econlife - How to Measure Our Misery by Elaine Schwartz

An economist could say that three “lows” and one “high” bring happiness:

• low inflation
• low unemployment
• low interest rates
• high growth

Taking the flip side, they also let us identify misery.

The World’s Misery

Economist Arthur Okun (1928-1980), created the first Misery Index. By adding together the inflation rate and the unemployment rate, he had a measure of economic distress. I guess it makes sense that when purchasing power dips and joblessness climbs, there are fewer smiles.

Now though other economists have taken the idea a step further. Johns Hopkins Professor Steve Hanke tells us that we should add interest rates and growth to the equation. More precisely, he totals the unemployment, inflation, and bank lending rates. Then, from that number, he subtracts the percent change in per capita GDP growth. When the first three rise, they are the “bads.” But if the last one goes up, it is a “good.” You can see that high numbers are alarming.

From a list of 98 countries, these are Dr. Hanke’s most miserable five in 2017:

The States’ Misery

Returning to the Okun approach, we can use data from a 2016 paper to see the most  miserable states during the Great Recession. To get his numbers, an SMU economist added his inflation rate formula to the unemployment rate. (The NBER dates for the recession were December 2007 to June 2009.)

From a list of the 50 states, these were the five most unhappy:

U.S. Misery

Returning to the Okun approach, for the worst U.S. numbers, we can look back to the stagflation of the early 1980s when we had a stagnant economy and inflation. Now though, combining exceedingly low inflation and unemployment, our March misery index was 6.46:



However, even with such a low index number, the U.S. is not among the 10 least miserable countries:

Our Bottom Line: Misery Index Questions

Like all statistical yardsticks, a misery index can be a handy tool. However, we should also remain aware of its defects:

• With unemployment, we are looking at the tip of the iceberg. Although we can have too low a participation rate, too many discouraged workers who left the labor force and part timers who want full time jobs, still the unemployment rate can be attractively low.
• As for the inflation rate, the index assumes that low inflation numbers are good, even when they are too low.
• And thinking of unemployment and inflation together, equal weighting could sometimes be misleading. Unemployment can generate much more misery than inflation.

So, even with the U.S. Misery Index approaching its 60 year low, we might be sadder than we think.

My sources and more: The more you look, the more misery indexes you find and the more interesting it becomes. The Hanke list and some analysis were at Cato while this paper had the U.S. states numbers. Meanwhile, there were many possibilities at Bloomberg.

Please note that several sentences from today’s post were in a previous econlife.

This post was slightly edited after publication.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Those Subscriptions That We Love to Buy (and Barely Use) by Elaine Schwartz

MoviePass subscribers can see up to one movie a day. They just go to a theater and use an app that sets up the ticket payment. While a subscription used to be $50 a month, now you pay a jaw dropping $6.95 for 30 movies. The catch? You have to pay for a whole year upfront and add a $6.55 processing fee.

This is the story and then some economic insight…

The MoviePass Subscription

Soon after you sign up for MoviePass, a debit-like card will arrive in the mail. Then, you use their app to select a film and to check-in. At that point, they transfer the price of the ticket to your card so you can use it to pay as you enter.

This person used his app to see Dunkirk. “Success” meant the money had been transferred to his card:






The Numbers

MoviePass is very aware that the average moviegoer goes to a theater just 4.5 times a year. If their subscribers went daily, the firm would be paying an average of $8.97 a ticket or maybe $270 a month per person (unless it had a special deal with the theater). And if we are in a big city like New York or San Francisco, the ticket price soars to $16.50. But MoviePass does not have that problem. A whopping 88% of its subscribers underuse their MoviePasses.

And that takes us to behavioral economics.

Our Bottom Line: Mental Accounting

Nobel Laureate Richard Thaler explained seemingly irrational consumer behavior through mental accounting.  The following example is somewhat comparable to the MoviePass people who underuse their subscription. It is about Thaler’s friend at a department store quilt sale:

“The spreads came in three sizes: double, queen and king. The usual prices for these quilts were $200, $250 and $300 respectively, but during the sale they were all priced at only $150. My friend bought the king-size quilt and was quite pleased with her purchase, though the quilt did hang a bit over the sides of her double bed.”

As Thaler described, assigned to specific “mental account,” a purchase gets a reference that lets you know if it is cheap or expensive. Not only did the (mental) account for the quilt benefit but also the woman enjoyed an elevated transactional utility from the cheap purchase. Similarly, once MoviePass lowered the monthly subscription rate below $10.00, people’s “mental account” or imaginary bucket for entertainment got a bargain. And like the king-size quilt, the transactional utility of the purchase created a pleasure that far outweighed the reality of using it.

At this point we might even throw in the optimism bias from another economics Nobel Laureate, Daniel Kahneman. Defined as the difference between an expectation and its outcome, I wonder if the optimism bias (typically applied to risk taking), also explains why MoviePass buyers thought they would attend far more performances than they realistically would be able to fit into their lives.

So, returning to where we began, we have a lower MoviePass price that appeals to our mental accounting and takes advantage of our expectations bias.

My sources and more: This NY Times article on MoviePass started me thinking about the concept. From there, my investigation led me to The Hollywood Reporter  and BusinessInsider. and the perfect complement, Richard Thaler’s mental accounting paper.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - When the Economy Is Like the Weather by Elaine Schwartz

Where are we going? To forecasting problems.

Forecasting

The Past

IMF forecasting has been notoriously flawed. Predicting seven shrinking economies, they were way off for the Great Recession. The total was 91.

Below, do compare the pink to the blue.  The pink side represents the countries the IMF expected would be in recession. The blue is what really happened. As you can see, for 26 out of 27 years, their accuracy was rather bleak:

But the IMF is not alone.

There is a reason that the U.S. publishes a sequence of revised GDP growth estimates. More time means more data and hopefully more accuracy. In 2015, the numbers first took statisticians to a recessionary contraction and then, later, to solid growth:

The Future

You can decide if the following IMF forecasts will be accurate:

And yes, those IMF’s projections are close to what the Congressional Budget Office expects for the U.S. In dollars though, the difference is large, especially when compounded:

Our Bottom Line: The Likelihood of Predictability

Accurate forecasting is supposed to help policymakers. Some say it creates efficient decisions for fiscal and monetary policy. Good planning can erase future problems and minimize pending crises.

However, is it possible?

Many say no. Based on flawed models, continually changing data, and human bias, precise forecasting is tough. For the economy, policy lags often make current projections inappropriate when conditions change. It is also possible that knowing the future changes current behavior. Or, it can ensure that the prediction occurs.

You see where all of this is going. Whether looking at the weather, the economy or elections, forecasting is a chancy art. So, returning to the IMF and the CBO, we can be skeptical.

My sources and more: FT, here and here,  has been the ideal source for facts about IMF forecasting. From there, I recommend looking at Phillip Tetlock’s econtalk interview, this Atlantic Council analysis, and fivethirtyeight for a political focus. All display that we just don’t yet have a crystal ball.

Today’s post was slightly edited after publication.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

Exams by Andy Jobson

Everyone knows that exams are stressful for students.  For students who have not performed well during the semester, the exam can ‘make or break’ the credit, determining if a course must be repeated.  Even for the good students, the ones who care deeply about their grades, the exam can make the difference between an A or a B.

American students, though, might like to know that British students face a much more stressful exam time.  For one thing, the exams tend to come only at the end of the year, meaning that you have to remember a whole year’s worth of material.  For another, the exam can represent half of the final grade; at my school, the exam is only worth 20% of the semester.  When I spent my junior year abroad, stories were rampant of the various ways students coped (or failed to cope) with the anxiety.  One of my favorites involved a student who brought a teddy bear (presumably as a comfort) to the exam; midway through, he received permission to visit the loo.  Upon his return, he glanced at his paper and grew enraged.  “Why haven’t you done more than this?”  he yelled at his bear.  “Don’t you realize the time?”  He then proceeded to tear the bear apart.  (Of course, since I didn’t observe this directly, I cannot swear to its veracity!)

Students need to understand that exams can be stressful for teachers, too.  I always fret about whether I’m being too tough or too easy.  Did I cover the material sufficiently?  Did I ask the questions in a fair way?  Multiple choice tests can be challenging to write; I want my answers to have one clear ‘best’ answer without having too many ridiculous options.  Essay and short answer tests are easier to write, but tougher to grade.  How do I determine the point value of various questions?  What must a student say in order to receive full credit?

Mostly, though, the exam tells me if I’ve been successful in reaching my students.  What do they recall?  Did I manage to make them care about the material enough to prepare?  It’s always disheartening to see the occasional blank page, where a student clearly remembers nothing.  It can be ironic when a student displays absolutely no understanding or knowledge of anything I tried to teach, then writes on the final page something like “Thanks for being a great teacher!” 

I do sometimes laugh at the responses; we’ve all seen our share of crazy answers.  One of my favorites this year was in response to the question, “What book in 1798 launched the Romantic Movement in Britain?”  More than one thought the safest answer was Romanticism for Dummies.  A few others, possibly already thinking of college, wrote Romanticism 101.

Any teachers out there want to share the best ‘wrong’ answers to your exams this year?  Please share below.  Have a great, test-free summer! 

An educator of 22 years, Andy Jobson has taught government, economics, and U.S. History. Currently teaching English literature at Riverside Military Academy in Gainesville, GA, he’s also been an administrator, a STAR teacher twice, and taught elementary school with Teach for America.

econlife - More on the Mom Penalty by Elaine Schwartz

During February, we had lots to say about the mommy penalty. Now there is more.

Our first stop is a cartoon and then a study from Denmark.

The Cartoon

In “You Should’ve Asked,” French cartoonist Emma perfectly sums up the mommy penalty in two words: Mental Load.

Emma tells us that, “When a man expects his partner to ask him to do things, he’s viewing her as the manager of household chores…So it’s up to her to know what needs to be done and when…” And to cope with home as her second full-time job.

This is a brief excerpt from a much longer (phenomenal) cartoon:

The Denmark Study

To remember the quantitative side of the mental load, just think, “20%.” From 1980 to 2013, the long run gender pay gap averaged close to 20%.

Who

Although the data is from Denmark, it is not just about them. Initially, the Scandinavian countries did have less of a gender pay gap. Then though, their progress slowed, others accelerated, and all of us are close to the same spot now.

Below, the convergence is evident:

Why

Asking why that gap continues, the authors of this study say it is the children. Women switch to more family friendly firms and jobs. They work for fewer hours. Their pay dives– initially down close to 30%. Meanwhile for men, no change.

You can see the drop for women right after a first child was born. Even 20 years later, it never bounced back:

Furthermore, this study’s authors emphatically believe that we have causation here, not correlation.

Our Bottom Line:  Human Capital

Because we are also talking about raising children, we can ask if it’s good or bad for them that women are drawn to the home.

If you support the “good” side, then comparative advantage comes into play. Thinking traditionally, you believe that women are more suited to childrearing.  Consequently, they should be doing more of it and accept the opportunity cost.

On the other hand, blaming outdated social norms, you could believe that moms who work should not be tethered to the home. The data below is from 2002 but might still prevail:

Whichever, your side, we can all agree that most women have more of a mental load in the home than their partners.

My sources and more: If you go to just one link after econlife, do see the entire cartoon. But if you do continue to the academic side, this paper is a possibility.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.