Wednesday, April 23, 2014

Adverse Selection in Cartoon

For students of microeconomics, you know it's adverse selection when the market failure happens before the behavior. In this case the predatory lenders choose to make bad loans to those who couldn't repay them, before the lenders defaulted. It is market failure because the costs of their predatory actions fall on third parties who are neither buys or sellers of the loans.

Sunday, April 20, 2014

Sunday, April 13, 2014

The Super Rich

The Rich Are In A Class All By Themselves

• The super rich or the 1% have come under public scrutiny as debated over income disparity rages on.
• We often hear cries that “the rich keep getting richer and the poor keep getting poorer.”
• The Gatsby’s of the 1920s have lost their wealth but have regained their wealth in 2012.
• Wealth is different from income. Wealth is the accumulation of assets. Income is a flow variable that means earnings over a period of time.
• For the top .01% of families wealth has been handed down.

Per Unit and Lump Sum Subsidies and Taxes

I want to thank Gene Hayward for being a continual inspiration to me.

Friday, March 21, 2014

Minimum Wage

This cartoon infers that raising the minimum wages does not cause unemployment.  The cartoon suggests that the the theory is dead.

This cartoon makes a logical error.  That is what is true for the part doesn't mean it's true for the whole.
Macroeconomics covers so many variables that you cannot aggregate them into a single theory.

Economist Greg Mankiw lists the hundreds of economists who believe the theory and hundreds of economists who don't believe the theory here.  A decade ago Ravi Batra postulated that a change in minimum wage would increase employment.

I was wondering if the debate over a raise in the working wage was really an argument about a static equilibrium.  But when there is a change in a variable, people change behavior and adapt.  So an increase in the minimum wage changes behavior in workers.  For example, one behavior that may happen is that workers drop out of the labor force when they are unable to find work.  This behavior would decrease the unemployment rate (UNRATE = U/LF).

What disturbs me most is how the media can shape public opinion.  When the "cost" of an opinion is easy it is adopted quickly.  A cartoon can easily be assimilated and because it is printed readers don't investigate the truth behind it. I observe this cognition all of the time.  When students say that they want "learning to be fun" they mean that it is easy.  When learning is easy, students mistake content for learning.  This is what I mean.

Suppose that I teach an accounting concept by playing monopoly in class.  Students think accounting is easy and fun but the rigor isn't there.  That's what wrong with the cartoon above.  It lacks the rigor and makes learning fun.  

Monday, March 17, 2014

Income Inequality

Here's a link to NBER data base. If you can find the source of the data that colloberates the assertion in the cartoon, please post in the comments.  I don't doubt that the assertion is true, however, I could not find the study.

The Gini Coefficient measures the extent of income inequality.  It is calculated by dividing the area between the line of perfect equality and the Lorenze curve by .5.  Wikipedia lists the Gini Coefficient as .45. This area would be approximately .225.  I just don't believe that this area is the same as it was in 1920.