May 2011 JOLTS Release: March 2011's Beveridge Curve

Using the recent unemployment rate from the CPS and yesterday's JOLTS release, Corrections offers an updated Beveridge curve.

Monthly & Annual Wholesale Trade: Sales and Inventories, May Release

Below, HP-filtered May's Monthly & Annual Wholesale Trade: Sales and Inventories up to April 2011 (click to enlarge).

Stochastic Volatility in an AR(1)

Below, we display two AR(1)'s with the same unconditional variance.  One has very slow-decaying stochastic volatility that is an AR(1) with unconditional mean 10, while the other has constant variance of 10 (note that it would be hard to tell this from the second diagram! We offer a random draw of results).  

First, the values with and without stochastic volatility (click to enlarge).

And our stochastic variance terms in our AR(1) (click to enlarge):

Weekly Initial Jobless Claims - May 12th Release

Weekly Initial Jobless Claims up until May 5th (click to enlarge).

May 2011 JOLTS Release: March 2011's Beveridge Curve

Using the recent unemployment rate from the CPS and yesterday's JOLTS release, Corrections offers an updated Beveridge curve.

Tax Receipts and Tax Rates

Will increasing taxes on the rich help deficits?  90% tax rates on the wealthiest or 28% on the wealthiest, and no discernible change in Federal Tax revenues as a proportion of GDP.  This relationship, known as Hauser's Law, is quite robust.  Below, see the relationship (click to enlarge).

Rule of thumb: people who want to raise taxes on the rich don't want to do so to fix deficits;  they have ulterior motives.

Share of Labor

A subset of the population does not like that economists use mathematics. Theories of various current events are often given.  Such theories, if they are to replace the sort of "economics 101" that is now taught, need to explain phenomena like the one displayed graphically below: the remarkable stability of labor's share of national income (click to enlarge).

It's almost a miracle it has fluctuated so little in the past 64 years, as the proportion of women in the U.S. workforce (for example) rose from 15% to over 50%, while proportion of men employed shrank a small amount.  

Explaining stylized facts like these is the first step in being taken seriously.  

Impulse Response Functions and Data

Every once in a while, you create a graph without really massaging the data that looks very similar to a calibrated model.  Below, a "shock" and return to trend in initial jobless claims (click to enlarge).  Note that the data is in percent change from a year ago.

Inflation and Prerecession Trends

Here, Corrections displays the Consumer Price Index and a linear projection of the CPI using prerecession data.  It gives an idea of how the recession impacted inflation so far.  It is further worth noting that the CPI is well-known to overstate inflation (causing social security benefits to outpace real inflation) for several reasons, such as an inability to price quality improvements (it should be clear that the quality of most products has risen over time).  It's also worth noting that older measures (such as those used by shadow statistics) overstate inflation even more by not adapting their measure to new products or changing expenditure patterns.

See the consumer price index and projected consumer price index displayed graphically below (click to enlarge).

Spanish Flu

In their paper "The Economic Effects of the 1918 Influenza Epidemic" (Working Paper, 2002), Elizabeth Brainerd and Mark V. Siegler examine a graphically powerful natural experiment.  They use the 1918 Influenza Epidemic as a natural experiment on population.  The dramatic loss of life and the seriousness of the epidemic can be seen in Figure 1 (click to enlarge).  The fact that this flu took out middle-aged people rather than young and old people can be seen from the "W" shape in Figure 2a (click to enlarge).  

The authors find a very robust impact on areas hit heavily by the flu: higher growth rates (consistent with standard neoclassical growth model predictions).

Rule of thumb:  graphics are the most convincing way to argue a good natural experiment.

Employment Situation - May 6th Release

Unemployment rate up until (and including) April 2011 (click to enlarge).  Note the uptick.  In Corrections understanding, the data does not take into account the May 5th release of Weekly Initial Jobless Claims (which was for the week ending April 30th).

Weekly Initial Jobless Claims - May 5th Release

Weekly Initial Jobless Claims up until April 30th (click to enlarge).  Note the dramatic uptick.

Cash for Clunkers

NBER Working Paper "The Effects of Fiscal Stimulus: Evidence from the 2009 'Cash for Clunkers' Program (NBER Working Paper, 2010) (gated) by Atif Mian and Amir Sufi provides a great "economist" story.  They look at the Cash for Clunkers program and find that it caused 360,000 extra cars to be purchased, almost all of them coming from people who would have bought cars sometimes in the next seven months.  That is, it did not generate "new" car sales, only pulled them sooner from the future.  Enacted in July and August 2009, its effects were reversed by March 2010.

Their figure displays it best: a thin, sharp upward spike with a lower-than average drop-off for the next five months (click to enlarge).

Business Employment Dynamics: 2010Q3 Release

Here, Corrections displays the recent Business Employment Dynamics data from 2010Q3 in rates.  They come from administrative data.  Gross job gains and gross job losses are clearly defined.  Expansions and contractions give the rate of businesses that either expanded their payrolls or contracted their payrolls, in net.  Openings and closings give the rate of businesses that open or closed their doors that quarter.  See these six time series graphically below (click to enlarge).

Trusting Surveys

In their new paper, Manipulation of Social Program Eligibility (AEJ: Economic Policy 2011), Adriana Camacho and Emily Conover offer an analysis of Columbian census sampling on election years.  They find that sampling is likely manipulated right before election years to increase the number of beneficiaries of welfare programs.

The lines below denote elections.  One can see a large relative sampling increase of the poor before and during election years.

Rule of thumb: when surveys have consequences, their outcomes will be manipulated.

Taxation and Tax Avoidance

Corrections offers a nice figure from Emanuel Saez's "Do Taxpayers Bunch at Kink Points?" (American Economic Journal: Economic Policy 2010) (gated) (ungated).   The figure is a histogram of reported income by tax filers (married and single) in $800 categories from NBER's public use tax data.  Note the dramatic bunching for single tax filers around the first increase in marginal tax rates (click to enlarge).  See paper for table notes.

Rule of thumb: distortionary taxation is first order.  Everything else is second order. 

Supply-Side Economics

Here Corrections provides a powerful graph on the distortionary nature of taxation from Marco Bianchi, Bjorn R. Gudmundsson and Gylfi Zoega's paper "Iceland's Natural Experiment in Supply-Side Economics" (AER 2001).  Before 1987, Icelanders had to pay taxes on the previous year's income.  In 1987, they had to pay taxes on the current year's income.  Consequently, 1986 had no substitution effect away from work, though taxes were still being paid.  Compared to the surrounding years, there was an increase of  4.16% in real GDP.  Employment jumped by 4.16% for women: to put this into perspective, this is 15% of the entire increase in the employment rate of women between 1960 and 1980, a sexual revolution.

Among the best graphs Corrections has seen in economics displaying a relatively clean natural experiment can be found below (click to enlarge).  

Anything resembling a 4.16% increase in GDP growth per year is something worth fighting for.  Compare if we could capture less than one fourth of this hypothesized 4.16% effect.  By 2020, US GDP would be 1.8 trillion dollars higher: enough to solve any welfare problem one can come up with.  To see this graphically, see projected US GDP with a 3% real growth rate (the average) or 4% real growth rate below (click to enlarge).

Rule of thumb:  nothing but growth matters.

Student Instructional Hours

The Chicago school year is 174 days with 5.75 hours per day, for a (rounded) total of 1001 instructional hours per year.  The New York City school year is 186 days with 6.83 hours per day, for a (rounded) total of 1271 instructional hours per year.

The cumulative difference is striking, and is graphically depicted below (click to enlarge).  By the time a New York City student has graduated, while being in school for 12 years, they have effectively been educated for 16.51 Chicago school-years.  Prima facie, a remarkable disparity.  

Debt, Primary Surplus, and Inflation

Four graphs relevant to understanding the current budget situation and inflation.

Historical, real U.S. Debt (click to enlarge).

Historical real U.S. Debt as a Fraction of GDP (click to enlarge).

Historical U.S. primary surplus as a fraction of GDP (click to enlarge).

Historical U.S. inflation rate between quarters, by percent change in CPI (click to enlarge).

Give Peaceful Resistance a Chance

New York Times opinion "Give Peaceful Resistance a Chance" (March 9th, 2011) offers insight into part of an economist's raison d'être. The article by Erica Chenoweth, a Professor of Government at Wesleyan University, misunderstands heterogeneity in revolutionary starting conditions. Her claim:

Unfortunately for the Libyan rebels, research shows that nonviolent resistance is much more likely to produce results, while violent resistance runs a greater risk of backfiring.

To back up this statement, she claims that:

Indeed, a study I recently conducted with Maria J. Stephan, now a strategic planner at the State Department, compared the outcomes of hundreds of violent insurgencies with those of major nonviolent resistance campaigns from 1900 to 2006; we found that over 50 percent of the nonviolent movements succeeded, compared with about 25 percent of the violent insurgencies.

Why is this bad research? Because not all revolutions have the same starting conditions. Imagine a world in which there exist dissidents who optimally choose between armed rebellion and peaceful protesting. These dissidents know the government they face and the probability of success of a given venture. Then the observed probability of failure for armed revolution may be higher than of peaceful protest even when both were always chosen optimally. To understand why Chenoweth and Stephan get the results they do, observe the following conjecture in figure form (click to enlarge).

A rational rebel will take the upper envelope of these two decisions. If this is the case, then we will see violent revolutions under oppressive regimes that generally fail, and peaceful protest under non-oppressive regimes that generally succeed. There will be no Ghandi's under Hitlers, Stalins, and Mussolini's. Ghandis can only be successful under men who are inherently peaceful when others are peaceful with them, such as Churchill. Similarly, it may often be difficult for Malcolm X's or The Weathermen to succeed in vastly less oppressive societies, where hoses and dogs rather than machine guns and concentration camps are used to control protest. They are unable to gain the sympathies of the populace. Martin Luther Kings are better suited for the United States than the Malcolm Xs or Bill Ayers of the world.

It is no coincidence that Bill Ayers changed from attempting to bring down the United States by armed rebellion to bringing it down from within--he reoptimized.

The conclusions Chenoweth attempts to draw are faulty due to sample selection.  Armed rebellion may be more likely to succeed conditional on the situation but less likely to succeed when looking at the unconditional success rate.

Killing in L.A. drops to 1967 levels

LA Times article "Killing in L.A. drops to 1967 levels" (December 26th, 2010)" makes the common and unfortunate mistake of claiming, without cause, that crime rises during economic downturns.

Strikingly, homicides in the city have dropped by about one-third since 2007, the last full year before the economic downturn, according to a Times' analysis of coroner records.

It's unclear why a reasonable person would think that murders rise during bad economic times, beyond some primitive association of poverty and criminality. Certainly, all evidence is to the contrary. The graphs below show the trends in homicide rates over time (first in per capita rates, and second in per capita percentage changes in crime). Nothing in these trends supports the Time's "predictions that a bad economy would inexorably lead to higher crime."
(click to enlarge)

(click to enlarge)

In addition, a 2004 Journal of Economic Perspectives article written by University of Chicago economist Steven Levitt (available here) argues that the impact of macroeconomic variables on crime such as murder is theoretically ambiguous, and that violent crimes do not vary systematically with the unemployment rate. Pointing out how little "experts" seemed to know about crime trends, the article includes the following graph (re-printed without permission, click to enlarge), which could have served as a warning to the LA times.

Autocorrelation in Presidential Approval Ratings

Corrections examined President Obama's Approval Ratings and noticed that they appeared more noisy than white noise, e.g. that they were negatively autocorrelated.  They are displayed graphically below (click to enlarge):

To check that they were too noisy, we graphed out the distribution of "up up", "up down" "down up", etc. in a contour plot, where "darker" means more density, and "lighter" means less density.  A "-1" means down, a "0" means same, and "1" means up.  Therefore, "Same Up happens 5% of the time" would correspond to "x=0 y=1 z=.05".  This is displayed graphically below (click to enlarge).  As a reader can see, most of the time approval ratings stay the same.  But the point is that we have skew--rarely do we get "up up" or "down down", the upper right and lower left corners, respectively. 

The main point here is that for reasons inexplicable to Corrections, a "down" tick is more likely to be met by an "up" tick than a noisy process would predict.  We posit this warrants further analysis.  Suggestions as to causes are welcome.

Update: Upon further reflection, Corrections suggests this is likely due to the absence of a unit root with noise.  That is, every movement we see is one of two types.  The first is a "real" movement.  The second is a "noisy" movement.  Noisy movements are transitory and likely to disappear.  Real movements are permanent, in expectation (letting opinions be a random walk, for example).  Any movement due to noise will likely go away next period--up noise will be met with down, and down will be met with up.  This explanation doesn't completely satisfy Corrections, but it seems relevant. 

The Unemployed Held Hostage, Again

New York Times editorial "The Unemployed Held Hostage, Again" (November 27th, 2010) simply lies to its readers. It claims that there is no reason for tax cuts, but that extending unemployment insurance is a necessity. "There is no good argument for letting jobless benefits expire, or for extending those cuts."

Both of these claims are false. Harald Uhlig in an American Economic Review article "Some Fiscal Calculus" (also discussed here) estimates that for every dollar of government stimulus, in the long run time-discounted $3.40 is lost. For every dollar given up in taxation, time-discounted $2.40 is gained. On the other hand, Robert Shimer has estimated that unemployment insurance accounts for between 1-1.5% of the nation's unemployment rate.

A Woman. A Prostitute. A Slave.

New York Times article "A Woman. A Prostitute. A Slave." (November 27th, 2010)states that, when it comes to ending forced prostitution "There are no silver bullets, but the critical step is for the police and prosecutors to focus more on customers (to reduce demand) and, above all, on pimps."Corrections has a silver bullet: legalize prostitution. Essentially reiterating an earlier point ("Enabling prostitution" from September 3rd, 2010), it seems rather obvious that forced prostitution is an inferior input into prostitution services. Presumably, upon the legalization of prostitution, willing prostitute supply will shift out dramatically more than forced prostitutes.  This will cause forced prostitute quantity to shift down. We depict the silver bullet to severely decrease forced prostitution in the United States graphically below (click to enlarge).

The responsibility for the larger amount of unwilling prostitutes is on those that oppose legalized prostitution.

Revisiting Educational Hiring

Earlier this year, in May, the New York Times ran the article "Teachers Facing Weakest Market in Years" (May 19th, 2010). The article claimed that

Even upscale suburban districts are preparing for huge levels of layoffs. School officials and union leaders estimate that more than 150,000 teachers nationwide could lose their jobs next year, far more than any other time, including the last major financial crisis of the 1970s.

Corrections suggested this was nonsense, that the comparison was faulty, and that the Times only offered anecdotal evidence. A commenter, Student1776, suggested that, given there was little evidence for writing an article about how poorly teachers were faring, the Times might have ulterior motives.

Here, Corrections offers a bayesian update on that hypothesis. The summer was not unkind to educational occupations. Below, we offer the residual of HP filtered, deseasonalized educational hiring and separations ("taking out" the long-run business cycle variation and homogeneous monthly effects).  This image indicates to Corrections that teacher separations (including quits) have not suffered much during the recession (click to enlarge).

For those unfamiliar, Hodrick-Prescott Filtering ("HP filtering") is a way of separating business-cycle frequencies from time-series data.  For those interested, we can graph GDP and HP filtered GDP from the first quarter of 1947 to the third quarter of 2010, in billions of chained 2005 dollars (click to enlarge):

For visual purposes, we can zoom in on the first quarter of 1980 to the third quarter of 2010, to help understand the severity of the recent recession (click to enlarge):

 Finally, it is important to note that while deviations from business cycle trends look like quarterly GDP growth, they aren't.   For better understanding, we offer a graph of recessions from 1947:Q1 to 2010:Q3 and deviations from HP filtered GDP in billions of 2005 dollars (click to enlarge).

Hopefully, this brief introduction to the HP filter makes clear that our extraction of business cycle trends are not taking out the phantom educational job loss claimed by the New York Times.  This job loss does not appear to exist on either the hiring or separation margin, unless one's loss function is as biased toward finding teachers in trouble as the one used by the New York Times.

The Cost of Terrorism and Airline Security

Lost in much of the debate on airline security and invasive searches has been a realistic examination of the worth of the costs and benefits of these invasive searches. Given that the last few attempted terrorist attacks, such as the al-Qaeda's Shoe Bomber, or Umar Abdul Mutallab, the Underwear Bomber were stopped in the air rather than by airport security, it's unclear whether or not security has stopped any attacks that Corrections has heard of. Let us leave that aside.

Let's say that airport security could stop all attacks, and without it two Boeing 737's would explode in the mid-air with 175 passengers every year, with no survivors. The average flyer is 42 years of age, and they would lose around of their expected 77.9 year life, or 33.9 years. This is a total 12,565 life-years lost. There are 809,611,003 airline passengers per year, and according to the wait time figures Corrections found, each individual spends about 5-6 minutes in line (between 1 and 25). This is a waste of approximately 7,697 life-years to 9,236 life-years each year.

If this tradeoff is about correct, then a pure utilitarian back-of-the-envelope calculation makes it look as though the time tradeoff from waiting in line alone is about the same magnitude as the cost of death from two Boeing 737's blowing up every year.

For skeptics, the annual budget is $8.1 billion a year. Taking the typical government $6.9 million per life saved, (a statistical measure of the value of human life), it appears as though we are spending the value of 1,173 people each year on the TSA. That is, if the TSA isn't saving 1,173 people per year, the money may be better spent elsewhere.

From these back of the envelope calculations, it appears that everyone would benefit from the government abolishing the TSA and allowing many people to die each year. Further, this assumes the TSA actually has some nonzero impact.

Corrections is interested in comments. Obviously these are back-of-the-envelope calculations and assume away some issues. What first-order losses or gains are we missing?

No, They're Not a 'Hitler' or a 'Stalin'

New York Times article "No, They're Not a 'Hitler' or a Stalin'" (November 16th, 2010) offers a complete misreading of Russian history leading up to the Second Congress of Soviets following the October Revolution of 1917.

Communism has never once arisen — not in the U.S.S.R., not in China, not in Cambodia, not in Cuba, not in Vietnam, not in North Korea — as the cumulative result of social reforms. It was always brought by violent revolution carried out by a fanatical minority, usually during or right after war. Once in power, committed revolutionaries sought to transform agrarian countries such as Russia or China into modern industrial states by oppressing peasants and applying political terror.

This is not true. The lead-up to the Russian Revolution was 56 years in the making, seeing a series of social reforms brought on by both violent extremists and political reforms. In the period between the Peasant Reform of 1861 and the October Revolution, Russia saw the freeing of the serfs, an overhaul of the penal code and judicial system, the creation of the Duma, the legalization of trade unions, organization of political parties, and the creation of local elective bodies with their own taxation rights. To be sure, Russia also saw anti-liberal reforms, but this strengthens the point that this period of great social reform lead directly to the Revolution of 1905, which in turn found its new steady state after the February and October Revolutions of 1917.

The claim that Communism did not result from "cumulative reforms" is a fallacy. Cumulative reforms certainly co-moved with increasing instability in Russia over the course of a half century, leading to the first Communist government, enabling it to kill tens of millions of people until its fall in 1991.

One Year Later

One year ago today Corrections wrote our first post, on the Fifth of November. In the time since, we have written 268 more posts, and received approximately 5,200 unique visits for a total of 10,300 page views. These articles have ranged on topics from crime and punishment to the economics of medicine, drugs, stock markets, GDP, judge political bias, and more.

Of late, our posts have slowed, as we have shifted away from the brief articles that marked the birth of Corrections and towards more detailed, data- and simulation-intensive articles. Initially, our objective was to Correct the news sources we saw as consistently making economic mistakes in their analysis.

For the next year, we plan to offer fewer articles, less focused on an individual news article. Instead, we shall offer articles that go into more depth and explain an idea we see as one that needs Correction. One example of this might be the idea that it's questionable if unemployment insurance raises unemployment. It does. At all times.

Corrections plans to revisit this decision one year from today. As always, comments, Corrections, and suggestions are always welcomed. We would like to thank you for your readership, and hope our new format will offer our readers something new.

Wyoming Rep. Lummis: Estate tax rise has some planning death

Casper Star-Tribune article "Wyoming Rep. Lummis: Estate tax rise has some planning death" (October 30th, 2010) discusses a cause that Corrections has championed for years but that has been relatively unreported in the media. The estate tax is set to rise from 0% this year to 55% next year for gifts in excess of over $3,000,000. Cynthia Lummis reports an unintended consequence of this tax hike.  She does not, however, note how the same incentives encourage murder.

U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31.

In terms of numbers, this most importantly captures small businesses and farms with high levels of capital that are transferred from one generation to the next (hence its mention in a local Wyoming newspaper). Remember that the business does not have to have revenues in excess of $3,000,000, but worth of over $3,000,000.  The death tax has several marginal tax rates, depending on wealth, as displayed graphically below.

If it hasn't earned it previously, the estate tax certainly earns its nickname "death tax" because of the manner in which it currently incentivizes death.  This will come in the form of both voluntary death, as the article notes, such as suicide, or involuntary death, such as a child murdering their elderly parents.  We can graph out the increasing incentive children have to murder their parents--upwards of $3,000,000, they gain about $1,500,000.  Certainly, when store clerks are murdered for less than $100 in a robbery, it is not overly difficult to imagine these incentives meeting a threshold for murder.  Below, we graph the "benefit to murder" created by a hike in the estate tax (click to enlarge).

We note that our analysis foregoes inclusion of the $1,000,000 exclusion allowed for in 2011. Our core point will of course remain the same.

Perhaps the most interesting note is not how much death taxes encourage murder, but how regulatory uncertainty motivates murder.  It could well be that the coming tidal wave of Republicans in Congress will roll back the estate tax.  However, this will occur after it is too late for prospective inheritors to murder their parents.  Therefore, it may be in their interest to pre-emptively murder their parents, even if they think a Republican congress will roll back the estate tax.  In this sense, not only will a hike in the estate tax cause murder, but we can also say that regulatory uncertainty kills.

Don't judge the jobless

USA Today article "Don't judge the jobless" (October 27th, 2010) discusses "99ers", individuals who have collected extended unemployment insurance for 99 weeks and are about to run out. The author, while attacking Robert Barro who "doesn't know what it's like to be unemployed for this long," claims:

My story isn't unusual for young professionals.

It actually appears to be quite unusual. In order to see why, we can take general U.S. statistics as a first pass. Two questions are important to finding out if someone will be a "99er." The most important is "what are the chances an individual finds a job in a given month?" (Alternatively, "how long does it take to find a job?") We can examine the job finding rate per month as approximately equal to the number of unemployed re-entering the workforce. This isn't an exact statistic, as individuals may move from job to job, but it will be rather close. The number of jobs found in a given month over the number of unemployed for that month is displayed graphically below, and is known as the "job finding rate" (click to enlarge).


How might we interpret the above graph? As of August 2010, the number of hirings/unemployed was 0.32. That is, 1/3 as many people were hired as were unemployed. Extending this logic and making a few assumptions (homogeneity, only the unemployed are hired, both assumptions we shall defend as simplifying, but not result-altering later) that only the unemployed are hired, then the average individual should spend 3 months unemployed, or 13 weeks unemployed. 33% will spend one month, 22% will spend 2 months, 15% will spend 3 months, 9% will spend 4 months, and so on. To spend 22.77 months unemployed (99 weeks) comes with a very small probability-- 0.02%. Two hundreths of one percent is rather uncommon indeed. But this is slightly wrong for a number of reasons, though it is relatively accurate as a first pass. Say 30% of those new hires come from people moving jobs. We still have the probability 0.4%, or about half a percent.

First, the author notes that they were re-hired for a four-month stint before becoming unemployed again. We can ask a similar question: "What are the chances (making similar assumptions) that someone who was hired will last for four months?" We can find this from the "job loss rate", calculated as the number of fires, or separations (depending on your preference) displayed graphically below (click to enlarge).

In any given month, about 1.75% of currently-working Americans are fired, and about 3% separate from their job (for the interested, this gives about a 33-month average for a given job, reasonable when teenagers and young adults are added to the picture). In Correction's recollection, adults spend something approximating double that on a given job. What are the chances the author will be fired within four months of finding a job? Making similar assumptions, there's a 93.2% chance that an individual will not be fired before four months. That is, the chance the author would be fired within four months (or less) was 6.8%. While not as small a probability as a hundredth of a percent, this still puts her in a very small minority.

Corrections recognizes that these calculations assume a homogeneity that is not present. However, in the author's case, we actually think these assumptions have helped her. The inability to find jobs has fallen primarily on men, the uneducated, and construction workers. The author, formerly in the information industry, a woman with a college degree, will be less, not more common. Rather than attacking Robert Barro, who "doesn't know what it's like to be unemployed for this long" for a reason, and who wrote the (text)book(s) [1] [2] [3] on modern macroeconomics, the author would be better served by spending time looking for work. Her plight does not seem as common as suggested, and it appears rather difficult to rack up 99 weeks of unemployment, especially if one is college-educated and not in construction.

There is further data about unemployment insurance that Corrections has mentioned before ("Loss of Jobless Benefits Could Lower Unemployment Rate" July 6th, 2010). Even in the depths of Pittsburgh's recession in the early 80's, where local unemployment was higher than it is now nationally, individuals suddenly found jobs when their unemployment insurance ran out (click to enlarge):

Hidden costs to tax cut

Boston Herald article "Hidden Costs to Tax Cut" (October 23rd, 2010) talks about the benefits of a tax cut as if it would be a direct transfer from government coffers to consumers. However, they would potentially gain much more.

Each voter must decide if that 3 cents per dollar savings is worth more to them than what they would lose in cuts to public safety, schools, roads, senior programs, health care, libraries, housing.

Because taxes create deadweight loss, for every three cents transferred from government is more transferred to them. Indeed, it could be much more. This is depicted in a competitive constant marginal cost case graphically below (click to enlarge). However, it could be extended to a monopolistically competitive case--this would make Corrections point even more strongly, as tax incidence may sum to more than 100% for monopolies, as they transfer the loss of the tax to the consumer inefficiently, so to speak.

Put in the way the Herald is arguing it, individuals may be losing one cent of government services for every three they get back in sales tax. Additionally, they are gaining not only what they lost, but what they never bought because of the tax wedge. They gain the amount they were taxed as well as the distortion, the tax wedge, brought on by that tax.

The most conservative court? Hardly

Boston Globe article "The most conservative court? Hardly" (October 10th, 2010) discusses the leanings of the Supreme Court over the last few years. What it lacks is the recognition that the average justice's opinion is not what makes up a court--it is the median Justice's opinion. Corrections offers a simulation of the median and mean of a court composed of 9 justices (though the number has changed, the spirit of the simulation remains). It is important to note that all that follows below is a simulation.

Presidents are elected every 4 years with a 50/50 split in expectation between parties. Each President picks up his party's preferences with a small deviation of his personal preference. If a Justice leaves, one is appointed with the current President's ideology plus a noise term. If a Justice does not leave, he changes his opinions slightly from last period in a random walk. Each Justice has a 5% chance of leaving in any given year.

Then for 9 seats from a simulated ~235 years, we can plot the ideology of the person sitting in that seat, depicted separately for each seat graphically below (click to enlarge).



Similarly, we can merge all the Justices into one graph, if it helps understand the magnitude of individual shifts (click to enlarge):



But what is important for the court is the median Justice, not the mean, and not any individual. We present the President's ideology along with the mean and median Justice ideology below (click to enlarge):



In the simple simulation above, for most reasonable parameter values, the median Justice, in part because the parties differ much more than the personality noise for Presidents and the ideology noise for their Justices. Indeed, in any number of most simulations we ran, the median variance was much greater than that of the mean. This is an important distinction that the Globe's discussion of individual Justices did not encompass (though its discussion of decisions remains relevant).

On the Pulpit, Rabbis Earn More Than Christian Clergy

Normally, Corrections avoids old articles.  However, Jewish Daily Forward article "On the Pulpit, Rabbis Earn More Than Christian Clergy" (September 15th, 2010) wonders aloud why rabbis are paid, on average, more than christian clergy. It comes to no firm conclusions. Indeed, Corrections spent some time thinking on the curious problem: Catholics and Protestants appear to be paid between $25,000 and $40,000, while Reform and Conservative Rabbis appear to be paid between $137,000 and $147,000. A rather large gap.

Corrections came to the weak conclusion that the story was about opportunity cost and relative wealth status. However, the same publication came out, two weeks later, with the article "Rabbi Searches Are Tough, but Are They Illegal?" (September 29th, 2010). This article mentions nothing about pay, and merely describes the theological implications of a cartel of Rabbis:

The RA requires synagogues to enroll exclusively in its search process, filters the selection of candidates the congregations may interview, and prohibits candidates and congregations from finding each other directly. Any Conservative rabbi who seeks a pulpit outside the RA’s centralized process, and any congregation that interviews candidates from other movements, will be penalized.

It bespeaks either a deep ignorance of economics or a willing deception of their readers that the Forward did not connect the two. To note that Rabbis have a firm cartel with punitive powers on the one hand, then wonder why Rabbis are paid so much on the other is ludicrous.

Cartels artificially limit supply to raise prices. It utterly clear to Corrections that the Rabbinical Assembly is a cartel of Rabbis that artificially constricts supply and raises wages. The Rabbinical Assembly's cartel also possibly increases quality above what the market would demand to further drive up price, though there is no evidence for this either way (merely a likely possibility). A depiction of what the Rabbinical Assembly is practicing may be found graphically below (click to enlarge).

The New American Normal

New York Times article "The New American Normal" (September 27th, 2010) states that there may be heterogeneity in the ability of traders to make money during various market conditions. Corrections doesn't see this as being the case. We expect that a trader has an equal opportunity to have a positive expected value on a trade whether the market is highly volatile or not.

Fragmentation holds sway. The stock market used to be a fair proxy for the state of the economy. Now it’s a market of traders, not investors. They want to know what the spread is today and tomorrow; they can make money on the way up or down; they care far less about U.S.A. Inc.

So the market goes where it goes — up of late but largely directionless (which makes it harder on those up-or-down traders) — while out on Main Street the struggle to make family payroll continues. People work longer hours, they juggle how to cover their kids’ needs, how to de-leverage just a little — and they’re still meant to “consume” for the economy’s sake.

First, for the ill-defined class of "up and down traders", we might consider they do better when the market is highly variable. However, a quick view of the 30-day average S&P 500 price variance dispels this notion rather quickly (click to enlarge). If anything, Corrections expects that the average trader did better in the low volatility areas than the high (NBER recession dates are colored in grey).

Either way, it's ludicrous to claim that traders like one market environment over another, unconditional on their current assets. Unconditional on current assets, a trader who believes the market will be constant will be able to make money off selling a put below the current price (believing a stock won't go below the sum of strike price and premium) and selling a call above the current price (believing a stock won't go above the sum of the strike price and premium). A trader can flip sides on the trade if he thinks volatility will be high. If the market is undergoing a constant increase, then demeaning by the expected trend yields the same trading strategy. Whatever the market conditions, it's rather simple to construct trading strategies that require simple adjustments. The level, rate of change, and volatility won't matter.

The only manner in which changing market conditions may matter to a trader is an increase in the cost of capital (for deals requiring leverage) a decrease in their ability to utilize specific knowledge or expertise (analysis of mergers and acquisitions may presumably require expertise and contain a cyclical trend), or if the trader already owns positions in the market and does not want those to decline--distinctly separate (though difficult to distinguish without data on specific trends) from their ability to make money off present market conditions.

The Campaign Disconnect

New York Times editorial "The Campaign Disconnect" (October 1st, 2010) defines and interprets wealth and income dispersion in the United States. Corrections has a different take:

In an era of extreme economic inequality (which is another way of saying economic unfairness) [...]

We forgo analysis of the ludicrous definition of "fair" Bob Herbert uses. What the Times does not note is that high dispersion in wealth and income might be better termed "opportunity" and "motivation." Take the extreme example: complete equality in wealth. There is no opportunity for wealth to increase, and therefore no motivation to work or be creative.

In this respect, while it seems a concern for wealth and income dispersion "equality" is ubiquitous, it appears to miss inequality as a motivating factor in human creativity.

A Best Seller as 4 Films Tied Together With Talk

New York Times movie review "A Best Seller as 4 Films Tied Together With Talk" (September 30th, 2010) concerning the Freakonomics movie is in error in its report on an experiment in public high schools run by John List and Steven Levitt. It gets the payment method wrong in multiple ways.

The Grady-Ewing vignette, filmed in a vérité style, follows an experiment in which ninth graders at a Chicago high school were paid to improve their grades: $50 for every grade above a C and the chance to win a $500 lottery.

To qualify for payment, all students had to have all grades be C or higher, no in-school or out-of-school suspensions, and no more than one unexcused absence. If they qualified, 50% would be paid $50. The other 50% would be given a 10% chance at $500. Further, for 50% of either group, the parents would be paid. For the other, the students would be paid. (That is, there were four treatment groups and a control).

The Times gets the threshold wrong, eschews the payment of parents, and gets the payment doubly wrong.