today's brain teaser

What is the difference between a trained economist and a guidance counselor?

ANSWER: An economist needs a Ph.D. to tell you nobody pays the sticker price.

update: Cost of College says 1/3 of all college students are paying sticker price. I feel as if I know about half of them.

more college graduates = higher employment for non-college graduates

...a 10% increase in the number of people with a four-year degree in a given metro area was associated with a two-percentage-point rise in the overall employment rate from 1980 to 2000.

The benefit was particularly large for women with a high-school diploma or less. "The results are consistent," the author writes, "with the hypothesis that individuals accumulate greater skills from working in labor markets" alongside highly educated and trained workers.

Week in Ideas: Daniel Akst
December 28, 2012, 8:38 p.m. ET

paper:

"Human Capital Externalities and Employment Differences Across Metropolitan Areas of the USA," John V. Winters, Journal of Economic Geography (Dec. 10)

GiveDirectly

at Marginal Revolution

Here, too

And: MR likes Givewell for evaluations of charitable organizations.

related: One of my favorite books is William Easterly's The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good.

For me White Man's Burden was a page-turner.

pop quiz

What percentage of households have artificial Christmas trees?

ANSWER

not your father's bell curve

Sticky wages in 2011:

The tall bar in the middle represents workers who had a wage increase of $0
People to the right of the bar had pay raises
People to the left of the bar had pay cuts
Why Has Wage Growth Stayed Strong?
By Mary Daly, Bart Hobijn, and Brian Lucking

I've been meaning to post this for a while now.

I find this chart fascinating. I have never, not once in my entire lifetime, seen a curve that looked like this -- although they must be out there.

Here's the San Francisco Fed write-up:

Researchers generally point to asymmetries in the distribution of observed wage changes among individual workers as evidence of nominal wage rigidities. Figure 2 plots an example of this type of wage change distribution in 2011. The dashed black line shows a symmetric normal distribution. The blue bars plot the actual distribution of nominal wages.

The figure’s most striking feature is the blue bar that spikes at zero, indicating the large number of workers who report no change in wages over a year. This spike stands out in the distribution of actual wage changes, suggesting that, rather than cutting pay [in line with reduced earnings], employers simply kept wages fixed over the year. This is supported by the large gap to the left of zero between the actual distribution of wage changes and the dashed black line representing the normal distribution. This gap suggests that the spike at zero is made up mostly of workers whose wages otherwise would have been cut.

Once you start thinking about sticky wages, you see them everywhere.

For instance, Ed and I were watching an episode of Friday Night Lights a couple of weekends back, and the story line, which spanned multiple episodes, revolved around budget cuts to the schools. First the cuts were rumored, then the cuts were announced, and then there was rending of clothes and tearing of hair and parents mobbing board meetings to demand that cuts happen to other people's programs, not theirs. (And, yes, this sequence of events does sound familiar).

It was high drama.

Teachers would be FIRED!

Football teams would be MERGED!

Fire and flood, death and despair!

Two years ago, right up to the moment I found out about  downward nominal wage rigidities over the business cycle, ^* this story line would have made perfect sense to me. Like everyone else on the planet (including pick-up farm workers and their employers in India, apparently), I simply took it as a given that people can be cut but wages can't. In hard times, fear and loss (and television drama) follow directly from this belief.

But once you know about the money illusion, a school budget crisis loses most of its oomph as dramatic premise. Watching the pandemonium onscreen, I was unmoved. I kept thinking, "How about a wage freeze? How about a furlough? How about a wage cut?"

"How about everyone sit down and do some arithmetic and, while you're at it, figure out that it's not like the Dillon School District is a family where the sole breadwinner just lost their^** job. You've still got money coming in, you just don't have as much money coming in next year as you did this year. (Or, if Dillon is anything like Westchester County, you don't have as big an increase coming in next year as you did this year, but you've still got an increase.) So everyone's gonna have to make do with less, but nobody's gonna starve, not unless you insist on firing the young teachers so the old teachers don't have to take a cut."

No dice.

The story arc ends with teachers getting fired and football teams getting merged, and nobody says 'boo' about the possibility of 'shared sacrifice' and the like.

I realize that, in real life, employees do take freezes and furloughs to keep everyone on the job. But they don't do it often, as the chart reveals.

^* I have now consumed so much macroeconomics that I can read formulations like downward nominal wage rigidities over the business cycle almost as fast as I can read twinkle, twinkle, little star.
^**It pains me to write "the sole breadwinner just lost their job," as opposed to "the sole breadwinner just lost his job," but I think the time has come.

Clear as mud

I was just reading one of my favorite "market monetarists," (pdf file) Jose Marcus Nunes, who writes Historinhas. Apparently, the Fed is at last making its move to increase transparency.

The results - charts (pdf file) illustrating such arcana as the appropriate timing of policy firming and the appropriate pacing of policy firming - brought to mind my all-time favorite edu-chart: the strands.

more more middle class....

re: re: We all want to be 'middle class' and Speaking of the middle class

As part of not getting my stride back today, and inspired by my success at finally locating an income chart that includes medical benefits, I tracked down inflation charts on:

public education spending (and here)
college spending
health care spending

Gadzooks.

Good thing apparel prices have been falling or we'd all be walking around naked. Walking around naked or, alternatively, walking around fully clothed with a whopper of a student apparel loan to pay off.

And while we're on the topic of mind-boggling and rising prices for the big stuff, as opposed to reasonable and falling prices for the little stuff, why do I have to keep hearing about housing bubbles when the really huge bubbles seem to be tuition and health care?

speaking of the middle class

re: Grace's post "We all want to be middle class" (and other posts on this subject)

I finally found an income chart that includes medical benefits:

Concerned About Income Stagnation? Blame Rising Health Insurance Costs 

(I haven't fact-checked the chart.)

Every time I see articles about stagnating wages, I want to know whether benefits are or are not part of wages. Assuming benefits are not included in most estimates of wages, and assuming this chart is accurate, what we see is health insurance eating up what would have been a nice, steady series of raises.

Good thing we can all buy cheap electronics from China--!

off-topic (somewhat): Scott Sumner on targeting NGDP

Sumner: Nominal GDP Targeting Can Save the Recovery (video interview with Kelly Evans of the Wall Street Journal)

I can't remember when I first became convinced that the Federal Reserve should stop targeting the CPI PCE and start targeting NGDP (the sum of all current dollar spending in the US).

Maybe a year ago?

I bring it up today because the idea has abruptly broken through to the mainstream, and because the state of the economy will determine whether our kids have decent jobs after college (or any job at all), not to mention whether parents will have the money to pay for college in the first place. So now's the time.

I think about NGDP-targeting this way:

1.
The Federal Reserve has a dual mandate: price stability and full employment. It is required to pursue both.

Since the crash, we have had unusually low core inflation, lower than average inflation during the Great Moderation, which was 2%. Update 1/10/2012: PCE inflation has averaged 1.37% over the four years 2007-2012.

We have also had a catastrophic collapse in employment, which is not becoming any less catastrophic as the years go by:

This chart shows the percent of the civilian population that is employed. Before the crash more than 63% of the civilian population was employed; since the crash we have bounced between 58 and 59%.

2.
The chart above is, literally, an image of a depression. In it we see employment drop off a cliff, hit bottom (let's hope), and stay there. The chart makes it impossible for me to call the situation we are in a "recovery," a "weak recovery," a "faltering recovery," an "anemic recovery," a "limping recovery," a "recovery experiencing strong headwinds," or any other formulation that includes the word recovery. This is not a recovery. In my book, this is a depression: a minor depression, but a depression nonetheless. It's not getting better, and I don't believe that more 20-year olds acquiring STEM degrees will fix things.

More STEM degrees may or may not be a good idea; better K-16 education (I've expanded my horizons) unquestionably is a good idea.

Neither one is going to fix the chart.

3.
Why is that?

Since I'm not an economist, I have to choose which expert(s) to believe. And, after spending probably a year of my life reading the various explanations of the crash, I'm persuaded by Scott Sumner and the market monetarists, (pdf file) which is not to say anyone else has to be persuaded, obviously. I'm writing an amateur economics post on an education blog just to let you know about market monetarism if you don't already.

I'm convinced the market monetarists are right, and I want our federal overlords policy elites to stop targeting inflation, and start targeting NGDP, as market monetarists recommend.

4.
Wages are sticky -- sticky meaning wages can go up, but not down. (Wages are sticky in one direction.)

I live in a state, New York, where public sector wages are beyond sticky; here in New York, public sector raises are sticky. I'm tuned in to public sector compensation because I've been dealing with my district's budget crisis for a few years now, but wages are sticky across the board in every sector, public and private.

Sticky wages kill jobs. Period. Sticky wages kill jobs because when profits decline, some employees have to be laid off so other employees can maintain their current salaries. In theory, when profits (or tax revenues) fall, wages could fall, too, and everyone would still have a job. Companies would bring in less money in sales, so they would pay less money in compensation, problem solved.

In reality, when profits (or tax revenues) decline, wages stay put. So people have to be laid off.

I have had a front-row seat watching this process unfold here in my town. Where sticky wages are concerned, I don't need experts to explain the world to me. Sticky wages are real, I've seen them, they take away jobs.

Update 1/10/2012: human employees replaced by wolves....

5.
Which brings me to the Fed.

The Bernanke Fed strongly opposes deflation and will do whatever it takes to prevent it.

The Bernanke Fed also strongly opposes inflation (the cure for deflation), and appears to think that if low inflation is good, lower inflation is better. It's fine to go to 1.5% "core" inflation (CPI minus food and energy). It's fine to go to 1%. Two percent is a ceiling, not a target. Update 1/102012: The new 'ceiling' appears to be 2.5%.

At some point (where?) inflation is bad because it might turn into deflation.

Also, if you go into recession for 18 months, and "lose" all the inflation you would have had during that period, the Bernanke Fed thinks that's fine.

There is no such thing as an inflation shortfall in the Bernanke Fed, it seems.

6.
Real estate.

Housing prices, overall, are at 1990 levels.

1990.

The Bernanke Fed is a deflation fighter, and yet the Bernanke Fed has presided over a 25% deflation in house prices in just 3 years time.

7.
Given what we've been through, I conclude that neither real estate nor jobs are coming back as long as the Fed continues to target inflation. If the Fed is targeting 2% (or 1%) inflation, and we need 33% inflation (roughly) just to get back to where we were, then we're looking at the new normal. Since I personally see no way jobs can be decoupled from prices, that means jobs don't come back, either. Not for years and years and years.

Update 1/10/2012: Hamilton Jobs Gap Calculator

So I'd like the Fed to stop targeting inflation and start targeting nominal GDP, which includes inflation but is not limited to inflation. The beauty of NGDP is that it combines inflation and employment in one number. Double mandate, single target.

I'll post links to the market monetarist blogs and the various endorsements and counter-endorsements later on. In the meantime, Scott Sumner began his blog, The Money Illusion, in 2009. Within the past month Goldman Sachs published a report endorsing the idea, and Cristina Romer wrote a column agreeing. Brad DeLong and and Paul Krugman have both endorsed; at National Review, Ramesh Ponnoru was an early adopter and advocate.

Update 1/10/2012: Worthwhile Canadian Initiative has the easiest-to-understand explanation of why inflation targeting has failed -- and why "level" NGDP-targeting would succeed -- that I've seen so far.

^* I've just this moment Googled a line from Brad DeLong saying 1% is the new 2%.

help desk - fiscal multiplier

We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly negative long-run multipliers around -0.42. The multiplier is sensitive to the fraction of transfers given to credit-constrained households, the duration of the zero lower bound and the capital. The stimulus results in negative welfare effects for unconstrained agents. The constrained agents gain, if they discount the future substantially.
Fiscal Stimulus and Distortionary Taxation
Thorsten Drautzburg, Harald Uhlig
NBER Working Paper No. 17111
Issued in June 2011
NBER Program(s): EFG

I'm confused about the concept of the fiscal multiplier.

I've read explanations characterizing the multiplier as a simple multiple: if the multiplier is 1.5 and the government spends $1 million, then the net spending beyond that $1 million is $500,000.

1.5 x 1,000,000 = 1,500,000

But that's not right, is it?

What does a multiplier of .52 actually mean in terms of what the public spends beyond the amount the government spent?

what is the effect of the Triborough Amendment over the long-term?

I want to check my reasoning with all of you.

Yesterday the Times carried a long editorial on the subject of New York's public sector unions and the state's fiscal crisis, which included these two factoids:

In April 2009, private sector income was down 9%.
In April 2009, public sector employees were given a 4% raise.

and

Average salary for New York’s full-time state employees in 2009 (prior to April raises): $63,382
Average personal income in NY state: $46,957

State Workers and N.Y.’s Fiscal Crisis
New York Times
3/6/2011

I assume these two facts are connected by the Triborough Amendment, a statute that is apparently unique to New York state. Under the Triborough Amendment, when a public sector union contract expires, its terms remain in effect until a new contract is signed.

This means that raises negotiated in good times must be awarded in bad times, which explains the 4% raises paid out in April 2009. It also means that the union has little incentive to negotiate during an economic downturn.

From the Times:

Last April, in the midst of one of the worst financial crises that New York and the nation have ever faced, the state’s unionized workers got a 4 percent pay raise that cost $400 million. It came on top of 3 percent raises in each of the previous three years. These raises were negotiated long before the recession began, by a Legislature that routinely gave in to unions that remain among the biggest political contributors in Albany.

During the same period, many private-sector workers had their pay or hours cut. Private-sector wages in New York dropped nearly 9 percent in 2008. In 2009, Gov. David Paterson pleaded with the unions to give up the raises to help the state out of its crisis. Union leaders attacked him in corrosive television ads, and Mr. Paterson eventually caved, settling for an agreement that reduced pension payments to new employees. The deal wasn’t enough to address New York’s serious fiscal problems.

The Triborough Amendment was adopted in 1972.

Here is the line of reasoning I want to vet with you.

What is the likely effect of the Triborough Amendment over time?

To me, it seems that over time the relative position of public sector to private sector employees would change, with public sector employees moving ahead and private sector employees falling behind.

Over time, the gap between public and private sector income would grow larger. If private sector employees take income cuts while public sector employees receive raises (or, at a minimum, do not take freezes or cuts) -- then each time the economy recovers, hasn't the ratio of public sector to private sector compensation changed?

Then, when the next recession arrives, doesn't the ratio change again?

If so, is that why we see average salary of full-time public sector workers in New York state at $63,382 while average personal income is $46,957?

I realize this comparison isn't apples to apples, but given that public sector employee incomes are presumably included in the $46,957, the actual ratio of public sector to private sector income must be even larger.

What it looks like to me -- and please tell me if I'm not thinking this through correctly -- is a  decades-long redistribution of wealth from one segment of the middle class to another segment.

Or is that wrong?

Do the incomes of private sector workers somehow bounce back up to where they were before each recession while the incomes of public sector workers 'stand still' long enough for the ratio to return to what it was before the downturn?

public schools in the Great Depression

Three years after the stock market cratered in 1929, American schools suffered their own crash. School districts had managed to ride out the early years of the Great Depression; in fact, because many districts depended on property taxes, which didn’t crash as fast as income taxes, more than a few managed to increase spending.

But in the 1932–33 school year, many districts ran out of funds. With more than one in five workers unemployed, many households didn’t have the money to pay property taxes, so all of a sudden, the school boards didn’t have enough money to pay their bills. Some 2,200 schools in 11 states closed entirely—in Alabama, schools in 50 out of 67 counties shut down. Many more districts cut services or sharply reduced their hours; thousands of districts in the Midwest and South shrank the school year to fewer than 120 days.

Dire States
By Megan McArdle

I had never read this before...

Google inflation tracker

A second inflation measure comes from Web behemoth Google and is a pet project of the company's chief economist, Hal Varian. As reported by the Financial Times, earlier this year, Varian decided to use Google's vast database of Web prices to construct the "Google Price Index," a constantly updated measure of price changes and inflation. (The idea came to him when he was searching for a pepper grinder online.) Google has not yet decided whether it will publish the price index, and has not released its methodology. But Varian said that his preliminary index tracked CPI closely, though it did show periods of deflation—the worrisome incidence of prices actually falling—where the CPI did not.

Do We Need Google To Measure Inflation?
Economists are creating new methods for tracking prices.
By Annie Lowrey
Posted Monday, Dec. 20, 2010, at 5:10 PM ET

Interesting.

equation

Economists' Grail: A Post-Crash Model
By Mark Whitehouse
Wall Street Journal November 10, 2010

I love this.

21st century skills

One of the goals of No Child Left Behind is to increase the availability of data. Part of the implicit model underlying No Child Left Behind is that with improved information, parents will recognize good and bad schools. Principals will identify good and bad teachers. District administrators will identify weak and strong principals, and state  administrators will recognize struggling school districts. Armed with this information, parents will choose with their feet, and the other actors will undertake the necessary reforms to improve education.

As an empirical economist I am, of course, sympathetic to the use of data, and as a school board member I pushed for more thorough evaluation of our programs. But the gap between the rhetoric and the ability to use education data effectively is large.

Few school districts have the resources to analyze statistical data in even remotely sophisticated ways. In the early days of the Massachusetts Comprehensive Assessment System (MCAS) tests, I visited the Assistant Superintendent for Curriculum and Instruction who was anxious to use the testing data to help Brookline address its achievement gap. The state Department of Education had provided each district with a CD with the complete results of each student’s MCAS test. In principle, it would be possible to pinpoint the exact questions on which the gap was greatest. The problem was that no one in the central administrative offices could figure out how to read the CD. I loaded the CD onto my laptop and quickly ascertained that the file could be read with Excel. Shortly thereafter, our Assistant Superintendent attended a meeting of her counterparts from the western (generally affluent) suburbs of Boston and discovered that Brookline was the only system that had succeeded in reading the CD. Districts have become somewhat more savvy about using data. A younger generation of administrators has more experience with computers, but relatively few would be able to link student report cards generated by the school district with SAT scores and the state tests.

Principals, district administrators, and even state-level administrators generally begin their careers as teachers, and relatively few teachers have strong backgrounds in statistical reasoning. In my experience, the people who rise to senior administrative positions in public education are smart. They understand in a general sense that estimates come with standard errors attached, but faced with a report that last year 43 percent and this year 56 percent of black students in fourth grade were profifi cient in math, few could tell you whether with 75 students each year, the change was statistically signifificant.

When I stepped down from the school board, one of my colleagues joked that they could all go back to treating correlation as causality. In education policy settings, one repeatedly hears statements like: “Students who take Algebra II in eighth grade meet the profifi ciency standard in grade ten. We must require all students to take Algebra II in eighth grade.” “Students taking math curriculum A and curriculum B get similar math SAT scores. The curricula are equally good.” “Students who are retained in grade continue to fall further behind. Retention is a bad policy.”2

School administrators may understand at some level that they are only looking at  correlations, but almost none have the training to address the issue of causality, and faced with a correlation, they will often interpret it causally in the absence of evidence to the contrary. The capacity to address causality, weaknesses of various measures, and other strengths and weaknesses of statistics is very limited. The Public Schools of Brookline recently recruited for a Director of Data Management and Evaluation. Although school board members generally are not (and should not be) involved in personnel decisions other than those involving the Superintendent, in this specific case the Superintendent asked me to participate in the candidate interviews. Many of the candidates held or had held similar positions in other districts. I asked each candidate how we could decide whether a math curriculum used by some, but not all, of our students was effective. Many of the candidates did not think of this question in statistical terms at all. Only one addressed the issue of selection—and we hired him.

Measurement Matters: Perspectives on Education Policy from an Economist and School Board Member (pdf file)
by Kevin Lang

Apparently they don't cover Excel in ed school.

Journal of Economic Perspectives

back issues are free online

The Journal of Economic Perspectives (JEP) attempts to fill a gap between the general interest press and most other academic economics journals. The journal aims to publish articles that will serve several goals: to synthesize and integrate lessons learned from active lines of economic research; to provide economic analysis of public policy issues; to encourage cross-fertilization of ideas among the fields of thinking; to offer readers an accessible source for state-of-the-art economic thinking; to suggest directions for future research; to provide insights and readings for classroom use; and to address issues relating to the economics profession. Articles appearing in the journal are normally solicited by the editors and associate editors. Proposals for topics and authors should be directed to the journal office.

Online issues of the Journal of Economic Perspectives published since 1999 are now publicly accessible at no charge, compliments of the American Economic Association.

Goody.

words, diagrams, & math

Nick Rowe

quiz

financial literacy

[A]mong respondents age 50 and older, only half of them got the first two answers right and only one-third of them got all three answers right.

There's an interesting exchange about what schools should teach re: financial literacy.

And, if you follow the link to JumpStart, you find this:

In 2008, the Jump$tart Coalition also conducted its first national survey designed to measure the financial literacy of college students. The two surveys present contrasting results. The financial literacy of high school students has fallen to its lowest level ever, with a score of just 48.3 percent. The average score for college students on the same 31 question exam, however, was 62.2 percent, nearly 15 percentage points above that of high school seniors. In fact, if measured on the high school senior base of 48.3 percent, college students actually did nearly 29 percent better. In addition, scores improved for every year of college with seniors averaging 64.8 percent. The good news is that American college graduates are close to being financially literate and probably will be so with more life experience. The bad news is that just 25 percent of our young adults are graduating from college and this number appears to have stabilized. This means that 75 percent of young American adults are likely to lack the skills needed to make beneficial financial decisions.

and: interview with an online economics teacher

the unknown unknown

at Seth Robert's blog

Or should that be the known unknown?

Paul H: doomed!

We are truly doomed methinks. Many of the names that I see on my roster have to be misspellings in the delivery room. I have kids tell me that I'm spelling their names wrong so I go and look up their intake docs and sure enough, I had it right.

I don't want to put up actual names but some examples are; ett where the intent was eth, cha where the intent was sha, cr where it should have been chr. That's just the beginning.

Then you have what I call the 'theme meme', like a daughter named Chastity with a mom called Virgin (should it be the other way around, perhaps).

I'm not sure if these things are coming from deranged nurses or parents who can't spell. Either way, doomed!

Jim the Realtor seems to agree.