Saturday, June 30, 2007

Facebook vs Myspace

Apparently Facebook users are more educated that Myspace users. The answer lies in how the two systems evolved with their customer base.

Good application of supply and demand

Professor Greg Mankiw applies basic supply and demand theory to a NY Times article. Click Here

Sunday, June 17, 2007

NY Times and interest rates

If you read the NY Times Business section last friday, you would have thought the sky was falling. Click here for the article.

"Homeowners are not the only ones who will have to swallow higher costs. Corporations, accustomed to financing operations with cheap debt, will see their expenses rise, cutting into profits. In addition, rate increases will crimp the private equity buyout boom, which has been fed in large part by the heavy issuance of corporate debt at low rates"

But the Times should have focused more on this sentence:

Stocks have so far shrugged off the jump in interest rates. The Dow Jones industrial average closed at 13,553.72 yesterday, up 71.37 points; the average is 0.8 percent below its high of June 4.

Sure, the negative interpretation of rising interest rates has some bite. All else equal, rising interest rates should dampen housing demand, constrain business activity and dampen growth.

However, there is a positive spin to this that should at least be mentioned. A positive interpretation would mention that after a weak Q1 growth rate of 0.6% annualized, the markets are now expecting Q2 growth to accelerate at a 3.5-4% annualized rate. Increased growth means more borrowing by consumers and business, shifting the demand for capital, and hence interest rates, up.

My theory has just received a thumbs up from Professor James Hamilton over at Econbrowser:

Moreover, if this were purely a rise in real rates induced by either international factors or the Fed, I would have expected to see stock prices fall significantly. If expected future profits and dividends are held constant and the rate at which they are discounted goes up, the stock price would have to fall. Yet we have seen stocks hold their own, even as bond prices plunged, suggesting that rising yields have come at the same time as rising expectations of future profits and dividends.

Let this be a lesson that you should read the business press with a high degree of skepticism. Reading the business section does not constitute an alternative to paying attention and learning the theories.

Tuesday, June 12, 2007

Income Inequality.

This article has an interesting take on rising income inequality in the Western World, with particular focus on the United States.

A couple of points to elaborate on. The study that removes the effect of young and old workers can be read, in plain English, here.

Some interesting conclusions of the article:

A majority of Americans have no credit card debt. And of the 46 percent of Americans who do, the Federal Reserve's Survey of Consumer Finances says the median balance is $2,100. Moreover, Pew surveys from 2004 through 2006 found that only 9 percent of Americans said that they "owed a lot more [in credit card and installment debt] than they could afford."
Middle class assets are up. Real median net worth for all households rose from $69,000 in 1989 to $93,000 in 2004 -- an increase of 35 percent.
Most household debt is mortgage debt. Mortgage debt as a share of total debt has increased from 71 percent in 1989 to 79 percent in 2004. For the vast majority of people, their major source of wealth is equity in their home.
Bankruptcies are rare. Only 1.5 percent of households declare bankruptcy in any given year.

The data on income inequality is also extremely interesting. On the one hand income inequality is most definitely on the rise.

On the other hand, consumption inequality does not look to be rising as fast. (This can be explained by economics using a lifetime earnings model. Since consumers attempt to maximize total consumption over a lifetime, they will often borrow/save in order to smooth their consumption over a period of years, ignoring periodic up/down swings in income. Since the market has become more efficient in allowing this--think Credit Cards, ATM's, ARM Mortgages---it is reasonable to believe that consumption inequality will be less than income inequality).

On the other hand, the rise in income inequality is an interesting phenomenon worth thinking about. In my opinion, the reason is a combination of technological changes and the superstar phenomenon. In other words, technology has amplified the returns to skills of certain performers.

As to the political implications of rising income inequality I am less certain. On the one hand, the Robber Barron's error could cause a large amount of political strife. On other other hand, do you feel more envious of Bill Gates earning USD50bn or the fact that your neighbor just got a raise to USD100 thousand and is now making more than you?

Of course if there was more equality in the education system then income mobility would likely be higher. But that is not the case right now. It is also the case that we could have a more efficient health care system. But that is a a whole other topic and debate.

Monday, June 11, 2007

What does Economics do to your political leanings

Brad Delong, an economist at Berkeley, has an interesting post on the value of neoclassical (read orthodox) economics here . In one sentence he believes that neoclassical economics is of value to everyone from the center on left since it tempers the lefts radicalism while it is poison to anyone on the right since it radicalizes their views.

Bryan Caplan suggests that the data says otherwise. I would have to agree. Personally, I believe that economics makes you think harder about your political leanings and de-radicalizes your beliefs. For instance, people on the right who have studied economics are more likely to support more immigration than those who do not (with exceptions of course). Meanwhile, leftists who study economics are less likely to support nationalization of key industries and are less likely to see impending doom to driving cars. This does not suggest that either side abandons their beliefs, but their views are more reasoned and easier to accept to the opposing side.