Looking behind statistics

The skill of looking at statistics is a learned skill. Too often, people just take the numbers as is without trying to think deeper about what the statistics are telling them. The Economix blog on the New York Times posted the stats on marriage from the Census and how the different rates break down. A good exercise would be to have students look at the statistics try to figure out why they are the way they are. For example, why to people get married at different ages in different parts of the country.

Marriages, births & divorces all down

It seems that the recession is being reflected in the demography of the United States. In 2009, the number of new marriages, births and divorces all went down. The New York Times Economix blog has a good write up on this and the stats.

The decline of marriages and births are generally happy events, and the decline represents young people postponing these big mile stones by a year or two, when hopefully economic conditions improve.

But what about divorce? An earlier Economix blog post noted that financial stress increased divorce. Basically, that couples that fought a least once a week about money were 30% more likely to get divorced. With the recession and all the financial stress this involves, there should be an increase in the divorce rate. And most likely there will be... when the economy improves and couples can afford to get divorced. Or on a more hopeful note, the improving economy will help mend these damaged marriages (in that case, the recession might have silver lining).

How bad is housing? The worst.

The new existing home sale numbers were the worst...ever. Check out the chart below, it gives an indication of how far the housing market has fallen and how far it needs to come back to recover. Keep in mind that the tax breaks had the effect of getting potential buyers to "move forward" their date of purchase. That implies that the next few months (year) could continue to be bleak.

Mortgage Origination and the Housing Bubble

This is a good chart showing the types of mortgages (origination) during the housing bubble. It just shows percentages, so it does not give an idea of the changes in the net amount of mortgages during this period (which was also increasing and then crashing down). However, it does give an idea of how the bubble was expanded with riskier mortgages.

Policy makers and intro economics

Narayana Kocherlakota, the president of the Minneapolis Fed recently gave a speech saying that if the Fed keeps interest rates too low for too long it risks creating deflation. This statement has received a great deal of attention. The best blog on it, cited by both Krugman and Free Exchange blog on the Economist web page is Worthwhile Canadian Exchange that remarks "everyone should be forced to take Intro Economics".

New Federal Reserve Web Page

The Federal Reserve has updated and improved its education web page so that in links to all of the educational materials on the twelve different regional banks web pages. Here is the link: federalreserveeducation.org

Tragedy of the commons and space junk

Tragedy of the commons is a standard case for market failure. In the absence of property rights a resource will be over used and degraded. This is the core concept in environmental economics and economists have come up with all types of solution to this, including the program of "cap and trade" for carbon emissions (this is politically controversial, but pretty standard in economic theory). Here is a new example, that my really work with students who love their cell phones and the Internet). Space junk. The Free Exchange blog on the Economist web page has a great post about how space is a common resource and is becoming polluted with space junk. The problem is that too much space junk will ruin satellites that we have become dependent on for every part of modern life. Yet, because there is no incentive, nobody is seeking to protect this resource.

Hidden cost of low interest rates

Opportunity cost is the core of economic thinking. The tricky part of economics is trying to see all the possible alternatives and assess the costs and benefits of these alternatives. The current interest rate policy being pursued by the Fed is a good example of this. The extremely low rates of 0-.25% for Fed Funds is good for banks and those managing large debts that have adjustable rates, but is really bad for savers and people living on fixed incomes. The fact that this policy has been in place for several years and could continue for a long time is affecting people's investment decisions by encouraging people to invest in riskier assets. Gretchen Morgenson has a good column in today's New York Times about the effects of low interest rates and the hidden costs. While she does not make a good argument for raising rates, she does point out the costs that many people are currently ignoring.

Bleak view from abroad

The German magazine Spiegel online has a bleak view of the current American economy. While bleak views are not anything new and are hardly unique these days, the article and images are good because it gives an insight into how Europeans are viewing the current crisis.

Is efficiency a goal in itself?

Uwe Reinhardt has a good post in today's Economix blog about how economists view efficiency and whether that is a good thing. He does a good job explaining Pareto and resource allocation. He also does a good job at pointing out the weakness of this view and how it applies to current economic issues in which free market policies are pushed by economists because of the claim of efficiency - such as immigration and growing economic inequality. In my opinion, it is a good piece for students to read.

Two graphs to show depth of recession

How far have we fallen in this recession and how far do we need to grow to regain what we have lost? The reality is that the recovery will not feel like a recovery until we start closing the gap between potential and actual GDP - growth by itself is not enough because so much has been lost. These two graphs struck me as indications of the size of the loss.

The graph of the left shows the decline in retail sales. The one of the right shows net worth. The story it shows is connected to the negative wealth effect that is weighing down consumer spending. Basically, consumption has and will continue to be low because households are significantly poorer than they were prior to the crisis.

Getting up to speed on the crisis

Since the beginning of the economic crisis, the challenge with starting an economics course is getting the students up to speed with what has happened in the crisis. In contrast to the teaching before the crisis, students now come in on the first day with lots of questions about what is happening and what will be happening in the economy. The two problems with answering student's questions is that what is happening in the economy is really complex and nobody has a firm grasp on where the economy is going. This second part is largely because the focus and points of worry are changing so completely and so quickly. Think about it. Right now the big point of focus in deflation. Three months ago is was Greece. The history of this crisis is a whirlwind tour of economics.

As I begin to plan for the beginning of another school year, I am looking for articles that can get students up to speed on the current state of the economy. I do not want a big article that tries to cover everything (that is where books come in). Instead, I want an article that has the "signposts" of things students should be aware of and gives them an idea of where the economy is at and the big events that got it there. Today's news analysis in the New York Times by Floyd Norris does a good job of accomplishing this task - short and to the point. Something the students can read in a few minutes and then I can use a class period to take apart and explain.

Hidden Cost of Parking

Most of my economics students are in the process of getting, or have just obtained, their drivers licence. This pass to freedom is among their most cherished rites of passage. For high school students it is a big event to drive to school, as opposed to riding the bus or getting a ride with somebody else.

Many students quickly realize that the freedom of driving is hardly free. There is the large costs of gas, insurance and repairs.

On a side note, it is often sad to see how much time students spend working to pay for their cars. They often spend too much time working jobs, and not enough on school or sports.

However, one cost they do not think about is parking. The school I teach at provides free parking to students. Tyler Cowen in the Economics View column in the New York Times explores the real cost of parking and how there are many market distortions in parking. He notes how these distortions work as a subsidy meaning that the reality of free parking causes people to drive too much. It is a great little piece and I will be using it with my students this fall. It will be interesting to hear how they respond to something that cuts so close to their new found freedom.

Color Photos of Depression

While this is an economics blog and not a history blog, the two are not exclusive. Example, teaching about the Great Depression (which gets a lot of notice these days). The Denver Post has a good collection of color photos from the Depression. They really make the period come alive. While the images themselves may not have the same feeling of desperation as the more iconic pictures, the details in the color photos are amazing. Also, a key point to remember about the Depressions is that, like now, not everyone was in a soup line or living in a Hooverville.

Recession and Long Term Growth

Edmund Phelps has a good piece in today's New York Times about the need for thinking about long term structural issues in the face of the current recession. His point is that we should not think about the current recession as a problem of insufficient demand, but as a result of weak growth due to poor business investment. He sees a good recovery will only happen if there is a return to innovative growth. Interestingly enough, he also sees the need to create more low wage jobs to help the whole society enjoy the benefits of economic growth.

Two points on his ideas:

First, he tries to differentiate his ideas from those calling for more stimulus to increase demand. By this, I think he means Krugman and others. However, I do not see why the economic choices offered by Pheleps and those of Krugman have to be an "either .. or" choice. Why not both?

Second, he focuses on funding innovation and tax cuts for hiring low income workers. Good ideas, but do good innovative business ideas really need special support? Why not support education, which is most likely to create innovative ideas in the first place?

Public savings and private costs

The New York Times has a good article about cities going to extremes due to budget problems and scrapping entire services (such as buses) and cutting the school calendar. These types of stories are common these days. The good part of this article shows how the public savings were forcing individuals to pay higher private expenses. In the article, it is mostly less affluent people who are hurt. However, it does not take long to figure out that this higher cost should also affect wealthier groups.

There is a lot of talk about how consumers need to start spending to revive the economy, and that the root to this is raising consumer confidence. However, if services that people depend on are being cut, or are under threat of being cut, and the alternatives are potentially expensive, why would people choose to spend current income instead of saving it for unknown expenses. This is a big issue and a key part of consumer uncertainty.

You wonder how many people would be willing to pay higher taxes to get their services back.

Health Care: Positive and Normative Economics

The terms normative and positive economics are part of any introductory unit in economics, but usually they are not covered beyond that point. They are important concepts because they speak to the limits of economic decision making before it bleeds into areas of morals and values (which many economist seek to stay clear). I must confess that I seldom bring up the terms after the intro unit (I would further say, these concepts are not a significant part of my intro unit).

I think this needs to change. Doing more with the concepts of positive and normative economics is something I have been trying to work more in to my course. I have come to the conclusion that economics, and economists, would be better served if they were more clear about when they have crossed from positive economic statements based on models and statistics and into the normative world of values. Such a practice would also help clarify things for the public. However, I do not see this happening since making a argument based on normative economics seems weaker than one made on positive economics.

Because of my goal of bringing normative and positive economics into my course, I was happy to see Uwe Reinhardt's post "Is Health Care Special?" on today's Economix blog. The focus of the post is the health care market should function like any other market - basically, is health care like houses. However, this post is the first in a series. Still, it is good potential reading on normative and positive economics which ties it to other aspects of economics (particularly the work of Kenneth Arrow). The post describes how Arrow viewed the market for health care in the terms of perfect competition and Pareto optimality. I hope the second part is just as good, since it could be a good reading for reintroducing the concepts of normative and positive economics into the unit on market failure.

Sound of one hand clapping and the tax debate

Maxine Udall has a great post about road quality as a statement about the nature of our economy. She bases her post on an article from the Wall Street Journal about how in the Mid-west some paved roads are being converted back to gravel because the local government does not want to pay to maintain the roads. She expands on this to note how a viable road network is crucial to a strong economy and how the United States has been letting is road network deteriorate over the past few decades.

However, the focus of her post is a quote from a person living on a paved road that has been converted back to gravel, "I'd rather my kids drive on a gravel road than stick them with a big tax bill." Udall notes that poor roads might mean his kids having less income (fewer job opportunities) or somebody dying because the ambulance cannot make it to the hospital). Faced with the loss of these benefits, his children might prefer having a high tax bill to keep the benefits of a paved road.

The core of Udall's post is that the debate over taxes often focuses on the cost of the bill, paid individually, and not the collective benefits society gets from better public goods. For her, the whole tax debate is the "one hand clapping". Too much attention is focused on the cost (taxes in the future) and too little on the benefits forgone by not getting better public goods (again potential benefits in the future).

The only addition I would make is that often the total benefits of the public goods are undervalued. At the extreme are the cases of the Egyptian Pyramids or the Great Wall of China. These are both examples of public goods which have produced benefits far in excess of their costs (yes, I know people died building these structures and I am placing a value on their lives and the benefits produced now is revenue from tourism, which is quite different from the original intention of the builders, but these are still benefits). Basic point, on a cost-benefit analysis, both of these were great uses of taxes.