Unhedged economists are vulnerable economists

People the econ job market is pretty good. So it seems surprising that the University of Florida is defunding, and thus effectively killing, their PhD program in Econ as reported here.

But, it is perhaps not so mysterious when you consider the unhedged financial position of that department. As the article points out, it generates a lot of credit hours and tuition money from its classes, but most of those hours come in the Arts and Sciences College. Meanwhile, the Econ department is in the business school.

So its revenues accrue to one accounting unit while its costs are borne by another. No wonder the department has shrunk from 38 to 11 and there are plans to shrink it further still to 6!**

This is a classic case of unhedged risk, the academic equivalent of a firm who earns its revenues in Pesos but pays its costs in Dollars.

Note that the department was offered the option of moving to Arts & Sciences, "where, deans say, the Ph.D. program might have survived. The faculty voted not to move because, they say, the liberal-arts college has its own financial problems, and they were concerned about salaries, research budgets, and teaching loads."

My department at OU was in the B-school back in the day and faced a similar situation. They decided to move (or got kicked out, depending on who is telling the story) to A&S and our program lives to this day!


**Mrs. Angus says that if she was one of the 11, she'd be very careful about accepting a drink or any food from the B-school dean!

Hat tips to PrisonRodeo and RKG

Yikes! I married a free-market nut

Mrs. Angus goes full libertarian in her interview with the American Institute for Economic Research.

Here's one bit to whet your appetites:

Q: What’s the most important economic concept for the average person to understand?

A: Just because the market isn’t doing a great job at something doesn’t mean the government can do it better.

Amen, sweetheart, amen.

Economist Questions

AIER does an occasional post where they ask an economist to answer some questions.  Some of the questions are pretty serious, some more whimsical.

I gave it a shot. 

You Say "Profit" Like It's a BAD Thing

Profit:  I don't think that word means what you think it means.

Here is what LvM thought it meant.  Pretty interesting.

But now kids think it's a bad word, a bad thing, and that making profits makes you a bad person. 

Jesus said it best:  Profits are not without honor, but in your own country, and among your own kin, and in your own house,  Or something like that.

MicroWork Development

From the HBR....

What’s the best way to help the world’s poor? The answer may not be giving them more aid. What people need to break the cycle of poverty is work. A small but growing industry known as “impact sourcing” is addressing that need head-on by hiring people at the bottom of the pyramid to perform digital tasks such as transcribing audio files and editing product databases. Essentially, it’s business process outsourcing aimed at boosting economic development.

Impact sourcing is not unlike microfinancing: It aspires to create meaningful work for and put money in the pockets of the people who need it most. And because it connects new workers—often those who’ve been marginalized, such as Muslim women in Calcutta—to the global supply chain and addresses real needs of first-world companies, it could quickly reach a large scale. In a study commissioned by the Rockefeller Foundation last year, Monitor Group estimated that the market for impact sourcing was $4.5 billion in 2010 and would rise to $20 billion by 2015. It also predicted that employment in the industry would grow from 144,000 to 780,000 over the same period.

Nod to Kevin Lewis

Guide to Candy Trading

For you young economists out there (and for the Dub MOE, who takes candy from children)... The Guide to Candy Trading


Thanks to Eddie M.

Podcastration: Parasites

Got to talk to some of my favorite people:  Zach Wiener, of SMBC fame, and Kelly (Wiener)Smith, a really cool biologista and general science nerd-punk.

The theme, as Kelly put it, is this:  "how people parasitize economies and how parasites economize people."

The podcast.

The Koreas at the Olympics

In response to my Grantland Olympic piece with LeBron, a few people have asked why we didn't specifically discuss  the Koreas. Maybe I'm missing the question, but the basic economic model seems to explain them very well.

From the 2000 games to date (including what has happened in London), North Korea has won 20 total Summer Olympic medals, while South Korea has pocketed 101.

South Korea has almost twice the population of the North (48.5 million to 22.6 million) and a per-capita income that is more than 15 times greater ($31,700 to $1,800).

Of North Koreas 20 medals, 15 have come in weightlifting and judo. These are examples of the "easy-pickings" sports we discussed in the piece. South Korea is also strong in tae-kwon-do and archery.

The economics of labor and capital

Recently, the Economist argued that China's astoundingly high investment rate makes some sense because China is a capital scarce country with a very low level of capital per worker compared to the US.

This may well be true. It is certainly the case that it makes sense that China's investment rate is higher than that of a very capital abundant country like the US.

However, the article concludes with some amazing errors, both factual and economic:

the evidence suggests that China has not seriously overinvested. That does not mean rebalancing is unnecessary. Under China’s capital-heavy model of growth, owners of capital have been getting much richer than workers. The main reason for shifting from capital-intensive production to the more labour-intensive, consumer-friendly sort is not to sustain economic growth, but to reduce inequality. Workers could then enjoy more of the rewards of China’s past investment.

Where to begin?

First, as the graph in the article showed, relative to rich countries China is NOT engaged in "capital- intensive production" because they have very little capital per worker. I thought that was the whole point of the first part of the article.  They are decidedly engaged as a simple matter of fact in labor intensive production compared to countries like the US.

Second, if China stops accumulating capital, the owners of capital will continue to make a lot of money and worker salaries will continue to lag. Owners of capital are getting rich because its relative scarcity makes its rental rate high. If capital is paid its marginal product and marginal product diminishes, capital owners make a greater return when the capital stock is relatively small.

In order to raise worker salaries, workers need to become more productive. Part of this can come from workers' own investments in human capital, but a big part comes from the amount of capital per worker in the economy.

If China wants to reduce inequality between the earnings of capital owners and laborers, then they decidedly should NOT "re-balance" away from investment. Of course they should try and make sure that the investments undertaken actually raise worker productivity and are not state led vanity projects or boondoggles.

The greater amount of capital per worker, the higher is worker productivity, the higher will be wages and the lower will be the return to capital. That is the way to diminish the gap.

Raising China's capital per worker is crucial to raising the living standards of Chinese workers.

Weinersmith Hour

Very cool conversation with Zach Weiner (of SMBC note) and partner Kelly, together the "Weinersmiths." Had an hour of talk and discussion of economics. Zach sounded like he had terminal pneumonia, but it was fun nonetheless.

Minimalist Economics Posters

Some minimalist economics posters.

And, some more. New and improved: Now, with REAL econ!

Thanks to John-O!

Great Little Economics Story for Class

From Tommy the Tenured Brit, an example.  I have adapted it for teachers of Econ 101: This is a fine little problem to give in class, complete with video. The essentials:

• Bridge revenue is tax-free, by law
• Bridge toll is 80 pence, for multiple passages per day
• Bridge revenue is 2,000 pounds per week in the busy summer, less in winter. About 80,000 pounds per year
• Owner is responsible for upkeep and repairs on bridge and toll machinery, cost 15,000 pounds per year
• Bridge "comes with" cottage, land, and fishing rights
• The bridge just traded hands at a price of 400,000 pounds.  

1.  What is the implied discount rate (assuming that the bridge (with repairs), the tolls, and the tax break are all perpetual)
2.  Now assume that tax break is eliminated, the discount rate is the same as for #1, and that the effective average tax rate on the owners is 40%.  What would be the predicted change in price, or the capital loss the owners would be stuck with?
3.  Are the owners making a supernormal return because of the tax break?

Unless I have got me sums wrong, the answers are:

1.  16.25%
2.  New price would be 243,750 pounds.  So the tax break is worth 156,250 pounds
3.  Of course not!  The tax break is the reason that the bridge was worth 400k instead of 243k pounds.  But the implied rate of return is the same, because the tax rate is capitalized into the value.

Now, then, let's talk about capital gains taxes on investments in new plant and equipment, SHALL we?

Economists at Sea

Economists at sea...

Fourth, we must acknowledge the intimate, inseparable relationship between politics and economics. Modern debates about who caused the financial crisis—­government or the private financial sector—are almost ­nonsensical. We are living in an era of money politics and large powerful interests that influence the laws and regulations and their enforcement. In order to catalyze the evolution of economics, research teams would benefit from multidisciplinary interaction with politics, psychology, anthropology, sociology and history.

This makes sense to me. But then I was never a good enough economist to get a job as an economist...

More good news

Wow! The December 2011 jobs report is out.  200,000 net new jobs. Pretty good. Unemployment rate falls to 8.5%. 

Good news for president O. 

 

A Year in Review

I thought about doing a "year in review" post.

But I couldn't have come close to doing it this well.

So, with props to KPC friend Prof. Dave Collum, the year in review!

Warning: Contains Graphic Content

After this quite delightful little kerfuffle, Zach Wiener was kind enough to send me the original of this cartoon. Interesting Rorschach test: we learn something about YOU, from who you think is being mocked. This issue discussed at greater length here. (Hint: Zach always mocks everyone, including himself. He is not really a fan of false certitude, or ideologies. Check the crest here...)

Anyway, I got this for Christmas:

In the place of honor, right over the throne, so that men are obliged to stare it, and women will have plenty of time to look at it, too, while they are doing whatever it is that they do that takes 45 minutes in there. (Not very high quality, it's a cellphone pic, so if you want the original comic it's here...)

Christmas Wisdom from LeBron

"good regulation should take account of our rather extreme ignorance. That means emphasizing the more general protections, as embodied in a ready supply of safe liquid assets, rather than obsessing over the regulatory micromanagement of particular bank activities."

More here.

Fascinating Graph

As KPC pal Tim Worstall puts it, "Fascinating graph!"

He is quite right.

Sinvergüenzas!

So proud to be an American. Appalling links from around the nation.

1. San Fernando turns....your stomach.

2. Cook County prosecutors pursue case of man without FOID permit who had a gun. Even though he could not possibly have had an FOID permit.

3. Wrap rage: We need regulation of holiday packaging, because "Today's packages force consumers to fight tooth and nail to get them open."

4. Maxine Waters is going to make you miss Barney Frank. Really.

5. Robert Reich: The grease is gone, baby.

On the other hand, there is still some hope. Chris Coyne responds to OWS, in a brief and effective way.

And Mark Perry explains why Chinese "currency manipulators" are actually our friends.

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