Bastiat’s Bastions

More than anything, I’m hoping to start a good discussion with this post. Today’s Times Picayune has an article titled “whites pursued Katrina insurance complaints more than blacks.”

Here’s a snipet:

“The blacks didn’t complain ’cause they got tired,” said Doretha Kitchens, 58, who recalls numerous phone calls to her insurer that often ended with her being put on hold.

And another:

Minority distrust in government also shows up in polling. AP-Ipsos polls taken shortly after the hurricane last year showed 56 percent of minorities said they doubted the government could really help them during a disaster.

I encourage everyone to read the rest of the article before posting anything, and I’ll wait to open my own mouth.

NM

One of New Orleans’ original “Catholic League” schools, Holy Cross, recently announced its intention to move its campus out of the lower 9^th Ward. The area had been in decline for years and hurricane Katrina heavily damaged the century (plus) old campus. There was somewhat of a battle over the new site – some wanted the school to relocate to Jefferson Parish, others wanted Holy Cross to stay in New Orleans. New Orleans won, so to speak, as the school announced it will move into a recently vacated Archdiocese of New Orleans school district.

What I found interesting was the logic that some opponents used to fight against Holy Cross moving into Jefferson. A recent article in the Times Picayune stated:

Ray Ferrand, principal of Bonnabel High School in Kenner, said Holy Cross would increase its enrollment at the expense of Jefferson Parish’s public elementary, middle and high schools.

Joe Potts, head of the Jefferson Federation of Teachers, urged the board to reject the sale, saying it does nothing to help public school children.

Holy Cross charges a tuition of about $6,000 per year. If parents would opt to take their children out of Bonnabel, where they do not directly pay any tuition, to spend $6,000 per year, could this possibly be indicative of a problem with Jefferson’s public schools? And is it is even plausible that increased competition for Jefferson’s public schools could lead to improvements? If Holy Cross had paid Jefferson Parish more than $2 million for land, couldn’t that money have been put to use to aid the public schools?

NM

I read this article on Slate and did not learn anything about the American economy.

Let’s start with the thrust of the article.

1. Apple farms that get people to pick their own apples are a “scam.” This is because they charge high prices for the right to buy apples; apple consumers purchase more apples at these farms then they otherwise would.
2. Apple farmers should be reviled because they grow dwarf apple trees – trees where the fruit is easy to pick. Apparently, the author would prefer that orchards engage in growing trees where this was not the case, where regardless of who is picking the apples, it will be more costly do so.
3. In addition, these apple farms should again be reviled because they provide value-added products.

So if I may summarize so far:

1. Apple farms get to charge a higher price and sell a larger quantity by following this strategy.
2. Apple farms have taken steps to lower their costs of production.
3. Apple farms produce goods and services that apple consumers wish to purchase.

Next, the author suggests that this method enables “inefficient apple farms” to survive. Let’s evaluate this claim. High prices, large quantities, products consumers want, and cost saving measures? What’s the inefficient part? He’ll have to do better than that.

And what does it mean to suggest this is a “scam?” Where is the deception?

Again, I haven’t learned anything about the American economy. What I did get out of the article is that Mr. Gross doesn’t have much faith in people making choices that make them better off. He thinks that apple picking consumers can’t help themselves (himself included), they tend to “overconsume,” “overpay,” and “overeat.” I wonder who he would like to have make these decisions for us.

Mr. Gross is certainly entitled to his opinion – he clearly has opinions on what he would like “Americans” to consume. One point we always try to make on day one of economics class is the difference between positive and normative statements. Positive statements are statements of facts – of what is, or of what will occur if a change is made. Normative statements are statements of opinion. All of the “economics” in this article is entirely normative, nothing but Gross opinions.

And another “day one of class” point – thank goodness for the beauty of markets and basic personal liberty! People like Mr. Gross don’t get to tell us what to do – we can each make the individual choices that maximize our welfare as we perceive it. The beauty of markets is that enough people wish to purchase apple donuts at an orchard, and if these people are willing to “vote with their dollars,” sure enough, producers will find it profitable to produce donuts. The fact that the author had the choice not to go there, and did so anyway, should tell him something. He says it himself – he likes to go and pick the apples.

While in order to not be accused of doing the same thing Mr. Gross does, I stop short of suggesting you should not read his articles. And it certainly is fine for authors to state their opinions. But don’t let articles like this fool you into thinking you are learning about economics. There is a reasonably famous quote attributed to Joan Robinson, an economist herself.

“The point of studying economics is so as not to be fooled by economists.”

The point is also not be fooled by those who pretend to be economists.

–CT

As I have told my classes often, it is worth noting that there is no Nobel Prize in Marketing, Management or Accounting.

Check out the press release from the Nobel folks.

–CT

Kimberly Barrilleaux, a student in my Econ 211 class, sent me this New Orleans Times-Picayune article on a new type of rent control passed by the St. Bernard Parish Council (10/4/2006). As you can see by reading the article, St. Bernard has established a peculiar style of rent controls, not on the level of the rent charged, but instead on who one could rent to. In a parish where 93% of the homeowners are white, establishing an ordinance that denies homeowners the right to rent their homes to anyone but blood relatives (which the ordinance does), clearly keeps most non-whites from being able to rent in St. Bernard, unless they were renting their before the storm. This clearly violates the civil rights of anyone not kin to someone wishing to rent their St. Bernard homes out. The lawsuit charging a violation of the fair housing act and equal protection under the law is surely warranted.

Councilman Mark Madary nails the issue on the head. In the Times-Picayune article, Paul Rioux writes:

Madary…said St. Bernard can’t afford to turn away anyone who wants to invest in rebuilding the parish after virtually all of its 27,000 homes were swamped by Katrina.

“Without an infusion of outside investors to jump-start the recovery, you might be living next to a debris pile for a lot longer than you would like,” he said. “The longer the houses sit empty, the harder it is to convince people to come back.”

He said the ordinance also unduly restricts property rights.

“When you buy property, you buy the rights that go with it,” he said. “To go back retroactively and change those rights is unconstitutional in my opinion.”

This ordinance is a violation of the property rights of all current homeowners. It denies them the right to sell their property to those who would build rental housing in the area (as this potential market for their houses disappears) and to rent their homes out to the renter who would pay them the highest rent.

This ordinance constitutes a “takings” because the property owner is denied the market that was once part of their potential market. By reducing the number of potential buyers and renters, the demand for housing in St. Bernard is kept down, as is the incentive to build such homes for rental or speculative purposes. This ordinance limits housing and the future growth of St. Bernard.

To make matters worse, this ordinance is not a very smart move for politicians who wish to spend money raised through taxes. Rental homes are not given homestead exemptions and are completely taxed and their value is affected by the rental income they generate. Owner occupied housing, which is partially homestead exempt (for the first $75,000 in value), will generate less income as the housing demand is depressed by this ordinance, which reduces the values of all homes.

MC

I watched the Yanks beat up on the Tigers last night. I’m floored by how much love is been giving to Derek Jeter (aka Mr. October, Captain Clutch) by the Fox crew. And again on ESPN.

Suppose we wanted to take a scientific approach in determining who is a “clutch” player. Obviously we’ll have to figure out what a “clutch” situation is, and then look at players’ performance in those situations.

A very important consideration though, and one that will be pointed out strongly and often when you take your QBA classes, is that sample size is extremely important in making statistical inferences.

I am pretty sure when you flip a coin that it comes up heads with probability very near 0.50. But if you flip a coin 4 times and if it comes up heads three times (75% of the time), is that strong evidence that the coin is loaded (that in fact heads come up more than 50% of the time)? The answer is no. A certain amount of random variation is to be expected.

In fact, in this situation, even with a coin that we were certain would come up heads with probability 50% of the time, we’d expect to see 3 or more heads 31.25% of the time if we flipped the coin 4 times. Now if we flipped a coin 400 times and sow more than 300 heads, that would be strong evidence that our coin is not “fair”.

Likewise, if you only saw last night’s game, Derek Jeter is the greatest baseball player in history. Of course, drawing inferences based on only 5 plate appearances is clearly dangerous if not entirely ridiculous. (Anyone remember Tuffy Rhodes?) Yet, if you listened to the broadcast, everyone knows Derek Jeter is “Captain Clutch”. How?

We could all disagree about exactly what is meant by “clutch”. Perhaps late in close games? Bottom of the ninth? Or simply in the playoffs? But even if we settle this disagreement, it is still very difficult to tell who is a clutch player, because by the nature of these situations, there are very few “clutch” situations during a season (or even a career).

Can we make inferences from these small sample sizes? Perhaps not with much confidence we are right. Just as flipping 4 coins will occasionally result in 3 or even 4 heads (is that “clutch” coin flipping or random variation), some players will may appear to be clutch players when in fact it is just random variation.

Is the case for Jeter? I don’t know. But neither do the announcers on Fox.

But for your amusement, I have taken Jeter’s stats and the much maligned Alex Rodriguez’s stats in all the playoff games they have played and listed them below. Because they have played different numbers of playoff games, I have adjusted their statistics – the numbers you see will are for each 100 playoff at bats they have. (Jeter’s sample size is much larger than A Rod’s). You can make your own conclusion. Could you do something fancier? Absolutely. You’ll see I purposely left off the names of the players.

Dr. Jahn Hakes and Dr. Skip Sauer (both economists at Clemson while I was in graduate school) have done some work on identifying clutch hitting in major league baseball. For an example of their work, click here. What do they find? They cannot find statistical evidence of persistently clutch hitters.

Why is that a couple of sports nuts economists, armed with PhDs from top schools, years of play by play data, and tons of computing power can’t find evidence of consistent clutch hitting, but the talking heads on Fox know it? Hmmmn.

If you like this type of analysis, then read a book called Moneyball by Michael Lewis. It’s about how the GM of the Oakland A’s (Billy Beane) listened to scouts (announcers?) less and started doing more statistical analysis in drafting baseball players. The A’s have been quite successful despite their relatively low payroll. It’s an awesome book for someone interested in baseball, statistics, economics, or even business in general.

–CT

I’ll post a comment later with the identities of the players. And for those of you looking for extra credit, bashing Jeter or A-Rod won’t do.

Harrah’s got a bid from a private-equity firm to purchase their company for $15 billion dollars.

These bids are always very interesting. As economists, we think the stock market does a very good job reflecting all available information about Harrah’s, its profitability, and its future prospects. In fact, this post is in the same spirit as Dr. Coats’ post on political/terrorism markets. Markets are very powerful agglomerators of information.

In this case, the stock market consensus (yesterday) suggested that the value of Harrah’s is $64 a share, or roughly $12 billion.

Why do economists think these markets are efficient?

If you think a company is worth more than the stock market’s price, you certainly can buy shares of the company and hope that the value increases. If you are right, you will be rewarded financially. Likewise, if you think a company is overvalued, you can sell (short) the stock, and again you will be wealthier if the value decreases.

Because there are monetary incentives to be right (just as there are in the Iowa election markets), there is a incentive to acquire information about the company’s prospects, and therefore much information and analyzing occurs. Stated a bit differently, if you have information about a stock price, you have a major incentive to act on it. In doing so, your information is reflected in the market price. As a result, most economists think that stock prices are very efficient – on average they are correct predictors about future profitability of companies.

What is interesting here is that this equity firm disagrees with the market consensus and is offering to buy the company for $81 a share, or $15 billion. This firms thinks Harrah’s is seriously undervalued, to the tune of about $3 billion.

Why? You’d have to ask the leaders of the buyout. An obvious candidate is management. If you think the managers are adversely affecting the stock price (company’s value), then one option is to buy the whole company yourself, stick in your own managers, and increase the value of the company by making better managerial decisions. If you own the whole company, you will receive all of the rewards of doing so. If they are wrong, well they just paid 20% to much for the company. Not to hard to figure out how that will go.
Because many buyout attempts are announced, but ultimately don’t go through, another interesting part of the story is the stock market’s reaction to the announcement.

If investors were certain this buyout would go through, and because the equity firm is offering to buy shares at $81, the share price would rise to (just less than) $81 per share.

If investors were certain the buyout would not go through, there would be little stock price reaction. Say I offered $20 billion for Harrah’s – investors will soon learn I can’t afford Harrah’s on my meager salary.

The fact that the stock market appreciated significantly, but not completely, suggests there is a significant probability of the buyout going through, but that it is not certain, as is often the case with these deals. Yet, the fact that someone is willing to pay $81 is new information for the stock market.

Stay tuned…these things take a long time to resolve, and every once in a while, new bidders will show up on the scene, making things even more interesting.

–CT

Late last night (Oct. 1, 2006), I couldn’t sleep and turned on cable news, “Fair and Balanced.” The twin talking heads, the “Beltway Boys,” were making their predictions on how many seats the Democrats would pick up in the House and in the Senate, and whether it would be enough to upset the current Republican majorities in those two chambers. They both thought the Democrats would fall short of winning the Senate, but were split over the House, with one saying they would fall short and the other saying the Dems would get the majority in the House.

One thing to remember about the talk of the talking heads is that Talk is Cheap. Talking heads don’t have that much to lose if they miss things a bit. So, I went to the tried and true method of predicting the outcome of those races, the electronic market at the University of Iowa. At www.biz.uiowa.edu/iem, you can see the results of a real live betting market on the House and the Senate. These markets work better than the polls on predicting the outcome of these races, because they use all information available, including the polls. At the Iowa Electronic Markets, the traders who think that the Dems will take over the House have an incentive to buy up contracts that have the Republicans losing the House. The market, then, weighs the opinions of those who think the Dems will win in proportion of the money bet on the Dems winning, and weigh the opinions of those who think the Reps will maintain their majority in the House in proportion to the money these people bet. The market, then, is a panel of experts who are willing to place bets on their projections, weighted by the money they are willing to bet.

These markets really work very similarly to the Double-Auction markets I demonstrate in my principles of economics classes. They also work very similarly to sports books and pari-mutuel betting (horse racing). Besides the Iowa Electronic Markets, Tradesports.com (http://www.tradesports.com/), a popular sports betting site, also often runs bets on such political events. In fact, if people start betting more on one horse, then the odds for that horse winning goes up. If the markets did not work this way, the odds makers would lose and be forced to pay out more than they take in.

Can anyone really know what will happen in these elections? Not really, at least not until the elections are over. Can we make better predictions than the polls? Here the answer is “yes.”

For a full explanation as to how the market works, go to the www.biz.uiowa.edu/iem site, or go to an article I wrote for the Bayou Business Review some years back at http://www.nicholls.edu/mcoats/newopeds/iowapoliticalmarket.htm.

A couple of years ago, Robin Hanson suggested the same type of betting market could be set up to predict terrorism events. You can read Hanson’s paper, “Designing Real Terrorism Futures,” at http://cipp.gmu.edu/news/PE-of-Terror.htm (I presented my own paper with Robert Tollison of Clemson and Gohkan Karahan of NSU at that conference). Hanson’s idea is that markets are good ways to combine information from many sources, such as the CIA and the FBI, because as we know, these agencies tend not to share information.

Hanson’s “terrorism futures market” never got off the ground. Even though we know that one of the problems that left us vulnerable to the attacks on 9/11 was that the CIA and FBI don’t communicate, and worse still, information sometimes gets squashed in the bureaucracy. Hanson’s market would have given people in the know, the FBI and CIA operatives, an incentive to commincate their information in a simple, easy to understand number, a price. Politicians who didn’t bother to read the proposal got up in arms at the notion of a market for terrorism and squashed the idea before it could even get a fair hearing.

By the way, if you go to the Iowa Electronic Market, you will see that the Beltway Boys weren’t that far off.

MC