John Cochrane is now blogging

John Cochrane is now blogging.

Recession Raises Poverty Rate to a 15-Year High

New York Times article "Recession Raises Poverty Rate to a 15-Year High" (September 16th, 2010) fails to acknowledge the poverty rate's intertemporally unstable nature. It compares poverty rates over time, an improper comparison due to the way poverty rates are calculated.

The share of residents in poverty climbed to 14.3 percent in 2009, the highest level recorded since 1994. The rise was steepest for children, with one in five affected, the bureau said.

One might think that individuals in the U.S. were only as well off as they were in 2004, when chained GDP/capita was approximately the same as it is this quarter. However, Corrections contends that we are actually even better than this. Below, find graphically depicted U.S. GDP over time in chained 2005 dollars (click to enlarge), and U.S. GDP per capita over time in chained 2005 dollars (click to enlarge). Note that chaining dollars is an attempt to introduce new products for comparison (otherwise, comparing cell phone prices from 1960 and today would not be well-defined).

The poverty rate from 1994 is measuring something completely different from the poverty rate in 2009. Poverty thresholds have changed multiple times, under a "sliding scale" approach. For example, in 1964, ~2.6% of U.S. households owned a color television. Circa 1994, 97% of U.S. households owned a color television. Beyond this, these televisions were not only cheaper, but were of better quality, programming, and durability.

Why is this relevant? Because increasing product quality is not properly measured, even with chained GDP. Below, we take minivans as an example.

In 2003, using Barry, Levinson and Pakes's instrumental method for demand estimation (also discussed in a previous post), Amil Petrin, in his phenomenal paper, "Quantifying the Benefits of New Products: The Case of the Minivan" (JPE 2002) estimates the value in dollars to consumers from the advent of the minivan by Chrysler in its first five years (1984-1988) as $2.8 billion in consumer surplus, and $2.9 billion in total surplus.

This surplus comes solely from an improvement in product quality that is largely unreflected in price due to monopolistic competition by competitors (GM and Ford introduced their own minivans in 1985). This sort of change will not be reflected by even chained GDP numbers. Because of increasing product differentiation (Petrin's "new goods" problem) and monopolistic competition (or competition), life is getting better than we're measuring with our best measures of product-chained GDP. Quality of life is higher.

Poverty indicators are not appropriate for "long" time spans because of innovation. Locally, we might think 2008 and 2009 are comparable. But in 1994, the internet had yet to be invented. Since then, as Austan Goolsbee and Peter Klenow estimate in "Valuing Consumer Products by the Time Spent Using Them: An Application to the Internet" (AER 2006) (gated) (ungated), the median individual gained $3000/year because of the advent (and widespread use) of the internet. The reason for this large gain is largely due to increased price competition and increased value of time. Since 1994, almost everyone in the United States is vastly better off than they were. (Another example might be how much individuals would have paid for a smart phone in 1994, given the millions that have them now and how "little" they paid for them relative for 1994 willingness-to-pay). This massive increase in consumer surplus generated from an increased value of time is unmeasured by GDP (underestimated) and poverty measures (overestimated). Use of these to compare long-run trends is ill-advised, especially when one has an ideological/Malthusian axe to grind.


Unfortunately, the notion that GDP growth generally underestimates utility gains is almost universally ignored in long-run intertemporal comparisons of utility.

Parenting should be a nonissue in gay marriage debate

Los Angeles Times article "Parenting should be a nonissue in gay marriage debate" (June 16th, 2010) concerns itself with the issue of gay marriage. However, it cites a study that is incapable of properly identifying what the Times suggests it identifies.

And a key reason, one of the lawyers said, is that children fare best when raised by a married couple of opposite genders.

The premise itself is dubious. A longitudinal study published online this month in the journal Pediatrics found that the adolescent children of lesbian couples fare very well. In fact, they 'rated significantly higher in social, school/academic and total competence and significantly lower in social problems, rule-breaking, aggressive and externalizing problems' than others their age.

The study in question, "US National Longitudinal Lesbian Family Study: Psychological Adjustment of 17-Year-Old Adolescents" in June 2010 Pediatrics, by Gartrell and Bos, examines sons and daughters from 154 volunteer lesbian couples. The note that the children rated significantly higher should raise some alarms for the people at the Times, especially given the study's 7% attrition rate. Why would we assume volunteer lesbian couples would be representative of marginal lesbian couples who get married and have children because of a change in law?

That is to say, if we are to evaluate public policy, we should evaluate the individuals whose decision would change due to the law. However, we are by definition not examining these individuals in this study, and we are not identified. We might further imagine that a change in the law will change the "rules" under which the data was observed, further rendering the study irrelevant.

The Times is better served by its next, well-made point, that "The premise is also irrelevant," rather than unidentified studies.

More Men Marrying Wealthier Women

The New York Times article "More Men Marrying Wealthier Women" (January 18th, 2010) separates two inextricably linked boons associated with marriage: pecuniary and non-pecuniary gains. In particular, the article notes,

“Men now are increasingly likely to marry wives with more education and income than they have, and the reverse is true for women,” said Paul Fucito, spokesman for the Pew Center. “In recent decades, with the rise of well-paid working wives, the economic gains of marriage have been a greater benefit for men.”

without any mention of non-pecuniary gains from marriage (specifically, in terms of housework and raising children), it is impossible to understand who gains the most from marriage. For example, the figure below displays two levels of happiness (U1 and U2) that a couple can achieve (click to enlarge).

In period 1, the couple cannot obtain a higher level of happiness than curve U1. However, suppose that (due to a decrease in discrimination) women's earning ability increases at the same time that man's household production ability increases (perhaps due to the advent of easy-to-use household cleaning appliances). Now, looking at the period 2 curve, the couple can achieve a happiness level of U2. At their optimal point, the wife works more than she was before, but it is clear that both partners are better off--perhaps the wife gains from doing less housework. Ultimately, the gains in marriage do not have to be pecuniary.

Resolution: Get a Deal on a Gym Membership

New York Times article "Resolution: Get a Deal on a Gym Membership" (December 25th, 2009) requires incorrect assumptions on the U.S. fitness industry.  The article seems to assume that gym membership is procyclical (it increases when the economy is strong and decreases when the economy is weak). Corrections suggests that the opposite is quite possible.

But this year the frenzy has been ratcheted up a notch as clubs try to make up for the recession, which caused many corporate sponsorships to evaporate and many individual members to drop out or cut way back on costly extras like personal training and massage.

First, Corrections notes that according to the International Health, Racquet and Sportsclub Association (IHRSA) in 2006, there were 42.7 million health club members. In 2007, there were 41.5 million members. In 2008, there were 45.5 million health club members.

This makes sense. When individuals consume most goods, there are two inputs--commodities that they buy (t.v. sets, or gym memberships) and time they use to consume the good (tv-watching time, or time at the gym). While gym memberships cost money, we expect the larger portion of their cost comes in the form of time.

In a recession, when unemployment is high and wages are low, we expect that people will move away from money-intensive goods, such as expensive meals, and toward time-intensive goods, such as gym time, and its complement, gym memberships.

We may, however, expect revenues to go down, as shopping around for a gym, and going to a gym farther away becomes more feasible and thus gym memberships become more competitive. The general trends for gym membership are displayed in tabular form below.

Corrections will be sure to post the 2010 IHRSA results from next month.