More Thoughts on Grad School

Hear This

If you are thinking about grad school, you should listen to this radio conversation with Penelope Trunk just to be sure.  Also read my comments earlier on doing a PhD.  It wouldn’t hurt to read this, this, this, and this.  It’s not my place to tell people they shouldn’t go to grad school, but I do think most need to hear “the rest of the story.”  At minimum you should really know why you are going after that masters, PhD, MBA, law, or medical degree.

“But It Worked for Me”

In the interview, a caller would often say “Well I got this degree and wouldn’t be in the great position I am now otherwise.”  This supposedly refutes the argument that grad school is a bad choice in many/most cases.  Let me explain why it is poor logic.

First, there are cases where grad school is a requirement to work in a field.  Yet, there are plenty of fields where grad school is far from necessary to be successful (e.g. writing, business).  In these fields, especially, we must ask “What does the counter-factual look like?”

Considering the counter-factual let’s us compare how successful a given person would have been in the world where 1) they did go to grad school, or 2) they didn’t.  Talented writers don’t need to sit in classes that teach them to write creatively.  A sharp business mind might be better off getting experience rather than book smarts.  It is very likely many people would do just as well without a grad degree and not have to take on debt.  Saying “It worked for me” does not prove grad school was necessary.  Many might have been just as successful or unsuccessful on their own.

I once had a boss who said “A turkey with a PhD is still a turkey.”  If you can’t make it in the business world without an MBA, you won’t make it with one.  If you can’t get a publisher for your novel without an expensive creative writing degree, the degree is not going to make a difference.

Grad School as An All-Pay Auction

There is a type of auction where all bidders pay their bid, but only the highest bidder gets the auctioned item.  Grad school is perhaps a little like this: only the top of the talent distribution is going to be highly successful.  Very few writers will have a bestseller.  Less than 1% of MBAs will become CEOs.  Think of this as “winning” the auction.

The thing is, everyone that goes to grad school pays – usually by taking on debt and certainly by spending time.  All grad students pay yet only a few “win.”  But who wins?

Some will say luck determines who gets to the top.  In that case, grad school is an all-pay auction in which a winner is randomly chosen among those who bid (i.e. went to grad school).  This assumes everyone has an equal, if small, chance of winning.  You get this chance by going to grad school

Yet, another possibility is that the talented going into grad school will be the talented leaving grad school (And the untalented will remain untalented).  This is the “Turkey hypothesis” stated above.  In this case, grad school is costly, but the naturally talented will “win” no matter what.

I think each story has some truth to it.  And, the network effects can be large at very elite schools.  But, 95% of grad schools don’t fit into that category.

Think carefully through these issues before going to grad school.  The marketing lines from many schools don’t tell you that you are first and foremost a revenue stream.  Make sure you know what you are getting out of it before signing up.

My Friday morning post on how awful agricultural subsidies are is here in case you missed it.

Posted in Better Thinking, Economics | 2 Comments

The Presidential Politics of Ag Subsidies

Presidential Posturing

I’ve occasionally said the U.S. Senate consists of 100 people each convinced they should be president.  Consequently, your typical Senator doesn’t want to ever inhibit any future presidential prospects he or she might have.

Due to the quirky presidential primary system, voters in early states matter a lot.  This paper finds that a voter in an early state has five times more influence than a voter in a late state on who gets the nomination.  That means if you want to be president you need to make voters in Iowa and New Hampshire very happy.

It turns out an effective way of making some one happy is to give them gobs of money.  Since bribes are illegal, congressmen regularly appropriate about $20 billion per year for agricultural subsidies.  Corn farmers receive the largest portion of this money, and guess which state grows the most corn:  Iowa!  Iowa is one of if not the biggest recipients of farm subsidies in the U.S.  Senators are making sure Iowans are happy in case they ever need those valuable primary votes.

Agricultural Subsidies

Euphemistically called things like “commodity stabilizers,” agricultural subsidies are at their core payments from the government to farmers to supplement their income.  This transfer of funds from taxpayers to farmers has the effect of driving down the price of commodities, such as corn.

While lower prices may appear to be a good thing, artificially low commodity prices can have quite perverse effects.  In fact, agricultural subsidies work to undermine several other efforts of the Federal government.  Below I explain how these programs keep developing-world farmers in poverty and potentially increase the obesity “epidemic” in the US.

The Government Fights Itself

Lowering the price of US farm products will lower the world prices of such products.  This means that farmers in developing countries will either earn less for their products or will be driven out of business if they cannot compete with their subsidized counterparts.  This study estimates that US could increase Third World farmers’ incomes by around $7 billion each year by stopping farm subsidies.  It is ironic, then , that the US spends billions on development aid to reduce worldwide poverty yet does so much to increase worldwide poverty through farm subsidies.

A second perverse impact of agricultural subsidies is that it lowers the price of unhealthy foods.  For example, high fructose corn (HFC) syrup is artificially cheap because corn is artificially cheap.  Food makers thus use HFC in many food items we say Americans should be eating less of.  By lowering the cost of unhealthy foods, farm subsidies may contribute to Americans’ overindulgence (though admittedly this has been hard to show empirically.)

Again, though, the government is fighting itself.  The government supposedly wants to discourage unhealthy living because the government will pay much of the tab for American obesity and its co-morbidities.  Perhaps Mrs. Obama could be more effective if she spent less time getting kids to “move” and more time lobbying her husband to veto all farm subsidies.  That would be a great way to fight obesity and poverty.

Solutions

Let’s summarize:  the Federal government transfers billions of tax dollars to a very small segment of Americans.  This transfer then increases Third World poverty, undoes some positive effects of development aid, and potentially encourages Americans to eat unhealthy food which will then increase Medicare costs that are already set to bankrupt us.  It is a remarkably efficient way to screw things up.

Like many of Washington’s spending problems, the root issue lies in the nature of the incentives.  Electing a new crew of politicians is unlikely to change much.  I wish reform-minded activists would spend more time trying to change the incentives rather than the people.

In this case, I think we should randomize which states are “early” primary states.  One year prior to the election year, states could be randomly assigned to one of five primary dates each separated by two weeks.  Ten states would hold primaries on each date.  Since the early states would change each election, we could avoid excessive doting over special voters.

Posted in Better Thinking, Economics, Poverty, Solutions | 6 Comments

What If You Could Pay for a Job Interview?

Have you ever seen a job posting that you know you’re a perfect fit for?  If you don’t have a contact in the organization, it can be depressing.

You know you are a good fit but how can you credibly convey this information to the company?  After all, a typical job posting might generate hundreds of applicants all claiming (and lying) that they are a perfect fit.  You are just one needle in the haystack.

This is also a problem for firms.  Firms want to find good fits.  Unfortunately, “good fit” does not always mean the person with the best GPA or alma mater.  Many companies are flooded with applications from people who look good but really don’t want the job.  For example, a good fit may be someone with a below-average GPA, but who really wants to work in in the area and is therefore more likely to stay with the company.  It’s quite hard to tell if an applicant sees a position as a back-up or their top choice.  There is an “information asymmetry” where the applicant knows much better than the firm how qualified and interested he or she is in the job.

This matching problem is frustrating and costly for both job seekers and firms.  Firms must use expensive software to weed through hundreds of resumes.  It is guaranteed these programs miss great candidates who didn’t use the right buzz-words.  Firms interview un-serious candidates and no doubt hire the wrong people often.  Job seekers waste time applying for tons of jobs they don’t really want or are marginally qualified for.  It is one big, uncoordinated mess.

A Simple Solution

There is a simple solution to this mess:  firms should ask applicants to make a donation in any amount they like when they apply for a job.  The donations would go to one of several pre-selected charities so that the applicants aren’t paying the firm for an interview and firms aren’t trying to earn money by posting fake ads.  I’d suggest an “honest broker” website could manage these donations and charge a fee to companies posting jobs.

Job seekers would know the company is serious about hiring someone because the firm paid a sizable fee to post the ad.  Firms could spend less on HR labor and software to cull through numerous applications, but they would also have an incentive to write informative ads which will increase the probability of attracting the right type of candidates.

I would also suggest applicants be able to see what others pay so that they can decide how much they want to spend (just like eBay).  This mechanism would offer a credible way for applicants to tell companies how interested they are in a position.  Instead of spending days sending out tons of resumes, job seekers might find 5 perfect positions and allocate $500 for these applications.  Applicants could tailor-make their materials for each of those five companies.

This arrangement would greatly simplify the situation.  Fimrs could see which applicants put their money where their mouth is.  Knowing these candidates are serious, they would be willing to invest substantial time interviewing the top 3 or 5 bidders to understand why the applicant believes he or she is such a good fit.  By making better hires, firms would suffer less costs from turnover and there might be less frictional unemployment.

Of course, you might think this discriminates against applicants who cannot pay.  While a rich applicant could pay top dollar for all postings, that person can still only take one job.  If the firms consider several applicants closely, this will still give others a shot.  Furthermore, I can imagine colleges offering low-interest loans to help needy students participate in this market effectively.

Also, you should read my earlier post today on why crime is bad economically.

Posted in Economics, Solutions | Leave a comment

Why Crime Is Bad (to an Economist)

I spent most of Monday and Tuesday dealing with the aftermath of having our keys stolen.  This included walking home to get the spare car keys and then walking back to get the car.  I then spent too much money getting a new car “clicker.”  Then I had to go to Lowe’s to copy some keys (and back since they messed up).  Finally, we had our locks changed which was time consuming if not expensive.  I was determined to get a blog post out of the whole mess.

Dead Weight Loss

It’s time we learn a valuable economic concept:  “deadweight loss” (DWL).  You can think of DWL as economic transactions that would make buyers and sellers better off but which do not occur.  For example, taxes cause DWL because they raise the price of a good so that some people choose to not buy that good.  All the transactions that don’t happen because of the tax represent the DWL.  We say there is a loss of economic efficiency.

Crime also can cause DWL.  In my case, I spent both my money and time to deal with the effects of the malfeasance.  This means I cannot use those resources in the ways I wanted.  Believe me, I would have much rather spent the money on something other than new car keys.  I wish I had been working on something productive than running to Lowe’s for key duplicates.

Since I will not spend the money on what I want to spend it on (say, a few dinners out), these transactions will not occur.  Think of the costs I paid because of the crime as a lump-sum tax on the dinners I was going to buy.  Taking into account this “crime tax,” I will buy fewer dinners.  That is DWL.

If we think about places like Mexico where violence and crime is running rampant, there is huge DWL imposed on the population.  If you must hire security guards and purchase bullet-proofed cars, this is essentially a tax on living in Mexico.  That “tax” will create DWL and reduce economic efficiency in a nation.  In short, it can slowly strangle an economy in the same way excessive taxation can.  For this reason, economic growth is closely tied to high-quality government institutions that can restraint evil.

The Broken Window

But, didn’t the crime help Honda and Lowe’s because I spent money there?  Certainly these “sectors” of the economy benefited from the crime.  Yet a DWL still exists because I did not get to spend the money in the way that I judged as most valuable.  I had to divert funds from something I highly valued (e.g. dinners) to something I needed but wished I didn’t (new keys).

This gets to the point of a famous essay by Frederick Bastiat.  Some may judge the criminal as good for society because he caused money to be spent.  Honda and Lowe’s benefited.  But, Bastiat reminds us this logic ignores the unseen.  As I explained above, there are transactions that don’t occur because of the crime.  These are “unseen.”  It would have been more economically efficient for the “unseen” rather than the “seen” transactions to have occurred.

I don’t talk about macroeconomics much, but this notion gets to the powerful critique of the idea that war spending is good for the economy.  War spending means resources spent on the military are not spent on other things.  Ask your grandparents and they will tell you how many things were rationed in WWII.

In the recent Keynes vs. Hayek video, Hayek makes this point in response to the claim that WWII got the US out of the Depression:

Wow. One data point and you’re jumping for joy
the Last time I checked, wars only destroy
There was no multiplier, consumption just shrank
As we used scarce resources for every new tank

Pretty perverse to call that prosperity
Rationed meat, Rationed butter… a life of austerity
When that war spending ended your friends cried disaster
yet the economy thrived and grew faster*

If wars help us out of bad times, should the government pay criminals to go around and steal cars and burn houses?  Won’t destroying property then force spending which will stimulate the economy?

Why doesn’t the government go around destroying things to help the economy out?  Wait, they did.  It was called Cash for Clunkers.

*These last two lines are referring to the fact that many economists (Keynes’ “friends”) predicted a recession once the War ended and the US started winding down military spending.  Paul Samuelson wrote in 1943: “The final conclusion to be drawn from our experience at the end of the last war is inescapable–were the war to end suddenly within the next 6 months, were we again planning to wind up our war effort in the greatest haste, to demobilize our armed forces, to liquidate price controls, to shift from astronomical deficits to even the large deficits of the thirties–then there would be ushered in the greatest period of unemployment and industrial dislocation which any economy has ever faced” [italics in the original].    Yet, as we know, the period after the War (1950’s) was one of the best periods of economic growth in our history.

Photo: http://peacepulse.blogspot.com/2010/07/agatha-christie.html

Posted in Economics | 3 Comments

Why are ties and greeting cards so expensive?

I think ties and greeting cards are expensive.  Of course, that may just say a lot about my preferences and willingness to pay.  Yet, it seems the cost of a tie or greeting card far exceeds the cost of producing one unit.  That is what I mean by these items being expensive.  Their price greatly exceeds their marginal cost.

For example, nice ties can cost $80 or more.*  There is no way it costs the garment industry (with its Asian factories and automated machinery) anywhere near this much to produce a tie.  And greeting cards?  It is a piece of paper with art and low-quality writing for $3.99.  You can buy well-written children’s books for less, so it can’t be that the paper and writers for that one unit cost so much.

I think what we are paying for with ties and greeting cards (and surely many other products) is variety.  When you shop for ties and greeting cards there is always a wide selection.  At nice clothing stores there is only one tie for each style.  Stores must offer this variety for customers to shop there.  You just don’t go and pick up a standard “Happy Birthday,” “Welcome Baby,” or “Congrats Grad!” card.  Businessmen don’t want to be all wearing the same ties either.

Supplying this variety means many ties and cards are trashed.  Sure, some get sold at discount stores, but I bet a lot never are bought.  This means when you pay for your card or tie, you are actually paying to cover the cost of several cards or ties.  You aren’t just paying to cover the cost to make one card.  You are also paying for having a choice of a bunch of styles.

*The whole issue of whether many people actually pay that price is another blog post.  Price discrimination and discounting is a big part of this market.

If you missed my Wednesday morning post on trying to be a big shot in a big city, read it here.

Posted in Economics | Leave a comment

Which Half Is Merle Haggard In?

Recently I wrote about how some people highly value a city’s “interesting-ness” and some could care less.  The article I linked to discussed how cities rated as highly livable tend to not be the cites so many people apparently want to move to.  These “un-livable” cities are the big, messy metropolises like Boston, New York, Washington, LA, and San Fransisco.

These big cities are what I call “love it or hate it cities.”  I’ve observed a wide polarization of opinions about these cities.  For example, regarding my future home, half of people tell me they “love DC” and half “hate DC.”  I hypothesized that part of this polarization can be explained by different valuations for the amenity of “interesting-ness” that such cities offer.  Interesting-ness is often not well correlated with inexpensive, easy to navigate, or clean.

This reminded me of Merle Haggard’s hit “Big City”:

I’m tired of this dirty old city.
Entirely too much work and never enough play.
And I’m tired of these dirty old sidewalks.
Think I’ll walk off my steady job today.

I think I can guess which half Merle falls into.

Personality Differences Across Cities

Because some people value the opportunity to live in an interesting place, I expect there is substantial sorting of people across cities.  Different types of people will choose different types of cities.

Based on casual observation, it seems that a desire for “interesting-ness” is probably correlated with certain personality traits.  For example, a drive to “make it big” seems common among many who flock to these cities.  In these cities you might get your big break at a cocktail party, whereas you won’t likely meet a cabinet secretary or Hollywood producer in the most-livable Pittsburgh.

Yet, the big cities also tend to have high levels of inequality.  Being extremely successful is far from guaranteed.  For every movie star in LA there are 25 waiters scrapping by to pay the high rents.

Not surprisingly, the chance of “making it big” is highly alluring to some people.  Let’s call them “gamblers.”  The gamblers will go to NY or DC or LA when they are young to try and make it.  A few will, but many will end up living less-than-glamorous lives making less-than-glamorous pay.  The other type of person, a non-gambler, will choose a different city where housing is cheap.  This person has little chance of ever making it big, but will probably be comfortable.

For this reason, it is not surprising that the big cities are often described as obsessed with money.  Many people who choose to move there have a certain personality type and this further reinforces the city’s culture.  Of course, nice people live in these cities too!

Someone really should look at personality differences across types of cities.  I’d like to know how “desire to live an interesting life” is correlated with risk taking too.

Posted in Economics | 2 Comments

Some People Hate Commitment

As a market for a new product evolves, we typically see the price fall.  For example, flat screen TVs used to be unaffordable to most Americans but are now had by many families.  This technology spread through the population in large part because prices fell.  Only a few years after a product’s invention, even lower-income Americans are enjoying the technology.

Commitment Aversion

To get more and more customers to purchase a product, sellers must lower the price over time.  I call this, “moving down the demand curve.”  However, sometimes the price of a good is not a dollar amount.

For various reasons, some potential buyers may want to avoid commitment to a product.  I’ll call this “commitment aversion.”  In economic terms, this commitment functions as an additional cost.  Being “tied down” is costly to some people and may make some products too expensive for some (i.e. the purchase price plus the cost of being tied down is higher than their willingness to pay).  For example, cell phone contracts lock-in the person and are annoying and costly to get out of.  If you really hate committing, then you might not get a cell phone.  In fact, a decade ago it was very hard to get a cell phone without signing a multiple-month contract.

A highly likely reason for commitment aversion is income uncertainty.  If you have bumpy income you don’t want to lock-in consumption decisions for long periods.  This is probably why I tend to associate commitment aversion with lower-incomes, and it might just be a category of risk aversion.  However, I can see inherent tendencies to commitment aversion also being irrational.  Trying to separate rational versus irrational commitment aversion would be interesting.

I would love to know how prevalent both types of commitment aversion are.  We casually observe commitment avoidance in relationships and jobs, and some of these decision don’t seem all that rational.  Are there demographic or life outcomes that correlate with commitment aversion?  It seems like there would be an optimal level of commitment that leads to successfulness.

Forget the Commitment

So what does this have to do with lowering the price for a good.  Well, I have noticed a number of companies whose business model is based on non-committal.  That is, they are taking existing business models requiring commitment and recasting things without commitment.  This essentially lowers the price of the good or service for the commitment averse.  Given the success of these companies, I have to think there is something to it.

Two examples:  Cricket Cell Phones and Planet Fitness.  Cricket makes a big deal out of no signed contracts for their cell phones.  Planet Fitness (“The Judgement Free Zone”) breaks with the standard gym contract and lets you go month to month.

With the lower price (i.e. no commitment) comes a lower level of service, but it also means the core product is now affordable to a new segment of the population.

Can you think of other businesses that have gone non-com?

If you missed my post on how “interesting” cities are, you should read it too here.

Here is a great picture.  She is trying so hard to be judgment-free!


Posted in Economics | 2 Comments