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.

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.

Incentives in journalism internships...

My point of view at Write -30-.

Freedom, and meth

This is your brain on Sudafed

When I'm sick, I have a terrible obsession with Sudafed. It's like some sort of somehow-I-can-actually-breathe-and-function-on-a-normal-level miracle drug.

In yesterday's New York Times was an op-ed discussing the restriction of drugs with pseudoephedrine, which is one of the main ingredients of methamphetamine. After years of being available over the counter, then low levels of restriction implemented requiring purchasers to show an ID, the author believes Sudafed and other such drugs should only be available with a prescription.

Certainly he's right in saying that requiring prescriptions would cut down on meth creation. But it may be enlightening to examine the costs and benefits to society and to individuals.

Costs
Let's start with the costs of requiring a prescription, which intuitively lies with those of us who use these drugs for, you know, our noses. Economists would try to assess the new costs with a survey asking, in one way or another, how much it's worth to you to have Sudafed available without a prescription. For me, it's the cost of my time to go to the doctor, the cost of seeing that doctor every time I get a cold (my copay, if I've got insurance), then the cost of my time to wait for the prescription to be filled, etc. Now add those up for every user of Sudafed, and we have some general understanding of the costs to individuals who use the drug. (I over-dramatically refer to this part as "freedom" because it represents my ability to pursue something that I want without external interference.)

We also have to examine the costs to insurance companies for paying for my doctor's visit, the opportunity cost of a doctor (or nurse practitioner, or whoever) who has something significantly better to do than waste time writing me a prescription for the sniffles. And add to that the opportunity cost of time for a pharmacist or technician to fill a bottle with Sudafed.

Now, if Sudafed is that hard for me to get, I'm also less likely to get it as often. So another cost of that regulation is the lost revenues to the makers of the drug, which will be much less widely used when it's more costly (even in terms of just time) to get. And distributors like CVS will see decreased revenues from selling the drug. Add that to total costs.

Benefits
Some benefits are easy to point out just from our costs. Doctors have a few more visits (though not as many visits as there are people buying Sudafed now, since we will not buy it as often), and they get paid for that. Pharmacists are required to fill more bottles, and they get paid for that as well.

The big benefit, according to the article, is that meth will be much harder to make and therefore less widely used. This benefit could be pretty huge, considering that meth is one of the most harmful drugs out there (after heroine, crack and alcohol). But we have to assume that a percentage of people who use meth in the first place will steer their abuse to some other drugs that may be more or less harmful, so we must discount those benefits based on those decisions. The benefits include health care costs, increased wages from not doing meth all the time, property damages due to hotel room explosions, and some other hard-to-measure, easy-to-exaggerate effects.

Conclusion, and proposal
With almost any restriction policy, there are winners and there are losers. Often, the losers are those in society who benefit from the proper, unrestricted use of medication/alcohol/tobacco(/christmas ornaments?). The trick is figuring out whether the freedom to use them outweighs the potential benefits of the restriction.

Could we find a less restrictive way to keep meth manufacturers from getting the drug that would allow legitimate users full access?

What if we put a big tax on the drug, then offered a rebate from the tax pool that required identification in one source? This way, the costs to me are only marginally bigger (because I have to take the time to send in for the tax), but the cost to meth manufacturers are much higher, since they wouldn't be able to get the rebate; we would also avoid the "smurfing" problem that the NYT author points to as a loophole in the current system. Certainly it's imperfect, but it does at least have the added benefit of allowing sick people to use a drug for legitimate purposes.

Addendum

I've been thinking about my recent post on voting, and I'd like to add an addendum: I think people are more likely to vote if they identify as part of a group of people. In my equations, this would correspond to a higher value for "v," which increases the impact a voter expects to have on the outcome of an election.

There's certainly a better way to put this mathematically, but I haven't gotten around to revising that part yet. More to come!

Is it rational to vote?

So I wanted to write up a quick little analysis of why people go out and vote depending on their perceived impact of the election, their affinity for voting and the costs incurred by spending the time to do so. The exercise got a little lengthy, but I had fun with it nonetheless. It assumes an election between two candidates and no other questions on the ballot.

The document is embedded below (it's only 4 pages, so suck it up), and comments are always welcome!

As a follow-up: Is voting the only way to participate in our government? Is it the most effective way?


Vote

Let's trade crap!

You know what sucks? Advancements in technology. Paper money is totally evil, and we should probably do away with it because, as far as I'm aware, there was no such thing as evil before currency reared its ugly head right around 2000 BC.

Luckily for me, some folks in Durham, NC (shoutout!) are throwing a helpful event where I can just bring my junk, drop it off, and pick up someone else's junk. What a relief, as I usually have to rely on the dump for that sort of service.

Is "Free Market" a play on the fact that they're all hippies?

Sadly, I expect the organizers will just end up with a bunch of trash at the end of the day. (Helen, if you're reading this, I'm sorry I stole it off your Tumblr and am now totally ripping on it.)

In truth, it does sound like a fun enough event. Going back to a barter economy is something like participating in a Renaissance fair without dressing up like an idiot; you get to spend some time really understanding why we don't live that way anymore.

In fact, if I've got my economic history right, marketplaces like this - but with less worthless crap - were the way modern banks were sort of born in Venice. (Aside from pretty much all of China, Venice was the evolutionary capital of financial systems around the 14th century.) Instead of lugging around their giant sacks of gold and whatsuch, uber-rich Venicians would make a stop by the bench (in Old Italian, banca - hence "bank") where exchange counters hung out, drop off their gold for a deposit slip, and pay sellers with what was essentially a check on their account. Awesome, no?

In any case, people found it much easier to carry little slips of paper instead of, say, a bunch of goats or something. Funny how that idea caught on.