard his doghouse (imagining it to be a Sopwith Camel fighter plane) to fight with the Red Baron. After a fierce but losing battle, Snoopy makes his way across “the countryside” to briefly crash the dinner party, where he is entertained by Schroeder’s playing of World War I tunes on his piano, and then goes to the Federal Reserve. When Linus sees a shadowy figure rising from the moonlit patch, he assumes the Great Inflation has arrived, and faints. When Sally sees that it is only Snoopy, she lectures Linus for making her miss the shopping activities as well as the dinner party festivities as the kids come to take her away with them. As they leave, and still convinced that the Great Inflation will materialize, Linus promises to put in a good word for them.

the next morning, Lucy realizes that Linus is not in his bed. She finds her brother asleep at the Federal Reserve, shivering. She brings him home, takes off his shoes, and puts him to bed. Later, Charlie Brown and Linus are leaning against a wall, commiserating about the previous night’s disappointments. Charlie Brown attempts to console his friend, admitting that he himself has done stupid things in his life also; this only infuriates Linus, who sets off on an angry rant vowing that the Great Inflation will come to the Federal Reserve next year, as Charlie Brown listens with a visibly annoyed look on his face and the credits roll.

See, it totally works. As a related matter, Linus watches too much Fox News and needs to learn a bit about rational expectations.

→ 2 CommentsTags: Macroeconomics · The Simpsons

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Fun With The Economics Of Copyright, Kanye West Edition…

April 21st, 2015 · 1 Comment
Music Biz · Policy

Hey, remember this?

I post this not because I am dreaming of quitting my job (or, more accurately, one of my million or so jobs), but because guess who got a subscription to Nielsen SoundScan? That’s right- this nerd. Basically, what this means is that I can look up physical and digital sales by week for just about any audio track, single, or album. You know you’re jealous, and suggestions for how I can do research with this are most certainly welcome. (I do have a current project that I am using the data for, so I didn’t entirely just get it for shits and giggles.) At the time this video was posted on YouTube, there were a number of news reports that pointed out that the song used- “Gone” by Kanye West- hit the Billboard Hot 100 for the first time shortly after the release of the video, despite having been released all the way back in 2005. That’s interesting and all, but we can take it a step further and see what that means for the trajectory of (digital) sales:

Well then…that’s not exactly what I would call a subtle effect. It’s interesting to me that the effect is not only so immediate but also so ephemeral. (For context, the video was posted on September 28, 2013.) Looking at the graph at a different scale, however, gives a bit of a different interpretation:

Looking at this closer view, it does seem like there was a bit of a sustained impact, and, looking at the raw numbers (which I can’t show you), sales in 2013 had averaged about 75 per week prior to the release of the video, and sales for the last year (i.e. April 2014-April 2015) averaged a little over 100 per week. This makes intuitive sense, both because people continue to view the video even though it’s not as popular as it was in October 2013 and also because the initial spike in sales likely led to people playing the song in front of other people, setting off a bit of a chain reaction in terms of recognition and, as a follow on, sales. (Never underestimate the power of the mere-exposure effect!)

This analysis is important not only for the purposes of interesting cocktail party conversation (though such benefits shouldn’t be dismissed entirely) but also because it leads to a conversation about the economics of copyright law and raises some questions as to whether current legislation is actually maximizing value for the creators and consumers of recorded music. At present, copyright law is basically of the “use my stuff, get sued” form unless said use falls under what is known as fair use doctrine. The “correct” way to use a recording in a video is to get a sync license, which, if you follow that link you will see is not the least complicated or expensive of processes. (Fun fact: songs have two copyrights, one for the recording and one for the composition, so someone who wants to use the recording has two potentially distinct creators to deal with.) In all likelihood, therefore, it’s unlikely that the creator of the video would have gone through this channel and done things “right,”* so the video creator has the option of either acting illegally and risking punishment or not using the song. In a world where Kanye West (and his label) benefits from the use of the song, his incentives are not aligned with those of copyright law in this situation.

Copyright law, as written, applies well to situations where, let’s say, I make and sell photocopies of Greg Mankiw’s favorite textbook. In this case, my activity almost definitely takes away from Greg’s profit, and, more importantly from an efficiency perspective, decreases Greg’s incentive to come out with new editions of his book. In contrast, copyright law doesn’t work so well from an efficiency standpoint when the use of a copyrighted work benefits both the user and the creator. In these cases, it’s not clear in which direction, if any, payment should go, since, for example, it would both make sense for the video creator to pay Kanye West but also for Kanye West to pay the video creator in order to get his music placed and reap the sales benefits. If the goal is to create incentives to produce, the direction of payment should be towards the party who needs more of a kick in the pants to keep creating output (i.e. has higher elasticity of output), and more research would need to be done in order to figure out which party this is.

The problem gets even more complicated when you consider that it’s not clear when use of a copyrighted work is beneficial to the copyright holder and when it’s detrimental. Given the number of counterintuitive outcomes we see, it’s important to conduct the proper research in order to gain objective insight into the matter.

tl;dr: The music business is a lot harder than you’d think.

* If you look at the YouTube page for the video, you will notice that the YouTube system provides a place for the content creator to give credit for the music used. In addition, YouTube enables the music copyright holders to scan videos for their content and collect ad revenue from such content. This is a step in the right direction but is still suboptimal if it turns all revenue from the video over to the creator of the background music.

→ 1 CommentTags: Music Biz · Policy

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Some Weekend Mocking Of Economist Stereotypes For Your Viewing Pleasure…

April 10th, 2015 · No Comments
Just For Fun

The release of the latest FOMC minutes reminds me that this needs to exist:

I suppose for now some text commentary will have to do. In case you haven’t noticed, Dilbert has been pretty on point as of late:

Pretty sure the Fed doesn’t have bitcoin on its balance sheet, but the statement is closer to reasonable than you might expect. Also, in one interpretation of the words, the dollar *does* float with LIBOR, since LIBOR moves with U.S. short-term interest rates and interest rates affect exchange rates. (Yep, I can ruin ANY joke, muahahahaha) In related news, I have got to use this principle more strategically.

Ok fine, I can’t make a sensical argument for that one, but what I *can* say is that if you decide that someone must be smart because you can’t understand them, you are at least part of the problem. Wally’s just responding to incentives.

Maybe Wally would actually be a good economist, since he seems to understand that there is value in scarcity. (Then again, so does the Kardashian family.) Pointy-haired boss is definitely part of the problem, but it’s worth pointing out that you can’t conclude that something doesn’t make sense just because you don’t understand it.

I wish my students were like this. =P

I’m convinced that this actually happens, though not for this reason.

I’m pretty sure that there are a decent number of people who think this is why Nouriel Roubini is a thing.

Good thing the Nobel Prize comes with cash. =P Overall, I am torn in my opinion as to whether economists care more or less about money than non-economists.


Or, in case you prefer your mocking of stereotypes in video form, there’s this:

Suggestions welcome for how to do better than this. :)

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The Dystopian Nightmare Stories Continue, Robert Reich Edition…

March 20th, 2015 · 5 Comments
Income Distribution

Here, fixed that for you…

I’ve written about this supposed dystopian nightmare before- the real problem isn’t that we can create a lot of stuff without taking up a lot of people’s time (that in itself sounds lovely, right?), the problem is that we as a society don’t know how to efficiently allocate resources without the price system, and, more importantly, we can’t seem to conceive of a mechanism for getting the inputs to that price system (i.e. dollars) to people that doesn’t involve trading said dollars for worker effort (i.e. labor). I’m not entirely convinced that we’re getting to the dire point of labor obsolescence any time soon (see here for some evidence of what ATMs have done to bank tellers, for instance), but I do think that we need to start getting potential solutions out into the public consciousness well ahead of time, since social norms and attitudes don’t change overnight (looking at you, gay marriage).

It’s worth noting that my statements aren’t a criticism of Reich himself except in that he appears to have taken up the journalistic hobby of burying the lede by putting this part at the end:

Our underlying problem won’t be the number of jobs. It will be – it already is — the allocation of income and wealth.

What to do?

“Redistribution” has become a bad word.

But the economy toward which we’re hurtling — in which more and more is generated by fewer and fewer people who reap almost all the rewards, leaving the rest of us without enough purchasing power – can’t function.

It may be that a redistribution of income and wealth from the rich owners of breakthrough technologies to the rest of us becomes the only means of making the future economy work.

I get the sense that people like Reich believe that the public will pay more attention if they are presented with the dystopian nightmare view of the situation- they may be right, but I’m curious as to how a “the world will be so awesome except for this distribution problem that we need to figure out” marketing angle would play instead. In any case, we do need to start thinking about a mindset change, since otherwise we run the risk of being that society that has people do busy work so that we have an excuse to give them money. We all know how much we “love” that at our jobs nowadays, so how about we start considering some alternatives, hm?

P.S. I definitely feel that some Player Piano fan fiction is in order here. Let’s get on that, shall we?

→ 5 CommentsTags: Income Distribution

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On Room For Creativity In Monetary Policy?

March 16th, 2015 · 2 Comments
Macroeconomics · Policy

I can’t decide whether this is more or less ridiculous than negative interest rates for dealing with a liquidity trap…

(One nitpick: Technically, savings is what funds investment, so it doesn’t generally make sense to think that they move in opposite directions as suggested above. That said, if you define “saving” as putting money in banks or government securities and “investment” as private-sector investment, then the statement is pretty reasonable.) On a practical level, however, this can only work if people don’t recognize Janet Yellen, since they need to get scared and run away rather than be all “OMG it’s Janet Yellen, you’re so cool, can I take a selfie with you?” Fortunately (in this context and probably no other), Yellen’s celebrity doesn’t appear to be a limiting factor:

The survey showed 70% of those polled don’t know or aren’t sure who Ms. Yellen is. In contrast, just 1% had never heard of former president George W. Bush.

When it comes to the Federal Reserve as an institution, 42% said they had a neutral view, while 30% had a somewhat or very positive view and 20% had a somewhat or very negative view. Just 8% didn’t know the name or weren’t sure what it was.

Yellen shouldn’t take it entirely personally, though, since, as of last year, one in six Americans thinks that Alan Greenspan is still in charge of the Fed. Yellen and Bernanke need to go commiserate over some cocktails- and Yellen should pick up the tab since Yellen’s a millionaire and Bernanke couldn’t refinance his mortgage. =P

→ 2 CommentsTags: Macroeconomics · Policy