Hidden Cost of Low Interest Rates

As my Economics 411 class discussed this afternoon, typically short-run monetary policies reverse and the more "medium" and "long-run" environments take over economic behavior. It occurred to me, as I looked around the room at the other 18-22 year old students in this room, that most of my colleagues have never experienced anything outside of essentially zero nominal short-term rates during their economic lifetime (that is to say, when they first became aware of economic applications and had an understanding of interest rates). It occurred to me that there could be a hidden "bubble" that is not considered in the normal discourse of low interest rate environments: an unpreparedness of young economists for "normal" interest rate environments.

Part of this unpreparedness can be found by thinking of optimal savings decisions. For much of my life and the lives of my generation, there have been paltry returns on short term, safe savings. In fact, as shown in the graph above, certificate of deposit rates have nationally been below 1% (3-months) since March 2009, almost six years. The idea is further highlighted in the US News & World Report article titled 10 CDs with High Interest Rates:

To most, the certificate of deposit is a typical bank account: safe, reliable and far from sexy. But that wasn't always the case. It's hard to believe CDs returned double digits not too long ago, especially since they will probably never reach those rates again.

While the economic scholars that are in my Econ 411 class will be aware of the higher interest rate environments of the late 70s and early 80s, the environment that most Americans of my generation have grown up in have seen meager returns on savings accounts, checking accounts, and almost every other interest bearing asset. It is not difficult to believe that Americans as a whole, and especially my generation, have adjusted their investment psyches to only expect these low returns. They have come to accept that interest bearing assets do not provide adequate returns and seek other assets (stocks in particular) in search of these returns. I do not believe that my generation will be able to over come this negative stigma of CDs/savings accounts when making their investment decisions in the future, potentially making sub-optimal investment decisions.

Another part of a potential "bubble" within young economists is a lack of preparedness within "normal" interest rates environments. For most of my generation's economic education process, there has been a substantial focus on keeping the foot on the gas, which is to say keeping interest rates accommodating for economic expansion. While I can talk your ear off about the pros and cons of Quantitative Easing programs or the mechanics behind breaking through the zero lower bound, I am surprisingly unprepared for what to do in the good times. While my generation's economists do know the mechanics of raising interest rates, it seems as this seemingly simple policy might not be as straightforward as it once was. The Federal Reserve noted this exact problem in their press release Policy Normalization Principles and Plans:

However, in light of the changes in the System Open Market Account (SOMA) portfolio since 2011 and enhancements in the tools the Committee will have available to implement policy during normalization, the Committee has concluded that some aspects of the eventual normalization process will likely differ from those specified earlier.

Our generation, who has known nearly exclusively the process of monetary expansion, will now have to begin dealing with the unwinding of the massive quantitative easing programs, using a rule book that may becoming ever outdated. It may look counter-intuitive, but young economists could be rooting for another recession, so at least they will know what the heck they should do in response.

Terrorism Economics

The book Freakonomics and the follow up SuperFreakonomics shed lights on a multitude of non-economic decisions and behaviors and applied economic theories about incentives to help explain their behaviors. This same scope is applied to a weekly podcast put on by Freakonomics author Stephen Dubner; recently Dubner tackled the issue of terrorism. While the podcast tackled a multitude of issues, it highlighted the need for economically correct approaches to eradicating the threat to terrorism. In this light, the best approach to accomplishing this goal is a reduction of terrorism "profits".

In the podcast, there is a discussion of return on investment, or ROI, for acts of terrorism. In the same way that you can encourage investment into projects by showing a higher ROI, you can discourage this type of behavior by lowing "profits" that terrorists may achieve. When looking at the profits of a terrorist group, they are the economic disruptive costs to the country being attacked. The analysis of this ROI can be highlighted by the September 11th terrorist attacks, with the costs and benefits (from the attacker's prospective) broken down by the New York Times article One 9/11 Tally: $3.3 Trillion. Their analysis revealed that there was a significant return for these attackers:

Al Qaeda spent roughly half a million dollars to destroy the World Trade Center and cripple the Pentagon. What has been the cost to the United States? In a survey of estimates by The New York Times, the answer is $3.3 trillion, or about $7 million for every dollar Al Qaeda spent planning and executing the attacks.

A portion of these losses (i.e. terrorism "profits") were the direct results of the attack, including $55 billion from physical damage and $123 billion from economic impacts. However, a majority of these costs were on the indirect side: the response of the United States going to war in the middle-east has cost $1,649 billion, plus an estimated $867 billion in future war/veterans care costs. The US reaction to the September 11th attacks has added, and continues to add, to the gains of the al Qaeda terrorist cell that conducted the attacks through increased additions to the national debt, diverted spending from other governmental investments, and further cost of lives. It seems as if the reaction that the United States has had played directly into the hands of the terrorists, giving them an ever greater return on their investments.

It seems then that the power to influence the incentives for terrorist groups lie directly in our hands. By designing governmental policy to respond correctly to terrorist attacks, we can greatly reduce the payoffs these cells receive and reduce the equilibrium levels of attacks overall. While it seems nearly impossible to argue we should do nothing in response to attacks, avoiding an overreaction to terrorist attacks can create a more optimal response. The overreactive nature of current terrorism policy was described by Ted Koppel in his WSJ Opinion article Ted Koppel: America's Chronic Overreaction to Terrorism. Koppel links terrorism and overreaction:

Terrorism, after all, is designed to produce overreaction. It is the means by which the weak induce the powerful to inflict damage upon themselves—and al Qaeda and groups like it are surely counting on that as the centerpiece of their strategy.

This American overreaction, as Koppel demonstrates, has lead to a prolonged war in Iraq and an antiterrorism enterprise so large that "...disbanding such a construct, is an exercise in futility." If the United States government, and more importantly, its society would have had a less of an immediate reactive nature, policy could have been constructed to respond to the terrorist attacks in a significantly more targeted way. Such methods that could have been utilized could have included special operations targeted at the al Qaeda group responsible, economic sanctions, or a number of others that would be substantially responsive yet economically cost efficient.

Relative Wealth: A Response

A recent Michigan Daily article has been making the rounds not only around campus, but has garnered national media attention as well. The column Jesse Klein: Relative wealth has more than 137,000 reads on The Michigan Daily website, 282 comments, and has been picked up by Business Insider. While the response to the article has been largely negative, the article raises an interesting topic: how does one compare relative wealth across the nation? While there are many ways to determine household "wealth," this analysis will be contained to the economic data point of household income to make a comparison of what is considered "middle-class" across the United States.

The important first step in this analysis is to define exactly what is considered middle class in the United States. For purposes of my analysis, I will take the definition of a fixed middle class as offered by Anthony B. Atkinson and Andrea Brandolini in their working paper On the identification of the "middle class". In their paper, they explain:

In economics, interest in the middle class appears to stem in part from the perception that distributional studies have focuses on the poor, at one end, and on the rich, at the other end, leaving out the middle. Solow's references to the "middle 60 per cent" could be interpreted in this sense, being bracketed between the bottom 20 per cent...and the top 20 per cent.

This definition allows us to analyze the definition of household income as an indicator of the middle class. According to the Census Bureau, the second through fourth quintiles of national household incomes was between $20,901 and $105,901 in the year 2013. From the Michigan Daily article, the author cites a $250,000 household income that she considers to be middle class; however, according to Census Bureau data, this would be well within the Top 5% of earners nationally.

However, looking at data at a national level can ignore fundamental differences across geographical regions. This idea of "relative wealth" that was touched upon in the Michigan Daily article was expanded upon in the Wall Street Journal article Middle Class, Undefined: How Purchasing Power Affects Perceptions of Wealth. In the article, Jo Craven McGinty explains how differences in prices of goods and services can have a large impact on actual household wealth:

Costs for goods and services in different metropolitan areas vary by as much as 40 percentage points, and the disparity in rents is even greater. The differences cause some people to feel squeezed, while others who earn the same amount but live in a different area feel flush.

By utilizing the price factor, as further analyzed in the Bureau of Economic Analysis Regional Price Parities, we can understand the differences across regional "real" incomes. As noted by the BEA, the San Francisco Metropolitan Area has a RRP of 121.3, indicating that the price levels of goods and services are 21.3% higher than the national average. Applied to the definition of middle class national household incomes, the "real" wage for the SF area would be between $25,352 and $128,457. While this analysis can show a large differential from the national average, the divide becomes even larger when compared to cities with low levels of RRP. The lowest five Metropolitan Areas have an average RRP of 81.1, more than 18% lower than the national average and approximately 33% lower than the SF area, with a corresponding middle class household income between $16,954 and $85,906. This analysis reveals that citing a single national average cannot fully explain the underlying economic differences between different geographical regions.

On the Gender Gap

It is all to easy to lie using statistics, but by using proper analysis, you can find the real truth behind facts. One particular area that I find overblown with the use of possibly misleading statistics is the discussion of the gender gap in wages that exists within our society. This gender gap, it is argued, is a result from the discrimination against women in the work place; however, those who argue for this discrimination often do not look closely enough at the facts.

The website RateMyProfessor.com has gone a long way to assisting students in determining which classes to take based on the positive or negative characteristics of the professor. However, it apparently has also gone a long way to assisting students in venting their unconscious biases toward women. In the New York Times article Is the Professor Bossy or Brilliant? Much Depends on Gender, Claire Cain Miller examines a new interactive chart based on the posts of the RMP website. She concludes:

The chart makes vivid unconscious biases. The implications go well beyond professors and college students, to anyone who gives or receives feedback or performance reviews. It suggest that people tend to think more highly of men than women in professional settings, praise men for the same things they criticize women for, and are more likely to focus on a woman's appearance or personality and on a man's skills and intelligence.

As this her findings flowed from her analysis of an interactive chart published by Benjamin Schmidt, I decided to play around with the data myself. Using the word "bossy", which is not only highlighted in the title of the article, but was a point of emphasis on Sheryl Sandburg's book Lean In. The chart reveals (below) that yes, there appears to be a gender bias with the negatively connoted word "bossy". However, the issue I take with this apparent bias is the scale to which this bias is present. The use of this word is listed in uses per million; even in the most prevalent case of disparity in the use of the word "bossy" (computer science), there is only a difference of about 1.8 uses per million. It doesn't seem reasonable that a difference in 0.00018% of words used can be statistically significant. Even looking at more common words, such as "brilliant" (cited by author, difference in ~0.0072%) or "best" (difference in 0.0484%), reveal that, while these words are skewed toward males, it may be difficult to call them statistically significant.

Apart from statistical significance, ignoring specific confounding factors can lead to an overestimation of the gender gap in earnings. A recent article from the Michigan Daily analyzed the gap in wages between men and women at twelve top public universities. According to their analysis:

Calculations show that the average disparity between female and male salaries at these 11 top colleges and the University [of Michigan] shows that women earn 96 cents for every dollar a man makes—3.4 percent less. Furthermore, these top universities fill their most prominent positions with mostly men. Analysis revealed that 37 percent of executive employees were female. Sixty-three percent were men.

Lack of a large sample size notwithstanding, the 3.4% difference between men's and women's earnings can easily be explained by factors other than gender biases. It is unclear if the data cited is based on a median value of men and women, but if it is in fact, the data can be skewed toward higher male wages based on the mix of employment (i.e. males as President's/Athletic Directors, females as Provosts/Vice Presidents).

The Patent Problem

The world of patent litigation has become increasingly large and increasingly public. Big name clashes have occurred over the past few years, mainly centered around the technology industry. An ongoing, lengthy court battle involving Samsung and Apple has dominated much of the headlines, but a growing concern in recent years is the so called "patent trolls". These individuals or corporations specifically file patents, with no intention of using them, to litigate against companies who come up with similar ideas and uses, and who actually use them.

An article in the Wall Street Journal by John Chambers and Myron E. Ullman outlines the large costs of these patent trolls. Each author's company has been a victim of these "patent-assertion" entities, and they site a growing number of these companies in existence today:

According to RPX Corp., more than 3,600 companies and named defendants were sued by so-called patent-assertion entities in 2014, triple the number in 2006. Patent-assertion entities-aka nonpracticing entities, or as some would call them, trolls-that own patents but do not make products or sell services based on them file more than 60% of patent litigation in the U.S.

The authors further site a 2012 Boston University study that estimated that companies spend upwards of $29 billion annually defending patent lawsuits. In light of these facts, the authors call for greater regulation designed to curb abusive litigation. However, this litigation reform may be too broad based to fix this issue. If an individual or entity is to file for, and win the rights to, a patent, it only seems reasonable that they should be able to defend the unlawful use of their property. To say that someone is abusing patent rights simply because they are not currently acting on the patent is a matter of opinion; these entities could be protecting an idea for future use or looking to sell the patent when the technology becomes developed further. For a legislation reform to be truly effective, it must clearly define what is considered "abusive" litigation practices; that unfortunately comes down to a matter of opinion, which does nothing to solve the problem.

A well placed reform on the beginning stages of the patent system could go a long way in solving the patent problem. A Vox article entitled Everything you need to know about patients gives readers an excellent explanation for some of the root causes of the problem. Timothy Lee writes:

The Patent Office has around 8,000 examiners who processed more than 600,000 patents in 2013. Given the complexity of the examination process, that doesn't leave much time for examiners to scrutinize applications and search for evidence to invalidate them. The Patent Office has also struggled to recruit examiners with the technical expertise to evaluate complex patent applications...

Lee brings to the forefront the key hole in the patent system: lack of manpower. Simply enough, the Patent Office does not have enough skilled employees to make proper decisions on the applications of new patents. As a result, the burden has increasingly fallen on the court system to make the determination over the validity of patent claims and the settlement of patent lawsuits. A reform designed around patent approval process would go along way in solving the issue. Such a reform should focus on bringing in a greater number examiners who have skills in technology based industries and who would be familiar with their technological applications. Providing reform on the front end, not the back end, can cut down the costs that Chambers and Ullman site as a drain on the economy.

No, Rand Paul, Do Not 'Audit the Fed'

The Paul Family, specifically father and son team Ron and Rand Paul, have made fairly significant noise over the past few years with their views on the Federal Reserve. Specifically, they have called for the end of the 101 year old institution that is responsible for setting the monetary policy for the United States. I count myself among the numerous Fed supporters; yet, in light of Rand Paul's op-ed, it is important to understand the facts surrounding "Audit the Fed".

Senator Paul does an excellent job of providing "facts" in his op-ed entitled Audit the Fed. However, a more appropriate title may have been How to Lie With Statistics and Scare Uninformed People to Do What I Want (perhaps an editor could come up with a more succinct title, but the point remains the same). Below are some of such facts that Rand Paul attempts to use in his justification for auditing the Fed, along with "fact check" of sorts from the article Unfriend the Fed: Rand Paul's Attack Re-examined by Pedro Nicolaci Da Costa of the Wall Street Journal.

Paul begins his article with a comparison of the Fed to the failed investment bank Lehman Brothers. He notes:

If the Federal Reserve was a real bank, without extraordinary powers, it would be insolvent. The Fed has $4.5 trillion in liabilities and only 57 billion dollars in equity. It is leveraged at 80:1, nearly three times greater than Lehman Brothers when it failed.

Clearly an opening to create shock and awe for readers, it makes one wonder how it is possible for the Fed to survive under such leveraged conditions. First, it comes down to the key praise "without extraordinary powers", or, if the Fed was a regular bank. However, to say that the Fed is just a regular bank completely disregards the definition of the Federal Reserve system. The Fed was created by Congress and holds the full faith and support of the United States government; to say that the Fed is insolvent would be parallel to saying that the government was insolvent. Second, as pointed out in the article by Nicolaci Da Costa, the structure of the Fed does not allow it to build up further equity. He points out that the Fed has been earning "record profits", but the law requires those profits to be handed over to the U.S. Treasury. Again, this key feature of the Fed not being a regular bank comes into play; when the Fed grows its liabilities and it, by law, cannot grow equity, its leverage will increase.

Rand Paul explicitly tries to call for greater oversight through an audit of the Fed. He says:

What we really needed was more oversight of the Fed, not small community banks. If the Fed has purchased more than $2 trillion dollars of "distressed" assets, don't tax payers deserve to know what they bought? Did they buy the assets of friends and acquaintances? Did they buy any liabilities from companies they used to work for?

In terms of his last question, the Federal Reserve is not allowed to buy liabilities from companies, so if there is any speculation that they have done so, perhaps an audit would be justified. However, it is more likely that his use of the word "liability" might more closely mean the "distressed" assets that he mentioned before. Nicolaci Da Costa provides an explanation for these assets:

The Fed did acquire distressed assets in its bailouts of AIG and Bear Stearns and as part of other 2008 emergency rescue programs. But these loans have been fully repaid. The Fed also bought mortgages backed by housing agencies such as Fannie Mae and Freddie Mac...The Fed's balance sheet currently totals $4.5 trillion, more than five times pre-crisis size. Of that total, $2.5 trillion of the assets are Treasuries and $1.7 trillion are mortgage-backed securities.

As pointed out, the distressed assets that were on the Fed Balance Sheet have already been repaid and taken off the Fed's books. Any further distressed assets that may have been purchased would have had to be so well hidden that they would not have been revealed in one of the several layers of auditing the Fed currently undergoes. These supposed $2 trillion of distressed assets are just one more fact that Senator Paul needs to get straight before pushing further for "Audit the Fed".

Correct Government Key to Productivity Turnaround

A new report from the McKinsey Global Institute has set off a flurry of economic opinions that aim to solve the problem that the report has unveiled: a global slowdown in economic activity due to slowing employment. The report identifies that global growth will shrink by approximately 40% due to a slowdown of employment growth to 0.3% from 1.7% over the next fifty years. McKinsey, and the vast majority of opinion articles that have been published since its release, attempt to solve the problem by promoting the importance of improving productivity.

One such opinion was penned in today's Wall Street Journal by William A. Galston. Galston argues in the article How to Reverse the Looming Economic Slide that the solution to the global slowdown can be lead by government action which increases productivity. He states that without rapid economic growth, the social costs of an aging population will soon be unbearable. His solution for economic growth flows from the recommendations of the MGI, that government intervention in the form of investments are the key to boosting productivity. Two key areas that he highlights is the importance of government investment in research and development and infrastructure as each of these areas will not see the capital flows needed from the private sector alone. Galston summarizes his conclusion:

The U.S. can remain the world's predominant economic power in the 21st century—if our political system can get the basics right.

While there is no denial that the U.S. government's investment in R&D and infrastructure would help improve productivity, when framed in the current political sphere, this long term plan seems destined to fail. First, given the historically unprecedented levels of government debt, not only in the United States but in Europe and other developed countries, it seems unlikely that governments will have their finances in good standing to provide the capital outlays needed to boost productivity. Realistically, before additional spending can occur in the public sector, governments need to get their finances in order, and by the time that occurs, we could be well into the economic slowdown. The political gridlock in Washington is another factor that hampers Galston's argument. Fiscal conservatives and liberals cannot agree on a plan that they both support, such as a tax overhaul, it seems nearly impossible for them to agree on more polarizing investment and R&D spending.

This is all not to say that the government cannot be a factor in the turnaround of productivity in the United States. In fact, they will play a key role, just not the one Galston has outlined for them.

The role the government should play is outlined in the Harvard Business Review article The Productivity Challenge of an Aging Global Workforce. The authors, James Manyika, Jaana Remes, and Richard Dobbs, offer the prospective of the government as a regulator, providing the incentives necessary for the private sector to boost productivity. Central to their argument is that 75% of necessary growth output per year could come from companies and governments adopting best practices. They highlight reforms in the retail sector:

In retail, for instance, productivity could increase by another one-third in developed economies and double in emerging economies between 2012 and 2025...Government regulation has a central role here. In Russia, retail productivity more than doubled in just 10 years when the government opened the sector to foreign competitors that brought modern formats with them.

This role of "regulator" is one which can easily be achieved by the government. They are able to capitalize on this regulation role by providing incentives through targeted reforms and law revisions. Requiring companies to be compliant with economic best practices or writing tax reforms to reward those companies who are most productive can be a less politically charged way to seek the productivity gains that are needed.

Corporate Cash, Not Buybacks, are Hurting the American Economy

From my background in the business school and my pursuit of an economics minor, I consider myself a lucky individual who is able to stand at the intersection of the two related fields. I can utilize one school of thought to aid the other, and vice versa, providing me with a unique insight to the connection between financial and economic events. And, as I am finding exceedingly more important, I can understand when the connection breaks down or the facts are presented in such a way to make the two stand at odds.

This is exactly what Nick Hanauer attempts to do is his article Stock Buybacks Are Killing the American Economy. Hanauer attempts to explain how the diversion of corporate profits to share buybacks has been destroying the "real economy" and contributed to the income inequality present in the United States today. While the points that he makes regarding income inequality may be valid, I take contention with his complete disregard of financial theory when explaining how buybacks are destroying the economy. Hanauer explains:

In the past, this money flowed through the broader economy in the form of higher wages or increased investments in plants and equipment. But today, these buybacks drain trillions of dollars of windfall profits out of the real economy and into a paper-asset bubble, inflating share prices while producing nothing of tangible value.

I would like to first take issue with the idea of corporate profits flowing through to higher wages. While it may be true that highly profitable companies can afford to pay its employees more, Hanauer completely ignores the effect of rising stock prices on households' wealth. Outside of real estate investments, the second largest asset individuals hold is their retirement accounts; as a result of increasing share prices, as he himself pointed out was an outcome of share buybacks, these retirement accounts can see appreciation in value. While higher wages may be a positive for the economy, rising household wealth can have the same desired effect.

The other portion of his argument deals with possible increases in investments coming from corporate profits. According to financial and economic theory, investments in these types of projects are only profitable as long as they are the "best" or most "efficient" use of resources (that is to say the opportunity cost is taken into account). Hanauer argues that these investments are the best use of resources but more and more CFOs seem to be disagreeing with him—as evidenced by the increased amounts of buybacks. Hanauer is failing to recognize that there are significant benefits of these buybacks, namely decreased cost of capital, tax benefits, and satisfied shareholders (which is important for the stock market as a whole). For Hanauer's argument to hold, CFOs who themselves are very educated and well versed in the needs of their companies, must be incorrect about capital allocation on an increasingly large scale. If the CFOs are correct, to do anything else would be economically inefficient and actually destroy value.

While share buybacks may not be hurting the American economy, exploring a different area of corporate balance sheets reveal a significant area that could be causing problems: cash. The Wall Street Jounal in conjunction with Deloitte, published an article titled How Record Cash Reserves Influence Corporate Behavior. In the article, they point out that not only large companies, but increasingly small companies, are holding more and more cash:

Between 2008 and 2013, [large companies] nearly doubled their cash reserves from $1.61 trillion to $2.88 trillion, and at the same time, the small cash holding companies kept accumulating at an even pace and increased their reserves from $433 billion to $656 billion.

While these record amounts of corporate cash may have benefited companies during the tough economic times of the recession, but as the economy continues to recover, cash piles are becoming a large inefficient use of resources. With yields across the yield curve near historic lows, the return that cash is currently seeing is paltry. It seems increasingly likely that companies would be able to find profitable investments to take on or, if none exist, they can distribute that cash to shareholders so they themselves can be rewarded for holding the company's stock and be able to find worthwhile investments themselves.

Opposites Attract? Changes in Marriage Economics

While I initially took the course to fulfill my social science, my Economics 323: Gender Economics class has been distinctly interesting. Thinking about such qualitative social issues such as marriage and childbearing by attempting to grasp each concept with some sort of logical model has shifted my prospective and opened my eyes to a new way of thinking. One particular issue that we uncovered in class was the answer to the question: do opposites attract in marriage? We uncovered, using a gains from trade model, that opposites should—economically speaking—attract as there will be larger gains from trade when each individual in a couple specializes in the production of a good in which they have a comparative advantage. By the use of complete or partial specialization in the individuals allows the couple overall to reduce opportunity costs and maximize combined output.

This economic model is discussed in the John Shoven textbook Demography and the Economy. In chapter 3, Shoven summarizes Gary Becker's work Treatise on the Family:

Gary Becker's 1981 Treatise on the Family proposed an economic theory of families based on "production commentaries," in which husband and wife specialize in the market and domestic spheres, respectively, and hence, are more productive together than apart...By having one person specialize in domestic responsibilities, while the other supports the spouse and children financially, couples are more efficient than singles.

Becker's analysis aligns perfectly with the gains from trade theory and for a significant period of time founded the basis for much analysis within the marriage economics field. However, as our class discovered, this theory poses a problem when applied to modern data on marriage patterns. Research done on recent marriage patterns reveal that opposites may not actually attract and factors outside of production skills are increasingly relevant to the marriage decision. 

One particular factor, friendship, is discussed in the New York Times article Study Finds More Reasons to Get and Stay Married. The article discusses the impact on friendship between spouses on marriage utility:

One reason for [benefits of marriage persisting] might be the role of friendship within marriage. Those who consider their spouse or partner to be their best friend get about twice as much life satisfaction from marriage as others, the study found...But in recent decades, the roles of men and women have become more similar. As a result, spouses have taken on roles as companions and confidants, particularly those who are financially stable, as the economists Betsey Stevenson and Justin Wolfers have discussed.

This seems to contradict what the initial gains from trade model that was proposed. Factors that would likely drive friendship in a relationship, namely similar education levels, similar interests, etc., are also those likely to reduce the comparative advantage between the individuals from a trade prospective. This research suggests there is a confounding factor other than these production factors that go into the overall utility (satisfaction) of marriage, and this factor is increasingly becoming more and more important.

But what caused the shift in the importance of the "friendship" factor. People across the United States did not just wake up one day and begin to increasingly think "gee, I should really marry someone that I am really friendly with".

The answer comes down to one word: cohabitation, or living with a "partner" without a formal marriage. According to the analysis of Neil Shah, writer for WSJ, on a Pew Research Center study:

For many Americans, staying single, cohabiting or raising children out of marriage increasingly looks like the best available option. Nearly 25% of young adults 25 to 34 who have never been married were cohabiting last year, up from under 22% in 2007, Pew says. Roughly 7% of adults 30 to 44 were cohabiting in 2010, too, according to a different analysis, up from 3% in 1995.

The increased importance of friendship within marriages flows directly from cohabitation. Individuals are taking longer to determine whether or not to marry another person, utilizing cohabitation to make this determination. These "couples", who often will not pool resources (specifically finances) and will not make the normal gains from trade decisions. As a result, they have had to look to other factors (similarity, friendship, etc.) to provide utility in a marriage.

Revised Post: Super Bowl Ad-conomics

As part of my Econ 411 class, we are required to revise 5 of our previous blog posts, refining the ideas that we present. I chose to revise my analysis of Super Bowl economics, focusing solely on what I call "Ad-conomics":

The entertainment of Super Bowl night does not end on the field; plenty of people remain focused on the action between the action: advertisements. It is no secret that advertisers go all out for the Super Bowl. They sink some of their greatest ideas into a 30 second clip which costs $4.5 million (that's $150,000 per second plus the costs of actually producing the ad), all to reach what is the largest audience in the United States. With costs so great, it makes you wonder if the value is actually worth it.

An article by Matthew Yglesias on Vox entitled The unsustainable economics of Super Bowl ads attempts to answer to that question, and his answer is a resounding "no". The article begins with a discussion of a common measure of value in the advertising industry:

The easiest way to look at this question is to start with industry-wide CPM statistics. That stands for cost per mille, the price an advertiser pays to reach a thousand viewers (advertisers love Latin, apparently). The average CPM for 2015 so far is $37.35 which makes a $4.5 million Super Bowl ad worth the cost if it gets 120.5 million viewers.

Clearly the Super Bowl advertising did not live up to its "value" as described by the author as only 114.5 million people watched the Super Bowl, as was reported by Nielsen. Further building to the authors point in the article, Yglesias explains how advertising cost has outgrown viewership increases, such that now advertisers are "paying a premium in CPM terms."

However, the author fails to realize two key facts about Super Bowl advertising costs. First is just the simple economics of demand for advertising space. The $37.35 average CPM is based on all advertising so far in 2015, including normal shows and shows that are competing for viewership. No one event can compare to the Super Bowl, which dominates ratings and faces almost no competing programs. Simple economics say that advertisers would demand this program in greater proportion to the "average", increasing the amount that they are willing to pay. The second point that the author fails to recognize is the increase engagement that consumers have to these ads. Plenty of consumers remained glued to the television during advertising spots, as opposed to possibly turning away from the TV during normal programming. In addition, millions of Americans take to Twitter, YouTube, and Facebook to continue to view/analyze the ads. This often leads to people voicing their opinions and voting for the ads that "won" and "lost", further driving advertising engagement. Clearly, again, advertisers would be willing to pay a premium for this economic feature.

A recent Forbes article attempts to elicit exactly how much this premium would be for all of these extra economic features related to the Super Bowl. Part of their article directly responds to Yglesias's use of an average CPM figure. The author, Chris Smith, cites a comparable major TV event, the Academy Awards, and its CPM figure of $42 to estimate an effective audience ad cost of $8 million for this year's Super Bowl. However, Smith agrees with my analysis of even higher premiums for Super Bowl ads: "nobody tunes into the Academy Awards to watch the commercials."

The full analysis of the Forbes article details a slightly higher price tag based on the statement by NBC executive Seth Winter, who estimated that a price tag of $10 million would still be worth it for companies to advertise:

"We did an analysis around last year's Super Bowl that Fox ran, and our analysis showed that with all of the video distribution pre- and post-game, the value of the PR, the value of that which advertisers used to activate around their investment that it reached a very solid good foundation number of $10 million."

The article then goes on to challenge this $10 million figure based on four main components: basic television viewership, social media, media coverage of the game's commercials, and increased brand awareness. Two of the ideas, TV viewership and social media, were highlighted above and the article further breaks them down quantitatively: 54% higher brand recall for a Super Bowl ad and an average of 19 million additional impressions via social media. The other two components, media coverage and increased brand awareness, are both based on studies performed by market research firm Repucom and researchers at the University of Wisconsin-Eau Claire, respectively.  When combined, all of these components of "value creation" add to $10 million.