Econ Club Fall 2008

The first (organizational) meeting of the Econ Club needs to get set. If you were a member of the club last year and are interested in continuing and perhaps willing to help run it, please let me know.

Patrick Emerson

P.S. Disregard the calendar below, it is doing its own thing...

Cross-Price Elasticity of Demand

Here

Why Do We Keep Seeing This?

Econ101 folks...
http://krugman.blogs.nytimes.com/2008/04/29/gas-tax-follies/

The future...

Interesting paper on brain drain here.

ED RAY

We will meet with Ed Ray at 4pm on Wednesday in 650 Kerr. If possible try and show up around 3:50 and gather in the elevator lobby of Kerr so we can all go up together.

Think of some good questions!

Memory Lame

by Wade Murff

I remember very clearly how I spent my entire winter break completing the application process for over a dozen law schools. It can be a tedious affair, for the information you provide in your application must include full disclosure of your triumphant-yet-checkered past and the embellishment gently massaged into your personal statement had better accompany at least a wide brushstroke of the truth. Failure to provide a legitimate representation of yourself may land you in hot water when you apply to sit for the bar exam and the supervisory authority finds a discrepancy in your past and decides to investigate.

I remember receiving my first acceptance letter. "Whew!" I sighed. "Well, at least I know I am in somewhere!" To my astonishment, the acceptance letters just kept coming. During a 3-day period the "big envelopes" were shooting into my mailbox like sniper fire. One day I had to run for cover to avoid being hit by incoming acceptance letters.

Wait a tick! You mean to tell me that I have received only a couple of acceptance letters, several rejection letters, and that my mail was never actually shooting into my mailbox like sniper fire? Oh, the humanity! Well, okay then. I must have made a mistake in talking about it. I guess I just have a different memory about the affair. It's just that I worked so hard for the last four years and put a lot of time into my applications and I wanted to be viewed as a great candidate for the position to which I aspire. So I made a mistake. That happens. It proves I'm human, which, you know, for some people, is a revelation. (click hyperlink)

Subprime Lending

by Wade Murff

During the 2006 winter term I chose to do a small descriptive report on the subprime lending industry for my ECON383 class. The title of the class is "The Economics of Discrimination" so naturally I set upon the task of rooting out a connection between the subprime lending market and discrimination. Looking back on the paper I am naturally overcome with a light syrupy film of embarrassment; as an undergrad, one’s writing and technical skills can improve drastically in a years time, if one chooses to put the time in, I guess. At any rate, I stumbled upon some relevant considerations that do not receive much airtime in the ratings-driven mass media outlets: discriminatory practices of lending institutions. Fox News, CNN, MSNBC, USA Today, etc., while assisting corporate sponsors in smearing their logo feces all over the mass media landscape, more or less provide the same glut of information as each other, focusing on the current interest rates and the effect of the “crisis” or “meltdown” on the overall economy; all formulated for maximum ratings.

In a 2004, Paul Calem, Susan Wachter, and Kevin Gillan produced a study on subprime activity in Chicago And Philadelphia. Their findings on the percentage of subprime loans, by borrower and race, reveal that in Chicago 21.4% of subprime purchase-type loans and 51.8% of subprime refinance-type loans belong to African-Americans alone. Similarly, Philadelphia’s numbers show that 13.7% of subprime purchase-type loans and 60.3% of subprime refinance-type loans belong to African-Americans. Sounds like, at least in Chicago or Philly, being of African American descent increases the likelihood of being a subprime borrower. In addition to providing evidence of strong correlations between African-American homeowners and subprime shares of neighborhood loans, the Calem et al paper also reveals that participation in subprime lending increases with borrower risk but some borrowers appear qualified for prime loans. Hmm.

According to Jack Guttentag, Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania, part of the problem is that some prospective borrowers have difficulty in determining whether or not they qualify for prime rates. Lack of knowledge and/or experience, coupled with disparate state-to-state, lender-to-lender underwriting requirements may cause some otherwise prime rate-qualified consumers, not in the know, to opt into subprime arrangements. In his recent work, “What Is a Sub-Prime Mortgage Lender?” Guttentag asserts, “The main reason some prime borrowers end up paying sub-prime prices is that they are solicited by subprime lenders and go along with the deal pitched to them without ever contacting a mainstream lender."

Lawful preferential actions based exclusively on individual borrowers’ financial qualifications on the part of risk-garnering lenders are warranted and seem their respective right as legitimate businesses. Consistent within the Calem paper and many others, however, are references to asymmetrical or “imperfect” information between the borrowers who are justly or unjustly offered subprime mortgage rates, and the lenders. Many of these studies produce empirical evidence indicating that some subprime lenders directly target selected demographics for their attractive deals, particularly low-income, African-American neighborhoods.

The discovery of high concentrations of subprime loans among African Americans suggests the use of statistical discrimination as not only a means of targeting advertising, but also as a conduit through which a larger portion of a valued demographic may be drawn into a profit-maximizing model that utilizes price discrimination. The unintended consequence of municipal-, state-, and federal-level regulations legislated on subprime loan market activity thus far is an apparent contraction in the supply of subprime loans. Some lenders, responding to the subprime market’s rising regulation and negative publicity have simply announced their withdrawal from subprime lending.

Perhaps the real battle that underserved prospective homeowners and those looking to upgrade their financial viability face is one of information; maybe some consumers aren’t sure where to turn, who to trust, or who not to trust, figuring that they couldn’t possibly be led to financial ruin and destitution legally. While the Home Owners Equal Protection Act (HEOPA) of 1994 provides guidelines for high-rate and/or high-fee consumers, the law does not protect prime rate-qualified borrowers from unnecessarily entering into a high-rate contract. Borrowers are therefore responsible for knowing their credit-worthiness (such as FICO scores) and arming themselves with such information in the event that they are in need of a mortgage or home equity loan.

Predatory lending activities may not be explicitly racially motivated, but they most certainly are profit-fueled and ultimately criminal. Perhaps the disparities in responsible credit knowledge found between the prime loan consumers and minority or low-income consumers reflects a carryover effect resulting from a long history of general economic disadvantage. Maybe not. One thing seems for sure though, a consumer’s well-being can hinge on her knowledge about her credit standing, credit options, and the laws that are in place to better the system.

The charge of government, however, seems clear and immediately pursuable; to reiterate the principles contained within HOEPA, both to the consumer and the producer, and to threaten with and carry out punitive measures against lending institutions, such as commercial banks (or their compartments) and savings and loan associations, who engage in activity consistent with predatory lending practices. Assuming that the benefits outweigh the costs, and that the market’s efficiency would be increased given fully-informed consumers, a highly-publicized federally-funded consumer credit campaign could prove beneficial.

The FTC provides a wealth of consumer information regarding consumer credit on its website but it is unlikely that the consumers who earnestly need such information will happen across it while surfing the internet. In terms of visibility, the FTC might do well by taking inspiration from current subprime mortgage lender advertising techniques, such as search engine marketing and strategic ad placement. In the interim, state and municipal government should strongly encourage prospective refinance- and home equity installment-type borrowers to first seek loan counseling from a consumer advocacy agency or a city or county housing department.

If you're interested in reading the full paper by Calem et al, you will find it here.

Most Lucrative Undergraduate Degrees

In terms of average starting salary, economics is a pretty good choice (from CNN Money):

The average starting offer for seniors majoring in:

Economics: $51,631
Finance: $47,905
Marketing: $41,323
Business Administration: $43,523
Mechanical engineering: $54,587
Chemical engineering: $60,054
Management information systems: $46,568
Civil engineering: $47,145
Electrical engineering: $54,599
Computer science: $51,070
Accounting: $46,508
Logistics/Materials management: $43,294
Liberal arts (including psychology, political science history, English): $30,502

OK, so maybe engineering is more lucrative, but then there is the compensating wage differential to consider.

Bruce McGough

Bruce will join us on Wednesday, Feb 13. He is a macro-economist, so be prepared to ask him about the macro-economy.

I'll look into Pizza...

-Patrick

President Ed Ray to Speak to the Economics Club April 2nd

Ed Ray, President of OSU, has accepted an invitation to speak to the Economics Club. He is scheduled to meet with the club at its regular meeting on April 2nd. We will meet with him in the 6th Floor Conference Room in Kerr Admin Building (Kerr 650). Please don't be late as Ed has only a hour to spend with us.

In the meantime, why did we ask President Ray to speak to us (other than the fact that he is the president)? He is a eminent trade economist who made some major contributions to the trade literature before he became a full time administrator. Here is a sample of his early work.

State Representative Sara Gelser to Speak on Jan 30th

Sara will join us at our regular meeting, so think about questions you have about legislating and economics.

From her bio:

Sara Gelser (Democrat, Corvallis) was sworn in as State Representative for House District 16 on December 2, 2005 after being appointed to fill a legislative vacancy. In 2006, she was elected to the position. Soon thereafter, she was elected as Assistant Majority Leader for Policy for the 2007 legislative session.

During the 2007 session, Sara served on the Revenue Committee, the Health Care Committee, and was Vice Chair of the Human Services and Women's Wellness Committee. She was also appointed to chair the House Guidelines Committee, which was created to oversee stringent ethics reform in the Oregon House of Representatives. In her first full term in office, Sara was able to pass several bills she introduced. Most significantly, she passed Karly's Law which will improve child abuse investigations statewide and a Mediciad waiver bill which will allow children with severe disabilities to grow up in their family homes rather than foster care or nursing facilities. She also saw successful passage of a bill to allow statewide electronic permitting for contractors. This was the largest regulatory streamlining initiative for the construction industry in the United States. Sara was also a founding member of the new Oregon Senior and Disability Caucus.