The fact that we all appear is amazing in itself. Trying to coordinate an entire department of economists takes considerable patience, not to mention side payments and bribes. However, we remain a remarkably cohesive group that shares a common vision of quality undergraduate education. And, students respond to the goodwill and harmony they sense.
Our number of majors continues to rise, and we no longer depend upon business students to fill our classes. Innovative courses like the Economics of Crime, Economics of Sports, and Visual Economics have successfully attracted new types of students. This summer we are experimenting with one-credit courses in the Economics of Love and Marriage and the Economics of Religion. Even better, the Economics Club has re-emerged from its hibernation. The Club has begun a tutoring program and, despite my personal pleas for alternative frankfurter-like food items, plans to sponsor a student-faculty pizza party. The department is doing well.
Bob Stonebraker, editor
ROAST PIG!? Get Those Kids Off the Roads! So what has this to do with economics? Economists know of
several phenomena that could explain the crash data in such a way that the
benefits of prohibiting young people from driving would be grossly overstated. I
will mention two phenomena, “learning-by-doing” and
“survivorship.” Fat Expansion: How Long Will it Last? Unemployment: How Low Can it Go? Economists disagree about the source of recent good fortune. However, we
do agree, election-year rhetoric to the contrary, that policy initiatives from
both the Democratic White House and the Republican Congress are largely
irrelevant. External factors seem to be key. But, which ones? One group insists
that current unemployment is too low and that inflation has been held in check
by a series of favorable, temporary, price shocks. Possibilities include:
Yes, roast pig. Succulent, savory pig served spectacularly
by the sage who brings you this newsletter, Dr. Robert J. Stonebraker.
Delicious, delectable pig devoured by students and faculty at the department
picnic held in the Stonebraker back yard last fall! Are you salivating? Let's
hope so.
As you've probably guessed, Dr. Stonebraker's decision to roast a pig
is brimming with macroeconomic policy significance. To roast the beast Bob used
a Cuban pig box -- a 4'x30"x2' box lined with sheet metal and equipped with
a recessed metal tray serving as a lid and repository for charcoal briquets. You
get the idea. The heat from above roasts the meat to perfection as long as
master chef Stonebraker removes the tray at just the right moment -- timing is
critical.
We suspect that he chose this method of roasting his pig to test the
hypothesis -- developed in Charles Lamb's essay, A Dissertation upon Roast Pig
-- that waging war is a grossly inefficient way to cure unemployment. (See
Steven L. Slavin's Economics, 5th ed, Irwin/McGraw-Hill, 1999, p. 233.).
Lamb recounts a Chinese fable in which mischievous Bo-Bo (Could Lamb have meant
Bob-o?), the son of the swineherd, Ho-ti, burns down the family cottage and,
alas, the nine hogs sharing the living space perish. But there's good news; he
discovers the gastronomic wonder of roast pig when he puts his fingers into his
mouth after burning them on one of the crispy critters. When Ho-ti returns he
makes the same discovery and, thereafter, is seen regularly burning down his
cottage to enjoy this delicacy. The practice catches on and soon villagers, far
and wide, are burning down their cottages to enjoy roast pig.
Lamb's analogy was straightforward. Waging a war will lower unemployment, just as burning down a
house containing pigs will create tasty food. Yet, neither is especially
efficient. The Stonebraker pig box clearly gets results more efficiently --
roast pig to rival Ho-ti's and with his house still standing. So, it would seem
that nonmilitary spending is a more effective means of achieving prosperity
(roast pig) without inflation (conflagration).
Those of us who enjoyed last year's feast want a repeat performance next September. And, we want your help.
Press Bob to continue. And, as those of us with ancestral links to the Balkans
have done, encourage him to add barbecued lamb (no pun intended) to his
repertoire. No matter if you cannot attend yourself. Stress the acceptability of
the second-best solution -- vicarious pleasure derived from someone else's
first-hand enjoyment. Be assured, if you are not here, we will think of you as
we lick our fingers.
Data circulated in Harrisburg last year have led to a cry by insurance companies
and politicians to remove driving privileges from sixteen and
seventeen-year-olds and to restrict driving by drivers under age twenty-one to
daytime driving only.
The data, reproduced in the graph below, show a strong
inverse correlation between crashes per thousand drivers and age. Looking at the
graph, policy-makers have concluded that getting the younger drivers off the
road will lead to radically lower accident rates. Their chain of logic is:
a) accident rates are very high among sixteen and seventeen-year-olds;
b) prevent them from driving when they’re sixteen and seventeen and the roads will be
safer;
c) if they start driving at eighteen, they will begin with the lower rate
observed on the graph for eighteen-year-olds; thus, overall accident rates will
drop dramatically.
If safe driving is a skill that is learned, then
keeping young drivers off the road will only defer that dangerous
learning-by-doing phase to an older age. That would shift the curve to the
right, but not change its structure. Learning-by-doing is most often associated
with Nobel Prize winner Kenneth Arrow ("The Economic Implications of
Learning By Doing," Review of Economic Studies, 1962). Before Arrow’s
paper was published, a Swedish economist, Erik Lundberg found a multi-plant
steel firm that improved technology and training in every steel mill but one -
the Horndal factory (Producktivitet och Räntabilitet, Stockholm, 1961). In
the improved mills labor productivity increased at about 4 percent per year. In
the neglected Horndal factory, productivity increased at a rate of 2 percent per
year. That 2 percent is often attributed to “learning-by-doing.”
Although that interpretation is controversial among economists, similar
“Horndal” effects have been detected by other economists, including
Paul David. In a neglected factory, workers and managers somehow learn more
efficient ways of doing their jobs as they accumulate on-the-job experience. If
the Horndal effect applies to safe driving, then prohibiting driving for the
youngest drivers merely shifts into the future the learning of safe driving.
A more macabre explanation for the decline in crashes with age is survivorship.
The survivorship principle is most often associated with George Stigler
("The Economies of Scale", Journal of Law and Economics, 1958). The
argument is that some business firms (drivers) will be better adapted to safe
driving than others. Although bad accidents can and do happen to good drivers,
the odds are not good for those who are slow to learn safe driving habits.
What happens then in the early years of driving is a Darwinian, evolutionary
winnowing-out process. Those slow to learn may only be frightened into quicker
learning by close calls or tickets from police officers. But they may also be
incarcerated, lose their licenses, or sadly, disappear from their age cohort. In
keeping with public choice theory, an exceptionally bad driver may even vote
with his feet and move to a place with public transportation so he doesn’t
need to drive. Thus, older drivers are survivors of a process of natural
selection that progressively retains the most skilled drivers.
There are other factors that could account for the inverse relationship between auto crashes and
age. But before we impose large costs on sixteen to twenty-year-olds,
let’s measure how much of that inverse relationship is due to Horndal and
survivorship effects.
Well I've never used a phone booth, and I've never seen my toes.
When I'm goin' to the movies I take up seven rows.
.....Weird Al Yankovic
My pants are tight. Too tight. Especially after eating dinner -- especially a large dinner. Especially one followed by a
bowl of ice cream -- especially a large bowl. Especially one topped with
chocolate sauce, with potato chips for crunch.
Larger pants would help. But, I prefer to ignore the problem. That squishy flesh oozing over my belt is a
fleeting phenomenon and will surely vanish next month. Or, so I tell myself. Is
there self-deception afoot? Of course. Purchasing larger pants would explode my
preferred self-image. Larger pants are a blatant admission of one's true girth.
Purchasing that next size signals resignation. It signals defeat. It lends a
sense of finality to it all. Delusion is more fun.
Why did this happen? While some might plead genetic misfortune, I cannot. I checked the family photo album.
My ancestors bear no blame. I did it to myself. Why? It must be economics. Oh,
no. Not another "economics can explain anything" article! Absolutely.
It's all costs and benefits, supply and demand.
Growing obesity
Obesity is growing, and not just around my personal belt. The percent of Americans
considered officially obese now tops 33 percent, compared to 25 percent a mere
15 years ago. More than 20 percent of U.S. men and 30 percent of U.S. women are
actively trying to lose weight. Other countries suffer similar trends, but the
U.S. clearly leads in excess poundage.
Why? The biology is straightforward, a
simple matter of calories consumed versus calories burned. We who consume more
calories than we burn end up with tight pants. America's collective belly has
bulged because we eat more and we exercise less. And that, according to a recent
paper by Tomas Philipson and Richard Posner of the University of Chicago, is the
result of basic economic principles [The Long-Run Growth in Obesity as a
function of Technological Change, Working Paper W7423, National Bureau of
Economic Research].
Prices and Quantities
Quick. What has happened to food prices over time? That's right. They have fallen. Technology drives food prices
down. With better equipment, better seed, better fertilizer, and better
techniques, farmers continue to produce more with less. Since World War II farm
productivity has soared at almost twice the rate of the rest of the U.S.
economy. Even though we eat out more often, the relative cost of food continues
to fall. Americans now spend only 10 percent of disposable income on food, down
from almost 25 percent in 1929. In short, food is cheap and getting cheaper.
And, when prices fall, the quantity consumed rises.
Of course, increased eating could be offset by increased exercise. Even a bag of crunchy cheese puffs could
be counterbalanced by appropriate penance on a treadmill. But, don't bet the
ranch on it happening. Food may be cheaper, but exercise is more expensive. Our
great-grandparents had no need of treadmills or lap pools or rowing machines.
Work was work and everyday activities afforded ample exertion to keep their
tummies tucked. Exercise was not something one consumed at the health spa after
work; it was part of work. Sweat was not a recreational expense; it was how
people earned a living. Is it any wonder that we exercise less? When prices
rise, the quantity consumed falls.
My current students think work is sitting in
a computer lab doing a web-search for a research paper. At the same age their
grandfathers were swinging a pickaxe at a coal seam 500 yards underground. The
caloric expenditures differ. New technologies impact even play. Years ago, our
parents flocked to the playgrounds and ballfields for recreation; our own
offspring sit mesmerized by Nintendo games.
Rolling down hills and splashing
through creeks chasing tadpoles can be fun, but are more likely to be chosen
when no affordable alternatives are available. In the distant past, that was
often the case. No longer. Television, video games, and the internet create
seductive options. The opportunity costs of outdoor adventures rise when we must
sacrifice an hour with Big Bird or Pokemon to enjoy them. A friend recently
chided his nine-year-old son for playing computer games instead of exercising
outside. The son, holding his game controller aloft, replied with a smile,
"Don't worry Dad, my thumb's in great shape."
European waistlines are less expansive than ours. A colleague in another department chalks this up as
additional evidence of Europe's cultural superiority. Philipson and Posner chalk
it up to economics. Europeans do walk more than Americans. But, given their
greater population density and higher gas prices, this makes good economic
sense. Europe seems less infested with couch potatoes, but this too has economic
roots. Sofa spuds specialize in television viewing, and the benefits of such
viewing here and abroad differ widely. Have you ever surfed channels in Europe?
There's nothing to surf. With competition and content long-stifled by government
bureaucrats, European broadcasters are no match for either the quality or
quantity of U.S. offerings.
In other words, America's battle with the bulge does
not stem from some recent depravity. Our collective weight gain does not signal
some senseless lack of self-control. It is a rational response to the changing
prices of food and exercise. Stick that on your plate and eat it.
Wait, there is more! Medical researchers find similar results -- obesity is a natural
biological response to abundant food. The Economist recently reported on a
series of experiments led by Luciano Rossetti from the Albert Einstein College
of Medicine [July 31, 1999]. Working with rats, Rossetti found that appetite
patterns adjusted quickly to environmental changes. Rats allowed to feast freely
for three days actually pursued additional eats more aggressively than those on
restricted diet.
Rossetti's explanation comes from evolutionary biology -- and
economics. When food is abundant, animals are programmed to eat as much as
possible and to store excess fat for potential famines to come. The bodies of
those rat coming off a three-day caloric coma were apparently screaming,
"food is abundant, forage and eat while you can." However, poorly-fed
rats hear very different biological signals. Expecting little food, they turn
off their appetites. Why expend scarce energy to forage if no food is to be
found? In other words, when "nutrients are available, a sensible animal
will hoard them. If they are not, it will get on with other things."
The same economic forces that create collective corpulence determine how we fight it
as well. Have you ever tried to slim down? Go ahead, raise your hand. Mine is
already in the air. Now, think about battle plans. Did you rely primarily on
diet or on exercise? If you said "diet," join the crowd. That's the
dominant approach. Why? Could it be because exercise costs us scarce time and
dollars while dieting saves them? Could it be more economics?
Hope on the horizon?
Are we doomed? Will our bellies balloon indefinitely? Not necessarily.
Philipson and Posner claim that as incomes continue to rise, demands for
healthier foods and exercise rise as well. Obesity is not concentrated at the
top of the income distribution. Indeed, it is actually less prevalent among the
well-to-do. Health foods and health clubs require fat wallets. Wealthy CEO's can
afford personal trainers and spinach salads at the local spa; Joe Six-Pack
cannot. Joe settles for bowling, burgers, and beer. More wealth could mean more
health.
Might education help battle bloat? Maybe. But, U.S. colleges and
universities have less-than-impressive track records. We continue to push
activity courses out of the curriculum in favor of more academic, and more
sedentary, substitutes. Most schools, including IUP, do supply students with
well-stocked recreation centers. But use of these are voluntary while the former
courses were required. More importantly, we lure students to campus with
increasingly well-stocked, all-you-can-eat cafeterias. In effect, we drive up
the price of exercise, and drive down the price of food. I recently asked a
group of economics majors, "what do you get when you are offered unlimited
food at no extra cost?" Their response? "Stuffed."
Perhaps colleges will subsidize exercise more and overeating less. Perhaps someday
increased wealth save the day. Perhaps someday the Pittsburgh Pirates will win
another World Series. Should I hold my breath? Until then…..burp.
The U.S. economy is in the process of setting a record
for the longest expansion since World War II.
Inflation and unemployment are near thirty-year lows. According to the National
Bureau of Economic Research (NBER), the average length of post-war economic
expansions is 50 months. We are at 108 and counting.
The previous longest
expansions were those of 1961-69 and 1982-90. The 1961-69 expansion was fueled
by Kennedy tax cuts and spending for the Vietnam War. The 1982-90 expansion was
fueled by the Reagan tax cuts.
What is fueling the current expansion? One factor
is the fruits of the technical revolution in which corporations have invested
large amounts in new production processes, equipment and computers. These
investments, made in the face of increased global competition, have increased
productivity as well. A second factor has been the skillful guiding of monetary
policy by the Federal Reserve Board led by Chairman Alan Greenspan.
As the nation enters a new century and an election year, will the expansion continue or
will it run aground?
Beginning
End
Duration (months)
October 1945
November 1948
37
October 1949
July 1953
45
May 1954
August 1957
39
April 1958
April 1960
24
February 1961
December 1969
106
November 1970
November 1973
36
March 1975
January 1980
58
July 1980
July 1981
12
November 1982
July 1990
92
March 1991
???
108*
* Through February 2000
Source: National Bureau of Economic Research
Down, down, down. How low can it go? Unemployment has not been
this low since the 1969. Neil Armstrong was golfing on the moon, the Beatles
were topping the hit parade with Yellow Submarine, and the Steelers embarrassed
themselves with a 1-13 record in Chuck Noll's first season as head coach.
Unemployment is not supposed to be this low. For twenty years economic textbooks
have identified six percent as the natural rate of unemployment. Authors have
insisted that no lower rate is sustainable. At lower rates, labor shortages will
force employers to raise wages in their quest to attract new workers. Higher
wages, in turn, ignite inflation. Attempts at driving unemployment below the
natural level will, supposedly, spark a surge of accelerating inflation.
What happened? At 4.1 percent, the U.S. rate of unemployment is well below that six
percent benchmark. And, it has been well below that mark for five years, with
nary a whiff of accelerating inflation in the air. Can it continue? We do not
know.
1. Dollar appreciation. From 1995 to 1999 the dollar appreciated almost 10 percent
relative to the Canadian dollar, 40 percent with respect to the Japanese yen,
and 50 percent with respect to the Mexican peso. Of course, if we can get 50
percent more pesos with our dollar, the net price we pay for a Mexican good
falls by 50 percent. Appreciation is a powerful anti-inflationary force. It cuts
the dollar price of foreign goods and forces American firms to restrain prices
to stay competitive. The dollar has depreciated in recent months. Will inflation
follow?
2. Raw material and technology prices. Prices for technology and several
key raw materials, especially oil, dropped quickly during the mid 1990's. These
cuts in non-labor costs could have masked underlying inflationary pressures in
the labor market. Will the recent run-up in oil prices end our fun?
3. Fringe benefits. Shifts to managed care providers such as HMO's slowed the rate of
inflation in the medical care sector and, in turn, the cost of employer-paid
medical benefits. Slower growth in fringe-benefit costs has countered higher
wages and held overall inflation down. Can this trend in medical inflation
continue?
A second group fingers fundamental shifts in the U.S. labor market as
the cause:
1. Demographic changes. Baby boomers grew up. Those green, unskilled
workers who poured into the labor force in the 1970s were seasoned veterans by
the 1990s. Over the 1960 to 1998 period unemployment rates for workers aged
16-19 averaged 24.5 percent compared to 3.7 percent for workers aged 45-54. As
the labor force ages, unemployment should naturally fall.
2. Improved job matching. The recent rise of temporary work agencies probably helped slash
joblessness. By providing a ready pool of pre-screened workers, temporary
agencies enable employers to lower hiring costs and more easily resist wage
demands of incumbent employees. In addition, the "job tryouts" and
experience gained by temporary workers ease their transition into longer-term
positions.
3. Worker anxiety. The decline of unions, coupled with
well-publicized layoffs and corporate downsizing, might have given otherwise
aggressive workers a severe case of the jitters. Employees who fear for their
jobs might prune their pay demands. Possible. But, while media pundits have
promoted this theory for several years, its quantitative impact seems minimal.
4. Incarceration. Yes. Jail. We have been throwing prisoners in the pokie at
record rates. Along with Russia and South Africa, we lead the world in terms of
the percent of adults behind bars -- a percent that has doubled in the last 15
years. And, the group most likely to be jailed -- young, poorly-educated,
minority men -- suffers the highest unemployment rate. Since we exclude
prisoners from the unemployment calculations, it should be no surprise that
incarceration lowers the published measure. Although dumping such men behind
bars wipes them from the unemployment data, it is clearly no economic triumph.
Moreover, it ignores the likely negative impact imprisonment is likely to have
on their future employment opportunities.
Is it favorable price shocks? Labor supply shifts? Both? Time will tell. However, in the meantime, the fruits of
success are unequally shared. A rising tide supposedly lifts all boats, but not
this one. Many boats are bobbing comfortably in calm seas. Others, despite
frantic attempts to bail, have taken on water and sunk. Unfortunately, Indiana
County is among those listing near the bottom. After another succession of mine
closings, last month's unemployment rate for the county hit 9.3 percent, more
than double the national level.
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