Do What you Want to do and Excel at it

There's an old (bad) joke bout statistics (especially averages): They're like bikinis - what they reveal is interesting, but what they conceal is essential.

Statistics reveal that Engineering majors earn more (on average) than Economics majors, who earn more than Business, and Philosophy majors, respectively. But what these statistics conceal is that the choice of major is not random - not everyone has a knack or interest for engineering. In fact the sorting is pretty one-dimensional. As my undergraduate Money and Banking prof used to say, "theres people who can do calculus and people who can't."

That's not the news. What is, as Free Exchange points out, new research shows that individual differences in ability within each major explains most if not all of the difference. After all, an exceptional student in philosophy can go on to a great career as a lawyer.

Here's the bad news for the artsy-fartsies: the research underlying on which the post is based long-run lifetime earnings. So, if you're a philosophy major, be patient. You'll be surpassing your business major classmates around the time your kids are following in your footsteps as philosohpy majors.

Prohibition, the War on Drugs, Zero-Tolerance Laws, and Abstinence

The world is full of perverse unintended consequences in response to government attempts to eradicate markets, even when there is a well-intended reason for attempting to do so (usually to "save the children"). Fewer children drinking, using, driving under the influence or being sexually promiscuous is clearly a good thing. Does that mean that we should advocate for a monolithic policy of prohibition or should we take a more nuanced approach?

We certainly learned this lesson the hard way during prohibition. The prohibition of alcohol led to more crime, and while some individuals may have done without, significantly more folks simply used and produced alcohol more recklessly than they ever would have before prohibition.

There is also considerable dissent against the stupid war we are waging against drugs. This policy has driven the price of narcotics through the roof, created a monopolistic cartel market structure that has introduced an incentive to engage in violence to capture profits and other rents, and created entrenched bureaucracies in government that distort information and lobby for higher budgetary allocations and/or rights to retain money and property seized in raids. (A nice paper on this is Benson, Ramussen, and Sollars, “Police Bureaucrats, Their Incentives, and the War on Drugs,” Public Choice 83 n. 1, 21-45, 1995.)

Zero-Tolernce and lowering absolute thresholds in DUI laws also doesn't work. Under 0.10% BAC laws you've got a window of about 3 drinks before you're over. Basically, it has a divergent effect on use: a few more drinkers will abstain knowing that if they drive at about two drinks they're over the limit, but it raises the BAC levels of other social drinkers who drive after a party because being over the limit at 3 drinks is not much different from being over the limit t 5 drinks once you're caught. My friend Darren Grant has a neat forthcoming paper in Economic Inquiry on this.

If that weren't enough, check out this article from the Economist. Basically, Britain is trying to get kids to drink less by forbidding it, and forcing pubs to show more diligence in enforcing the 18 or older law on drinking. As a result, more teens are abstaining, but their volume of use is on the rise! As it turns out, for kids who were sidling up to the bar at 17, 16, 15 years of age, the old drunks and bartenders actually did a pretty good job of keeping an eye out and keeping them from obliterating themselves. Neat!

Growth, Emerging Economies, and the Leverage in the WTO

From the PBS NewsHour (click the picture to link to video).

Having your Cake and Eating it Too

I'll just post the link. Make your own judgements – I'd like to simply think about it in terms of opportunity costs.

Lou Dobbs, Hoax Victim

He's actually sunk to reporting urban legend as if it is fact. Thanks, Lou, needed more fodder! Check out these mythbuster articles by actual journalists: Seattle Times; Interntional Herald Tribune; The Economist. Wheeeeeeeee! (See Below):

"NO BOUNDARIES" to Sweet Lou's Gullibilitiy

Making the Grade

As it turns out, getting good grades in college is not a tricky empirical question. There is a simple formula:

1. Be smart;
   
2. Work hard.
   

Studies by James Michaels and Terance Miethe (1989, Social Forces) and William Rau and Ann Durand (2000, Sociology of Education) show a convincing relationship between time spent studying and working on classwork and grades. They also show that things like class rank/high school GPA/SAT scores/other preexisting characteristics have a strong effect.

One thing I found interesting is this: verbal SAT scores (satv) may have a stronger impact than math SAT (satm). Check it out (data analyzed using STATA):

Variable Mean Std. Dev. Min Max
gpas 2.797741 .368208 1.787 3.555
satm 584.1852 42.62034 484 730
satv 573.4815 38.59501 507 668
satc 1157.685 67.05358 1008 1330
------------------------------------------------------------------------------
. reg gpas class satm ecbu [aw=n], beta
-------------+------------------------------ F( 3, 50) = 12.71
-------------+------------------------------ Adj R-squared = 0.3986
------------------------------------------------------------------------------
gpas Coef. Std. Err. t P>t Beta
------+----------------------------------------------------------------
class -.125275 .0250027 -5.01 0.000 -.5486035
satm .001759 .0010401 1.69 0.097 .1894219
ecbu -.1364445 .0820951 -1.66 0.103 -.1812849
_cons 253.4883 50.38878 5.03 0.000
------------------------------------------------------------------------------

. reg gpas class satv ecbu [aw=n], beta
-------------+------------------------------ F( 3, 50) = 16.97
-------------+------------------------------ Adj R-squared = 0.4749
------------------------------------------------------------------------------
gpas Coef. Std. Err. t P>t Beta
------+----------------------------------------------------------------
class -.1028173 .0248065 -4.14 0.000 -.4502567
satv .0033683 .0010379 3.25 0.002 .3962096
ecbu -.0308692 .085759 -0.36 0.720 -.041014
_cons 207.4469 50.09281 4.14 0.000
------------------------------------------------------------------------------
. reg gpas class satm satv ecbu [aw=n], beta
-------------+------------------------------ F( 4, 49) = 12.98
-------------+------------------------------ Adj R-squared = 0.4748
------------------------------------------------------------------------------
gpas Coef. Std. Err. t P>t Beta
------+----------------------------------------------------------------
class -.0999089 .0249782 -4.00 0.000 -.4375205
satm .0010047 .0010068 1.00 0.323 .1081956
satv .0030886 .0010751 2.87 0.006 .3632994
ecbu -.0250653 .0859596 -0.29 0.772 -.0333027
_cons 201.1831 50.48664 3.98 0.000

Based on this, a one-standard-deviation increase in verbal SAT (about 38.6 points) increased these students' semester GPAs by about 0.13 points; math SAT was insignificant. Your choice of major does not seem to have a substantial impact, except perhaps on your salary when you're finished.

Finite Simple Group (of Order Two)

For no particular reason, something I got about a couple years ago that needs some new life.

Farm Programs and the Poor in LDCs

Last week there was a good article on farm programs and their focus as part of the Doha Round. I think it's an interesting question – The farm programs are bad, but mainly from the standpoint (in LDCs) that they are second-best solutions to their hunger problems. Export controls, etc. do lower the domestic price and may lead to more affordable staples for the world's poorest, BUT they are by far the second-best way to go about helping those who are hungry and in poverty. In addition to the usual reduction in output and economic distortions, these programs sometimes lead to producers in these countries hoarding of crops to try to hold out against the government and pressure for assistance, as has been the case in Thailand. Therefore the trade negotiations tread a fine line: Removing the trade restrictions is good on average, but doing so without replacing the trade controls with more sensible and direct ways of helping the hungry and poor could hijack what small measure of political support for trade liberalization we may have built over the last 20 years.

Beeronomics and the Terms of Trade

When Mark Thoma was in high school the price of a sixer was $1.25 and the price of gas was $0.25/Gal, so the relative price of beer to gas was 5. Now, the price beer of gas is $4/gal and the beer Prof. Thoma drinks these days is $5.50. I susupect what he drank in high school (Old Style, PBR) is more like 3.60 these days, so I'm going with that here, so now the relative price of beer to gas is about 0.90.

So what am I talking about? Are we better off, worse, or about the same as back then? Indubitably, most of us are better off. Real income has risen, and even more goods can be purchased in the typical household bundle now than was possible in 1971 (partly because many goods didn't exist then). Many households in the US today are 2, 3, or more car/TV/computer households, we eat more more and better foods than we did, proportionally fewer folks worldwide are poor, poverty is less severe, there's less war and other conflict, lower crime rates... you get the idea.

So... on average we have more income to spend on more and better things and we still bitch and moan about a few bucks a week on gas. So now, prices are going up, wages are stagnating, and things are starting to hurt more, but some people are better off, namely those of us who drink beer but almost never drive as a bike-rider, and occaisional beer drinker with a steady job, I'm pretty ok with the changes (my terms of trade have improved as a consumer), considering that the prices of some other things are not also rising rapidly. THE MARKET IS GIVING A CLEAR SIGNAL HERE (for those of you out there who are bitching and moaning but still claim to be pro-market) -- DRINK MORE AND DRIVE LESS (especially after drinking)!

The bigger danger is that fewer farmers are planting hops in favor of corn and other grains - this must be stopped to keep the price of beer down; I think we should get the government to intervene.

Blogging

This link's for you, Atin (and anyone else who wants). It follows along with the ego-hypothesis of blogging (with correlary 1: economists are egotistical pricks).

Ethanol, Food Prices, and More Bullshit

Virginians love to BM&G about how the corn conspiracy and ethanol subsidies are driving up the price of a steak and driving down demand for other locally-produced commodities from beef to coal. I say let 'em - they're just flat wrong.

There's a new study out on the increased food prices we're seeing, as summarized by the NYTIMES (the official summary of the OECD/UN report can be accessed here). The overall impact of ethanol on food price increases seen recently is about 2-3%. So, that loaf of pound of hamburger that went up by about a quarter at the grocery store had about a penny to do with ethanol. Anyway, as it turns out the reason food prices are rising is not this complicated, general-equilibrium of energy, housing and ethanol, but one of simple supply and demand (mostly just demand) in the food market alone. Basically, the reason food prices are rising is because people around the world are busting out of poverty and can now afford higher quantities and quality of food (which, by the way, is a GOOD thing). See, most of the corn in the US goes to cattle feed. Therefore as people get richer and consume more protein, badda-bing! Higher corn prices, which leads to higher plantings of corn relative to non-feed grains (soybeans, wheat, etc.) and those prices rise accordingly.

If you're looking to goat the government for grain prices in the US, look first at sugar policy. Sugar policy affects corn prices much more than ethanol for one simple reason: After feed grain, the highest end-use of corn is high-fructose syrup. Understanding this requires a pretty high-tech econometric techinique: Drink a Coke (you COULD drink a Pepsi and reach the same empirical conclusion, but I wouldn't recommend it), then look at the label. Then, go to Europe, and repeat. The second ingredient on the US can (after H2O) is high fructose CORN syrup; on the European can it is SUGAR. Ever wonder about this? Everywhere else it's cheaper and to put sugar in as the main sweetner in most things, but here it's not because the in the 1930s the us put a quota on sugar imported to the US, mostly to keep CUBA friendly (see how well that worked???).

Now the Sugar quota has a second, indirect effect on prices. You see, sugar isn't just a better way to sweeten drinks, IT'S ALSO MORE EFFECTIVE FOR MAKING ETHANOL! To make ethanol you need to start with SUGAR! In the US, guess what the main ingredient used to make the sugar for ethanol is! CORN (NOT actual SUGAR)! Ever wonder why Brazil is making and using ethanol more efficiently and with fewer subsidies? BECAUSE THEY MAKE IT SMARTER THAN WE DO!

Recycling is Still Garbage...For Now

I've always kinda liked this old article, entitled "Recycling is Garbage" from the NYTIMES on recycling. There's plenty to dispute in such cocktail-napkin calculations of such important stuff, but it hits it head-on (apply directly to the forehead): Recycling is no free lunch. In fact taking into account land prices, alternative uses of resources, and energy burned in recycling, it is usually more costly (even in environmental terms) to recycle than it is to pitch things like glass and plastic. Paper and aluminum usually do better in terms of cost-effectivness and energy use. In fact, given the higher energy use and carbon footprint of recycling we might be shooting ourselves in the proverbial foot.
But, in a long-run sense, maybe doing all that recycling earlier is beginning to pay off. Technologies for actually doing the job are improving and the NYTIMES now touts: "In Economic Terms, Recycling Almost Pays" (keyword: almost). Anyway, it teaches us to: 1. be sceptical of the "free lunch", and; 2. think dynamically and long-run, not short run. (Similar arguments can be made for ethanol, by the way: Initially we were burning more energy to make ethanol than we were getting out of it, now we've tipped that, and it's beginning to pay for itself. However, in the case of ethanol, who are we really kidding to think that it is a best long-run solution?)

Wire Hangers and Rubber Rooms

Sooo, I always like to cite a couple of back-of-the envelope calculations (as well as harder-core ones) about the gains from trade. 6-8 years ago there was something floating around about the gains from trade that put it at about $50-60,000 per job saved. So we could have levied a small non-discriminatory consumption tax on all goods sold (regardless of country of origin), redistributed every cent to those "hard working ... American" (wink-wink) that would have been laid off by the "great sucking sound" and we'd all have a little more than we did with the trade restrictions.

Another story has to do with rubber rooms. Because of labor obligations, most US-located assembly plants for US-label cars "employ" a certain number of workers in rubber rooms, where they essentially drink coffee and... (???).

But check this one out. In the US wire-hanger industry about 250, er, Americans are currently employed, facing competition (mostly from China) and are protected by a tariff. The Economists blogging staff estimates that the cost of the tariff to US dry-cleaning firms is about $212,000 per job saved.

The Energy (Sub)Burble

Check this out from Krugmania... Keep in mind this is about Sydney, not Dallas, but it tells us a lot about the problems of urban planning in the US. Then there's this article about Los Angeles... Sooo, it got me thinking about an energy-economics article from a few years ago in the Quarterly Review of Economics & Finance (I have it in my office but I'm on the road now) that basically said that we are almost completely unresponsive in our long-term capital investments to the current price of fuel, but more responsive to the real historic high price. We only hit historic highs for gasoline a few months ago, so sometime in the next 10-15 years we might be beginning to reorganize our lives to manage the prices we're seeing now (and that's the good news...).

Cool It!

Just when I thought I was saving the earth by taking most of my news from online sources instead of getting print subscriptions to most things, I had to see this article. I hate it when being well-informed about things makes you think carefully and comprehensively about them. There has to be some quick easy free-lunch out there like a gas holiday that will make all of our problems go away...

Canary in the Coal Mine

It's always good to be on our toes and be in this economic struggle of scarcity, but let's not lose our heads. I've been saying it for a while. In Malthus' time of writing his Essay on the Principle of Population, it was that we would run out of the ability to feed our growing population. Then, it was that we would run out of coal in the late 1800s and that we would run out of oil in the 1970s. Now, we worry about Oil and Food, and this week the Economist Magazine urges us to study history more carefully and not go nuts. There is no imminent danger of running out of oil; there is no imminent danger of running out of fuels to run our economies; there is no imminent danger of running out of food. There is a greater risk from climate change than from either of these problems, and we can probably even come up with clever ways of managing through that with some innovations in technology.

Life is good.

No Monopoly on Stupid

Once upon a time there was a debate between certain Republicans and Democrats about a handful of barrels of oil. One side puffed its populist chest out and claimed how much it would help the honest workin' man by lowering the price at the pump. The other side took a careful look at the proposal and keenly pointed out that it would make almost no impact on the world price of oil. Both side seemed to have ulterior political motives at heart. Heard this story before? It took place in 2000 and the debate was over the opening of ANWR in Alaska to drilling for oil. George W. Bush on the one side claimed that releasing the reserve to drilling would push the price of oil down and help good ole workin folks; Al Gore on the other side claimed that it would have little or no effect on oil. Bush was receiving money and political support from the oil lobby who stood to gain from the deregulation of drilling and the subsidized pipeline; Gore was receiving money and political support from environmental lobbies who opposed all forms of environmental damage.

Now the roles are reversed as the debate rages over the strategic oil reserves. Bush is out there claiming that the price would go unaffected; democrats are making wild claims about how much halting the stockpiling of oil will save blue-collar Americans. The release of the oil (or the stopping of its stockpiling) would be mildly detrimental to the oil lobby by slightly reducing the demand for their output; passing the moratorium would give the appearance that the democrats have done "something."

Bottom line: Like I've always said, "no political party has a monopoly on stupid economic ideas." Its corollary is probably that when they stumble on a good one it's either unintentional or for the wrong reasons. When will folks realize that if oil is as scarce as some claim then higher prices are the appropriate outcome?

The Great Contrivance

I thought this article from a few months ago was interesting, and frustrating. People will lobby for anything – even the price of gold. I just don't get it. We don't back our internationally-exchanged currencies with gold because we've seen how it can, at times, put internal equilibrium on a flimsy house of cards, yet we hold gold in our vaults. Still more confusingly, we let the world gold council lobby the IMF, World Bank, and even individual governments to further their own interests and prevent the further sale of sovereign gold reserves (something that would depreciate the market price of gold) - successfully. Some of the things the World Bank and IMF did to try to bring transparency, credibility and market reforms to the countries the lent to was very helpful, but I can't imagine why anyone should give a rat's patoot about gold in a post-Bretton-Woods world.

Cases like this is what lead the "antiglobalizers" to feel as if there's a vast conspiracy against the developing world. When the ideology of the IMF and World Bank changed in the 1980s, it seems like all we really did was trade one form of corruption (one that was known) for another (that was shrouded in "credibility" and "austerity"). The strange habits of these institutions in these areas discredits unambiguously win-win reforms like trade liberalization and distorts public opinion against globalization.

Bill O'Reilly goes nuts on Inside Edition

Normally I try to post things that are more constructive than this, but I needed something fun today. Bill-O going nuts is too much to pass up.