More Misconceptions About Economics

At Marginal Revolution, Alex Tabbarok reports on a survey of ignorant factual errors on the part of polled macroeconomic principles students at SUNY-Oswego (and hold the SUNY-Oswego jokes):

the median student believes that 35% of workers earn the minimum wage and a substantial fraction think that a majority of workers earn the minimum wage (Actual rate in 2007: 2.3% of hourly-paid workers and a smaller share of all workers earn the minimum wage, rates are probably somewhat higher today since the min. wage has risen and wages have not).

When asked about profits as a percentage of sales the median student guessed 30% (actual rate, closer to 4%).

When asked about the inflation rate over the last year (survey was in 2009) the median student guessed 11%.  Actual rate: much closer to 0%.  Note, how important such misconceptions could be to policy.

When asked by how much has income per person in the United States changed since 1950 (after adjusting for inflation) the median student said an increase of 25%.  Actual rate an increase of about 248%, thus the median student was off by a factor of 10.

The full survey results.

Bryan Caplan wrote a Reason cover story back October 2007 in on some of the theoretical misunderstandings most people have about economics, "The Four Boneheaded Biases of Stupid Voters (And We're All Stupid Voters)."

Comments

[Tulpa]

Freshmen at SUNY Oswego are idiots. In other breaking developments, it snows a lot there.

[Pham Nuwen]

I'm sure what you meant was that all freshmen seem to be idiots. I know I was.

[Episiarch]

hold the SUNY-Oswego jokes

Aww...can we make generalized SUNY jokes instead? I did used to work at Downstate.

[Tman]

Make fun of SUNY all you want, but I bet those scores wouldn't be as bad if you asked say, your average Maddow/Olberman viewer.

[Pham Nuwen]

Dude. Really? I doubt there would be a difference. The older I get the more I've noticed that people seem to be less tractable on their misguided opinions.

[Tman]

I mean they (Mad/Old) would be worse. Probably a lot worse.

[Pham Nuwen]

I know what you meant, bro. And I'm standing by my comment.

[?]

Them ignint kids is right(er).

the median student believes that 35% of workers earn the minimum wage

Plausible. Averaging fed minimums and state minimums, "minimum" pays slightly under $20k/year, and over 40% of Americans with incomes earn less than $25k/y. Plus, Mexicans.

inflation rate over the last year (survey was in 2009) the median student guessed 11%.

And they lowballed it. If you include what the official stats exclude?or if you go straight to money supply vs. historically stable(r) commodities?it was twice that. And they're students. Tuition very visibly inflates at more than 10%/year, and they've probably heard about it over dinner recently.
Actual rate an increase of about 248%

That's utter bullshit, but to the degree that it vestigially carries something that's in the raw numbers, it reflects what happened to the fraction of the population who got a lot more than 248% return on what the economy has been made into since 1950. Economics majors, for example.
Those kids will be the kind of "I'm middle class! I only?[voice drowned in yachting sounds]" assholes who comment at Marginal Revolution soon enough. Don't pick on 'em.

[Yonemoto]

don't forget grad students! I was making less than minimum wage for a good four years until I figured out how to make like I was working and goof off instead.

[Amakudari]

Plausible. Averaging fed minimums and state minimums, "minimum" pays slightly under $20k/year, and over 40% of Americans with incomes earn less than $25k/y. Plus, Mexicans.

Nope, the average minimum wage is around $7.40/hour, and you extrapolate gross income from that by multiplying by 2000 hours (50 workweeks times 40 hours/week). That gets you to $14,800.

I came up with $7.40 by taking the weighted average of state federal minimum wages and population, but regardless of the imperfections in that analysis it's worth noting only around 10% of the population is subject to a minimum wage rate higher than $8.

To get to your $20,000 a person would have to work about 54 hours/week at $7.40. That's 14 more than both the standard definition and statistical average for a US workweek.

And they lowballed it. If you include what the official stats exclude?or if you go straight to money supply vs. historically stable(r) commodities?it was twice that.

Inflation is a rise in the price of goods and services. You're right that they have individually experienced tuition inflation, but the same can't be said for food, transportation or housing. (As for food, commodity prices are only one of the inputs in its price; wheat must milled, baked, packaged, marketed, bought, etc. before it becomes bread on your shelf.) Even then, food is around 9% of the US budget, the lowest in the world.

None of those bode well for future inflation, but looking at year-over-year price increases I don't think many people can say that it's cost them 11% more to maintain the same lifestyle.

[robc]

Inflation is a rise in the price of goods and services.

No it isnt.

Inflation is the change in money supply (I would use M2, which puts us back to about 0%).

[Tulpa]

Wiki on inflation

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

[Old Mexican]

Re: Tulpa,

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

Which happens as if by magic, it would seem . . .

I mean, does ANYBODY comprehend what they're reading anymore?

[Banjos Kick Ass!]

+$1,000 (the price of a cup of coffee in a few years)

[zoltan]

+$1 million dollar Zimbabwean piece of currency

[domoarrigato]

Refusing to accept what everyone else agrees is inflation doesn't make your point about the dangers of expanding the monetary base sound any better. People who study inflation tend to dismiss those who simply refuse to use standard terminology to attempt to make a point.

[gaijin]

Viewed from the context of their age and actual life experience, they probably are not idiots as much as peer grouip centric in their views. Most of their peers probably do earn minimum wage for any jobs they may have/had in high school. And given the above-normal increases in the cost of higher ed, overstating inflation is probably consistent with their life experience thus far too.

[?]

This line-breaks-randomly-don't-take thing is very annoying, Mr. Squirrel.

[Apologetic California]

Yea, I'd fail many of these questions. I tend to overestimate guess numbers. Though I'd pretty much get the minimum wage and inflation question.

[Mr Whipple]

inflation rate over the last year (survey was in 2009) the median student guessed 11%.

If you use the "old" method for calculating CPI, it's about 8%. Commodities have been on a tear the past few months across the board, with a couple exceptions, and the dollar index has been on a decline during that same period. It won't be long before those high commodity prices find their way into consumer goods, but "officials" predict 1.5%. Yeah, good luck with that.

[Chad]

Doesn't the standard CPI measurement contain about 35% housing/rents, which have been falling or have been stagnant for several years now. That can mask a lot of increase in other things.

[domoarrigato]

yeah, but that doesn't mean the effects are somehow not real. people are spending less on housing. That makes their disposable income higher. If they have to use that extra income on other things that cost more, they are paying the same for their basket of goods and services - 0 inflation. For real.

[Tim Cavanaugh]

You can always correct an error of fact. But macroeconomics classes make you stupid for life.

[Kant feel Pietzsche]

Ditto for poli-sci, divinity, sociology, gender-studies, (fill in a race) studies...*

*This is only a partial list. Your mileage may vary.

[Chad]

When asked about profits as a percentage of sales the median student guessed 30% (actual rate, closer to 4%).

Who is this for? The retailer? Then it's probably true. But certainly not for many of the links along the supply chain. My industry averages around 10% margins. Some high-tech companies like Intel have margins well over 50%.

[Some Guy]

Margin and profit are not the same thing. Unless you think Intel has no overhead costs.

[Fatty Bolger]

Presumably he's referring to the net profit margin, not the gross margin.

[Amakudari]

Intel's net is usually around 25%. He's probably talking about their gross margin, which is going to be before a lot of expenses (marketing, administrative, interest, taxes, etc.). It's a measure of how well the company is controlling its costs, not the return to shareholders/owners.

That's not shocking, as tech (especially software) companies can have very high gross margins given the scalability and low variable costs of their product, but much of that gets eaten up by other costs.

[Shocked]

Got to believe that Intel's R & D costs are very high, which get charged to expense regardless of outcome.

[Uh, it's Chad?]

Consider who your talking about.

[Fatty Bolger]

Good point.

[domoarrigato]

I believe this incorrect answer is due largely to the students confusion between these two terms. I think it says more about that then it does about their inability to estimate things.

[Chad]

When asked about profits as a percentage of sales the median student guessed 30% (actual rate, closer to 4%).

Who is this for? The retailer? Then it's probably true. But certainly not for many of the links along the supply chain. My industry averages around 10% margins. Some high-tech companies like Intel have margins well over 50%.

[Kant feel Pietzsche]

I can't believe I'm wasting my time responding to Chad, but here goes:

Did you ever consider, I don't know, like, READING THE FUCKING ARTICLE?

"total corporate receipts were $20.7 trillion with a net income of $.82 trillion, for a 4% net profit rate"

Oh, wait, it's Chad......

[rhea]

Many have taken for granted economic and financial education. What they did not know is since we were young, when we go to the grocery or cook food, there is value that we can get which we just take for granted.

We help Americans move to Asia for jobs and prosperity. Learn more at http://www.pathtoasia.com

[Some Guy]

I would have thought the minimum wage number would be a higher. Maybe 6-8% or so. Maybe it is now.

But 25% wage increases since 1950? When I was 12 I could have made a reasonably educated guess based on inflation. That would certainly hurt with 11% inflation.

[Fatty Bolger]

Speaking of economic ignorance, I've noticed a LOT of political ads going after free trade lately. That's worrying because it indicates that it is probably polling well.

[Tim Cavanaugh]

I saw Newt Gingrich give a speech to 10,000 Central Valley Republicans this weekend, and by far the biggest ovation he got was for demanding more "Made in America" stickers and fewer "Made in China" stickers -- exactly the same applause line Barbara Boxer is using against Carly Fiorina.

And Republicans are supposed to be the party of free trade. (So long as you ignore that it was Bill Clinton and a Democratic Congress that passed NAFTA.)

[Brandybuck]

Republicans have never been for free trade. Hell, extreme protectionism was one of the two principles the party was founded on.

[Shocked]

It's interesting that they are against free trade but don't campaign for protectionism. I guess if they did, some one may start asking questions about the bad sides of that.

[Attorney]

The good news: These are 18-20 year olds with no real-world experience.

The bad news: 87% of respondents had already had an intro micro course.

[Mo]

Maybe their tuition went up 11% the previous year and that's what they were basing their inflation guess on.

[guy in the back row]

Since the results would probably be about the same at private schools, these SUNY kids get bonus points for paying much less tuition.

[Juvenile Lurker]

Q: Why is economics called "the dismal science"?

A: Behold!

[Doh!]

Lower the drinking age and raise the voting age in trade 🙂 Nothing like a mush headed college student without a clue that thinks he has a clue. After all his tenured Prof that never ventured into the world outside of academia told him so!

[Old Mexican]

When asked about the inflation rate over the last year (survey was in 2009) the median student guessed 11%. Actual rate: much closer to 0% [2009]. Note, how important such misconceptions could be to policy.

*Bullshit!* Sorry, I coughed.

At THAT point, it was closer to 6%. Yeah, that's about 5 PP closer to zero than 11% but zero it wasn't.

Inflation is a rise in the price of goods and services.

And planes fly because the ground goes down under them.

Stupid, stupid.

[Old Mexican]

Stats:

http://www.shadowstats.com/alternate_data/inflation-charts

[Some Guy]

According to ShadowStats we've had about 100% total inflation since 2000. I'm going to go ahead and call bullshit on that.

[Old Mexican]

Re: Some Guy,

According to ShadowStats we've had about 100% total inflation since 2000. I'm going to go ahead and call bullshit on that.

Yeah, you go ahead and do that . . . Don't say later you were not warned, though.

[Old Mexican]

More Misconceptions About Economics

Tell us about it, Doherty.

When asked by how much has income per person in the United States changed since 1950 (after adjusting for inflation [which inflation data???]) the median student said an increase of 25%. Actual rate an increase of about 248%, thus the median student was off by a factor of 10.

How 'bout adjusted for GOLD?

http://www.thefinancialhelpcen.....ncome.html

Maybe the students are on to something . . .

[TDL]

So you are claiming that we are poorer and our standard of living is lower than it was in the 1950's - 1960's?

Regards,
TDL

[Old Mexican]

Re: TDL,

So you are claiming that we are poorer and our standard of living is lower than it was in the 1950's - 1960's?

No. If you look at income adjusted for Purchasing Power, the improvement is much higher thanks to higher productivity, but income in terms of REAL MONEY (i.e. gold) has been DROPPING.

[Brandybuck]

My standard of living is so much better than my parents it's almost science fiction. We are so much better off today it is laughable to think it's only been a 25% improvement.

[Old Mexican]

Uh, right. How big was THEIR house? How long did it take for THEM to pay it in total?

Your standard of living improved compared to your parents because of your higher productive output, Brandybuck, not because the US economy pushed you upwards. Think about it.

[fresnodan]

It seems to me those are the results you would get from the Federal Reserve members and most congressmen.