Tuesday, January 25, 2011

Ruralites Are People, Too

A job candidate at work presented his paper, which details a government program that attempted to revitalize rural areas in the '90s. Some tactics included improving transportation, offering tax incentives for firms to open factories in rural areas, and so forth.

Such programs give me pause to beginning with, but my feelings were cemented once the speaker mentioned that they generally discourage job training. This is because job training helps people build skills and human capital, thus empowering them to move elsewhere for better prospects elsewhere, leaving the area even more impoverished.

Rural areas have no inherent right to exist, and discouraging their residents from improving themselves seems absurd. We don't want to help rural areas for their own sake; we want to help them because of the impoverished people who live there. And if these people feel that they are making themselves better off by choosing to move somewhere else, more power to them.

Sunday, January 23, 2011

In Defense of Adjustable Rate Mortgages

"No!!! We are not getting an ARM! If you want to get an ARM, I am done looking at condos with you!"

"Haven't you read about those people in the newspaper? It's worth it for peace of mind!"

"If you want to get an ARM, I'm not giving you any of the blanket!"

Normal people, like my fiancee, tend to say that they don't want X, no matter what. Economists, in contrast, tend to say that they might want X, if the price was Y.

To see if an adjustable rate mortgage would be right for us, we have to estimate a few parameters. For instance, consider a 5-1 adjustable rate mortgage, where the interest rate is fixed for the first five years. If an ARM offers a rate that's 1 percentage point lower than a fixed-rate loan, that's quite a bit of money: for instance, 1% of $300,000 is $3,000--per year.

If there's a 100% chance (or something close to it) that interest rates won't rise during the duration of our loan, then an ARM is a great deal. But it's very hard to make this assumption. More realistically, if there's a 100% chance (or something close to it) that we'll move to another house within the first five years, then an ARM is a great deal. Neither of these conditions is necessarily true, but we should at least consider if they might be.

But one meta parameter trumps everything else: my spouse's happiness is worth more than potentially saving some money by "gambling" on the mortgage.

Saturday, January 22, 2011

Is Weird Stuff Smaller at Costco?

As an economist, it's hard for me to shop at Costco. Everything in life is subject to diminishing returns, so while the first pack of trail mix might be great, I'll probably be sick of it by the time I get to pack 18.

I often find myself thinking: Even if half of this item goes bad, it would still be a good deal. Plus, as someone who lives in a relatively small apartment, it's sometimes difficult to make the size-price tradeoff.

Above is 5 pounds of butter and 16 ounces of lobster spread, the only size available for either product. At a normal supermarket, these products would be about the same size. Yet Costco's lobster spread container doesn't even seem to be comically bigger than its mainstream counterpart, as most items at Costco do.

Costco can get away with selling staple items like paper towels in huge portions, because people figure they will use them all eventually. However, this is less true for more specialized items. We picked up the lobster spread after trying a free sample; if it had only come in a 5-lb. container, we probably would have seen that as too big of a commitment.

Wednesday, January 19, 2011

Carrot and Stick of Parenting

I've recently been exposed to two theories about parenting, and I find the contrast between the two rather amusing.

We just watched the Freakonomics movie, which describes among other things how co-author Steven Levitt tried to motivate his three-year-old daughter to learn how to be potty trained. As an economist, he surmised an incentive scheme: he would give her candy every time she used the toilet successfully. Before long, though, the daughter began gaming the system, increasing her frequency of bathroom trips by peeing just a little each time in order to pad her candy haul.

Contrast this with the recent excerpt in the Wall Street Journal from Amy Chau's book in an article titled "Why Chinese Mothers Are Superior" (you really have to read the whole thing to get the full effect):

I rolled up my sleeves and went back to Lulu. I used every weapon and tactic I could think of. We worked right through dinner into the night, and I wouldn't let Lulu get up, not for water, not even to go to the bathroom. The house became a war zone, and I lost my voice yelling, but still there seemed to be only negative progress, and even I began to have doubts.

It shouldn't be surprising to anyone that you get better results (at least from the parents' perspective) by brandishing a hefty stick than you do by offering a carrot of trivial value.