Economics Of Thanksgiving

My darling wife found this article on the average cost of a meal at Thanksgiving and requested my analysis of the economics of Thanksgiving. Since I hate to deny her anything she wants, here are my thoughts:

As an economist, I wondered why people don't go out to eat on Thanksgiving and instead eat a large meal they prepare at home.

The article quotes a study that finds that a meal for 10 people costs $44.61 or about $4.50 per person which on the face of it seems pretty cheap. A good reason for eating in, as you can't get that quality of a meal at that price from a restaurant.

However, the study doesn't take into account the value of people's time. One recipe site recommends beginning your preparations at 10:45 am in order to eat at 5:30 pm. There are at least 2 hours of breaks in their cooking schedule but also, we need to add the time spent shopping for the specific Thanksgiving foods and clean up, which I'll estimate at 1 hour and 1 hour respectively. The total time for Thanksgiving cooking: 5 hours and 45 minutes.

Here are where some assumptions are going to be important. The less people enjoy cooking, the higher their time cost is going to be. Typically, the assumption is that people value their time at their wage rate (that being the opportunity cost). Below are some assumptions of people's value of time and their effect on the per person cost of the meal.



According to the Bureau of Labor Statistics, the average production worker earns just under $19 per hour. Earning $50,000 per year leads to an hourly wage of $25 per hour (working 40 hours a week, 50 weeks per year).

My guess is that to buy a comparable meal from a restaurant you'd have to pay at least $20 plus tip. These estimates seem to indicate that people who earn more $40 per hour (salary of $80,000 per year) would be made worse off by having to stay home and cook their own meals!

This clearly isn't the whole picture. People value time with the family and the special taste of their family recipes. Thanksgiving isn't inefficient for the rich because they enjoy the family time too. However, if Lincoln had added a second and a third Thanksgiving in March and July and I bet you'd see more people eating out.

Illegal Music

Here’s the headline and subtitle of an article about British music priracy:
“Illegal downloaders 'spend the most on music', says poll
Crackdown on music piracy could further harm ailing industry”

The author of this article is making a critical error. She assumes that the correlation between amount of money spent on music and downloading is causal when based on this study, it is just correlation. Consider two people: Al, a music-lover, has a high willingness to pay for music and Bill, who is indifferent to music, and has a low willingness to pay.

If there is no possibility that they could download music illegally, Al would still spend more on music than Bill. If all music was free on the internet and could be downloaded without fear of punishment, Al would again consume more music than Bill.

Since the legal music competes with illegal music, the price of one affects the demand for the other. An increase in the price of legal music may drive Al to download more illegally. In fact, since Al can get music illegally, it makes him less willing to pay for the legal music.

The effect would be the same for Bill. Low music expenditures would be correlated to low illegal downloads because that person doesn’t like music! This correlation does not imply that shutting down music piracy would be bad for the music industry. Shutting down piracy would drive Al and Bill back to legal music downloads (since the price of illegal music would become infinite). This would be good for record companies.

When the author claims that a crackdown could harm the music industry, she is assuming that legal music and illegal music are complements. That perhaps if you can hear it an album first, you’re more likely to pony up money for it.

My point is that the study doesn’t tell you whether legal and illegal music are substitutes or complements. You’d need a study that looks at how changes in the price of legal music affect the amount of illegal music downloads or a study that looked at how restricted access to illegal music affects legal music purchases.

Based on what the recording industry says, I’d bet they are substitutes. It’s their profits that are being impacted, so I’d give them the benefits of the doubt on this one. If illegal music is really a complement, they wouldn’t be so avid to shut it down, they'd be running free music stations themselves.

An Unintended Consequence to the Baucus Bill

Greg Mankiw posted this his comments on a study by the Congressional Budget Office of the Baucus Health Care Reform Bill.

The bill aims to give households a subsidy for the purchase of health care. To limit costs, the amount of the subsidy phases out for richer families. What is implicit in this phase out is that it works as a 20% tax on income.

A family of four that earns $23,000 per year gets a subsidy of $15,000 while a family of four that earns $92,000 per year gets no subsidy.

Let's say that the low-earning family has a chance to earn $1,000 more dollars per year by working more. Their subsidy would fall by $210.

If you think about total income as money from work and from the subsidy, they originally earn $38,000. After working more, the family earns $38,790.

Increasing earnings by $1,000 per year would require 3 more hours of work per week earning $7 per hour. However, the additional 140 hours a year that this person works doesn't increase their income by $1,000 (it only goes up by $790). So they really only earn $5.56 per hour!

The family implicitly earns less than the minimum wage and so those 3 hours a week of work may not be worked at all. This bill creates an incentive to stay in poverty.

It goes further than just an incentive to work less. As the CBO states:

Higher tax rates also reduce people’s incentive to raise their income in other ways,such as working harder in the hope of winning raises; accepting new positions or responsibilities with higher compensation; or investing in their future earning capacity through education, training, or other means....

There is no easy fix to health care. There are no free lunches.

Schools in the News

I don't like public schools. In spite of mixed evidence, I get the feeling that they aren't as effective as we hope. So when I read this article on Obama's speech to schoolkids, I was looking for how the government was going to screw things up more in an effort to fix it.

What I found, however, was this quote:

"The president's speeches tend to be [about] what's wrong with the country and
what can we do to fix it," said Bill Hogsett, a parent from Dallas, Texas. "I
believe this is the greatest country on Earth, and I try to teach that to my
children. ... I don't want them hearing that there's a fundamental flaw with the
country and the kids need to go forward to fix it.

"What?!?

This disturbing idea is apparently called American Exceptionalism and I think it is discussed best in this Autotune the News clip:


Exceptional Fast Food and Exceptional Dance Moves. God Bless America.

Health Care Article

Economist, Greg Mankiw, posted a link to this opinion piece on health care written by a Democrat who recently lost his father to an infection caught in the hospital. The article is exteremly interesting and filled with fascinating facts and observations. I'd like to summarize some of those facts as the article is a tad long (6 pages).

• In 1954, a minority of Americans had health insurance.
• An insured family will pay on average $654 per year of their own money on health insurance and an uninsured family will pay $583 of their own money.
• An insured family will pay on average $3,809 per year of someone else's money on health insurance and an uninsured family will pay $1103 of their someone else's money money.
• If you confiscated all the profits from health-insurance companies and the 10 biggest drug companies, it would pay for about 11 days worth of care for all Americans.
• If employers paid people directly instead buying insurance on behalf of their employees, then the average person would recieve $1.7 million dollars more in wages over the course of their life.
• From 2000 to 2005, health care costs have increased by 33% in Canada, 37% in France, and 47% in the U.K.. Very comparable to the 40% increase in the U.S.

His solution was to deregulate the most of the system, mandate that all Americans have catastrophic health insurance, get rid of the employer-based insurance system, create Health Insurance Savings accounts, and let most health care be paid for directly by the consumer rather than through insurance.

Semantics

As I prepare for the class that I'm teaching in the Fall, I came across a term that has always irked me. It's only semantics perhaps, but here goes. As the book defines it:

Market failure- occurs when markets, operating on their own, do not lead to a socially optimal allocation of resources.

When you hear that there is a "market failure" it seems to imply that markets are the wrong way to organize production of the good in question. In reality, a market failure is simply that the market is producing too much or too little of the good.

It doesn't follow from the fact that markets produce to much or too little that alternative means of production will be better. For instance, without regulation there is pollution (one kind of market failure). Our alternative is regulation to correct for the market failure. However, the regulation could be bad in a number of ways: causes output to fall too much, causes prices to rise too much, limits competition, has other unintended and undesirable outcomes.

If we're going to have a term for when markets are not maximizing social well-being, why don't we also get a term for when government does not maximize social well-being. I suggest this:

Government failure- occurs when the costs of gathering information, regulating behavior and monitoring for infractions of the law outweighs the potential benefits of a particular public policy; in other words, when the cure is worse than the disease.

I believe the children (and zombies) are our future...

Most of the people who know me know that I love zombies. So, when I found a game by the good people at PopCap called Plants Vs. Zombies, my friends would know I am already on board.

The game pits you and your garden against a shambolic hoard of the undead. The zombies slowly walk across your yard and the various flowers, mushrooms, etc. that you can plant all have their own ways of stopping the zombies.

But here is the really amazing thing about this game: not only is it fun but I think it could make kids who play it smarter.

There is a phenomenon known as the Flynn Effect. Dr. James Flynn found that IQ scores were steadily rising at about 3 points per decade*. I think games like this one have something to do with that.

Think about Tetris which a lot of people my age played as a kid. It forces you to think fast and organize a bunch of blocks as they fall past your screen. You consider the future likelihood of getting a certain kind of block. You plan to do that thing where you wait for that one piece that is four long to drop so you can eliminate four lines at once. Essentially, the games is mostly visual/spacial.

But in Plants Vs. Zombies, there is much more going on. Each plant has a different attack each zombie has a different weakness. The game is set up like a chess board and so a kid would have to plan where to put the plants to counter the walking dead (essentially visual/spacial). Also, each plant has a cost. Kids would have to budget whether expensive powerful plants are worth giving up a bunch of smaller, cheaper plants. So the game teaches that there is an economic trade-off!

There are dozens of plants that you earn as a reward for completing. Clever kids will think about the costs and benefits (which are mathematically pretty simple applications of multiplication and division) not only in the moment but also they have to do an intertemporal maximization problem in order to defeat the waves of zombies! And they do this all without thinking it is a chore.

This game would be incredible for 6 to 8 year olds. The game could easily be modified to have the math element be a litte more rigorous to have an even bigger educational effect.

Also think about this: Nintendo games were around $50 in the early 90s. That is around $70 in today's terms. Plants Vs. Zombies is only $10! Perfect for getting your kids. You can get seven different games like this for your kids for the same cost 15 years ago. More and more kids will have access to games that maybe seem silly but are sutbly teaching them important concepts.

Awesome.


*Which means that a person with a 100 IQ score today would score in the top 2.2% of the population 100 years ago.

On the Radio

Here are three slogans from the radio that alternately amused and terrified me:

Grimball Jewelers:
"Because we're hardwired to love shiny objects."

Credit Card Consolidation:
"Call now to learn how to get rid of your credit card debt in this era of government bailout."

General Motors:
"Reinventing the ownership experience."

The Rise of the Super Cow

Harvard economist, Greg Mankiw, posted on his blog experts from an article on cows and their relation to global warming. It says:

"a cow will emit four tonnes of methane a year in burps and flatulence, compared with 2.7 tonnes of carbon dioxide for an average car."

Methane also traps more heat than CO2 does. According to Wikipedia, methane is 72 times worse than CO2. Ergo, a cow is nearly 100 times worse that a car.*

The solution that the E.U. has arrived at, is to tax cows. That way the producers and consumers of beef will have to pay for damage done to the environment. The tax that the E.U. arrived at was 80 euros per cow. At today's exchange rate, that is about $100. According to Beef Magazine, where I go for all my cow-related information, the price of a cow is around $1500 or about a 7% tax.

According to the E.U. beef farmers, who lose out with the tax, production will just move to South America. They are likely right, some production would shift to a place without a tax. I think, however, it would be simple enough to make sure all imported cows and beef products have the tax levied on them as well.

But relocating production is not the only way to avoid this tax. Since the tax is per cow, the simple solution is to breed even bigger cows and to pump them full of growth hormones. That's why I predict that Europe will be dominated by supercows within 10 years. Mark my words.

*According to Wikipedia, there are 96 million cows in the US and 229 million cars. Which suggests (if cows are 100 times worse than cars for global warming) that the focus of anti-global warming people shouldn't be the electric car, but rather the polite cow.