Beer: Actually not a Giffen good

One of the great things about being a professor on twitter is that you have a built-in following. A few professors I know even require that their students follow them as part of their grade (in a social media sociology class, but details, shemtails, right?). I don’t force students to follow me, but I do invite them to, and I promise I will not read their tweets unless they ask me to follow them back. This is better for all involved, I promise.

Occasionally, though, students send me really interesting and novel pieces of news or goings on that relate to economics, and that’s where the joy of twitterteaching, yeah, I just made up a new word, comes in. Last night, a former student sent me an article on Oktoberfest beer, which claimed that Oktoberfest beer is a great example of the Giffen paradox because as the price went up, so too did sales, per capita!

If this immediately puts up red flags for you, you’re right to be thinking it sounds a little bit fishy. It is.

The law of demand states that as price rises, quantity demanded decreases. A Giffen good is a good for which price increases translate to increased consumption, hence the paradox, but the part the article is missing is that all else must remain equal. The only thing that can change is the price.

The example I use in class comes from my principles of microeoconomics professor, Thomas Nechyba. Imagine a family living on the Upper Peninsula in Michigan who heats their house with coal and spends two months in Florida each year during the winter. Now imagine that the price of coal rises so much that the family can no longer afford to go to Florida for the winter. In turn, they spend more time in Michigan, and actually use more coal because they need to heat their house during months in which they otherwise wouldn’t have heated their house. The price of the good is the only thing that changed, and it caused them to buy more of it.

Paul Krugman‘s Microeconomics textbook (written with Robin Wells) uses the example of potatoes during the Great Famine in Ireland. As a result of the potato blight, potatoes–a staple food for many Irish, but particularly the poorest–became increasingly expensive. In fact, they became so expensive that the poor couldn’t afford to buy other vegetables and meat, so they actually bought more potatoes. Again, a price rise translates to increased consumption.

By now, it should be clear that Oktoberfest beer doesn’t fit in with these goods. In these examples, the Giffen good is an inferior good (meaning we buy less of it as we get richer) and commands a large share of the budget. It’s also probably a little weird that I the only example I use was given to me over ten years ago when I was a student. The reason is that there just aren’t that many Giffen goods in the real world.

There are plenty of goods that we consume more of, on a macro level, as the price rises: Luxury goods, conspicuous consumption goods, goods for which advertising budgets increase substantially, goods that gain popularity through use by a celebrity, goods that start at introductory low pricing and creep up as they gain notoriety. None of these is a Giffen good, necessarily, and all probably still follow the law of demand, but notice that other things changed besides the price. There are few goods individuals consume more of as the price rises, and even fewer for which nothing changes but the price and we consume more.

The article demonstrates a fallacy of economic logic as it’s often applied by journalists, pundits, and politicians. This is a rather benign example of why I say that a little economics is a dangerous thing. In order for Oktoberfest beer to be a Giffen good, nothing else would have been able to change. Not the number of people attending Oktoberfest, not the composition of people attending Oktoberfest, not the price or availability of substitutes or complements, not advertising or popularity around the event, nothing. Those simply aren’t realistic assumptions normally, but particularly not when we aggregate up individual decisions to a big, world-renowned event.

So, I say not a Giffen good. What do you think?

(As a side note, I realize this space has been lightly used of late. Thanks for continuing to read.)

Totally don’t get Amazon’s pricing schemes

About a week ago, I visited a friend and colleague in DC and got to meet her beautiful baby boy. While I and another friend played and cooed and giggled, my friend raved about a baby mobile (Wimmer-Ferguson Infant Stim-Mobile). The baby loved it, she loved it, her husband loved it and apparently it made everyone in her household happier. Since my college roommate welcomed the arrival of her fourth little one a few weeks ago, I decided to send her a “hey you made it through three weeks with four kids” present and what better gift than one that will totally enrapture an infant for multiples of minutes, like even tens of minutes. Peace and quiet? Yes, please.

Another good friend is due this month, (yes, it’s the year of babies, and I’m behind, sorry y’all!) and I thought, well, the mobile’s two for two, why not send it to V as well? Last Friday, I went to buy it and imagine my surprise when the price on Amazon went up by $2.64 between this week and last week. A more than 10% increase in the price of the good when I’m buying the second one? While I can’t say that I’m seeing different prices based on my purchases (if so, I just guaranteed higher prices by declaring it’s the year of babies on my blog), it does seem odd that the price would go up on something I had just purchased. I was in such a principles of micro frenzy at the moment: Marginal benefit is decreasing! Willingness to pay falls as the number of goods increases. Why aren’t they charging me less, not more? That’s what the law of demand says, #goshdarnit.

That’s flawed thinking, of course. If they are actually offering me a different price based on my buying history, and I’m going back for another one, the first one probably already proved its worth (a chorus of “I love it” from my college roommate is what prompted me to look again for V), and so perhaps now I’m willing to pay more for it.

If that didn’t confuse me enough, I got over my mini-fit enough from the other day to go back and buy it regardless of the price increase, and it was back down again, within a few cents of what I had paid the first time.

One savvy small-business owner friend suggested that Amazon might be trying dynamic pricing to determine the best price for the product. That is perhaps even more fascinating than them trying to charge individuals different prices based on their purchase history or demographics. They did some of this before, denied it, and got in trouble for it, back in 2000, if you didn’t remember. Then, they were accused of charging different prices based on demographics, but claimed it was an experiment and totally random, and promised not to do it again.

At my last look, the price is back up on the baby mobile, the highest I’ve seen it. I don’t know what’s going on, certainly something.

Update: I’m not the first to notice this. Apparently, Amazon and other retailers are experimenting with airline-like pricing. h/t @ericmbudd

Update  #2: The New York Times is ON it. h/t @thomaspace

The advent of conversations I thought I’d never have

Even teaching at a place like the University of Colorado, marijuana use was never something I discussed with my students or professors. It didn’t really come up among my fellow graduate students (except the ones who played Ultimate, let’s be honest). Outside of one friend who owned a medical marijuana dispensary and a few pothead friends (mostly my guitar teacher, who taught me some Bob Marley before anything else), it just wasn’t something I talked about that much.

The passage of Amendment 64, however, has suddenly turned the conversation on its head in ways I never thought possible. More than once this semester, I have had my principles of micro students ask about marijuana legalization and how we tax it. (The answer was I didn’t know, turns out that in Colorado it’s taxed at a higher rate (regular sales tax) than other pharmaceuticals (exempt from sales and use taxes), which, from an elasticity and deadweight loss perspective in a simple supply and demand model, is certainly the way to go).

Another student asked me this afternoon about moving to Denver after graduation, where he might have a job opportunity. I, of course, lauded Denver’s many highlights and, to my surprise, added, “well, and you can smoke pot legally if you want.” He responded it was not his thing, but we then delved into a conversation on the relative economic merits and costs of legalization. I know that people have been having conversations like this forever, it just seems like they’ve suddenly become much more mainstream.

Finally, on Saturday, I got together with some friends and one friend’s very conservative, elderly, immigrant parents, perhaps the last people on Earth I thought I would have a conversation with about marijuana. But, they grow orchids, and according to the new law, her dad told the group, he can grow six plants and so can his wife, so why not get started? He didn’t want to smoke it, he said. I’m still not sure what he planned to do with it, sell it, keep it just because he could, give it away? But both of my friend’s parents were extremely excited about the possibility. We went back and forth on the specifics of the law all while laughing uproariously at the insistence of two elderly Chinese that they wanted to grow pot and were looking for a consultant to help them, while their daughter tried to convince them not to because she didn’t want to take care of the plants while they’re not in town.

Not your run-of-the-mill cocktail chatter, for sure, but suddenly, it is. Brave New World.

Economists and manifestos

I’ve had a few conversations over the past few weeks about how extremely long the academic publishing cycle is, particularly for economists. Combined with the lack of cohesive response to the financial crisis and 2010’s crisis of conscience at the AEA meetings regarding disclosure of funding sources, economists aren’t looking so good at the moment.

To address at least one of these concerns, a group of economists has put together a Manifesto for Economic Sense, which essentially calls on the fiscal and monetary policy-making bodies of the United States and Europe to kick things into high gear in order to end  “massive suffering” being inflicted. A rather impressive list of economists has signed it and though I wouldn’t call it beautiful prose (we’re economists after all), I’m a fan.

In short: The economy is suffering from lack of demand–companies aren’t borrowing or hiring, people don’t have jobs and thus aren’t buying things, which becomes more and more problematic (one person’s spending is another person’s income). Monetary policy is exhausted and fiscal policy is politically motivated and crappy, so let’s agree to focus on facts and push for credible, reasonable economic policy that will promote job growth, confidence and resilience. Sounds good to me.

h/t @JustinWolfers (Again, I don’t do everything he tells me to do!)

Weighing in on the soda ban

I’ve been only nominally present on the internet lately due to family stuff I won’t bore you with, but the last few days have seemed especially filled with vitriol towards Bloomberg’s soda ban.

I understand the detractors to be of a particular political bent, but I’ve been surprised by both the magnitude of the response and the apparent blinding nature of the issue. People I generally consider intelligent and levelheaded have, in my mind, totally missed the boat to have a larger conversation on policy.

Will Wilkinson, in the Economist, provides an account (invoking Jonathan Swift a bit) for his stance against paternalism, but sets up false dichotomies.

GIGANTIC sugared soft drinks are disgusting. Let’s just get that out of the way. Can we also agree that the high-calorie drinks rich people like to consume—red wine, artisanal beer, caramel frappuccinos, mango smoothies with wheatgrass and a protein boost—aren’t at all disgusting? At any rate, we yuppie pinot-drinkers know how to look after ourselves. In contrast, the wretched classless hordes, many of them being of dubious heritage, lack the refinement of taste necessary to make autonomy unobjectionable. Those who abuse their liberty, filling the sidewalks of our great cities with repulsive shuffling blimps, can’t expect to keep it, can they?

All those high-calorie drinks that rich people consume are consumed by rich people for a reason. Well, several, probably. They taste good (except wheatgrass, yuck), they confer some sort of status on the drinker (conspicuous consumption), and they’re expensive. Have you seen the price of Bordeaux lately? 2010 Chateau LaTour is $1500 a bottle. Why, you ask, despite there being a glut of many other wines on the market? It’s likely because Bordeaux is one of the few foreign wines that has been introduced to China. And the Chinese love their red wine. But we (the US government) don’t intervene and say we have to make sure that wine grapes are affordable and vintners stay in business, so let’s incentivize more wine grape growing in France or prevent the Chinese from demanding wine.

But I digress. These drinks are expensive because the market recognizes both their inherent qualities and conspicuous consumption qualities, identifies demand and supply, and provides at the equilibrium price. Every one of my principles students could show you a graph to that effect.

The difference is that we do intervene with corn, a primary ingredient in sugary sodas, which artificially holds down the price. Sugary sodas are not just cheap because of supply and demand; they’re cheap because government intervention, particularly subsidies for growing corn, keeps corn abundant and cheap.

Again, my principles students could all give you a list of reasons why those subsidies are in place: we care about food security and being able to provide our own food in case of a crisis; we want to preserve a rural way of life; we want to make sure farmland is used for farming and not housing developments. But also, subsidies become entrenched, often far beyond their usefulness. Farmers are used to the guaranteed income and don’t want to give them up. Companies who buy corn want corn cheap, so they lobby to keep the subsidies in place. Pop includes high fructose corn syrup as an ingredient, a cheap alternative to sugar. They want to keep the price of corn low so they keep their profit margins while keeping their product cheap.

Subsidies are hard to get rid of because they have the property of concentrated benefits/diffuse costs. A few people benefit a lot from subsidized corn (and indeed we all benefit a little from low prices on foodstuffs that have subsidized corn as an ingredient), and we all pay a little through our taxes to keep those prices low. Subsidies, in theory, should stay in place as long as the benefits to society outweigh the costs. And perhaps the soda ban shows that the costs (increased obesity as a result of soda consumption–though perhaps a tenuous link) are greater than the benefits to society as outlined above. Or Bloomberg’s just a paternalistic whack.

Is banning pop in larger than 16-oz bottles the right answer? Probably not. Can Bloomberg single-handedly change US farm policy? Absolutely not. So he does what is within his control. Is it paternalist? Yes, totally. But if we were really worried about paternalism, why didn’t I hear all of these people crowing about laws that seek to limit abortion rights and intimidate mothers and prevent access to birth control? Make a distressed rape victim listen to a lecture about her child’s beating heart, allow her doctor to withhold information from her, and make her wait three more days before having an abortion? Sure! But increase the cost of consuming something whose cost is artificially low and presents potentially harmful negative externalities? The nerve.


Claire Potter makes a similar argument in the Chronicle of Higher Education.

In which I review Matt Yglesias’ The Rent is Too Damn High

I caved last week and downloaded a Kindle App for my iPhone. It kind of killed me. I really love books–the bound, paper kind. I’ve been fighting the Kindle/iPad/tablet/Nook/e-reader thing for years now, and imagined I could still hold out for several more years. At least one publisher probably figured out that the best way to get me (and other holdouts like me) to convert was to offer certain desirable pieces solely on e-readers. I may be one of the few they got with this book, but surely there are others coming this way.

Matt Yglesias was a fellow at Think Progress and now writes a blog about economics for Slate. He’s thoughtful, smart, and perhaps even more important, concise. I’d followed him on twitter and through his various blog posts for awhile. When he released this e-book–too long for a magazine piece (still my favorite form of journalism) and too short to really be a book, book–called The Rent is Too Damn High, I felt like I had to read it.

I read the book (ebook, Kindle, whatever it is) in about an hour an a half when I arrived at a friend’s condo on Friday evening. I spent the entire next day talking about it and subsequently lent it to my ski buddy, who also devoured it in an evening. The skiing was terrible, might as well talk about economics, right?

Matt’s argument is fairly simple and straightforward. He argues that much of our housing and societal woes could be addressed–partly, certainly not entirely–by relaxing restrictions on building height and density and reducing implicit and explicit subsidies for single-family homes in the far-flung suburbs.

It’s a very convincing argument. Letting more people live in desirable places means more efficient transportation and other public services, reducing long average commute times, increasing the number of people walking and taking public transportation, increasing availability and variety of service providers, and more. Most importantly, perhaps, increasing density would reduce upward pressure on housing prices, which pushes people out of their homes, reduces variety and profitability of businesses, and likely contributed in some ways to the housing bubble.

At the center of the story is a profound disconnect in the way we think about houses. Hoping that a house will appreciate in value and constitute a sound investment is rather silly. Houses are made of wood and concrete and stone and steel, physical materials that will only degrade with time. The land a house sits on is an investment, and can appreciate based on the values of proximate amenities. But when housing prices increase rapidly, as they did prior to crashing a few years ago, they lose predictive power of the true value of the land and incorporate speculation. That’s how we get a bubble.

What I love about Matt Yglesias is that he is skilled at taking rather complicated topics in economics and making them perfectly accessible. He has a deep understanding of economic theory and relates those ideas in a clear, concise, and readable way. This book is no exception. It’s easy to read and clearly well thought-out.

My only real complaint is that I wanted more. Though there were places I wasn’t sure where he was going, it quickly came back to the point. The repeated discussion of elevators as technology was a bit amusing, but nothing more than a slight distraction. What I would have liked is to have seen additional discussion on the policy problems that additional density would create. No policy, regardless of how enticing it sounds, can change a rather significant trend in demographics without significant adjustment. This doesn’t mean that the costs aren’t worth it, but they are worth enumerating and discussing.

Water, for instance. While it’s cheaper per capita to get water to people who live in denser areas, it also means that pipes need to be replaced more often, and at least one person writing a book tells me NYC’s sewer system is in dire need of repairs. Direct re-use plants, increased sanitation, etc, are all things that belong in this discussion. Higher density housing also necessitates a stronger commitment to building more schools and park and hospitals. The ease of spreading diseases, access to sunlight, etc, etc.

There’s more, surely. In sum, though, read it. It’s quick, straightforward, and you might just learn something.

That is the point

I am in Colorado for what is an admittedly enviably long break from teaching classes. I have been spending time in various cities and this week had the pleasure of spending a day in the mountains with my dear friend from high school and her family.

B’s mom, M, and I were chatting a bit before we headed to breakfast (at the Butterhorn Bakery in Frisco. Love!) and she mentioned Yoram Bauman’s piece in the New York Times two weeks ago on his experiments to uncover the nature of economists’ stinginess. M was curious to hear my opinion on the matter, and so I thought I might share here what I shared with her.

At the heart of the paper is an experiment in which college students are asked whether they want to donate a nominal amount, $3, to one of two charities at the time of their class registration. One is a left-leaning group, WashPIRG, and the other a non-profit with the aim to reduce tuition rates, Affordable Tuition Now (ATN). The take-home message is that economics majors were less likely to contribute to either group and thus are “free-riding.” In addition, those who took economics classes but didn’t become majors were less likely to contribute than those who never took an economics class.

In his NYT piece, and in his paper, Bauman dismisses the type and name of the charities he employs in the experiment as rather meaningless to the outcome. “You may question whether these groups actually serve the common good, but that’s mostly beside the point.” It is my belief that the types and aims of charities are driving a lot the effect he sees, or at least have the potential to drive the effect.

For purely anecdotal purposes, I’ll tell you that I was an economics major, and I’m a little bit cheap, (have been my whole life), but that I also give to charity. Despite five years of impoverished grad student living, I still gave and will continue to give to charities I trust and admire. Now that I have a job and am feeling as though I’ve recuperated much of the year’s moving and dissertation writing losses, I’m also looking to expand that giving. Whether I give more to the charities I know or include new ones is to be determined, but you can bet that it will be a careful decision.

And I think that is where the problem comes in with Bauman’s experiment, carefulness. Research, thought, time, and emotional value all come into play when choosing charities to support. So do politics, often. And while I can’t say for sure that economics students are more careful about those decisions, if Bauman can’t account for that either, I don’t think he has a paper. Snap decisions about giving are likely very different than careful decisions about giving. And just because an economics class makes you less likely to give your money to an unknown organization with an unknown track record (or perhaps a known one that works for something that goes against some part of your belief system), I don’t think that makes us more stingy, it makes us more careful.

From an econometric standpoint, if the students who are more (or even less!) careful are the ones who are choosing not to donate–at least in that moment–then the effect you are attributing to stinginess is in fact not there. It’s what economists call an unobservable. The unobservable effect may be driving the difference in donations.

Even if economics students are not more careful, if there is any unobservable quality that is correlated with unwillingness to contribute, the effect is biased.

It’s also my experience that economics majors are more conservative–politically–than their arts and sciences counterparts. I have a hard time believing that right-leaning students would be inclined to donate to WashPIRG anyway, especially when they have likely spent a good deal of their college career dodging their canvassers in the street. (Maybe that’s just COPIRG.)

Overall, I disagree with the interpretation as much as the method. That taking an economics class leads to “loss of innocence” and thus not contributing is overly dramatic, patriarchal, and just plain silly. Aren’t we supposed to be educators? Since when is it my job to protect the innocence of college students? And why should we conflate giving with innocence?