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College Destinations Spotlight: San Francisco

The top spot in the biggest category of our 2017 College Destinations Index went to San Francisco, which ranked high in diversity, percentage of college-educated residents, mass transportation, and arts and entertainment options.

To read more, go to our main Daily Economy blog at

College Destinations Spotlight: Denver & Boulder

The great state of Colorado played prominently in our 2017 College Destinations Index, as the metro areas of Denver (above) and Boulder won their size categories.

Boulder, home of University of Colorado Boulder, took the top spot in the College Towns category. Boulder’s top ranking in its category was bolstered by high marks in percentage of college-educated residents, ease of non-car transportation into town, arts and entertainment offerings, as well as number of bars and restaurants. That’s in addition to a strong showing among our economic measurements as well…

To read this full blog, go to our main Daily Economy site here.

College Destinations Spotlight: Ann Arbor

Our 2017 rankings of top U.S. college destinations includes Ann Arbor as the best small metro. Our team of researchers gave it this ranking in large part due to its high percentage of college graduates among its residents, and its high level of diversity, affordable homes, and lots of restaurant and entertainment options. (Zingerman’s Deli, of course, is a classic.)

Ann Arbor has a history of ranking high on these sorts of lists…

To read the full blog, go to our main Daily Economy site here.

The Economics of Auto Safety

Early-production Citroen with hydropneumatic suspension. The DS was launched in 1955, and continued for 20 years.

The 1950s and ‘60s were defining decades in the evolution of automotive safety in the United States. Prior to the ‘50s, little thought was given by the industry to passively protecting passengers in the event of a crash. But despite resistance from the American auto industry, safety eventually won out, by popular demand of the U.S. consumer.

Some auto manufacturers’ names evoke a visceral sense of safety. SAAB, Volvo, Citroën, Mercedes, Rover and others devoted much of their energies to designing and building cars that were both inherently safe and crash-worthy…


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Best of 2016: Why We Live Beyond Our Means

This week we are revisiting some of the best Daily Economy blogs of 2016. This piece first ran in April. Our January research brief, also by Max, will deal with the same topic.

Americans are living beyond their means more than ever before. In a recent series of articles, The Atlantic Monthly documents “the secret shame of middle class Americans”: spending more, saving less and often unable to come up with even a few hundred extra dollars in the face of a financial emergency.

Experts often chalk this trend up to government policy or culture, but ignore a very basic explanation: We simply have more opportunities to make bad financial decisions than in the past. While this explanation sounds simplistic, it actually places financial health in the context of many other problems we humans create for ourselves.

Take, for example, the fact that people in the developed world are increasingly overweight. One commonly accepted explanation is that fatty and high-carb foods were scarce when humans evolved, so we developed cravings to help get what we needed. But in an age of microwaves and convenience stores, such instant gratification is at our fingertips, and we end up consuming too much.

From food to electronics, cars to homes, we’ve witnessed an explosion in the amount and variety of consumer products available. At the same time, shopping is faster and easier than ever before due to the Internet and ease of transportation.

Finally, our financial system has made borrowing and credit easier for consumers across the socioeconomic spectrum. Buying the next new toy used to require planning, saving and perhaps most importantly, waiting. Now, we can get the rewards of a new purchase almost instantly while pushing the cost and financial risk to the future. In effect, we can run a Ponzi scheme on our future selves, seeking short-term benefit for future costs that, though less tangible, can pile up to the point of disaster.

So should the government step in and restrict our opportunities to make bad choices? Not so fast. It’s instructive to look at our efforts to fight the ultimate source of short-term pleasure in exchange for future disaster, illegal drugs. The consensus view is that prohibition, aggressive policing and prosecution have done little to solve the problem.

The best solution available may be a combination of education and steps to make it easier to make the right financial decisions. Here at AIER, we hope to contribute to the solution with our upcoming economic wellness initiative.

From consumer goods to junk food to narcotics, we have trouble making decisions when instant gratification is available for costs that only come down the road. These problems increase when society and technology make the quick payoff more available. There may be no easy fix to people living beyond their means, but understanding the problem in the broader context of how we make decisions is the first step down the road to better solutions.

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Best of 2016: What Should the Minimum Wage Be?

This week we are revisiting some of the best Daily Economy blogs of 2016. This piece first ran in May.

In recent years we’ve heard many arguments in favor of raising the federal minimum wage significantly above its current level of $7.25 an hour. Some states (New York and California are the largest example) have adopted legislation mandating an increase in the state minimum wage. In most cases, the proponents of a higher minimum wage argue that it should be set at $15 an hour. But why $15?

One argument often given for raising the minimum wage is that inflation erodes the real value of the wage over time. If one were to adjust the minimum wage for inflation, today’s wage is below what it was decades ago. Thus, the argument goes, the wage should be adjusted to restore its real purchasing power.

The adjustment for inflation is done on the chart below, for the entire period the federal minimum wage existed, using constant 2015 dollars.

Today, the real value of the minimum wage is indeed below what it was in the 1960’s. The minimum wage reached the highest real value in 1968. That year the minimum wage was raised to $1.60, which is equivalent to about $10.80 in 2015. Thus, if the objective is to match the highest-ever real value of the minimum wage, today’s minimum wage would need to be raised to $10.80 an hour. Raising it to $15 an hour would far exceed any past level of real minimum wage.

But why should we raise the minimum wage to match its past real values? In general, workers are not guaranteed that their wages will rise with inflation to preserve their real value, and there is no reason why minimum wage workers should be an exception.

Moreover, other wages are often affected by the changes in the minimum wage. Economists, business owners, and managers long knew that employees tend to pay attention to their relative pay, not only the wage itself. An experienced employee who has been with a company for a few years might feel slighted if he is paid the same wage as the newly hired inexperienced person, even if that wage is $15 an hour. That’s why some argue that increasing the minimum wage would also push up the other wages, higher up the pay scale.

If the question is whether minimum wage workers have lost ground compared to their higher-paid counterparts, let’s look at the historical trends.

The chart below compares the federal minimum wage to the average weekly earnings of production and nonsupervisory employees (the closest approximation to hourly employees that can be found in the data).

Manufacturing provides the longest history of the average hourly earnings. Other sectors have shorter data series, but the overall trend is the same.

Throughout the 1950’s and 1960’s, the average hourly earnings in manufacturing were about twice as high as the minimum wage. In mining and in construction, the average hourly earnings were about 2.5 times higher than the minimum wage.

From the late-1960’s to the early-1980’s the ratio of average hourly earnings to the minimum wage was rising. But since the mid-1980’s that ratio appears to have stabilized. In mining and construction industries that ratio is about 3.5 – the average hourly pay is about 3.5 times higher than the minimum wage. The average hourly pay in manufacturing and in the service providing industries is about 2.8 times higher than the minimum wage.

We can conclude from this chart that the growth in the minimum wage did, in fact, fall behind the growth of other wages, since in recent decades the average hourly earnings exceeded the minimum wage by more than they did in the 1950’s and 1960’s. The minimum wage workers did not see the same wage growth other workers did.

But did the minimum wage fall behind enough to justify an increase to $15 an hour?

If an objective of policy were to rectify the situation and increase the minimum wage to restore it to the same position relative to other wages it enjoyed in the 1950’s and 1960’s, how high would the minimum wage need to be? Since different industries experienced different paces of wage growth, as is evident from the chart, the answer would differ somewhat, depending on the industry we choose to look at.

But the differences are not drastic – the minimum wage in the range of $10.00-$10.60 an hour would be sufficient to take the ratio of average hourly earnings to the minimum wage back to the level seen in the 1950’s, the time when minimum wage was closest to the average wages.

The data suggest that a minimum wage somewhere between $10 and $11 an hour is sufficient to both restore its position relative to other wages in the economy, and to restore its real purchasing power back to the historical heights seen in the 1960’s. Raising the minimum wage to $15 an hour goes far beyond any past historical experience.

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Ranking America’s Best College Destinations

Photo: University of Colorado Boulder, in Boulder, Colorado.

Today, the American Institute for Economic Research ranked the top U.S. metropolitan areas for college students. The annual AIER ranking is based on nine criteria that measure each area’s cultural, demographic and economic qualities.

In its 2017 College Destinations Index, the cities that ranked highest overall in each city size category were San Francisco; Denver; Ann Arbor, Michigan; and Boulder, Colorado. (See longer list below.)

“The location you choose to go to college determines where you will likely spend the next four years of your life, and possibly where you will start your career. Our ranking reflects the characteristics that make cities attractive to the average college student,” said Amanda Knarr, program coordinator at AIER.

AIER researchers weighed these criteria: youth unemployment; share of college-educated population; pervasiveness of diversity; the labor force participation of young adults; share of STEM workers; rental costs; ease of access to the city without a car; presence of arts and entertainment; and bars and restaurants.

San Francisco and Denver, the top ranking cities in the two large-city categories, offer a favorable economic climate and strong opportunities to prepare for work after college. The highest ranking metro areas for the small cities and towns, Ann Arbor and Boulder, boast a highly educated population, large numbers of STEM workers, as well as strong public transportation systems and plentiful bars and restaurants.

Cities that didn’t rank #1 nevertheless showed their own areas of strength. New York, for instance, led the major metro category for public transportation. Boston led in employing STEM workers. Minneapolis had low young adult unemployment, and Los Angeles was best for entertainment.

Among the top midsize metros, Portland, Oregon boasted by far the best public transportation system, and Pittsburgh and Cleveland had the lowest rents. Austin, Texas had the lowest youth unemployment, and Nashville and Las Vegas led in arts and entertainment offerings.

In addition to Ann Arbor, Norwich, Connecticut also demonstrated a strong record of employing STEM workers among the top small metros. Kalamazoo, Michigan had the lowest rent among this category, and Lincoln, Nebraska had the lowest young adult unemployment.

And among towns, Champaign-Urbana had the best public transportation system; Boulder, and Lafayette, Indiana ranked first and second on the share of STEM employment; Fargo, North Dakota featured the lowest rents; La Crosse, Wisconsin had the lowest youth unemployment; and after Boulder, Bloomington, Illinois topped the arts and entertainment offerings.

If you or your child is deciding on a place to go to college, our rankings may prove useful.  Although our findings are more general, we recognize that individual preferences play a strong role in the decision making process. The “College Destinations Tool” on our website lets you choose factors that you value the most to customize your own ranking. The tool, as well as detailed overall rankings, are available at

The top college destinations in each category are, in descending order:

Major metros (over 2.5 million residents):

1. San Francisco

2. Boston

3. Washington, D.C.

4. Minneapolis

5. Seattle

6. New York

7. Los Angeles

8. Chicago

9. Dallas

10. Houston

11. San Diego

12. Baltimore

13. Atlanta

14. St. Louis

15. Miami


Midsize metros (1 million – 2.5 million):

1. Denver, Colorado

2. Austin, Texas

3. Portland, Oregon

4. San José, California

5. Raleigh, North Carolina

6. New Orleans, Louisiana

7. Nashville, Tennessee

8. Columbus, Ohio

9. Milwaukee, Wisconsin

10. Virginia Beach, Virginia

11. Las Vegas, Nevada

12. Kansas City, Missouri

13. Pittsburgh, Pennsylvania

14. Tucson, Arizona

15. Richmond, Virginia

16. Charlotte, North Carolina

17. Cleveland, Ohio

18. Rochester, New York

19. Hartford, Connecticut

20. Buffalo, New York


Small metros (250,000-1 million):

1. Ann Arbor, Michigan

2. Tallahassee, Florida

3. Durham-Chapel Hill, North Carolina

4. Madison, Wisconsin

5. Gainesville, Florida

6. Fort Collins, Colorado

7. Honolulu, Hawaii

8. Santa Barbara, California

9. Bremerton, Washington

10. Santa Cruz, California

11. Lubbock, Texas

12. Norwich, Connecticut

13. Lexington, Kentucky

14. Lincoln, Nebraska

15. Eugene, Oregon

16. Albuquerque, New Mexico

17. Lansing, Michigan

18. Amarillo, Texas

19. Portland, Maine

20. Kalamazoo, Michigan


College towns (Below 250,000):

1. Boulder, Colorado

2. Champaign-Urbana, Illinois

3. Flagstaff, Arizona

4. Ithaca, New York

5. Iowa City, Iowa

6. Bloomington, Indiana

7. College Station, Texas

8. Manhattan, Kansas

9. Columbia, Missouri

10. Bloomington, Illinois

11. Charlottesville, Virginia

12. Lafayette, Indiana

13. Fargo, North Dakota

14. Athens, Georgia

15. State College, Pennsylvania

16. Rochester, Minnesota

17. Blacksburg, Virginia

18. Jacksonville, North Carolina

19. La Crosse, Wisconsin

20. Bellingham, Washington

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Best of 2016: Eight Market Predictions

This week, as we recharge for the new year, we highlight a few of our best-read blogs of 2016. This piece originally ran in January.
1. Stocks will go up, stocks will go down.

You know this, but it is worth repeating for the sake of your sanity. Markets go up and down daily. For every buyer, there is a seller. But there is a broader historical point here. Even during periods of relative growth, there are negative stretches. Likewise, during downturns there are upswings. Since 1990, there has never been a calendar year during which all 12 months were all up or all down for the S&P 500. 2013 was a great year for stocks and still saw two down months. 2008 was a terrible year and still saw four up months. Historically, stock markets tend to trend upward, but we should certainly expect that markets will go up AND down.

2. An investment advisor or financial planner will try to sell you something with the term “downside protection” immediately after a short-term drop in markets.

Going back to my first point, at some point during the year it is likely that markets will fall. It is precisely this time that we’ll see articles about pension funds considering more hedge fund exposure. We’ll start hearing our friends talking about “downside risk” and hedging against market losses. Naturally, these conversations crop up AFTER the market has dropped. Do yourself a favor and allocate to a portfolio that is comfortable BEFORE the market drops. This could mean significant “downside protection” (e.g., a position in cash, bonds, Treasuries, TIPS), or it could mean minimal downside protection if you are insensitive to short-term performance.

3. People will predict rising interest rates. It’ll happen someday!

For four straight years, we’ve heard that interest rates have “nowhere to go but up.” And yet, they were stable in 2012, up slightly in 2013, down in 2014, and flat again in 2015 (despite the Fed raising rates). On Christmas Eve 2014, the 10-year yield was 2.26 percent. This year, it was 2.24 percent. So much for a guarantee of rate increases. The funny thing is that now people are starting to say that they don’t expect increases in interest rates this year…A few years of bad predictions makes you start to question your assumptions. So maybe this will be the year that rates really start to rise.

Theoretically, there is a lower bound of zero percent on interest rates, even though Europe has negative interest rates. This lower bound and predicted Fed rate hikes are the reasons that economists and prognosticators keep saying that rates have nowhere to go but up, but they’ve been wrong for four years in a row. Every reasonable prediction is right so long as you don’t provide a time frame.

Whether or not interest rates rise, the purpose of bonds in your portfolio is usually to provide stability in the event of stock market turbulence. A small expected decrease in the value of your bonds is the price you pay for protection against large swings in overall volatility.

4. Apple will be an outsized driver of how we perceive market performance but may or may not be a big driver of how our portfolios actually perform.

People tend to perceive performance based on what they hear on the radio during their daily commute. The radio tells us what the S&P 500, NASDAQ, and Dow Jones did during the day. Apple Computer comprises about 3.7 percent of the S&P 500. Microsoft and Exxon, the next two largest companies as of this writing, comprise about 2 percent of the Index each. This means that the performance of these companies will have an outsized impact on how we perceive markets to be doing.

The radio does not tell us what our investments did during the day. For investors who are diversified across a range of markets and asset classes, daily reporting may not be a reflection of performance. I maintain a significant share of my portfolio in small caps, value stocks, international stocks, emerging markets, and bonds. The performance of the S&P 500 is important, but I should not expect to match its performance.

5. Emerging market stocks will provide a different return than U.S. stocks.

Another obvious point that almost certainly can’t be wrong! Emerging markets will have a different return from U.S. stocks, which will be different from small caps, different from European stocks, different from Value, different from commodities… you get the idea. You’ll see some people saying emerging markets will outperform, or Europe will underperform, or U.S. stocks are the place to be. Someone will be right, and someone will be wrong. Different markets provide different performance over different periods of time. The central idea of diversification is to dilute these differences.

6. Some funds will beat their benchmarks, some will underperform. Some funds will even have their 3rd or 5th straight year of outperformance.

Individual mutual fund families (e.g., T. Rowe Price, Vanguard, Fidelity) have hundreds of individual funds. By chance alone, some share of them will outperform. For example, if you had 100 different funds, you could expect 50 to outperform in any given year by chance alone. Half of those would outperform a second year and half of those a third year in a row. At the end of 3 years, you’d have about 12 funds that had three straight years of outperformance – but that would be indistinguishable from luck.

If anything, excellent five-year performance of a fund might predict lesser subsequent returns as its performance reverts to the mean. Take the story of Bill Miller. Miller was a fund manager that worked at Legg Mason and was referred to as a stock guru. The fund he managed (Legg Mason Capital Management Value Trust) outperformed the S&P 500 for 15 straight years from 1991 through 2005. Miller was crowned as one of the best stock pickers of the generation and graced the cover of countless magazines and newspapers. Investors couldn’t get into his fund fast enough.

What happened next was nearly as impossible: The fund bombed. Over the most recent 10 years (ended November 2015) the fund has returned a paltry 0.99 percent per year as compared with 7.48 percent for the S&P 500. In November 2011, Miller turned over management of the fund to his co-manager. Miller exemplified that excess fund returns simply don’t last.

7. Investors will continue to move toward passively managed funds, and assets under management by “robo-advisors” will continue to grow.

Over the last year, about $175 billion flowed out of “active” funds, while $435 billion flowed into “passive” funds (Source: Morningstar Direct Asset Flows, December 2015). This continues a trend that has active managers scurrying to stop the bleeding.

The problem is that actively managed funds continue to underperform the market. This isn’t going to turn around because it is mathematically impossible for active managers to beat passive ones over the long term. You’ll see a lot of articles about why now is the time to be with active managers because the market is tough right now and good active managers are going to be especially valuable. Guess who’s writing those articles?

I took a look at nine funds from a 2011 article titled “Best Large Blend Funds for the Long Term” from U.S. News. Ending November 2015, those funds had returns that averaged 11.29 percent. Compare that with S&P 500 index funds that returned 14.36 percent (Vanguard), 14.27 percent (SPDR), and 14.30 percent (Fidelity Spartan). Investors are going to continue to recognize the underperformance of actively managed funds.

8. Oil prices will change, labor market results will fluctuate, geopolitical events will arise, global economies will do better and worse than expected, the Fed will have meetings. All of these will be used as reasons that the market fell or rose on many occasions throughout the year.

Markets fluctuate. I just sold some Apple stock because I wanted to raise cash in order to do some work on my kitchen. Countless other people are buying or selling stocks and bonds every day for all different reasons. There is an entire industry dedicated to analyzing the broad market movements every day. It’s easy to ascribe a narrative to price fluctuations after the fact, but it’s impossible to truly assess the impact of millions of market participants on a daily basis.

It’s a lot harder to predict what will happen in advance. Granted, some prognosticators will be correct. By virtue of having so many predictions—like mutual funds—some will inevitably look prescient. The narrative at the end of the year will look well-reasoned, but it won’t tell the whole story. Stick to your plan and ignore prognosticators and market fluctuations from week to week.

Happy New Year!

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Space, the Final Frontier of Economics

When I was very small, I wanted to be an astronaut – or, better yet, to be Luke Skywalker. With the recent release of “Star Wars: Rogue One” (but I haven’t gone yet, no spoilers!), I thought it would be fun to take a look at the way economists have, in ways both serious and lighthearted, thought about outer space.

Star Wars is a big business here on Earth, as anyone doing their Christmas shopping in a big-box retail store this year will have noticed. But space can also provide an outlet for economists to practice their economic intuition in a playful way.

Last year, Washington University Assistant Professor Zachary Feinstein created an Internet sensation with his short paper written “to calibrate and simulate a model of the banking and financial systems within the galaxy” and “measure the level of systemic risk that may have been generated by … the destruction of the second Death Star.” And Paul Krugman, 30 years before his Nobel Prize, wrote “The Theory of Interstellar Trade,” in which he proves two “useless but true theorems” about how interest rates should respond to interstellar travel at relativistic speeds.

These papers each represent, as Krugman himself quips, “a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.” It’s easy to see how much fun they were to write (and read, for the right kind of audience), but they aren’t exactly relevant.

However, there are real-world intersections of space exploration and economics. This blog post from consulting firm Edgeworth Economics gives a brief nod to positive externalities from the Space Shuttle program. Private ventures are considering the feasibility of mining on other planets or asteroids. But my favorite application of using outer space in economic research comes from what we can see when we are in space and look down.

A 2012 study proposed and estimated a method for using lights seen from space at night to adjust estimates of economic growth. The basic idea is that for many developing countries, official GDP statistics may be of low quality due to a combination of factors, including larger informal markets, less economic integration over regions, and weak government statistical infrastructure.

With this in mind, even an imprecise signal of economic activity that can be measured objectively and easily (at least, easily to those with access to satellite imagery) may help improve estimates of GDP and economic growth. The authors show that changes in lights are useful signals of short and long-run GDP growth measures. They propose that (i) a weighting of official statistics and lighting data for countries with unreliable statistics may provide better growth estimates, and (ii) the lighting data can help us estimate growth at levels of geography smaller than countries. This is especially helpful, they say, in nations where such regional data is not readily available.

Economists may not be astronauts, but we can still learn from them.

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