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The Economics of Nannies

Little wonder that female graduates from Yale and even Harvard-MBAs drop out so often from the labor market rather than pursue their own around-the-clock career. On the other hand, this article ultimately shows why one shouldn't rely on NPR or the NY Times for economic discussions.

. . . When Muneton started working through Pavillion in 2002, however, she increased her salary to $85,000 a year. As she gathered sterling recommendations, she began increasing her pay. Eventually she worked for some of the country’s wealthiest people, whom she accompanied on private jets to many of the world’s most exclusive resorts. Today, she says, “there are no more poor people in my family.” Muneton bought a nice house for her mother, a condo for her sister and a taxi cab each for two of her brothers. She also owns a beach house in Brazil, a penthouse in Miami and two properties (a six-unit building and a duplex) in Los Angeles.
How does a nanny earn more than the average pediatrician? The simple answer is hard work — plus a strange seller’s market that follows a couple of quirky economic principles. A typical high-priced nanny effectively signs her (and they are almost always women) life over to the family she works for. According to Cliff Greenhouse, Pavillion’s president, that kind of commitment is essentially built into the price. Many clients are paying for the privilege of not having to worry about their child’s care, which means never worrying if their nanny has plans. Which, of course, she can’t, pretty much ever. . . .
. . . According to Pavillion’s vice president, Seth Norman Greenberg, a nanny increases her market value if she speaks fluent French (or, increasingly, Mandarin); can cook a four-course meal (and, occasionally, macrobiotic dishes); and ride, wash and groom a horse. . . .
And then there’s social climbing. “A lot of families, especially new money, are really concerned about their children getting close to other very affluent children,” Greenhouse says. “How do they do that? They find a superstar nanny who already has lots of contacts, lots of other nanny friends who work with other high profile families.” There are the intangibles too. “I’m working with a phenomenal Caribbean nanny right now,” Greenhouse says. “She is drop-dead beautiful. Her presentation is such that you’re proud to have her by your children’s side at the most high-profile events.” . . .

Some of the economics here is pretty lame. Pavillion has a reputation that helps people sort out who makes the best nannies. If they provide inaccurate information, wealthy people will tell others not to trust them. Those wealthy people will also not go back Pavillion when their first suggestion doesn't work out.

. . . But it’s hard not to wonder if the nannies who make twice as much an hour as the ones we’re considering are also twice as good. Nannies can be evaluated in the same way as what economists call “experience goods” — like wine, whose value can only be determined after experiencing it. When it comes to experience goods, price can be useful to reject anything below a certain minimum. After all, a $3 bottle of wine or a $5-an-hour nanny are pretty sketchy.
But price is useless — or worse, misleading — in differentiating among the adequate. . . . They also bear resemblance to “credence goods,” an economic term for something — whether a jar of vitamins or an auto tuneup — whose true value can never quite be determined. You’re more likely to overpay for a credence good in the hope that a higher cost increases the likelihood of a benefit. . . .

The Financial Times could use a good economics lesson

Economics

This article by Lisa Pollack in the Financial Times assumes that making investments isn't productive. I would argue that there is a reason why scientists are getting paid more in these financial markets than they were getting in science and that is they are producing more wealth there. Moving resources from lower to higher valued uses is valuable.

She approvingly cites a study that claims:

we find that industries that are in competition for resources with finance are particularly damaged by financial booms. Specifically, we show that manufacturing sectors that are either R&D-intensive or dependent on external finance suffer disproportionate reductions in productivity growth when finance booms. . . .
Finance literally bids rocket scientists away from the satellite industry. The result is that erstwhile scientists, people who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers. . . .

Can you explain the economics error here?

Economics

From the UK Independent:

It is the second-lightest element in the Universe, has the lowest boiling-point of any gas and is commonly used through the world to inflate party balloons. But helium is also a non-renewable resource and the world's reserves of the precious gas are about to run out, a shortage that is likely to have far-reaching repercussions.
Scientists have warned that the world's most commonly used inert gas is being depleted at an astonishing rate because of a law passed in the United States in 1996 which has effectively made helium too cheap to recycle.
The law stipulates that the US National Helium Reserve, which is kept in a disused underground gas field near Amarillo, Texas – by far the biggest store of helium in the world – must all be sold off by 2015, irrespective of the market price.
The experts warn that the world could run out of helium within 25 to 30 years, potentially spelling disaster for hospitals, whose MRI scanners are cooled by the gas in liquid form, and anti-terrorist authorities who rely on helium for their radiation monitors, as well as the millions of children who love to watch their helium-filled balloons float into the sky. . . .

Was real GDP growth in the first quarter even less than 2.2%?

Economics GDP

The Consumer Metrics Institute has this discussion:

Once again the BEA has used "deflaters" that will strain the credibility of the public, especially if they buy gasoline. To correct the "nominal" data into "real" numbers the BEA assumed that the annualized inflation rate during 1Q-2012 was 1.54%. As a reminder, lower "deflaters" cause the reported "real" growth rates to increase -- and once again very low seasonally adjusted BEA inflation "deflaters" have been the headline number's best friend. If the raw "nominal" numbers were instead "deflated" by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period, nearly the entire headline growth rate vanishes -- and the resulting growth rate would have been a minuscule 0.08% with "real final sales" contracting.
And real per capita disposable income actually shrank during the quarter -- even using the BEA's optimistic "deflaters." Real-world households likely felt the pinch even more. . . .

Something to think about including if you want to explain the changes in the number of robberies over time

Economics technologycausingcrime technologysolvingcrime

Using electronic payments won't only reduce bank robberies, it should also reduce street robberies. But as this article points out, you will see more cybercrime (so-called substitution effects). It isn't just for underground economies that people like cash. They also like it sometimes to protect their privacy. From CBS News:

The Swedish Bankers' Association says the shrinkage of the cash economy is already making an impact in crime statistics.

The number of bank robberies in Sweden plunged from 110 in 2008 to 16 in 2011 — the lowest level since it started keeping records 30 years ago. It says robberies of security transports are also down.

"Less cash in circulation makes things safer, both for the staff that handle cash, but also of course for the public," says Par Karlsson, a security expert at the organization.

The prevalence of electronic transactions — and the digital trail they generate — also helps explain why Sweden has less of a problem with graft than countries with a stronger cash culture, such as Italy or Greece, says economics professor Friedrich Schneider of the Johannes Kepler University in Austria.

"If people use more cards, they are less involved in shadow economy activities," says Schneider, an expert on underground economies.

In Italy — where cash has been a common means of avoiding value-added tax and hiding profits from the taxman — Prime Minister Mario Monti in December put forward measures to limit cash transactions to payments under euro1,000 ($1,300), down from euro2,500 before.

The flip side is the risk of cybercrimes. According to the Swedish National Council for Crime Prevention the number of computerized fraud cases, including skimming, surged to nearly 20,000 in 2011 from 3,304 in 2000.

Oscar Swartz, the founder of Sweden's first Internet provider, Banhof, says a digital economy also raises privacy issues because of the electronic trail of transactions. He supports the idea of phasing out cash, but says other anonymous payment methods need to be introduced instead.

"One should be able to send money and donate money to different organizations without being traced every time," he says. . . . .

New book by Doug Allen: Fascinating insights, explaining so many institutions that people take for granted

DougAllen Economics

For those who aren't familiar with Doug Allen's academic research, you are in for a real treat with Doug's book entitled "The Institutional Revolution."

I wrote a review of it for Amazon.com. Nonacademics should definitely not be put off by the the fact that this book is published by the University of Chicago. It is readily accessible book. Allen applies economics from dueling to the rise of the civil service to the rise of public police departments to why private lighthouses declined. People have a tendency to assume that the way things are organized today is the way that they always have been. Yet, it was not until the nineteenth century that policing in England became publicly provided (the same is true in the US).

Have you ever wondered why dueling got started or ended? Why the detailed rules were set up the way they were? Why seconds were used?

Given my own interest in crime, the discussion on the rise of public police is especially interesting. Who would have thought that so much could be explained by just the standardization of goods? Standardization, with the increased anonymity of exchanges, made it easier to steal.

How about this for an interesting fact: "By 1890, 'only three people in all of England and Wales were sentenced to death for murder committed with a revolver.' All of this was done in the context of private provision of police and justice." (I will just add that this was in an era when gun ownership was very common and there were no gun control laws.) But this is just one example of the fascinating facts that one continually comes across in Allen's book.

One question that I had in reading the discussions for the end of private lighthouses or private law enforcement was how much of this was a desire to create wealth transfers. For example, it is possible that firms turned to public law enforcement to stop theft from their factories and shops because the government was better at doing this job, but could it also be possible that private firms simply wanted someone else (namely taxpayers generally) to pay these costs?

Indeed, this last point seems to have played a role towards public law enforcement in the US where we went from private companies paying for law enforcement to public provision where others had to foot the bill. Anyway, it would have been interesting to see more of a discussion of other explanations.

I would also have liked to see some discussion of the relative costs of public and private provision. For example, if public provision runs twice as expensive as private provision (see Milton Friedman's old rule or a comparison of public and private schooling), whatever benefits there might be from public provision have to be weighted by these relatively higher costs. There is also the issue of whether you get the same output per hour of work in public provision as you get from private provision.

But one verdict is clear: this is a very interesting book and it will provoke much discussion.

Why do dinners cost more than lunches at the same restaurant?

Economics pricediscrimination prices

Well, I am glad that my book Freedomnomics mentions a couple of those explanations (I don’t have the one about the A-team). The competition explanation doesn’t seem right. You can see this phenomenon in DC with a whole row of restaurants right next to each other. Lunch might compete with “in-house cafeterias, the dirty water hot dog cart, chain restaurants, and delivery businesses,” but for dinner you are also less likely to eat right near where you work or live. Jonas M Luster has this discussion:

. . . Some things are static, such as my lease, power, linens, licenses, etc. Other things vary between lunch and dinner:

Lunch isn't prepared and served by my A-team. Many times waiters and cooks have to prove themselves during lunch before being allowed on the dinner line. This means I pay less in payroll.
Lunch doesn't usually serve a full menu. The menu is optimized for faster production and oftentimes smaller portioned. Smaller menu means less storage, smaller dishes mean less storage, and faster turnaround means less secondary storage costs (hot/warm holding, etc.)
Lunch diners spend an average of 45 minutes from entry to exit, dinner guests take over twice as long. This means faster turnaround during lunch hours, which either means more covers or less staff needed. Both saves me money.
Lunch guests don't want/need candles and expensive bottles of water. They want food. We cater to this by dropping down to the bare bone of fine dining hospitality, removing fluff.

Last, but not least, lunch is a competitive market. We compete with in-house cafeterias, the dirty water hot dog cart, chain restaurants, and delivery businesses. By pricing ourselves competitively we ensure good covers every day of the week (low day is Tuesday, high day is Thursday, by the way) and a hot, pre-stocked, kitchen for dinner. That saves us money (I don't have to pay someone to come in at 3pm and set up stocks and sauces, for example, I can have the lunch crew do those during slows and as part of their prep) and time, which in and by itself is money. . . .

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