Tuesday, September 22, 2009

Blog Comments

I have a policy not to respond to comments in the comments section. Its not because I do not care about the opinions of others (I do that is why I have comments), its just because sometimes it could lead to a lengthy debate on the comments section, which I would like to avoid. However, I do want to respond to your comments, and seems like my blog readership has gone past my known group of family and friends (which is really flattering). So, I request comment writers to leave a valid email address where I can reply to your comments, until I figure out a better way to do this. Thank You all for your interest in my blog.

Saturday, September 19, 2009

Colonial History of India

History in general and Economic History in particular fascinate me. I enjoy reading historical narratives, especially Indian Economic Historical narratives. However, every time I read these I also end up being frustrated at the contradictions, lack of triangulated evidence and statements that do not make economic sense. The most common story I read is that the British followed Laissez-faire policy and did nothing towards protecting against adverse trade in India, and that is why India is so poor. The second common story is that the British exploited India, forced raw material export from, and manufactured goods import into India. Here are some questions I have with these claims:
  • If the British followed laissez-faire policy and did nothing to protect trade, then it should have affected Britain also. To the contrary, if they had policies that ensured that british merchants who traded with India had subsidies and special privileges then that is not laissez-faire policy. That is domestic industry protection!!
  • Secondly, how can they force Indian merchants to sell abroad or export? After all if these traders were getting a better price domestically they would have sold it domestically right? Even if there were middle-men that bought cheap from domestic traders and arbitraged it higher to the export market, the domestic traders would not have traded at a price lower than what they would have received for it domestically right!! How is that forcing them or making them worse off? What am I missing in this line of thought?
  • Thirdly, the other side of the export argument which is the forced to import manufactured material from England and that forced local hand loom sector to die. Again, I would imagine industrial manufactured items have a higher value added that the textile manufactured by the local weaver with his hand loom. So, imported textile would be more expensive that the local textile. If the population was poor how could they afford it, except for the few elite who had the money to do so? Besides, how can someone force me to buy anything except at gun point? To the best of my knowledge the British did not do that. They may have imposed taxes on all kinds of things like salt and what not, but I do not think they made people buy textiles at gun point!!
These are the most important things that have jumped at me at my current reading. I think a lot of colonial history in India is marred with nationalist attitudes. It is inevitable that the economics and politics are entwined in such a way, because when personal freedoms were at stake, individuals were willing to over-look the economic in the fight for freedom. I would do the same as well. However, when we study economic history, I think it is important to at least make the concession that part of the logic used against manufactured goods from abroad a century ago in India was nationalistic and not purely economic. There is no denying that the Indian freedom struggle deserves its place in history. But, I do think that economic historians of India should be careful about parsing out the economic and the historical/political reasons, and be able to substantiate with evidence.

Sunday, August 30, 2009

Who gets the PF?

Provident Fund (PF) is a form of Social Security in India. Employers and employees each contribute 12.5% of the Gross Income into this kitty, so that when the employee retires she gets the accumulated savings from her lifetime income. Casual labor is highly prevalent in India, especially in the construction industry where a good percent of the laborers are migrants who move across cities and states based on the demand. Until about 10 years ago, only salaried employees (aka those that get a pay-check once a month) were required to be enroled in the PF program. However, a decade ago, a new law was instituted (in the name of protecting contract labor) that made it mandatory for employers to start PF for casual labor as well. This is a ridiculous policy, since these employees do not have any permanent address, they are mostly illiterate and do not have bank accounts (PF funds are deposited only in bank accounts by the government at the time of maturity). Neither the laborers nor the contractors were happy with this situation and the contractors challenged the law in the courts. After 10 years of fighting, they lost. The contractors' argument (a very valid one) is that there was no way for them to track down these individuals to give them their PF when they retire. They asked the government to put in place a system to give these funds out and promised to contribute to PF once the system was in place. The government's answer.. "It is not your problem how the PF is given away. Your problem ends with depositing the funds with the government".
Of course to us economists it is obvious that these are enormous rents. Here's another twist to the story. The laborers do not care for the PF, all they care about is their money. So they have made it very clear to the employers that if their income is Rs.100, that is what they should get, not a penny less. So, the employers are doling out the entire 25% of the PF into the government kitty, and employing fewer contract labor. In addition, they create bogus employee records with the names of their current employees' family members, open accounts in their name, wait a coupla years, terminate the employee and get the money back.
What a shame and what a waste of entrepreneurial talent!!

Thursday, August 13, 2009

Nuggets of Economic Wisdom

I am constantly amazed at the wonderful grasp of economics the common Indian citizen has. In another wonderful conversation with my flatmate's parents, his mother demonstrated a keen grasp of the importance of incentives. We were talking about the construction boom in India and uncle told us how difficult it was to get labor to meet the demand for construction in their city Nagpur. I wondered why there was no migrant labor from North Indian states! Labor migration is common in India, and its not surprising either cause most migrants are from some of the poorest districts of the country. So it was surprising that even migrant labor was scarce these days. That is when aunty dropped this wonderful piece of information and tied it all economically. She said that the unemployed in those regions were now being awarded unemployment compensation. Thus if they were going to get money and food just to sit at home why would they migrate in search of work. I was totally amazed. Here was someone who had not had a single course in economics, who had been a house-wife all her life and yet understood economics so well!! If only the policy makers had half her economic wisdom India would become an advanced country in no time.

Wednesday, August 12, 2009

Property Rights in India

Last night my flatmate and I were discussing Indian Economics and Politics with his parents. He mentioned a property rights case his uncle is fighting in the courts that gives a clear indication of the nature of property rights in India. His uncle owns ancestral property in a North Indian State. The property includes a house and some land around it. Since the family has moved away to live in a different city, they used the house as an occassional vacation home. A little over a decade ago, the state government approached them to rent the property. They had no plans to rent the place and so they declined the over. A year after this episode, someone visiting the village noticed that the house that was supposed to be locked up was being lived in. The person living in the house was the State High Court judge. When asked to vacate the property, he refused saying the government had given him the property. The owners have been fighting a case against the government for 12 years now. It does not seem likely that they will get their property back.
The irony is that the justice system which is supposed to arbiter such cases is party to this property rights theft. For every single progressive step the country makes, it slides down several thanks to a judicial and legislative system that exists to loot the common man of his hard earned property. It is a miracle that progress occurs in India in spite of these blatant misuses of the law and non-protection of private property.

Monday, August 03, 2009

Please stop the pollution!!

Some study has shown that 70% of Calcutta residents suffer from respiratory problems, so the government has decided to ban vehicles over 15 years old. How did they establish the connection? I do not know why I am surprised! Such knee-jerk reaction is common in India. Anyone who has been to Calcutta will know that it is a highly polluted city, not different from other cities in India. One needs to be in Calcutta during the rains to appreciate the full nature of pollution due to overflowing drains causing people to wade in ankle or knee deep filthy water to get to school and work. Will they ban the rains next cause it causes so much water logging and consequent pollution? On a similar note, will someone also tell the current US administration that Cash for Clunkers is a bad economic idea. Its a classic example of applying Keynesian logic and suffering from the Broken Window Fallacy.

Monday, June 29, 2009

Rains delayed, we seek permission to die!!

Those who know India know how much normal life is affected by Monsoons in the country. We are used to listening to platitudes such as agriculture is the back-bone of the country even today (agriculture contributes to less than 30% of GDP), and how agriculture is dependent on Monsoons. Every year we hear about thousands of rain starved farmers committing suicide. Either these farmers are irrational or have some kind of hereditary mental illness. For over 60 years the government has failed to provide adequate irrigation facilities, and they still believe the government will do something for them? Something is seriously wrong with them. They should all take a class in Bayesian Updating and rational behaviour.
The latest is this bunch of farmers who have requested the President to give them permission to die. One guy says he is fed up of red tapism, yet he goes back to the same government to ask for permission to die? Hmm!! What makes him think that the same red tape will make his petition move any faster than building proper irrigation systems? More importantly, what can the President do? Pray to the rain gods?

Friday, June 26, 2009

I am a Victim of racism

If I follow the logic of Mizoram Chief Minister, every time people ask me if I am Indian they are being racist. No! Seriously... Here's is his logic.

Monday, June 22, 2009

You can't be serious!!

India's North-East has been a contentious place since Independence. The NE states constantly complain that they have been neglected by the central government and that is why they have turned to violent methods. Here is a news item, and the logic is just completely screwy. The village was ruled by the Communist party for 30 years and they did not have any development all those years. Duh!! Sure there was no development. Communists care only about redistribution, and you guys wanted these communists to rule you, why are you complaining now? You say
I also realized that under CPM rule, we had lost the right to speak up. It was time to take a stand and speak up.
Of course you lost your freedom of speech under the communist!!
Here is the one sensible thing in the whole article
And nobody will pay tax to the government anymore.

Yes. Please stop paying taxes, and build roads yourselves. You do not have to become Maoists and bomb useless government offices. They are not going to help you anyway, so why waste precious resources buying bombs when you can use that to buy mortar to build your roads!!

Friday, May 22, 2009

Credit Card Holder Bill of Rights

The new administration is all set to bring in the new credit card policy. What they do not realize is that these rules will make people more indebted than before. Here is a simple analysis of a few key points:

1. No charges when card holders spend beyond credit limit.

Hmm. Lets think about this. The limit on my card is $2000, if I spend even a $1 more than that I have to pay $35 over the limit fee. So, I constantly have a running account in my head of how much I have spent on my card. If I feel like I am reaching the $1900 mark, I stop spending, because I do not want that $35 fee. If there was no fee, I would do nothing of that sort and keep using my credit card. Isn't that just common sense?

2. Card holders need to be given at least 45 day notice before fee and finance charge increases

The card companies already do that. They give you a 2 month notice before any changes to your card take effect. I have read the fine print in my card holder agreement. 

3. No arbitrary interest increases and universal charges. 

Hmm. My APR goes up if the card company perceives me as a bad credit risk. It is their way of protecting their money. Its just silly to ask the money lender to keep lending you money and not impose any penalties even though the chances of you defaulting on the loan are high. It is precisely this policy that leads to bankrupt government banks. 

People who do not know how to handle their money will not be better off by the government holding their hand. This is akin to saying that teenagers are risk prone so we should keep them under lock and key. That is a ridiculous idea. In the same way, these rules will only change the incentives in the credit card market. Even good credit risk people will find it more difficult to get a credit card, because the companies have no way of assessing risk through user fee and charges and APRs. So, they do not know if the person who is defaulting is doing so because he is a bad risk or because he is just taking advantage of the no penalty situation. 

Wednesday, May 20, 2009

Stop using Chinese please!!

Chinese toys, pet food and now Chinese dry-walls are leading to health concerns. One day, just for a day, people in the US should not use anything that was made in China or had components made in China. I bet you the country would stand still. 

Who has the right?

A couple of years ago, I saw a new item on TV where the parents of a young boy suffering from cancer refused chemotherapy and wanted to follow a more holistic method of healing. The city Social Services reported them and the parents were charged with negligence and forced to put their kid through chemo. Here is a similar case. I am not sure if its the same case. Why do the parents not have the final say in this matter? Is five years of a painful life better than two without pain? Its difficult to answer such ethical questions. What concerns me is that, the courts instead of saying "we do not have a definite solution here and are conflicted", have chosen to force the parents and penalize them. How should the law handle such cases?

Monday, May 18, 2009

Criminal Prosecution of Psychics

Last night I was watching 48 Hours on TV and the show was about scammers. One segment was devoted to this Psychic out in Florida who runs a legitimate Psychic business, but who is being criminally prosecuted by the City and State for swindling her customers of thousands of dollars. One lady actually gave her a million dollars and more to help improve her life condition, but now wants to criminally prosecute the Psychic for defrauding her. What I do not understand is how someone can give away a million dollars and then accuse the other person of cheating. C'mon if you believe that Psychics can actually change your life, you gave the money voluntarily. If you did not believe they could help change anything, and still gave the money then there is something else other than rationality that motivated your behaviour. I could not believe that the courts were taking the accusations seriously. 

Friday, May 15, 2009

Some Random Guy!!

I moved this past monday and my colleague Jared asked me how I found this apartment, and if I knew my landlord. I said I found the place on Craigslist, and that my landlord was some random guy who had advertised a place for rent. Jared was quite taken aback that I could trust my life and possessions to some random guy online. When I first moved from Nebraska to Virginia, I found my first landlord online. I had not met her, nor did I know anything about her. I saw her ad, replied to it, and her daughter (a law student back then) drew up the lease papers, made two copies, signed both and mailed them to me, I signed both as well, kept one for my records and sent the other with the first month rent as deposit ($450). I only knew the address in Fairfax, and drove up from NE in my truck. For all I knew, they could have been axe-murderers or just simply cheats with no real address. However, when I landed I was not surprised at all, and I lived in that house for two years and have fond memories (the only reason I had to leave was cause I was going away to India and also had the housing job with on-campus living). 
Of course when I moved this time, I met my landlord and made an informed decision. Sure! There are horror stories out there with Craigslist. But, the number of success stories far outnumber the horror stories. There is no regulation of Craigslist. Its a purely spontaneous creation and market run system and the measure of success is such that a young woman can go ahead and trust some random guy online advertising a house for rent. Markets Rock!!

Demand = Supply

I was amused to find the following product on Buy.com. A USB beverage warmer/cooler. What a neat idea!! I do not think I would personally buy it, but apparently someone has expressed a demand for such an item given that it is in the market now. I love the market system. It gives me an enormous variety of products for every whim and fancy. This past couple of weeks I have moved twice and noticed that I have a boatload of stuff. I compared my current moves to my moves back when I was studying/working in India and realised that I never had so many things when I was in India. In fact, when I was in India everytime I moved my stuff I would have 2 medium sized moving boxes filled with my books and stuff, and a one bag for my clothes and personal items. Now, I have a small truck load of stuff. The only reason I lament having so much stuff is cause its a pain moving. Otherwise, I am glad I them because it means at some point I had a demonstrated demand for this stuff and the market supplied it for me. Markets rock!!

Wednesday, May 13, 2009

Spontaneous Order on Roberts Road

Parking at GMU campus is expensive and a nightmare. Thus several students park in the streets around GMU. One such is on Roberts Road between Braddock Road and Tapestry. Since I have started at Mason, I observed that parking on this road has always been parallel parking. Once in a while there would be one odd car that was parked in a hurry and in a small spot would be sideways instead of parallel. Last week something extraordinary happened. Two days in a row the same car parked sideways instead of parallel. Within a couple of days the whole structure of parking on Roberts changed to sideways parking instead of parallel. No one asked those people to park sideways. It just happened. How about that spontaneous order eh!!

Monday, May 11, 2009

Enforcing Laws

A couple of months ago, I met with some of my grade school friends and was trying to look for pictures of our group from back then. It was difficult to find pictures, especially with me in them because our school was very conservative and boys and girls were not allowed to be in pictures together unless it was the whole class group. I remember on school retreats we were not allowed to bring our own cameras. One of the teachers brought her camera and took requested pictures at her discretion. She would refuse to take pictures of boys and girls together. However, this one time when I was in high school we went on a weekend retreat and some of the older kids brought their own cameras and took pictures they wanted to take. Although students were not allowed to bring their personal cameras, there was no way the teachers could enforce a ban on cameras. They could not check every single item of luggage students brought with them, neither could they track every single student's moves during the weekend. So in effect the ban on personal cameras was ineffective because of a lack of enforcement. 
This is true about so many Indian laws that simply have no enforcement. Even when they are enforced its the enforcer's discretion rather than rule based. In short there is very little respect for the rule of law in India. So a bunch of hoodlums can go and beat up women in a public place and get away with it. The reason is not just bad laws, but also lack of incentives to enforce them. 

Right To Information

India has recently enacted the Right to Information Act, which gives citizens the rights to get information from government agencies on any manner of issues as long as they do not compromise National Security. Here is an instance of RTI being successful (Hattip Amit). However, I cannot stop and applaud yet. Did Tyagi really have documents to prove that he had purchased the cow at fair price from Dubey? What incentive do the cops have to resolve such cases justly rather than just to pacify the person who filed the RTI application and make him/her withdraw so that the department is not embarrassed. If you read the story, you will notice that in both cases the police asked the citizens to either not pursue the case any further or write a letter saying the issue had been resolved. This seems like polite blackmailing to me. Sure it has kept these two police departments on their toes and has spurred them to act. But, it is their job right!! After all, we have other legislative mechanisms towards accountability in government departments, and none of them has been successful, why would we expect the RTI to be any more a success 10 years from now than any of the others written in the constitution. How soon before entrepreneurial elements discover rent seeking opportunities within the RTI?

Sunday, May 10, 2009

Star Trek

Back in September 1966, Captain Pike of starship Enterprise understood the implications of trade to maintain good relations. I do not know how many of you have seen The Original Season, and the Pilot episode. He suggests to the aliens that they could trade and mutually benefit. Cue to 3:00 minutes in this video for that particular insight.

Also note the championing of freedom.

Wednesday, April 22, 2009

Donkey Vs Elephant

That voting behaviour in India has nothing to do with policies is known to everyone. Voting is just another form of political signaling. My colleague Nakul is doing some interesting work on Voter behaviour in India, and is looking at the special case of Tamil Nadu which has had only two major parties and leaders the last 3 decades or so. However, irrespective of who is in power and what their election manifesto is, business is as usual in the state. Meanwhile, what gets politicians votes in India is what mode of transport they use to arrive at the court complex to file their nominations. Here is one politician on a donkey. Here's another on an Elephant. What can I say? India is a pretty vibrant country!! :D

Monday, April 20, 2009

Most Powerful in India

Business week published a list of India's most powerful 50 people. I did a quick count and about 28% of them are Politicians or Bureaucrats. The rest are Entrepreneurs, businessmen and individuals. It heartens me to see several entrepreneurs in the list!! Here is the link. 
Hattip Amit Varma

Wednesday, April 15, 2009

Grad school colleagues

I am proud to be part of the GMU tradition of grad students. Several of my batch mates and colleagues have defended their dissertation recently and their record is truly amazing. Several of them have completed their Ph.D. in four years, and none later than five years. Not only have they successfully defended, they publish in peer-reviewed journals and they also have great jobs. All these students are sympathetic to Austrian Economics. That is why I think the labeling does not matter. What matters is whether you do good economics consistently. Here they are in some chronological order. I have listed only those that I have known personally. Several more defended who I do not know personally, so I have not listed them.

Pedro Romero
Jenny Dirmeyer
Michael Thomas (defending soon)
Jeremy Horpedahl (defending soon)

Congratulations guys!! I am proud of you and very happy for you. 

Sunday, April 05, 2009

Slums of India

Thanks to the Oscar winning movie, the slums of India have become a much discussed topic in socials these days. In big cities like Bombay, slums, though illegal encroachments have water supply, electricity and other public goods. The reason for this is that slum-dwellers are a big vote bank, and no power-seeking politician can hope to win an election by over-looking this group. The economists' solution may be simple!! Evict them, or the government should sell the land to the highest bidder. Well!! Neither is an easy solution, and both will lead to much violence. What if they just gave the slum-dwellers titles to the encroached land? That solution is rife with problems as well. It creates perverse incentives for more slums to emerge. Most slum-dwellers, unlike popular opinion, are hard-working people. They just do not have enough resources to pay exorbitant rents in these cities. The problem thus logically goes to city laws that are unable to protect lessor and lessee.  Thus, lessor's ask for a security deposit equivalent to ten months rent, which is not a small sum for low income individuals.  So, to stop slums from developing and growing, cities just need to change their laws. Any other solutions?

Friday, March 27, 2009

Hershey's Krackel

Where can you buy a bag of Hershey's Krackel? Just that product and nothing else in the bag. Right now, you can buy a mixed bag of mini bars with some krackel, some Mr.goodbar and proportionately more regular milk chocolate mini bars. Why would Hershey's not sell krackel in independent bags, and even in assorted bags have just a few? Here are my economic explanations:
  1. Krackel is probably not as popular as Hershey's regular milk chocolate, aka demand for Krackel is not high enough to warrant Hershey's to make an independent bag of just Krackel
  2. Nestle Crunch is a close substitute and probably has the higher market share
I cannot think of other economic reasons. Do you have any?

ps: I emailed Hershey's marketing department and got this reply:

Thank you for contacting The Hershey Company. Your comments about KRACKEL chocolate bar are important.

We are sorry to disappoint you, but KRACKEL chocolate bar is currently not available. This product is not being produced for nationwide retail distribution at this time and we are unable to provide you with details as to when and where you might be able to obtain this product. We apologize for any inconvenience and assure you that your comments will be shared with our Marketing Department.

Friday, March 20, 2009

Rejecta Mathematica

I do not know how I stumbled onto this page, but the idea is brilliant. It is an online open access journal for Math papers that have been rejected by other peer reviewed journals. They believe that even rejected papers add value to the academic community. They even offer franchise options to other sciences to start a Rejecta journal within their academic community. This idea is great at so many levels. On a pure academic level:
  1. It helps authors vocalize their ideas even if they are rejected by regular peer-reviewed journals
  2. Seminal works like Tullock's 1967 article which was rejected several times before being printed in the Western Economic Journal, would probably get noticed right away
As an economic idea, what a wonderful entrepreneurial idea!! Any graduate student knows getting into the academic cliques of publishing is not an easy task. It is a rigorous time consuming process. However, I wonder if such an idea can work in Economics. From a grad student or young professor perspective, this may not be such a great signaling device. Imagine lines on your cv that state even one publication in Rejecta Economica. It could be a bad signal to potential employers or those that decide tenure. They know that your ideas have been rejected by regular peer reviewed journals. 
There may be flaws in the current publishing system (what system is perfect?!), but who would make the first move to start such a journal in the first place, and even if someone did who would be bold enough to send papers to them? My guess is the first mover problem would be solved by those that have little to lose from such exposure, such as tenured professors.  There would be a self-selection bias here. In addition, so many academic economists have blogs that exist as a medium to voice incomplete ideas or those that have little chance of being published or have even been rejected. The idea is cool though!!

Tuesday, March 10, 2009

The Economics of Vegas

One of the best things about being a GMU economist is that you look at the world differently. This past week, I have been at the Annual Public Choice Society meetings in Las Vegas and several things about the local economics have intrigued me. Here is a sample:
  1. Why is the law against public intoxication non-existent here? People can buy drinks and walk around with them on the streets and will not be arrested. How have the Casino lobbies worked this out?
  2. Is there collusion between the different Casinos to prevent entry into the Casino market? I personally do not believe there is, but a cab driver suggested it to me and I want to know the economics behind it. 
  3. The laws against solicitation are also different here. Why and how did the lobbies work that out? 
  4. How big are the profits and rents in the adult entertainment industry? There are several things to do in Vegas and how do Casinos keep their business from eroding due to competing entertainment activities?
  5. Every Casino and Hotel has free some free show or the other which has cost a lot of money to establish and continues to cost money to run. For example the Bellagio Fountain, the moving statues at Caesar etc. Why do they have free shows, as in what is their benefit or incentive to spend millions of $$$ to build and operate these. 
I am sure there is a literature on several of these questions. It would be interesting to research the answers to the seemingly obvious and simple observations in Vegas

Sunday, March 01, 2009

Beware!! Prices are falling

The Times has this front page news item. It is back to Keynesian Economics again, talking about deflation and unemployment. However here is something puzzling. The article mentions that prices will be 2% to 3% lower by September compared to a year before. Let me understand this right, the private sector is freezing and cutting salaries, and prices are falling at the same time and that is a cause of concern? Remember the basic budget equation I = PxX +PyY. I is falling, Px and Py are also falling and we are terribly concerned!! I don't get the logic. I understand that falling I is not that good, and my sympathies to those who have had to take a pay cut. But when your desk gets cluttered, you clear out the mess right!! You get rid of papers you do not need anymore and this is similar here. In basic positive economic terms, we are simply economizing. No reason to lament it. On a different note, I am glad to see the article report that the Public sector is doing nothing to cut salaries, and is in fact raising salaries. What does that tell us about efficiency and business savviness in the public sector?

Wednesday, February 18, 2009

Did markets perfectly clear?

I had one of the weirdest experiences of my life in the US today. My new basement apartment got too cold for comfort and I called Ali to take me to Walmart so I could buy a small space heater. Should have taken us about 45 minutes. We went to Best Buy, Walmart, Target the local Rite Aid and none of them had a space heater. Finally we went to Home Depot and they had the last 2 models (both without auto shut off and thermostat settings). It was extremely disappointing to not find the usual variety especially in a place like Walmart. Reminded me of my micro class from four years ago where we discussed that if markets were to clear completely then the shelves would be empty. I guess that is what happened in all these places. The market for space heaters probably cleared completely and that is why my demand was not met. 

Ali the constant contrarian argued that there would have been others like me who looked for a space heater and did not find it. That is a possibility as well. The sales guy in Target actually told me that they were getting ready for Spring supplies so they would not have space heaters again until next winter and that they had run out three weeks ago. Its still winter guys!! Some of us are still battling the cold in basements, and yes this morning it was below freezing and we had snow. Who is talking about Spring in mid February? 

Back to the original question. Did the market for space heaters clear perfectly? My guess is it was expensive to hold inventory for the stray purchasers like me. But really does the market for space heaters die out in the last week of January in this region? I find that strange to believe. I agree we have had a few warm spells but that does not make the cold go away completely until at least end March. What is happening to the market for space heaters?

Sunday, February 15, 2009

Family Planning Incentives

A couple of weeks ago, I heard someone on the radio talk about how depressing it was with this economy. He has lost his job and he was the sole provider of his family of 7 children and wife. He was angry that he was laid off and wanted the government to take some action against his former employer for firing him. As it is he was finding it very difficult to make ends meet even before he lost his job. I understand his frustration. I also understand that it would be difficult to find another job in this economy. What I fail to understand is how 7 children figured in his future plans. Children are expensive. Don't get me wrong, I love children, but they are just expensive. Baby food, diapers and supplies average about $8000 per kid for a year, or $56,000 for all 7 kids. Lets say the second year is half the expense of the first year, and that is about $28,000 for all 7 kids. Lets say after that their needs are pretty minimal; however once they finish high school even a most basic college education would cost them about $25000 (average four year private school) a year. That's about $700,000 for seven children. Lets even assume that these kids go to a public school at about $6500 a year. That is about $182,000 for seven kids. No offence meant to the guy who lost his job, but what made him not think about all these expenses? 

The median pre-tax adult male income in 2007 was about $50,000, and about $35000 for women. With seven kids I can reasonably assume that his wife is a homemaker. Lets say they pay no taxes, or that all their taxes are refunded. The monthly average income is about $4100, of which lets say they pay about $1600 towards their mortgage, about $1000 toward monthly food expenses (see here for estimates, I chose the thrifty plan and doubled the family size), and about $700 for Vehicle insurance, Gasoline expenses, electricity, and other utilities. This leaves about $800 every month to squirrel away towards retirement. This is a very conservative estimate and does not include other expenses on clothes etc. I still do not see how seven kids figure in this calculation. How do you ensure a quality life for them? With fewer children, you would have fewer basic expenses, which would mean you could live in a better neighbourhood and a better school district, have more quality time with each of them and maybe even have enough to pay for part of their college expenses. The wife would even have time to work and bring in more income to the family. The average salary lost due to a child for a woman is about $25,000 per year.

There is a simple question in intermediate micro texts: With rising incomes, individuals choose to have fewer children, does that mean children are inferior goods? The answer of course is no! They are normal goods but you choose to have better quality children. I still do not understand the logic of several children in the US. It makes some sense in rural India where more children means more hands in the family farm. Middle class urban Indian households have about 2 kids on an average. I refuse to believe that individuals are irrational either. There is some incentive to having more children in the US, and at this point I do not know what!!

Thursday, February 05, 2009

Is there a meaning to the area under the IDC?

I am teaching Intermediate Microeconomics this semester and yesterday in class we were talking about Indifference curves. While we wee discussing the different combinations of the two commodities along the same indifference curve, one of my students asked me if the area under the rectangle has any significance. To the best of my knowledge the area under the indifference curve which mathematically is the product of the quantities of the two commodities in utility space does not have a special significance. Do any of you know otherwise?

Sunday, February 01, 2009

Positive Vs Normative

I am teaching two classes this semester: Intermediate MicroEconomics and Economics of Developing Areas. We talked about the difference between Positive and Normative Economics in the first week of class. Of course, the question of the Economic Stimulus and the Bailout is not far away in Economics classes and it has been a challenge to keep my normative beliefs to myself and discuss only the factual in class. I am being careful in letting my students know when I make normative claims. I would say that I am very impressed with my class and how well they have understood the difference between Positive and Normative. However, right now some of the most common oppositions to the auto bailout is because they are private companies. While most people are convinced that bailing out the auto companies is not right, they are not as convinced when we talk about bailing out individuals through subsidies and import restrictions. I guess it is easier to hate the big industrialist while being emotionally attached to the small farmer. However, once students understand that the economic logic is the same they are able to make at least a cognitive distinction and understand that the clamour for subsidies is more for emotional than economic reasoning. I am proud of my students.