Badminton economics

August 1, 2012

One of the most basic principles of economics is that individuals respond to incentives.  This concept seems to not be understood by the Badminton World Federation. This group has structured a competition in which losing a game increases your chances of winning a medal. When 4 teams of players from Indonesia, South Korea, and Indonesia responded rationally to the incentives that were designed by the Badminton World Federation, all 8 players were disqualified. .If the goal of the team is to win Olympic medals, does it make sense to penalize players for behaving in a manner that is designed to increase their chances of winning a medal?


If one designs a system in which teams enhance their chances of winning by losing selected games, it strikes me as remarkably unfair to penalize the players that pursued a rational strategy. If anyone is to be punished, shouldn’t it be the people that designed this system?

Mobile apps for Academics

June 3, 2012

Judie Littlejohn and I had a presentation at CIT 2012  on mobile apps for academics. A list of mobile apps that we have found useful can be found here.

Obama and the job market

June 3, 2012

The June 1 jobs report suggests that the very tepid recovery has stalled. This is not much of a surprise to most economists.  Consumer and investment spending have been growing slowly, state and local government spending has been stagnant (at best), and federal spending has been growing at the slowest rate in decades. Firms will not produce many more goods (and will not hire many more workers) unless they can sell more. This should be fairly obvious, but there is a substantial disconnect between reality and popular perceptions.

Romney is touring the country and complaining about the rapid growth of federal spending under Obama. Yet, as reported in the Wall Street Journal on May 22, 2012, federal spending has been expanding at an annualized growth rate of 1.3%, the slowest rate of growth in federal spending in many decades (see the chart below).


chart of federal spending under several Presidents

5/22/2012 Wall Street Journal chart of spending growth

As many economists noted at the time, the initial stimulus plan was too small, and was a bit too late, to ensure a prompt recovery.  The tepid pace of the recovery is about what was predicted by the Congressional Budget Office and most economic models at the time.

The consensus among Republicans seems to be that spending (on everything except defense) should be cut so that taxes on millionaires can be lowered. Since millionaires are already paying the lowest tax rates they have experienced in nearly a century, this is a rather remarkable argument. There is, of course, no evidence suggesting that further tax cuts would be as effective as an increase in government spending in leading to a more rapid recovery. Yet, it seems to be strongly supported by many millionaires. Perhaps, as suggested by Romney, opposition to policies designed primarily to benefit the extremely wealthy is just a sign of envy on the part of those who are unemployed.

The Federal Reserve has been doing nearly all that it can. It’s time for the fiscal authorities to take action. That is not likely, of course, until after the next election. Unfortunately, November is still quite a ways away..

Supreme Ignorance?

March 29, 2012

During yesterday’s testimony on the ACA, Solicitor General Donald Verrilli tried to explain why the existence of a growing share of uninsured individuals raise health care costs for everyone else. The basic issue is that society as a whole already bears the cost of providing health care to those without insurance. Hospitals do not turn away uninsured individuals that show up at emergency rooms bleeding or experiencing a medical crisis. The cost of this treatment ultimately is covered in the fees charged to those who are able to pay for medical services (out of their own pocket or through private insurance, Medicare, or Medicaid). This, of course, raises the cost of private insurance plans. This issue, along with the adverse selection problem, makes the cost of health care out of reach of a large share of the population. The adverse selection problem, of course, disappears if everyone has health insurance. Upon hearing this argument, Justice Scalia stated:

“….you could say that about buying a car. If people don’t buy cars, the price that those who do buy cars pay will have to be higher. So you could say in order to bring the price down, you are hurting these other people by not buying a car.”

This analogy is rather baffling. Does Scalia believe that car dealers give new cars to low-income individuals that cannot afford them and pass the cost on to other car buyers? Does he believe that a reduction in market demand raises the price of cars? Is this just a case of supreme ignorance of basic demand and supply? Or has he just spent so much time listening to Fox News that his reasoning ability has deteriorated?

In any case, Scalia’s statement suggests that we have quite a ways to go in improving economic literacy.

Mobile computing

December 27, 2011

Forbes reports that iOS devices accounted for 13.4% of online sales on Christmas day (7% were made from an iPad). Android devices accounted for 7% of Christmas day online sales. While most of this is probably due to people loading new apps on their new tablets and smartphones, the rise of mobile computing is moving at a remarkable pace. The last few months have seen the introduction of a growing variety of $100-200 android tablets and free (older model) iphones and android phones with the purchase of a 2-year contract.

It will be interesting to see how higher education will change in response to the widespread availability of low-cost mobile computing. Will faculty see cell phones and tablets as nuisances to be banned or as useful instructional tools?

Liquidity trap economics

August 11, 2011

As Congress and the President continue to struggle over who can create the most damaging fiscal policy, the Fed announced that it will work alone to try to provide some economic stimulus. Unfortunately, this policy is likely to continue to be ineffective.  The graph below explains why.

Providing low-cost reserves to the banking system will have no effect if there are no additional profitable lending opportunities. There will be few profitable lending opportunities when we have so much excess capacity and such sluggish growth. The dramatic growth in excess reserves illustrates this problem very well.

It seems that U.S. policymakers have learned nothing from the lessons of the Great Depression, nor from the more recent experience of Japan and Europe. Monetary policy was remarkably effective since WW II in reducing the magnitude of cyclical fluctuations. The liquidity trap, though, has returned with a vengeance.

I suppose we should be grateful that those charged with monetary policy are not working to make the economy worse.

FoxBusinessNews assigns fiscal policy to the Fed

March 17, 2011

In one of today’s “fair and balanced” reports, Fox Business News has just placed the Fed in charge of fiscal policy. I hope that they take this more seriously than Congress seems to be.

(Do they have no one there with even a high school understanding of economics? Or can they not afford the compensating wage differentials that would be required to force someone with any knowledge of economics to read through their stuff?)