Thursday, December 8, 2011

And you call yourselves statisticians

It's been a long time since I wrote, but with school winding down, I thought I'd have a little discussion about econometrics. This morning, I came across a Gallup poll (via Greg Mankiw's blog) on the difference in education between the top 1% of earners and the bottom 99%. The idea is to attribute some of the discrepancy in earning to differences in educational attainment.

As reported, the top 1% are way more likely to go to college and get a graduate education than the 99%, which would, due to its size, closely resemble statistics of the average. This seems like a legitimate theory to explain at least some of the income inequality. But looks can be deceiving; it's conclusions aren't based on sound statistical methods.

The main problem here is breaking up the data. Given the popularity of Occupy Wallstreet and the 99% movement, the split between the top 1% of earners and the bottom 99% may be politically interesting. However, this is poor motivation to split the data at that point. If we were to split it instead at 2% and 98%, would we see a statistically significant difference from Gallup's initial findings? What about 3% and 97%?

What Gallup would have done were they equipped with the proper statistical motivations is split the data  based on the demographics first (that is, find statistically significantly different groups of earners), then test the difference in demographics (education, party lines, religion, whatever) themselves. This sort of threshold model would help them find a number (five, for example, instead of two) of groups of similar individuals within the population, then test the difference between the groups.

Instead, Gallup split the data via a politically motivated line and came up with -- you guessed it -- politically motivated conclusions. And they ought to know better.

Had they tested the data with the proper statistical tools, perhaps they'd actually come to a conclusion that might help illuminate the underlying reasons for differences in education between the rich and poor. But these results fuel argument rather than fostering any serious intellectual conversation. For shame, Gallup. For shame.

Monday, April 11, 2011

Free markets and efficient allocation

I've got to apologize for such a long blogging hiatus! It's been difficult to keep up with schoolwork and write, especially since writing about economics without a PhD and a Nobel Prize can sometimes make me feel like a bit of a fraud. To that end, please read the following disclaimer pertaining to all my posts, past, present and future:

Economics is freaking complicated. Sometimes people who think they know what they're taking about actually know nothing. And I am no exception.

Moving on. As I passed by a gas station on my way home today, I noticed a pretty sweet economics lesson in progress. The Red Sox had a home game, and a gas station near Fenway had converted into a parking garage in lieu of selling any gasoline.

This is interesting because the gas station's profit motive has led to the most efficient use of property; despite the fact that their pumps are full and ready to spew $3/gallon liquid gold into SUVs completely devoid of necessity in an urban setting, the owners saw the opportunity to make more money by selling parking spots to baseball fans (in SUVs completely devoid of necessity in an urban setting). That is, the station's owners saw that the opportunity cost of operating a gas station today was parking revenue and that it was worth more to convert their place for the day.

It's pretty telling how flexibility and "greed" lead to optimal allocation of resources. When shop owners see an opportunity for profit (which, in economic terms, includes opportunity cost and is therefore different from accounting profit), they change tacks. Since on aggregate people are willing to pay more for the new use of the property, we call this efficient -- consumers and producers get the highest net benefit through price signals. It's part of the invisible hand that Adam Smith talked about during the birth of modern economics: left to their own devices, participants in competitive markets will allocate resources efficiently.

Tomorrow, the gas station will be a gas station again, fulfilling its destiny as the most efficient use of land for that particular moment.

Saturday, January 1, 2011

Incentives in journalism internships...

My point of view at Write -30-.