How people who can't do math get shafted.

I have a car (an Accord, if you must know) that is 17 months old.  When I bought the car, the dealer offered me a car loan at 0 percent interest for 36 months, so I took it.  Even in the world of very low discount rates, accepting the loan allowed me to get a further small effective discount on the car.

The dealer called me today, saying I could trade the car in for a new car and not increase my payment; the payment would simply reset for 36 months.  I told him I needed to do a little math before calling him back.  The math I did was as follows:

Value of Old Car from Kelly Blue Book + PV of 36 months of payments = Cost of New Car.

Cost of New Car - Edmunds Value of New Car = $6000.

Yes, the dealer was trying to fool me into paying $6000 for...nothing.   In my particular case, he could not profit from informational asymmetry.  But for the person with the average math skills in the US?  That might be a different story.  We know this selling tactic must work sometimes, because otherwise I would not have gotten the call.

The first lesson from all this is we really need to do a better job teaching math.

The second lesson is that, in the meantime, we need to protect consumers from these sorts of practices.

How the price of a Martini reveals the property value of a city

A Hendricks Gibson is basically a commodity (although the bartender does need to know what she is doing). But a good Gibson at the Starlight Lounge in LaCrosse, Wisconsin is $8; at the Roof Garden at the Peninsula Hotel in Beverly Hills is $16; at the King Cole Bar of the St. Regis Hotel in New York is $22. 

Let's say the cost of the cocktail, including labor, but exclusive of real estate, is $7. Then the implicit rent you are paying for sitting in a bar in LaCrosse is $1; in Beverly Hills on a rooftop is $9; and in NYC is $15. If one consults Zillow, one will find that this ratio of 1:9:15 for real estate in LaCrosse, BH and Manhattan is pretty close to the truth.

One key thing--all these drinks are served in competitive markets--there is true thickness in bars in these markets. And the people at the Roof Garden and the King Cole will let you sit a nurse your drink without hassling you about it.  So while having a drink in these lovely spots is very expensive, it is not a rip-off--one just has to pay the rent.

A drink at, say, Disney World, or FedEx field, doesn't count, because if you want to stay at the Park/Game and have a drink, you have to pay a monopoly price for a drink (in the case of the stadium of the Washington Football Team, you might even pay for a drink that is past its expiration date).

Needless to say, further research is necessary.

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How Piketty's care with language can improve economics

When I was a freshman in college, I read Fogel and Engerman's Time on the Cross.  I loathed the book, because it implicitly endorsed the idea that it is OK, "in the interested of science," to dehumanize those African-Americans that were placed in bondage by viewing them as capital (I loathed it for other reasons as well, but that is for another time.) It also contributed to the broad view currently within much of mainstream economics that it is (1) acceptable to treat human beings as objects, and (2) that it is embarrassing to embrace humanity.  I was embarrassed that the book helped Fogel ultimately won the Nobel Prize in economics.

I thought of Fogel and Engerman again when a recent review in the Economist of Edward Bishop's The Half Has Never Been Told complained that a book based on the perspective of slaves could not be objective.  (To the Economist's credit, it repudiated the review and apologized for allowing it to be printed, but also kept a link to it so that readers could see how misguided it was).  Again, an allegiance to "scientific detachment" led to a bizarre view of an evil institution.  A "detached" view of slavery helps legitimize its practice, and thus is not in any way objective.

And so we come to Thomas Piketty's Capital in the 21st Century.  I have some issues with the book, but I love the first third of it.  I particularly like his treatment of "human capital:"

There are many reasons to exclude human capital from our definition of capital.  The most obvious is that human capital cannot be owned by another person or traded on a market.

The language of economics often treats people as commodities: the phrases "representative agent" and "human capital" are examples of this.   Sometimes these phrases are useful abstractions, but they also contribute to the sometimes pernicious indifference of mainstream economics to issues of justice.  Piketty's take on human capital might make us a little less indifferent.

Hannah Harris Green in The Guardian on Race, Crime and Television

She writes:

The First 48 is an A&E true crime reality show that documents real police investigations for the first 48 hours after a homicide report, including what happens inside interrogation rooms. If this sounds dangerous and ethically questionable, that's because it is. Police accidentally killed a child as A&E's cameras rolled, and a legally innocent man came to beknown as a murderer after of his appearance on the show. Catastrophes like these have led to lawsuits, and now many cities refuse to work with The First 48....

...This portrayal is not representative of American crime statistics. Although homicide arrests are disproportionately high among African Americans, about the same total number of white people are arrested in homicide cases as black people. The First 48's overemphasis on black crime is symptomatic of a larger disrespect for African American communities, which many Americans deem inherently suspicious.....

...Even release from jail isn't necessarily enough to erase the stigma that comes from appearing on the First 48. Tyson Mimms of Louisville, Kentucky sued A&E in 2011 for invasion of privacy and defamation. For over a year, the episode aired repeatedly with an onscreen message saying that Mimms was "awaiting trial", even though his charges were dismissed due of lack of evidence before the episode first aired.

UW-La Crosse Chancellor Joe Gow has issues with sifting and winnowing.

A geography professor at the University of Wisconsin-La Crosse, Rachel Slocum, made the mildly controversial point in an email to her students that Republicans in the House of Representatives had brought about the partial closure of the US government, and had therefore brought about the closure of the US Census web site.  This closure prevented her students from completing their assignments.  She never used abusive or offensive language.

Her point raised howls among the conservative blogasphere and media; when confronted with this, her boss, UW-La Crosse Chancellor Joe Gow, publicly reprimanded her for expressing a factually based opinion to her class.  In my view, it was his job to back her--not to agree with her opinion, but rather to defend her right to express it.

The irony is that Wisconsin is the very state that in many ways laid the foundation for academic freedom in state supported universities.  When Richard Ely was attacked more than 100 years ago for advocating in his classes on behalf of labor unions, the Regents of the University of Wisconsin rose to defend him.  As the Wisconsin Historical Society writes:

In 1894 Ely was teaching economics at Madison, including the various socialist and communist economic theories gaining popularity at the time. When this was discovered by Oliver E. Wells, State Superintendent of Public Instruction, Ely was attacked in the press not just for teaching left-wing theories to Wisconsin's youth but also for supposedly advising radical activists who were organizing a strike in Madison. When his dismissal was demanded, the university regents investigated his activities. 

After a series of witnesses had testified, the regents found no cause to fire Ely. Instead, they issued a famous statement defending the importance of academic freedom in a democracy. "Whatever may be the limitations which trammel inquiry elsewhere," they wrote, "we believe the great state University of Wisconsin should ever encourage that continual and fearless sifting and winnowing by which alone the truth can be found." That statement has become one of the foundation stones of intellectual freedom in America, and a hallmark of the University of Wisconsin.     

One wonders what Chancellor Gow would have done with Ely.  

Full disclosure: this is personal for me.  I was on the faculty at Wisconsin for 12 years (after getting my Ph.D. there), and was always proud to teach there, in part because of the plaque on Bascom Hill that memorialized sifting and winnowing.  It just made me feel good to walk by it, because I believed that the place I worked believed it.

But even more important, my mother taught at Wisconsin-La Crosse for decades, serving as chair of the English Department there for many years.  She also began the Women's Studies program there--surely, a controversial thing to do at the time she did it.   I can't help but wonder whether Chancellor Gow would have had the vision and the fortitude to support her important work.

The Windy City and The Foggy City

Hannah Green writes:

ERNEST HEMINGWAY famously wrote of Paris, “If you are lucky enough to have lived in Paris as a young man, then wherever you go for the rest of your life, it stays with you, for Paris is a moveable feast." For half a century, Hemingway’s nostalgic vision of the city of lights has made undiscovered literary geniuses wish that they could be unemployed in Paris in the 1920s instead of unemployed wherever they live, now. Last year, Teju Cole’s debut novel, Open City, offered a different kind of literary city. The main character, Julius, who resembles Cole, wanders the streets of New York, conversing with the city’s residents and falling into reveries about music, history, and literature. Most of the people he speaks with are immigrants, among them investment bankers and prisoners, shoe shiners and Columbia professors. Each conversation is evidence of the many layers of humanity that make New York the constantly fluctuating city it is. Cole’s New York is too much in motion to be moveable....

Dr Patricia Harris on Healthcare Exchanges

It is here:

Hannah Green interviews Josh Oppenheim Asia Times Online :: Skeletons in Indonesia's closet

Asia Times Online :: Skeletons in Indonesia's closet

INTERVIEW
Skeletons in Indonesia's closet
By Hannah Green 

LOS ANGELES - Joshua Oppenheimer's The Act of Killing is a transformative film. It presents a glimpse into one of the 20th century's lesser-known political mass killings: the extermination of suspected communists in Indonesia from 1965 to 1966. Unlike many other documentaries, however, The Act of Killing tells history through the eyes of the perpetrators. 

Oppenheimer said that when he first started working in Indonesia, he was shocked to hear former executioners boasting about their many killings. The paramilitary groups that helped perpetrate the genocide still had power, and society continued to uphold them as heroes. In order to understand their boasting, Oppenheimer and his crew asked Anwar Congo, a retired executioner, and other members of the paramilitary group Pancasila Youth, to tell their story by reenacting their killings on film. 

The result is as haunting as it is absurd. Anwar, the film's central figure, jumps from genre to genre as he struggles to capture his past. He casts himself first as a tough guy in a riff on American gangster films, then later as a bloodied corpse in a nightmare scenario where one of his victims seeks post-mortem revenge, and later as a victim of the same violence he perpetrated against others.... 

How I wish I could get an unbundled subscription to the Wall Street Journal

I cannot do my job without reading it, and its reporters are still excellent, even in the Murdoch era.  And in general, I have learned to ignore the rantings of the editorial page, which basically say that if a policy is first-order good for poor people, it is bad for poor people, and if a policy is first-order bad for poor people, it is good for poor people.

But there is one worthy in particular, sitting high in his aerie at the tip of Manhattan, whose misogynistic braying should be issued (if at all) from his parents' basement: James Taranto, the eager defender of sexual assaulters.  That I am sending any money at all his way is a constant annoyance.

Hannah Green writes on the problem of how victims of rape who are college students are treated

In Open Magazine (an Indian newsweekly), she writes:

Angie Epifano always wears the same necklace. It is simple—a round blue stone set in silver on a silver chain. When something reminds her of her rape, she holds the pendant in her palm and concentrates on how it feels. This brings her a sense of calm.

“It’s called ‘grounding,’” she says, touching the pendant during a Skype interview. It’s a technique psychological counsellors teach those who have experienced rape or other types of trauma: when something occurs in their daily life that reminds them of what happened—whether it’s seeing their rapist, or a certain smell or sound—they must concentrate on something else that will bring them back to the present.

“Some people have a memory that they think of, or a place that they felt safe in, like a wooded space. Or they’ll think of their favourite food or just anything that will bring them back to reality. If you were to run into or see your rapist—that’s the kind of tool that will help you get through the encounter.”

Read the rest here.

Ten Favorite Metro Systems--A Personal View (reposted from Forbes blog).

10) New York.  Butt ugly, smells bad, too many rats, but gets you a whole lot of places at reasonable speeds.

9) Washington, DC.  Very pleasant, beautiful stations, and when working properly, fast.  But its major design flaw (lack of double tracking) means that if one train goes down, the whole system gets gummed up.  And it is not maintained well enough.

8) London.  See New York, except I haven’t used it enough to see a rat.

7) Delhi.  Modern and fast, but you sure better like your fellow human if you are going to use it.

6) Tokyo. Miraculously efficient, but see Delhi.  As such, it reflects its city.

5) Kiev.  Metros may have been the only economic thing the Soviets did well.

4) Seoul.  Longest system in the world.  Clean and reliable.

3) Taipei.  Almost luxurious.

2) Paris.  If i weren’t for the strikes, it would be as close to perfect as a metro system gets.  The Louvre-Rivoli station is so beautiful, you wouldn’t mind waiting for a long time there.  On the other hand, you rarely have to.

1) Barcelona.  Goes everywhere, swiftly, cheaply, comfortably.

[Update: Hong Kong needs to be on the list too.  Maybe 2.5?]

Who Moves? Not Old People? (reposted from my Forbes blog)

A meme is out there that baby boomers, having raised their children, are ready to downsize.  (See here).  Some scholars, such as Arthur Nelson at Utah, say that as the population ages, there could be a mass sell-off of houses which will lead to a collapse in house prices.

One of our Ph.D. students here at USC, Hyojung Lee, and I are redoing a paper I did with Patric Hendershott about 17 years ago on the impact of age on the demand for housing.  Back then, Pat and I found that the effect of age was pretty minimal.  But times have changed, and so Hyojung and I decided it would be worth redoing the exercise using current data–the 2006-2010 American Community Survey.  We decided to look at moving behavior over the entire five years, and in 2006 and 2010 individually, since 2006 was a boom year for housing and 2010 was a bust year.

After controlling for marital status, income, educational levels, race and ethnicity, and geography, we estimated the impact of age on the propensity to have moved in the previous year.  The results are summarized in the graph below (for those who want to know, these are the coefficients from a linear probability model):

As you can see, basically the propensity to move peaks in the early 20s, and then declines to about age 50-55, and then stays pretty flat for the remainder of life (although in 2010 the very oldest seem to have a slightly greater propensity to move).

Some other findings: those never married are most likely to move, while those widowed are least likely to move (after controlling for age).  This implies that the typical elderly person is even less like to move than is implied by the graph above.  Asians are the racial/ethnic group most likely to move–non-hispanic whites, hispanics and African-Americans have similar propensities.  Mobility increases with educational attainment.  Higher income people move less than low income people.

We are doing a lot more work with this data as we prepare it for a paper, but in the meantime, our findings suggest that a mass sell-off (which means mass moving) arising from aging is unlikely.

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House Prices in Southern California need to Rest now (reposted from Forbes).

From my Forbes blog:

DataQuick today reported that house prices in Southern California have risen 28 percent from the last year.  A year ago, people who were buying houses in this part of the world were getting a good deal.  Now, the deal is so-so.

Take a look at the table below (it is something I constructed for my class on mortgages and mortgage backed securities).  The numbers on the vertical axis (.03,.05,.05..)are cost of capital numbers–the financing costs of owning a house.  Generally speaking, the cost of capital for owning a house is the mortgage rate plus one percent, which reflects that the cost of the equity in the house (the down-payment) is higher than the cost of the mortgage.  The numbers across the horizontal axis (10, 15,20…) are rent-to-price ratios.  Suppose you can own a condo for $360,000; the rent on the same unit is $1500 per month or $18,000 per year.  The price to rent ratio is then 20.

In the example given here, we are looking at a household that pays a federal marginal tax rate of 25 percent, a state marginal tax rate of 7.9 percent, faces closing costs of 3 percent, annual maintenance cost of 2.5 percent, a property tax rate of one percent, a Realtor commission of 5 percent, and expects to hold the property for five years (feel free to email me at richarkg@usc.edu if you wish to put your own assumptions in the spreadsheet that produced the numbers listed below).

As it happens, I have been looking at costs and rents in Westwood, a neighborhood just west of Beverly Hills and on the other side of the 405 from Brentwood.  Rents on 2 bedroom units run around $28 per year per square foot; prices are around $650 per square foot, so the price to rent ratio is around 23.  With current mortgage rates at 4.5 percent, the cost of capital is 5.5 percent.  So lets look at the cells that are bolded: a price to rent ratio of 23 and a cost of capital of 5.5 lies in the middle of them.  The numbers in the cell is the amount of appreciation that is required each year that one holds a property for renting and owning to break even with each other.

So right now, for owning to be a better financial deal than renting, prices must rise around 4 percent each year.  Is this feasible in the long run for Los Angeles?  Yes, because over the long term, prices in LA tend to rise by about the rate of inflation plus one percent, so if we think 3 percent steady state inflation is in our future, we should be fine.  But will it rise much more than inflation plus one percent for a long time?  I doubt it.  And of course, CPI growth is less than two percent right now.  House prices are about where fundamentals say they should be, but it is time for increases to slow down.

				Price to Rent Ratio
		10	15	20	25	30
	0.03	-0.031	0.003	0.020	0.030	0.036
	0.04	-0.024	0.010	0.027	0.037	0.044
	0.05	-0.017	0.017	0.034	0.044	0.051
Cost of Capital	0.06	-0.009	0.024	0.041	0.051	0.058
	0.07	-0.002	0.031	0.048	0.058	0.065
	0.08	0.005	0.039	0.055	0.066	0.072
	0.09	0.012	0.046	0.063	0.073	0.079
	0.1	0.019	0.053	0.070	0.080	0.087

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The Internet is Truly Awesome (Leonard Bernstein Mahler edition).

David Denby wrote a nice piece in the New Yorker a little over a year ago about this ten most "perfect" orchestra recordings of all time.  Coming in at Number 5 was Leonard Bernstein's Mahler 7 (the second time through) with the New York Philharmonic. (FWIW, I know seven of his choices, and love them all).

If one looks it up on the NY Phil's website, one finds a link to Lenny's marked up score of the piece, allowing us to see, among other things, directions from the composer he really wanted to make sure got  emphasis.  As such, the internet allows us to see how Leonard Bernstein went about thinking about one of the great, quirky pieces of all time, at any time we wish.

This is truly awesome.

John Roberts is supposed to be a smart man.

But he makes a specious argument.  He says that because in the presence of Voting Rights Acts, there is no disparity in voter turn-out, there is no need for a Voting Rights Act.  Huh?

Are models that assume linear utility useful?

I just saw a paper on how the desire of households to match with particular houses could explain housing market dynamics--in particular why house prices are more volatile than incomes.

Performing such an exercise is very difficult, and requires simplifying assumptions.  One of the most important simplifying assumptions in the paper is that utility is linear--that people value their last unit of consumption just as much as their first.  This assumption is clearly wrong--we know that marginal utility diminishes in consumption.  Yet the assumption was necessary to make the model tractable.

So do we know more about the world because of the model or not?  I really don't know.

If in 1987 you bought the average house in the average place...

…you have about broken even relative to the consumer price index. The Case-Shiller National Index for March 1987 was 62.03; for March 2013, it was 136.70.  The Consumer Price Index in March 1987 was 112.7; in March 2013 it was 232.77.  So the Case-Shiller Index has risen by  120.4 percent in 26 years; the CPI has risen by 106.5 percent.  So in inflation adjusted terms, the average house in the average place has risen by 13 percent over the past 26 years, or a little less than half of one percent per year.

[At the suggestion of Austin Kelly, I looked to see what would happen if I used the unit-weighted FHFA index instead of the value-weighted Case-Shiller index.  I found that based on FHFA, real house prices rose by 11 percent since 1991 (the first year for which data are available), or a little less than .5 percent per year.  So even though the index is different, the result is the same.]

Reposted from Forbes.

Could someone explain the market failure that protecting car dealerships solves?

The Wall Street Journal has a good story today about how car dealerships are (successfully) lobbying legislatures to ban Tesla Motors from marketing their cars directly to consumers.  GOP legislators, who get the willies about regulation that actually solves real problems, are on board with supporting protectionist policies for auto dealerships.

Does anyone really think that the industrial organization of the automobile retail industry works well?  My family buys a car every five years or so, and our experience is that no one tries to exploit asymmetric information like auto dealers.  I have lots of reasons to believe that our experiences are not unique.

What amazes me is that even in the age of the internet, when one can use sites like Edmunds to figure out what to pay for a car, dealers start out by assuming that the consumer is stupid, hope they get an absurdly marked up price, and only get reasonable when they find out their customer actually knows something.

Elon Musk is a visionary in many ways.  With the Tesla, he might make two important contributions--he might free  from petroleum, and he might free us from car dealers.

A metaphor for why Goodness of Fit tests are, well, not very good.

I am proud to say I learned my econometric from Art Goldberger, who had little use for R-squared.

Anyway, a smart friend of mine (who works in industry and therefore might not want to be named) pointed out that he could probably fit the brushstrokes of a Jackson Pollack painting with a 17 degree polynomial and get an excellent R-squared.  But he still couldn't predict what a next brush stroke might look like.

A painting by Morgan Green