US Income Mobility and Growth

Conflicting data and interpretations are confusing our understanding of personal income growth over the decade of 1996-2005. Politicians are using the data and analyses that support their agenda: are we surprised? My view of the overall media and political landscape is that they are being overly influenced by data and analysis suggesting that US society is becoming more unequal in regard to income and that only certain individuals, generally the already-rich, enjoyed income gains over the last decade.

My colleague Matt Slaughter, recently with the Council of Economic Advisers, likes to point to US Census data from 2000 to 2005 that purportedly shows, in Matt’s words: “income growth has been extremely skewed, with relatively few high earners doing well while incomes for most workers have stagnated or, in many cases, fallen. Only 3.4% of workers were in educational groups that enjoyed increases in mean real earnings from 2000 to 2005…: mean real money earnings rose for workers with doctorates and for workers with professional graduate degrees (i.e., MBAs, JDs, and MDs) and fell for all others.” Surprisingly, the set of workers with just undergraduate degrees had no real income growth between 2000 and 2005.

That sounds pretty bad, and a lot of politicians are using the data to support their claims of rising inequality and the need for some redistributive policies. However, let us be clear about what the data actually show – or more important, what the data do not show. The earnings of workers who had doctorate or professional graduate degrees in 2005was higher than for workers who had doctorate or professional graduate degrees in 2000. Yes. But this does not say anything about any particular individual’s earnings. The people who were in the workforce with doctorate and graduate professional degrees in 2005 were different from the set of workers with doctorate and graduate professional degrees in 2000. The same goes for the set of workers that did not have such degrees – the people in that category in 2005 were not necessarily in that category in 2000. In fact, it is very likely – a certainty – that some of the people without doctorates and graduate professional degrees in 2000 had such degrees in 2005!

So what I have always argued in the face of these data is that they do not say anything about any specific individuals, in regard to changes in their incomes.

This kind of analysis and data can be useful. For instance, if we think the economy is in a steady state, with equal cohorts of people moving through the age and education ranks, then a decline in earnings for, say, undergraduate degree holders would suggest that something is happening to the value of undergraduate degrees. But I don’t think this is the world we live in. The set of people with undergraduate degrees is very different today than it was even five years ago: the mix of degrees is different, the age and experience of the workers is different, and even the gender of the workers is different (and we know there are income differences by gender). The data may only be telling us about the makeup of the set of workers with professional graduate degrees (or undergraduate degrees) and how that makeup differs between 2000 and 2005.

Suppose, for example, that folks with graduate professional degrees were just hitting their peak earning years in 2005, while those with only undergraduate degrees had been hitting their peak earning years in 2000. Then it would be natural to see earnings growth for graduate degrees between 2000 and 2005 and earnings declines for the undergraduate set between the same years (as in 2006, the undergraduate set would have relatively more “early career” workers).

A different study tells a very different story. I first saw the story
reported on the editorial page of the Wall Street Journal, and Matt Slaughter sent me the actual study, “Income Mobility in the US from 1996 to 2005,” which was done by the Treasury. I have not seen any other media references to this report!

The Treasury study tracks the same taxpayers between 1996 and 2005. This analysis is relevant if we are interested in how specific individuals change their income levels, both absolute and relative to others, as they age and gain experience. It is not an answer to the question of “how do people with undergraduate degrees in 2000 compare to those with undergraduate degrees in 2005” but instead to the question of “how much does an average or median worker’s income change over a ten year period?” I think this latter question is extremely important, as to a great extent it is people’s ability to improve their relative and absolute standing that governs their perspective on the overall fairness and justice of the society in which they live.

So what does the Treasury study say? First, that the median taxpayer saw a 24% increase in real income over this period. Second, that about half of all taxpayers who were in the lowest 20% of income earners in 1996 moved to a higher income quintile within 10 years. Third, that the degree of mobility between this decade and earlier decades is basically unchanged. Four, taking the very highest income earners, those in the top 1/100th of one percent, 75% of those were in that category for 1996 fell out of it by 2005 – and the real earnings of that category actually FELL over the period.

The overall picture of the US society from the Treasury study is one of significant movement between income classes, with a general increase in earnings for all classes. This is what we should expect. Ten years ago someone entering the workforce with an undergraduate degree in computer science might be making $30,000. Today they would likely be in the top couple percent of the income distribution.

What would be most distressing to me would be data showing that folks in the lowest income category in one year were extremely likely to still be in that category ten years later. This is definitely not what we see.

Another study worth looking at is the Pew Charitable Trusts study on the Economic Mobility of Families Across Generations. This study looks at the movement across income classes from one generation to another. I will leave readers to look at this on their own, but when I read it, I was very comforted to see the kind of movement from poor to rich and from rich to poor that I think characterizes a truly great society.

Vermont's Pot Paradox

Here's a problem to test our principles -- or to force us to choose which one is more critical.

In nearby Vermont, a 61-year old woman -- a defense lawyer, no less -- called the Vermont Fish and Game service to help remove a dead deer from her yard (some details are here.) Upon looking around her yard, they discovered numerous marijuana plants (at this time of year, probably nice and ripe!) as well as some dry ganja. Such actions -- growing and possession of relatively large amounts -- qualify as serious felonies, with up to 30 years in prison.

The local prosecutor declined to charge the woman with felonies, opting instead for misdemeanor charges and then even dropping those in favor of a court-supervised "diversion" program -- kind of like what teenage kids might get for possession of alchohol.

It is relevant that this local prosecutor, Robert Sand, has in the past spoken out against our country's drug laws, saying they are not working and arguing for decriminalization of drugs like marijuana. Hallelujah!

Ah, but...The law is the law, is it not? For a prosecutor, elected to enforce the laws of the State, to turn his head on what the State currently considers a serious crime...is that right? And did the prosecutor go easy because it was a 61 year-old woman, and a peer, in that she was a lawyer?

If Mr. Sand thinks that marijuana should be legal, I agree 100% with him. But I am not sure that given his job, he can do what he did. If he cannot enforce laws that he thinks are bad, then I guess he needs to resign.

Or is a little civil disobedience on the part of public prosecutors OK?

Thoughts anyone?

Economists Writing on Climate Change

A colleague passed on to me the link to a special issue of The Economists' Voice, an e-journal from the Berkeley Electronic Press. The special issue is on climate change, and features some notable economists -- Kenneth Arrow, Joseph Stiglitz, Thomas Schelling, among others (three Nobel winners there!). The link for the journal is here but I think you need to register to read the full article.

At least some of the articles refer to the Stern report, and the reviews of that report that I wrote about in my latest post. Arrow, for example, explicitly mentions critics of the Stern report, and their main critique (insufficient discounting of the future) but he does not mention them by name.

Unfortunately the articles in the BE Press do not live up to my expectations for the authors and they do not match the rigor and clarity of the Nordhaus and Weitzman articles in the Journal of Economic Literature. Go read the BE Press for yourself and compare it to Nordhaus' article, or Weitzman's, in the JEL. If you don't see the obvious differences, let me know.

Stiglitz does not address any of the economics of climate change but plows ahead with major policy recommendations anyway. Great economics!

Arrow mentions the discounting problem, and agrees with much of it, but at the end of his article he does some back of the envelope calculations and concludes that the benefits of stabilizing CO2 are worth the costs. I wish he had made his calculations more consistent with, for example, Nordhaus and Weitzman so that we could compare the assumptions and see where they are different. Arrow does some things for ease of calculation that strike me as questionable: he converts a loss of 20% of output beginning in the year 2200 with a lower growth rate of output between now and then. While the growth rate calculations work out, I am not sure that the utility/welfare of the different time paths are the same: the second scenario has output lower in all the years up to 2200.

Schelling, as usual, is rather good; I am a fan of his (read The Strategy of Conflict, his classic on game theory). Schelling is open about uncertainties, including those of water vapor and clouds, and he even mentions favorably the ideas of geoengineering. He also mentions that the "precautionary principle" has been likened to the principle of "never do anything for the first time." I like that! But the article is also marred with jabs at the Bush administration (come on, guys); he mentions extreme bad outcomes such as the sea level rising by 20 feet but does not mention extreme good outcomes such as little climate change, favorable effects on agriculture and low mitigation costs; and he ends with this oddity: "How should we respond to that kind of uncertainty? Wait until the uncertainty has been resolved completely before we do anything, or act as if it’s certain until we have assurance that there’s no such danger? Those two extremes are not the only alternatives!" (p. 5, Economists’ Voice www.bepress.com/ev July, 2007).

All in all, I remain very impressed with the Journal of Economic Literature articles and will look at the BE Electronic Press, at least this one journal of theirs, somewhat differently.

The Stern Review on the Economics of Climate Change: Blistering Peer Reviews

In the latest issue of the Journal of Economic Literature, two papers deliver devastating reviews on the Stern Review on the Economics of Climate Change. The reviews are by serious, mainstream economists: William Nordhaus of Yale and Martin Weitzman of Harvard. These are not individuals and articles that can or should be ignored. Of course, they will be ignored by the mainstream media – while at the same time Al Gore’s receipt of the Nobel Prize carries the media day.

The Journal of Economic Literature is the sister publication to the American Economic Review and is put out by the American Economic Association, the leading professional society for economists. Abstracts of the papers, and instructions on how to buy them, are available here.

I have always said that my objections to the prescriptions of the most vocal climate change advocates are on three levels: one, the climate models depend too much on positive feedbacks that are not understood; two, the models have not really been tested, but instead are calibrated to the historical data; and three, even if one accepts the models, one then has to move into the economics of optimal policy, and there the best analysis suggests relatively modest reductions in carbon emissions for the near term. I like to ask environmentalists to summarize their prescriptions with the appropriate tax per barrel of oil: tell me what you think the price of oil should be increased by, in order to recognize the impact of carbon.

But back to the reviews of the Stern Review. So the Stern Review made big headlines when it came out, as it was commissioned by the UK government and was ostensibly a serious analysis of the economics of climate change. Both Nordhaus and Weitzman deliver fatal blows, although they try to temper it a bit. Here is a quote from Nordhaus:

“The central methodology by which science, including economics, operates is peer review and reproducibility. By contrast, the (Stern) Review was published without an appraisal of methods and assumptions by independent outside experts. Nor can its results be easily reproduced…(this) does mean that fatal flaws in evidence and reasoning, which might have been caught in the early stages under normal ground rules, may emerge after the report has been published.”

Weitzman says,

“However, in my opinion, Stern deserves a measure of discredit for giving readers an authoritative-looking impression that seemingly objective best-available-practice professional economic analysis robustly supports its conclusions, instead of more openly disclosing the full extent to which the Review’s radical policy recommendations depend upon controversial extreme assumptions and unconventional discount rates that most mainstream economists would consider much too low.”

Now in the spirit of full disclosure, I recommend everyone look at the papers for themselves. Nordhaus and Weitzman go out of their way to point out the positive aspects of the Stern Review. But the overwhelming conclusion, especially from Nordhaus, is that the extreme policy prescriptions of the Stern Review are way overblown.

To summarize the contrast: The Stern Review calls for a carbon tax of $350 per ton of carbon in 2015. Nordhaus’ model, which has been peer-reviewed many times, calculates the optimal carbon tax in 2015 to be ONE-TENTH of that, or only $35 per ton carbon. I find it useful to put these quantities in terms of something we understand more readily: $350 per ton carbon converts to $1 per gallon of gasoline, while $35 per ton carbon converts to 10 cents per gallon of gasoline. We are talking big differences here.

So what is wrong with the Stern Review’s economics? It is real simple – they use an extremely low interest rate, close to zero. Everything follows from this, and in my opinion, the assumption is crazy.

The essence of carbon policy is that we incur costs today for benefits many years into the future. Changing our energy usage patterns will be costly for us today, and the benefits of lower temperatures come 50, 100 or even 200 years in the future. Any time you are considering investing today for benefits in the future, you have to consider the interest rate. Investments to stabilize climate should yield returns – a rate of interest – in the ballpark that other investments yield. If we can invest in human capital, for instance, and earn 10% per year, why should we invest in climate stabilization if it yields a zero rate of return?

Nordhaus has some great examples to illustrate the unreasonableness of using a zero discount rate for climate policy: “Suppose that scientists discover a wrinkle in the climate system that will cause damages equal to .1 percent of net consumption starting in (year) 2200 and continuing at that rate forever after. How large a one-time investment would be justified today to remove the wrinkle that starts only after two centuries? Using the methodology of the (Stern) Review, the answer is that we should pay up to 56 percent of one year’s world consumption today…In other words, it is worth a one-time consumption hit of approximately $30,000 billion today to fix a tiny problem that begins in 2200…the Review would justify reducing per capital consumption for one year today from $10,000 to $4,400 to prevent a reduction of consumption from $130,000 to $129,870 starting two centuries hence and continuing at that rate forever after.”

Another point in this criticism is the essential inter-generational fairness issue. Per capita income worldwide has been growing at around 1.3% over many decades – and this is the number that the Stern Review uses. At that growth rate, per capital world consumption will grow from today’s $10, 000 to about $130,000 in two centuries. Which generation is the relatively poor generation? Are we so sure that we are impoverishing our children and our children’s children? What about all the new technologies, institutions such as democracy and market economies, physical infrastructure, and knowledge that we are bequeathing them? Do we not think that people 200 years from now will enjoy more leisure, better health, better technology, and generally be better able to pursue life, liberty, and happiness?

Read the articles, they are really convincing. For most of the media, of course, that will be too difficult. Much easier to report on Al Gore winning an Academy Award – oops, I meant a Nobel Prize.

Vinod Khosla and the Invisible Hand

On Monday, October 15, 2007, I saw the invisible hand at Dartmouth College.

Vinod Khosla, a founder of Sun Microsystems and now a venture capitalist focused on renewable energy, gave a talk to Tuck and Thayer students and faculty. It was truly amazing. Khosla laid out his vision of how the world was going to transition away from a petroleum and coal-based energy economy to one that would rely on renewable, low-carbon emitting forms of energy. But more than just the vision, Khosla is part of the invisible hand of market economics, of what I recall so fondly from graduate school as “price theory.” Khosla is playing a fundamental role in bringing together the scientists, entrepreneurs, professional managers, and investors that are needed to form the organizations that will provide us our energy needs of tomorrow.

But the most important part of his talk was his incredible optimism, his beliefs in the power of science, entrepreneurship, and markets. He described some of the truly amazing technologies that he is funding, from designer cells that focus all their internal mechanisms on producing butane, to “sub-critical” nuclear reactors, to cellulosic ethanol, to significant improvements to the mundane old internal combustion engine.

Throughout it all, he focused on the pragmatic, and the scalable. He will invest in projects that may not become huge, but primarily he wants to develop sources of energy that can supplant significant amounts of petroleum and coal. I may disagree with his views on climate change (see my other post of today) but I don’t disagree that we do have to transition away, gradually, from petroleum and coal.

It was wonderful when he dismissed an engineer’s criticism of biomass energy on the basis of thermal efficiency. I have always thought that engineers focus way too much on process efficiency, in regard to what percent of some input source (e.g., wattage from the sun) is transformed to the final product. What really matters is the economic efficiency of the process – dollar value of inputs vs. dollar value of outputs. BTUs are not all the same – BTUs in the form of sunshine are not all that useful in economic life, but BTUs in the form of gasoline are valuable.

I left feeling invigorated, and confident that if our politicians do not restrict our freedoms too much, there is little that we cannot accomplish. Certainly my confidence in thinking that my children will be able to enjoy even better forms of heating and cooling, lighting, and transportation was tremendously enhanced.

Gore Gets the Nobel

OK, let's all give Al Gore due credit for winning much of the world over with his efforts over climate change. It is true, the fellow has been quite relentless on the issue for some time. Now he gets the Nobel Peace Prize.

I still don't quite understand the Peace Prize aspect of this. The original language in Alfred Nobel's will is "to the person who shall have done the most or the best work for fraternity between the nations, for the abolition or reduction of standing armies, and for the holding and promotion of peace congresses." The story with climate change is allegedly that changing weather patterns will cause new strife between nations, especially in regard to migration and fighting over water resources. Maybe. Maybe not. Seems to me like many of the predictions over effects of climate change -- might happen, might not happen, and if it does, might be easier to mitigate down the road than try to prevent right now.

At about the same time that Gore got the Nobel, a judge in the UK ruled that the UK government may send the film to all secondary schools and they can show it to students, but they must note that the film is politically one-sided and is inconsistent with even majority scientific opinion in places. The ruling was in a lawsuit filed by an heroic parent -- who won back 2/3 of his legal costs since the judge ruled that he substantially won the case.

Here is one quote from the "guidance" that teachers in the UK must be given if they are to show the film:

The High Court has indicated that schools can lawfully show AIT to pupils without
breaching ss. 406 or 407 of the Education Act 1996, but that, in doing so they must
bear in mind the following points:

• AIT promotes partisan political views (that is to say, one sided views about
political issues)
• teaching staff must be careful to ensure that they do not themselves promote
those views;
• in order to make sure of that, they should take care to help pupils examine
the scientific evidence critically (rather than simply accepting what is said at
face value) and to point out where Gore’s view may be inaccurate or departs
from that of mainstream scientific opinion;
• where the film suggests that viewers should take particular action at the
political level (e.g. to lobby their democratic representatives to vote for
measures to cut carbon emissions), teaching staff must be careful to offer
pupils a balanced presentation of opposing views and not to promote either
the view expressed in the film or any other particular view.


The entire guidance is available here.

Dr. William Gray, climate change skeptic and a very respected US meteorologist (the two are almost now mutually exlusive, to the detriment of science), has this to say: "We're brainwashing our children."

What Did Israel Bomb in Syria?

Mystery still surrounds the September 6 strike by Israeli aircraft deep inside Syria. Much of the mystery is that the event was initially hardly noted -- particularly that Syria itself did not even issue a complaint. Slowly now more information is coming out. At the time of the event, one telling comment I heard was that there was an amazing coincidence of interests between Israel and Syria in keeping their mouths jointly shut.

New reports suggest that that telling comment was true. Papers today are reporting that the Israeli fighters hit a partially constructed nuclear reactor -- a Syrian reactor being built, supposedly, with the help of the North Koreans. If this is true, it explains why Syria did not complain too loudly. Israel's silence, of course, needs no explanation.

Also of interest is the ease with which the Israeli planes accomplished their mission.

It may be, however, that the Israeli's acted too fast. Clearer evidence on North Korea helping the Syrians build a reactor would be helpful.

I bet we hear more about this event over the next months. It is one of those things that gets a tiny story at first, and when you read it, you think, like Bob Dylan in Ballad of a Thin Man: "Because there's something happening here but you don't know what it is..."

Lee Bollinger's Unfortunate Remarks: Ahmadinejad at Columbia

There is a speech I would not have looked forward to giving -- "welcoming" President Mahmoud Ahmadinejad to the Columbia campus. Luckily it fell to President Lee Bollinger and not to me. Talk about a no-win situation.

President Bollinger, who was Provost at Dartmouth for a few years, scored about 80% on my grading scale. Unfortunately, the areas where he slipped up were rather serious.

So much of his speech is right on the point. Put most simply, we do need to hear what our adversaries have to say. For all the critics of the Iraq war, one would think that there would be overwhelming support for getting the best information possible on Iran before that comes to war as well. And the US can and will take the high road: let our citizens hear Ahmadinejad out, and let them make political decisions. We have elections coming up (lots of evidence of that in Hanover tonight, with all the Democrats in town) and voters should be seriously considering who will best handle the Iranian situation.

But...why then engage in some pretty nasty name-calling? Why call the President of Iran a "petty and cruel dictator?" Why say "I doubt that you will have the intellectual courage to answer these questions?" Why the scornful "You are either brazenly provocative or astonishingly uneducated?" These are soundbites unbecoming of the President (or even a professor) of one of the world's leading liberal arts universities.

While many seemed to enjoy the sight of Ahmadinejad having to listen to Bollinger's insults, I actually have to hand it to the President of Iran for his response: "In Iran tradition requires that when we in a person to invite to be a speaker we actually respect our students and the professors by allowing them to make their own judgment and we don't think it's necessary before this speech is even given to come in with a series of claims and to attempt in a so-called manner to provide vaccination of some sort to our students and our faculty." (Quoted from the Washington Post transcript, with some obvious grammatical problems.) No doubt, Ahmadinejad is no intellectual light weight. Sparring with him would be a good fight.

I also think that Bollinger should have held back on the long list of complaints against Iran. Get up, say why Columbia is having him speak and why people should at least accept that if not be proud of it, and then give him the podium. Save time for questions -- the real learning was in President Ahmadinejad's responses to questions, not in President Bollinger's prepared remarks.

It was a tough situation to be in, with half of the listeners sure to be ticked off no matter what you did. The job of University President is not an easy one.

France Steps Up to the Plate!

What a difference an election makes. On Sunday, French Foreign Minister Bernard Koucher said that "the world must prepare for the worst" in regard to Iran and, when pressed, said that the worst was "war." See the Deutsche Welle's story. (Ah, the Deutsche Welle, that reminds me of when I used to listen to DW on a shortwave radio -- and the BBC, before I lost my trust in that service.)

While backing down a bit on Monday, France stuck to its guns pretty well, saying that since UN sanctions will never happen, a set of EU sanctions similar to those of the US are possible: see the International Herald Tribune.

Le petit Nicolas, as one of my French friends refers to the French President, is making quite a stir on the international scene. What a shame he wasn't around when the US had to serve the world and take out Saddam Hussein.

An Experiment in Adverse Selection

An article in Friday's Wall Street Journal, written by Chad Terhune, describes new health insurance policies being offered by some insurance companies. I can't give a reference to the WSJ piece, but another paper reports on it here. The ones offered by American Community Mutual Insurance are particularly interesting. They are targeted at the "healthy young" and offer low annual premiums, around $1000 per year. That doesn't get you much, however, as there is a rather small maximum benefit and a large deductible. What it does get you is the option to buy a much larger benefits cap -- up to $5 million -- if you do get sick and want to initiate the higher coverage. "Coverage on Demand," the company says. Of course, that additional coverage is expensive. It HAS to be, because only the ones who buy it will need it! So given the adverse selection that has to happen, is there a price that will allow the company to break even at least, and that will attract some customers into the program? Or at any price, will the only customers who sign up be so costly that the company will have to lose money? The higher the price of the "coverage on demand," the sicker and more costly will be the individuals who sign on. Or, maybe, the individuals who get sick will have enough uncertainty and be so risk-averse that they will buy expensive coverage even when their medical bills will not be all that large.

There is a large market of rational individuals who find medical insurance too expensive and therefore go uncovered, so I can understand the experiments at attracting them. And there are a lot of new plans coming out, especially as some states like Massachusetts require insurance. The fine print is going to lead to a lot of litigation, I predict: what maximum benefits really are, whether they were disclosed, non- covered conditions, etc.

Great case to cover in a class on the classic information economics problems of adverse selection and moral hazard.

General Petraeus and Ambassador Crocker

A few observations on the testimony today of General Petraeus and Ambassador Crocker. I listened to some, watched a bit on TV, and based on what I saw:

1. If the White House communicated as well as these two fellows (heck, half as well), these hearings would not be happening – because the Democrats would not be in charge of Congress.

2. The moveon.org ad in the NYT brings rational discussion to a new low. To refer to General Petraeus as General Betray Us not only gratuitously insults someone who appears to really care for our country, and obviously works hard at his job, but it demeans the debate over the war. Shame on them.

3. The Democrats are really scared, because they see that if they do indeed win the White House next election and keep control of Congress, any pullout from Iraq will be their decision – and they could well be in a position of explaining to their supporters why we have to stay in even longer. Political posturing is cheap for them now, but they realize that if they were actually in control, they would be making the same decisions.

4. I never understood why “exit” is valued so highly, even if we succeed in stabilizing the situation. I see tremendous value in having, say, a US military base on the Iran/Iraq border – something widely reported today. What, strategically, is bad about having 100,000 well-trained and well-equipped troops on the borders of Iran, Syria, Kuwait, and Saudi Arabia?

Apple’s iPhone Price Cut

So no sooner did I write my post below about how Apple rarely has sales, and they promptly cut the price of the iPhone by $200. I did not mean by “sales” the (anticipated) cutting of price after an initial product launch, but instead the kind of sales like “back to school” or “holiday” or “Labor Day.” Cutting of price after an initial launch can often be wise, and I like to refer to it as “temporal versioning.”

Versioning is generally the idea of offering different versions of the same basic product at different prices. If you offer a deluxe version at a high price and a basic version at a lower price, you can effectively price discriminate, with some folks buying the high-priced version and the more price-sensitive folks going for the cheap version.

Critical to this strategy is separation: the two versions have to be kept distinct enough so that the folks who like the deluxe version won’t see the cheap version as almost as good, and at the lower price, a better deal overall.

With temporal versioning, separation is also temporal -- the time between the high price period and the low price period has to be long enough to keep everyone from seeing the sense in waiting for prices to fall.

Apple seems to have not temporally separated its versions well enough. Nice strategy, but off a bit on the implementation. The consumer outcry is pretty good evidence of the error. Interesting, often when discussing price discrimination students will mention the anger when some consumers discover that others are paying a lower price (economists like to walk down an airplane’s aisle asking people what they paid for their seat). My response to this is often: who cares if the consumers are mad? With Apple, and the importance of repeat purchases, consumer anger could translate quite powerfully into lower sales.

The Irrational Allure of Liberal Songwriter/Singers

So Pete Seeger has written a new song, "Big Joe Blues" that recognizes Seeger's earlier errors in overlooking the evil of the Stalin/Soviet empire:

He ruled with an iron hand
He put an end to the dreams
Of so many in every land
He had a chance to make
A brand new start for the human race
Instead he set it back
Right in the same nasty place

I admit to a certain attraction to songwriter/singers like Seeger, Lennon and Dylan. I think it is the pureness of their idealism, no matter how wrongheaded it might be, I just have to admire it. "Imagine there no possessions." Well, I can imagine that, and it is not pretty, but I can understand what Lennon was trying to accomplish.

Steinbeck' stories are similar. A very socialistic message, but one that hits you very hard and that cannot be ignored.

Apple and NBC Disagree on Pricing

The New York Times reports that Apple and NBC disagree over pricing of NBC’s video content on the iTunes site. Apple prices all TV shows at the flat rate of $1.99; NBC wants more popular shows to sell for more and to be able to offer promotional prices.

Such disagreements are not surprising. Both firms have monopoly power, so both want to make a monopoly profit. Of course, from one firm’s perspective, a monopoly profit by the other firm is equivalent to a tax that reduces sales and revenues.

Right now, there is a standoff, with Apple not offering any new shows from NBC. Negotiations are supposedly continuing. Who wins will suggest to me just how important the iTunes site is to the content providers.

The other interesting observation is how little Apple uses promotional pricing. I am thinking of buying a new Mac, and there is really little reason to hope for a “back to school” sale – well, I guess they offered an iPod to college kids this year, but generally you might as well not look forward to any big sales by Apple. Interesting pricing strategy -- and of course there is also the uniform 99 cent per-song price that has also been criticized by some copyright owners. Why not adjust price on the basis of demand for a song? Thoughts, anyone?

The Great Quiet

Anyone notice the lack of stories in the press about deaths in Iraq? Or how the decision by Muqtada al-Sadr to have his army take a six month break has hardly been discussed at all?

These are the best signs that "the surge" is working. Those who want to pull out, and those who want to make the Bush war policy look bad, are running scared.

Pessimism Runs Rampant

Who can't help but marvel at the obvious attempts by the liberal MSM to cast a negative pall on anything that could be even remotely linked to the Bush administration.

Yesterday in the Valley News there was a lead above-the-fold article with a Washington Post by-line (authors Christopher Lee and N.C. Aizenman). Headline: US Poverty Rate Down .3% in 2006. The second headline: But More Americans Lacked Health Insurance.

The article goes on to offset any positive aspect with a negative counter. For instance: "While median household income rose for the second consecutive year in 2006, the increase appeared to be driven by a jump in the number of people in each household taking on full-time jobs, rather than a rise in wages."

In fact this is the first time this decade the poverty rate has declined, and it was accompanied with an increase in median household income of .7%.

Record Low Temps Again?

The record low temperature for Lebanon, NH on August 18 is 41 degrees, recorded in 1957, the year I was born.

The National Weather Service forecast for tonight is a low of....41 degrees.

I think I have to build a fire.

Apple turns the corner

One of the top electronic game makers, EA, has shipped two new Mac games and will soon be shipping two other popular titles written for the Mac (well, maybe not really written for the Mac, but deciphered from the Windows version).

While still not quite matching the release dates of the Windows version of the games, EA's step into Mac-dom is welcome.

One of Apple's weaknesses has always been the lack of certain software, especially in the gaming arena.

With a few more hits like this, the only remaining reasons for not switching to a Mac would be.........ummmmmmhhhh...

Bill, can you help me here?

Hanover High Cheating Scandal

At the local high school, Hanover High, nine 17-year old students (all males) have been charged with misdemeanor counts of criminal trespass and/or criminal liability for the conduct of others, in connection with the theft of final exams in math and chemistry courses. It sounds as if the kids hatched – and implemented – a plot to steal exams before test day, so as to be better prepared. I believe they also gave other students the exams as a gift, which causes one to further question the kids’ common sense (unless they sold the exams, which raises the old economics question of whether you can profit more from information by using it yourself or selling it).

I am sorry for the kids, but it certainly was not a very bright thing to do. And I would have to say that in my ranking of crimes, this is one notch worse than, say, colluding with another student to share answers. These guys not only (allegedly) violated academic integrity by cheating, but they also allegedly criminally invaded school property and stole something. Not good.

But, the most interesting part of this is that, naturally, some of the kids are children of folks we know. I will resist any urge to engage in schadenfreude, for the usual “there but for the grace of God…” reason. However…one of the poor kids is the son of Jim Kenyon, a notorious columnist for the Valley News. This is the guy who never misses a chance to tear into Dartmouth and generally side with the forces of bleeding hearts and evil. His column is one I never miss, and much like Paul Krugman’s, it never ceases to raise my ire. The last one he wrote got me upset because he criticized our local food co-op for having a 60-year old woman arrested for shoplifting (she was later acquitted by the judge). The co-op should have shown mercy on a nice old lady, Kenyon said; my reading was that he has one kind of justice for people he knows and likes and another kind of justice for outsiders and “ne-er do wells”. Nothing like a little discrimination, eh?

Perhaps Mr. Kenyon knew when he wrote that column that his son was being investigated for his own form of shoplifting?

The Valley News had some quotes from Jim Kenyon regarding the incident and his son:

He said Hanover High School’s “high pressured academic culture” leads to widespread cheating.

“The entire community must be willing to take a hard look at how it might have unwittingly contributed to this problem and work together to find solutions.”

Kenyon said the school’s cheating problems “do not begin or end with the final exams now in question.”

Give me a break, please! So we are to sacrifice our academic ambitions because nine kids can’t resist the pressure to steal exams? And this is not mainly the problem of the kids and their families, but of the entire community? Yes, society is to blame, competition is evil, we are not responsible for our own actions, we all have to work together…blah blah blah.

The Fed to the Rescue

The Federal Reserve today singlehandedly created a 2% rally in the stock market and put to rest at least some fears of a credit crunch. I applaud Ben Bernanke and his colleagues’ move.

The critical distinction here is between bailing out investors who made bad decisions versus preventing a classic financial panic, of the “run on the bank” variety. I give my vote to the idea that there was indeed risk of a credit crunch, with a cascade of negative opinion creating feedback that was preventing capital from flowing to positive net present value projects.

The classic bank run occurs when depositors come en masse to a bank, demanding their deposits. These deposits are not, of course, in a vault at the bank but instead have been lent out to borrowers, with only some small percentage kept close at hand. If too many depositors demand their account balances, the bank must begin calling its loans, and therein lies the contagion effect.

In today’s market, the problem is not so much with traditional banks. But consider an investment bank like Bear Stearns. Bear Stearns discloses that one of its in-house investment funds held mortgage-backed securities that has declined in value so much that the fund is worthless – presumably the fund managers had leveraged their investments, so a relatively small decline in value could wipe out the net assets of the fund. Once disclosed, and given the overall worries about mortgage-backed securities, negative sentiment about Bear Stearns increases. In the normal course of business, an investment bank needs to borrow large sums of money to finance its activities. But given the concerns, and lack of knowledge of how bad the problems really are, who will want to throw money into a pot that might turn out to be rather empty? Afraid of being the claimant of lowest priority, nobody wants to lend money to such an institution under almost any conditions. This causes the investment bank to reduce its activity in a whole host of areas, and to sell assets it otherwise would hold, in order to raise funds. The vicious cycle begins, with lower prices in asset markets putting other institutions at risk…

I have been hearing from friends on Wall Street since at least June of the funny conditions in the credit markets. Credit was drying up, in the sense that lenders were just saying no, rather than just increasing prices by a reasonable amount to cover new risks.

It is funny how long it took for those fairly wide-spread debt market fears took to spread to the equity markets. One of those (many) instance where if only I had known for sure, I could have made some money. Ah, but how many times have I suspected some disaster only to see stock markets rise thereafter? Much better to buy and hold.

What the Fed did, in lowering the discount rate, was really quite genious. Very little additional credit will enter the economy as a result, and what does enter can be offset at an opportune time via open market operations.

But the Fed showed investors that they do understand that conditions are unusual and that there is a risk of a credit crunch. Credit crunches, panics, and runs should be prevented, and that is the job of the Fed. Bailing out mortgage bankers who loaned 100% of a home’s appraised value to buyers without verifying income is not the job of anyone.

By the way, I know folks in Hanover who had to pay for private mortgage insurance when they bought a house, and these are people with great jobs and in a great housing market. How is it that people in Florida and California are getting by with 100% loan to value mortgages, no income verification, and no PMI??