Could Ted afford his apartment? Probably not.

In the movie Ted (one that I am embarrassed to say I rather liked), Ted has a minimum wage job as a checker.  In Massachusetts, that means he makes $8 an hour, or around $1360 a month (I assume 4.25 weeks per month and no overtime). 

His apartment in Boston is pretty bad, so I am going to put it at the 25th percentile of the rent distribution, which puts it at around $750 per month.  This means Ted is spending far more than  half his money on his apartment (so I am not sure where he is getting his, ahem, beer money from).

Jonathan Haskel, Robert Z. Lawrence, Edward E. Leamer, and Matthew J. Slaughter on Globalization and Wages

Read the whole thing.  Here is the conclusion:

We hope that readers will take from our paper three main conclusions about  the recent trends in U.S. real and relative incomes. First, to date there is little evidence that globalization through the classic channel of international trade in goods, intermediates, and services has been raising inequality between more-skilled goods, intermediates, and services has been raising inequality between more-skilled and less-skilled workers. Second, there is at least suggestive evidence that globalization has been boosting the real and relative earnings of superstars. The usual trade mechanisms probably have not done this, but other globalization channels—in particular, the combination of greater tradability of services and larger market sizes abroad—may be playing an important role.  Third, our analysis sheds new light on the sobering fact of pervasive real-income declines for the large majority of Americans in the past decade.  These real-income declines may be part of the same globalization and innovation forces shaping returns to superstars and to capital.  

These conclusions must be placed in the proper context, which is  “there is so much more we need to know from future research.”  A good deal of recent empirical work investigates the effects of trade on the adjustment process of particular workers, occupations, and industries (which simple models ignore), and documents workers, occupations, and industries (which simple models ignore), and documents (the sometimes long-lasting) adverse effects.  Our goal here, however, has been to advance some basic models describing the economywide evolution of, for example, widespread real-wage declines but rising earnings of superstars.  Of course, future research will hopefully explore not only the experience of the United States but that of many other countries as well—both developed and developing.  

For superstars, we do not yet fully understand product prices in sectors that employ superstars relatively intensively. This is both because existing industry data do not distinguish highly talented individuals well (if at all), and because many of the sectors in which we presume superstars are concentrated  consulting, athletics, and entertainment do not have reliable data on product prices (or much else). Nor do we have good data on personal attributes that make individuals potential superstars.  We suspect that for at least some of these superstar intensive industries, globalization has played an important role in boosting demand  for their services—both via the information technology revolution reducing their natural trade costs and thus boosting their tradability, and via fast economic growth around the world boosting demand for their services. But these conjectures await  additional analysis. 

With regard to the sobering falls in real income for the large majority of Americans, our framework does add some new insights.  We agree with Autor (2010a) that explaining falling real income for so many American workers remains a daunting empirical challenge. Much research to date has focused on income inequality, not income levels. We argue that this focus should change, because the post-2000 real-income declines are pervasive, new, and troubling. Our enriched trade framework offers some possible explanations for how globalization and/or innovation work offers some possible explanations for how globalization and/or innovation can boost superstar real earnings yet reduce real earnings of so many others.

 The last paragraph is particularly, as the author's say, sobering.  But it also suggests that the outsourcing debate is more or less irrelevant--I doubt that China and India (other than Bollywood) are much in the superstar business yet.

How Los Angeles works better than you think

One of the keys to maintaining one's sanity when living in LA is to know how and when to avoid freeways.  When the 110 runs clear, it takes about 15 minutes to drive from my house to USC; when it is clogged, it can take an hour.  But that is OK, because I have a (largely) non-freeway route home that takes at most 35 minutes.

One of the reasons surface streets (outside of the West Side) in most of Los Angeles run pretty well, even at rush hour, is that 90 percent of the traffic lights in LA are synced.  By the end of the year, all lights will be synced.  As a conseqeunce, despite its traffic, in most parts of LA, one needs to wait for only one light cycle to get through an intersection.  Again, this is usually even true on downtown streets during rush hour.

The cost of syncing all the lights in Los Angeles will come to $350,000,000.  Let's do a back-of-the-envelope here.  If syncing saves the average Angelino (there are 4 million) even one minute per day, and time is worth $15 per hour, syncing basically pays for itself within a year.  That is government spending everyone should be happy supporting.

Those who own their houses with equity also get a tax break.

Matthew Yglesias, who wrote a terrific piece on the benefits of off-shoring yesterday, also wrote a piece on why Mark Zuckerberg has a mortgage:

Bloomberg writes that "wealthy individuals often choose to finance a home purchase rather than pay cash because of the overall low cost of mortgage debt and the additional access to liquidity," which is true but I think only scratches the surface. Another important issue is that interest payments are tax deductible, which is a very big deal if you have a very high income and live in a high-tax state like California.

But owning with equity gives the same tax break as owning with debt--the return one earns on her house (the rent she pays herself) go untaxed. Consider the following experiment: suppose you and your neighbor own your houses free-and-clear. Now you swap houses and charge each other market rent--you are now responsible for paying income taxes on that rent. The value of the tax break by staying in your own home is your marginal tax rate multiplied your return on equity. The return on equity is generally called net imputed rent.

The mortgage interest deduction places debt and equity on a level playing field when it comes to homeownership. Thus the many countries without a mortgage interest deduction, such as the UK, Canada, and Australia, still subsidize owner housing--they simply encourage people to own with equity instead of debt. This may be a very good idea.

What would game theory say about LIBOR?

On days like to day, I wish I were a game theorist.  The I could figure out what a Nash game would predict about LIBOR reporting, and how that would vary from honest reporting.

The rules of the game are well set out and mostly symmetric, although it is the mostly part that creates a problem.  Suppose there are N reporters and the LIBOR that is produced is based on the interquartile mean of what is reported.  Each bank is then seeking to maximize some objective function that depends on that interquartile mean, over which it has some influence.  If all banks have the same objective function, then symmetry will mean they all choose the same rate, which is not particularly interesting.

But each individual bank is gets some draw from a distribution, that it turn determines its optimal play.  This will produce heterogeneity in rates chosen.  Alas, I am not good enough at math to go any further than that...

[update: found a paper that does the exercise here.]  

Let's push 15 year refinances.

If someone refinances a 30 year 6 percent mortgage (with 27 years of payments left on it) into a 15 year 2.86 percent mortgage, the payment goes up by 10 percent, which is not nothing.  But within 5 years, more than 25 percent of the principal  on the 15 year mortgage is paid down.  For those who can afford the payment, this would largely solve the underwater mortgage problem.

Three reasons not to be crazy about hypothesis tests

(1)  With large samples, unimportant treatments can be "statistically significant."  If we precisely measure that a treatment has an influence of .00001 percent on an outcome, the treatment can appear significant, while not really mattering very much.

(2) Relying on hypothesis tests produces publication bias.  Suppose 20 different researchers run one regression each, but use different samples (I will assume they are independently drawn).  They are all examining a particular treatment effect--say the impact of divorce on child outcomes.  If one measures significance at p < .05, there is around a 65 percent chance that one regression will produce a "significant" coefficient, simply because of the random aspects of the coefficients.  The researcher who gets the "significant" coefficient is more likely to get her results published than those who do not.

(3) The fact that we don't generally do randomized trials on things like marital status means it is hard to draw inferences about the non-treated group based on those who are in the treated group.  In what may be my favorite book on applied social science work, Manski shows that the confidence intervals one should develop are much broader than those that are typically used.  His work also suggests that applying hypothesis tests in the social sciences is really problematic.  This is consistent with the theme that sometimes we can draw better conclusions from plots than test statistics.

To a large extent, one could deal with (1) and (2) by reporting Box-and-Whiskers plots of coefficient estimates across studies.  Dealing with (3) is much harder.