Thursday, June 23, 2011

When to Worry About Debt

Did you know Greece and the US are in roughly the same financial condition? I didn't either but last night's Daily Show taught me that since Greece's debt per capita is roughly the same as the United States' ($44,000 and $45,000, respectively), we're in the same boat. Yes, yes, it's a comedy show and this interpretation leads to funny conclusions. But it's still a sloppy interpretation; population doesn't matter. Wealth does. A single person can take on the whole of Greece's debt and still be solvent if the are wealthy enough.

So let's instead look at public debt as a percent of GDP. The US's public debt is 92.7% (yes this includes states' debt). Greece's is 130.2%. The US's debt is less than its GDP; Greece's debt is 30% more than its GDP. In other words, entirely different.

So perhaps it's not surprising that Daily Show viewers are sometimes very poorly informed about world events.

Wednesday, June 22, 2011

The Difficulty of Following Wealth

After checking out PolitiFact's audit of Jon Stewart's "ignorant FOX viewer" claim, I found myself on this fact check of Steve Moore from February of 2011. In the 1980s, he claimed that "The lowest income people had the biggest gains."

PolitiFact ruled this as incorrect. According to the economist they talked to, Gary Burtless, "Incomes rose in the bottom, middle, and top portions of the income distribution as Mr. Moore stated, although the income gains were certainly bigger at the top compared with the bottom." Interesting fact, but that's not what Mr. Moore said. Moore said, if you were poor in, say, 1980, by, say, 1990 you had the biggest wealth gain of anyone else. In other words, you're not poor anymore. Comparing the lowest quartile in one period with the lowest quartile in the later period tells you nothing since the people who composed those quartiles aren't constant.

Ideally, we would track families and see where they are year-to-year. Data on this isn't consistently available but economist Steve Horwitz took the time to gather some up some of this data from 1975 to 1991. Here's how you read the table. The left hand column indicates various quintiles in 1975. The rows tells us what percent of that quintile is in what quintile in 1991. For example, 0.9% of the top 20% in 1975 were in the bottom 20% in 1991.

Bottom 20% (1991)Fourth 20%Middle 20%Second 20%Top 20%
Bottom 20% (1975)5.114.621.030.329.0
Fourth 20%4.223.520.325.226.8
Middle 20%3.319.328.330.119.0
Second 20%1.99.318.832.637.4
Top 20%0.92.810.223.662.5

Almost 95% of the poorest 1971 Americans rose at least one quintile by 1991. About 60% were in the top two quintiles! This is a radically different story than what PolitiFact suggests, but Horwitz goes farther by looking at the average gains. On average, 1975 families at the bottom quintile had incomes $27,745 higher in 1991. This gain is larger than any other quintile following the same span of years. Contrary to PolitiFact's claims, Mr. Moore's state actually appears to be... .

Tuesday, June 14, 2011

Regional Inflation

Since I'll be moving from DC to West Virginia, I've become very keen on differences of cost of living, or what I think of as regional inflation (as opposed to the more common temporal inflation, or just inflation). The reason why I refer to it as a type of inflation is (a) it is a type of inflation (an increase in the price level) and (b) it reminds us we should adjust for it as it's just as important as conventional inflation.

For example, Matthew Yglesias argues Houston is growing isn't because they are wealthier but because they have room to build new houses. Here's his chart showing that a place like Boston, which is crowded, has a higher average income. If it's higher, why aren't people moving there (captured as more new housing)? "These days most people work providing services to other people, so it’s generally advantageous to be providing those services someplace where incomes are high. But people can’t move to Boston, on net, if it’s not possible to build houses in the Boston area." says Yglesias.

No, not that simple at all. Fundamentally, average wages in Houston are higher than in Boston. You have to adjust for cost of living. And the cost of living is 43% higher in Boston than in Houston (I can't get a permanent link to my inputs; I use Houston-Sugar Land-Baytown TX Metro - Houston TX as my comparison metro area but each of the three choices gives you about the same result). In the above graph, Boston has an average income of about $53,000. Houston's income's about $44,000, but in Boston terms (i.e. you move from Houston to Boston and your standard of living is the same), it's $63,224. Adjusted for cost of living, Houston's 18.9% wealthier than Boston.

Houston has more housing starts than Boston because it's growing. And it's growing (I'd wager) because it's wealthier than Boston.

Selection Bias From the Economist

Mingling with other cosmopolitans on multiple continents may fool them into thinking that the world consists largely of people like themselves. It does not.
From this week's Schumpeter.

Saturday, June 11, 2011

The Value of Marketing

Latest in health care debate is this opinion in the Economist proclaiming the private sector waste from marketing expenses. Let's ignore that this is just guesswork. Yes, we know private companies spend more on marketing than public companies. But the data on this kind of thing isn't public and many other explanations for the cost difference (private companies spend much more on fraud protection, for example). Moreover these are the same century-old arguments which condemned the waste from competition without considering the waste from monopoly. But that's not what I want to talk about.

It's true that advertising has zero-sum components and when a lot of people think of the most honest ad, this is it. Some ads, notably ones for product about conveying style (I'm cool because I buy this) are just about one side trying to be cooler than the other. We'd all be better off if everyone halved their advertising costs. But ads are more than Coke yelling "Coke!" and Pepsi yelling "Pepsi!" For more practical products, for the ones where there is virtually no cool factor (air conditioners, cleaning supplies, and insurance), ads have to do something different: they have to inform you.

Yes, lots of ads are repetition (that's how we learn) but with each repetition, there's information on a new product or deal. People save money, learn what they like, and discover a product which suits them best. Save the post office, federal agencies don't advertise. That's not just because they get their revenue from taxes, but they don't have any reason to come up with anything new. It's very confusion why some think stagnation is the answer to health care costs.

Update: Administration and advertising (fund raising) expenses positively correlated with effectiveness (for charities).