The Economic Way of Thinking

Am I Just Paranoid?

Alright, tax wizards, legal experts, and forecasters who read our blog, here's a question that I haven't been able to answer with any degree of confidence: should I be switching some of my household's retirement assets from a traditional to a Roth IRA now that the 2010 income limit will soon be lifted for people wanting to convert from a traditional to a Roth? 

Here's a little background for you about our situation...

Early in our relationship, my wife and I were convinced that a traditional IRA was the best bet because one should take an immediate tax credit whenever they can get it.  We had (and still do have) a hard-core streak in us.  We were convinced the promises being made of no taxes late in the Roth plans would be broken by the time we retired.  So, for "take your money and run" reasons, we opted for taking the quick benefit right away. 

A few years into my career (2006ish), a finance friend told me this was "silly" of us, that I was "just being paranoid" (he never cited this Green Day song, however!), and that there'd be no way Congress would ever touch Roth tax laws.  I was skeptical at first, but I became persuaded by his arguments.  As a result, we abandoned any additional investments in traditional plans and instead went "all in" with as much money as we could into Roth accounts.  However, because of the income limits, we were unable to switch the old traditional accounts over. 

That brings us to the present.  I fully understand the greater potential for appreciation that comes with the Roth plan, and I'm inclined to switch my traditional accounts over to Roths in 2010 (especially since they're underwater after the 2008 financial crisis).  But, I must say: I'm more scared now than I was a few years ago about the government reneging on their tax free promises under the Roth IRA. 

So, with this long-winded story before you, I'm left asking you, our readers: is there anything stopping Congress from reneging on their Roth promises to us?  When those of you who have many years ahead before retirement look into your crystal balls, do you really believe politicians will leave Roth tax laws alone? 

Hair Cuts: A Cyclical Asset?

I recently visited the very metro guy who cuts my hair.  As he always reminds me, I tend to put off hair cuts longer than I should; I tell him I'm just too busy to visit him every 5-6 weeks. 

When I do get around to visiting him, however, the conversation tends to be informative and a hoot.  For example, I always thought hair cuts might be moderately countercyclical (because of the "get a hair cut and get a real job" effect) or acyclical, but my guy insists that they're strongly cyclical. 

A dialogue that helps to make his point is below the fold:

How Do YOU Economize on News?

I have heard co-blogger, Pete, talk about the pleasure and quiet that comes with Sunday mornings (he has also blogged about Sundays here).  Sunday mornings are the one morning of the week where he's able to sip coffee on his back porch and read The New York Times as, some would say, it should be read--article by article with time (and coffee) to reflect.

For most of us (Pete included I'm sure), most of the days of the week are not like quiet Sunday mornings.  The hustle and bustle of a normal day leaves us with little time for careful reading. 

One More Hoop For Tenure

Inside Higher Ed has a story this morning about a new tenure policy introduced by the University of Toledo's president, Lloyd Jacobs:  Candidates up for tenure must meet with the president for a 30-minute chat.  While faculty are upset about the policy, the article makes it sound like the presidential visits are, for the most part, a formality. 

Let's think about some of the consequences of this policy.  On the one hand, the president has a bit more that he can stuff in his CYA file.  On the other hand, it opens the door for comments that could be used in a lawsuit. 

The policy can be thought to be introducing one last fail-safe before the university either cuts ties with a candidate denied or commits to an insanely long labor agreement with a candidate granted tenure. 

My biggest problem with the policy involves opportunity cost.  Presidential time seems like a tremendously scarce resource.  Time with tenure candidates is time not spent shaking hands, raising money, managing the university budget, etc.

Finally, if presidential chats ever become more than formalities and actually result in decisions being overturned, you can expect successful candidates to be, at the margin, tilted a bit more towards being more polished and able to explain their research and teaching interests succinctly. 

Another EWOT Question Of The Day

From the Economics Students Association blog.

Question Of The Day

Let's suppose a person enjoys a net benefit by following a plan of action.  Can you provide an example in which she nevertheless incurs a sunk cost?

It's The Margin That Matters:

"I need a B in your class or I won't graduate!"

I hear pleas like this almost every spring semester.  The student's GPA will be too low for graduation without the B.  I tell them it's not my class that has lead them into such trouble, it's the cumulative performance in all of his previous courses.  Have I ignored the margin?

A Kid Goes To Prison

The other day I ran a prisoner's dilemma experiment on my 10 year old son and 14 year old daughter.  They didn't hit the Nash equilibrium.  My son defected and got out of the prison sentence free.  My daughter cooperated and got ten years. 

I expected it to be the other way around.  Emily, upset, said "I KNEW he'd cheat!"

It was a one-time game.  I'm tempted to do it again.  I expect my daughter, in the iterated-game, would now choose to cheat -- the Tit for Tat strategy.

Don't Lose Sight Of The Margin

The other day I posted something on sunk cost.  I'd like to follow that up with an ECON 101-level example.

For several months I had been taking a med that lived up to all of its claims.  In fact, it worked much better than I could have expected, but there was a side effect -- it caused me to lose a bit of my vision, and that effect just wouldn't go away. 

Suffice it to say that I was concerned and frustrated.  I had Lasik corrective eye surgery a couple years ago, a couple thousand dollar procedure.  And here's where the economics comes in.  Should I drop the med because I paid $2000 for the Lasik, or should I chuck the $2000 and stick with the med?

Actually, in the economic way of thinking both questions represent false alternatives.  The $2000 itself cannot be recovered, it is a sunk cost, and it has already been "chucked" when I paid the bill.  What isn't "sunk" is the potential benefit of the Lasik, the additional benefit of my med, and the opportunity cost of sticking with the med.  What matters now is the margin.  What is my expected additional benefit of continuing to take the med, and what is my expected additional cost, my opportunity cost? 

As for my choice, I've found the opportunity cost to be too high, dropped the med, and my vision has returned to 20/20 within three weeks. 

Which puts me on a new margin, a new set of alternatives, as I now search for a new med, probably not as productive as the original, but one that allows me to retain something more important to me -- my 20/20 vision.

Addition:  I've been informed that a side effect of Viagra is also a loss of vision, but just to make the record clear, my med was not for a Viagra-related problem!

EWOT Quote Of The Moment: Sunk Cost

In the economist's way of thinking, sunk cost is a piece of history, for it represents no opportunity for future choice.  It may be cause for bitter regret... but it is no longer a cost in any sense relevant to the economics of present decisions.  It is a piece of information, a lesson in life.  Don't get us wrong -- the lesson is certainly not irrelevant, only the cost is.  The question is what do you do now? (p. 78)

Being Low on Gas Doesn't Mean Being Out of Gas

My favorite Gordon Tullock line, which was relayed to me by Loren Lomasky one evening when running late to the airport with him, is the following: “You’ve never been late for a flight unless you’ve missed it.”   

Thanks, in part, to Tullock’s wisdom about flights, I have the same attitude when it comes to filling up my car.  Time and again, I run dangerously close to running out of gasoline.  It’s never because I shop around for gasoline and worry about price; though, I do worry about whether or not a place is “pay at the pump” and will spend an extra minute driving to the more convenient station.   The reason I’m always on E is because time savings calculations trump other relevant margins.  Over a long period of time, being conservative and filling up when close to E, but not on E, wastes a lot of time.  Thus, the best approach for me is to get as close as possible to E without running out.  So far, the strategy has been good (i.e., I have only run out once and that was many years ago).  But, I was so close to E last night that I got a rush and couldn’t help but think about “The Dealership” episode of Seinfeld.   

(By the way, for more Tullock quotes and insults, click here.  My favorite personal insult from Tullock came in his Public Choice class when, in reply to a comment about anarchism, he said, “I suppose you’re one of those crazies who thinks hovercrafts can solve the problem of someone holding out their chunk of privately owned sidewalk…”). 

The Margin Matters: The Case of Clark Atlanta University

The news out of Clark Atlanta University this month is not good.  Earlier this month, 100 employees (including 70 faculty members) were laid off.  Administrators are now looking at other creative ways to save money, including a 10 percent pay cut for remaining employees. 

Clark Atlanta’s problems are complicated, but according to this Inside Higher Ed article, they have been slow to cut programs and “[e]nrollment has fallen from more than 5,000 at the start of the decade to less than 4,000 now, and about 200 students didn’t show up for this semester.”

Just as the "too big to fail" argument has been discredited by the recent financial crisis, the argument that a particular college or university is too big, old (Clark Atlanta was founded in 1865), or prestigious to struggle is also being discredited with each passing day. 

EWOT Quote Of The Moment: Economizing Behavior

From our textbook:

    When the price of a good rises, users of the good don't have to be told to economize -- they don't need economists to tell them what to do.  Instead, they find it in their own best interest to economize, even if they have never heard that word before (pp. 64-65).

Econ 101 Question Of The Moment

Have you ever noticed that there are relatively few gasoline stations in the center of large cities?  With such traffic one would think they'd do excellent business.  Assuming it's not a zoning issue, why are there so few stations among the skyscrapers?

Hummers Get The Most Tickets

Read all about it here.