Tuesday, March 31, 2009

An Alternative Way of Looking at Things....

I don't decry or denigrate Earth Hour. But, in my opinion, this is a more optimistic way of looking at the past and the future, and something worth celebrating. We have the ability to solve the problems - and it shouldn't mean sitting in the dark.

I welcome your thoughts.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.

5. Incentives produce “predictable” responses.
and
8. Quantity and quality of available resources impact living standards.

Studying the Use of Data

First of all, the germ for this post comes from a discussion with colleague who teaches AP Econ here at Collegiate. Discussions with him are definitely a fringe benefit.

Last night on CNN's Anderson Cooper, one of the top stories was the auto industry. Within the story was an example of how people often use statistics incorrectly to carry their story. I went to the website and pulled it up. The relevant portion begins about 4:30 into the broadcast and ends about two minutes later. After discussing the GM and Chrysler situation, the reporter uses a large map to show the states where over 100,000 people are employed in some aspect of the auto industry (suppliers, production, and sales). He then enlarges the map to include states where over 10,000 people are employed in the auto industry. The reach is significantly farther, as one might expect. I think the take away was supposed to be that if even one of the auto producers goes bankrupt, the jobs will disappear. If I'm right, is that statement disingenuous?

You can show the clip to your students and ask them the same question.
Ask your students these questions before they answer:
1) Are we talking about one company, two companies or all the companies? (Does the opening graphic relate to all companies or specific companies?)
2) Of all the jobs represented by the map, what's the spread of jobs related to each particular company? (Which of the jobs are GM, Chrysler, Ford, Toyota, Honda, Hyundai, etc., or doe we know? Would that change the map if we talked about one company vs. all companies?)
3) What type of bankruptcy are being considered? (Is it a Circuit City liquidation or United Airlines restructuring while continuing operations?)
4) If a company goes under, will the customers of that company stop buying cars altogether?

5) Does the fate of one company automatically doom the entire industry or only that portion tied to that company? (Which may or may not be significant, depending on the company we're focusing on.)

Admittedly, the way the story was told made for better "news". But, I'm not sure we are served well if we are given data that does not support the story well. Stories with better information, more depth and deeper questions might make for a better informed and educated public.

I look forward to your comments.

This post relates to the following Keystone Economic Principles:
3. All choices have consequences.
4. Economic systems influence choices.
and
7. Economic thinking is marginal thinking.

***UPDATE***
There's a marginally more helpful map included as part of a story in today's (Wednesday, 4/1/09) issue of The Wall Street Journal. It shows the location of GM and Chrysler auto production facilities. It adds some clarity, lacks other clarity. For example, while locating the parts plants as well as assembly facilities, it does not include dealerships which were included in the Anderson Cooper piece.

Friday, March 27, 2009

On the Fed and Housing

Today's edition of The Wall Street Journal has what I will call a mini-symposium on the question "Did the Federal Reserve Cause the Housing Bubble?" (Free content at this time.) It's quite good. Its value derives from the wide-ranging opinions offered by a variety of very qualified authors.

None of the individual statements are very long, so they could be distributed in class to small groups and used as a basis for a discussion.

On another somewhat related note, you might soon get to see messages from the Fed at your favorite cinema multiplex.

I welcome your comments.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.

3. All choices have consequences.
4. Economic systems influence choices.
5. Incentives produce “predictable” responses.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

Thursday, March 26, 2009

A Student Video on Free Trade

For those of you who are looking for innovative and interesting ways to have your students demonstrate their understanding of economic ideas, take a look at this video (HT to Izzit) put together by some young people on the streets of New York, asking folks about free trade.

If your students are doing something similar, please share with us.
This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
6. Do what you do best; trade for the rest.
and
8. Quantity and quality of available resources impact living standards.

Two Views of Change

Major events have a way of changing our world view. The current recession could a have a significant impact on how the people of the U.S. make choices. Much of this will come as a result of our internalized experience. Some of it will come as a result of changes in the institutions (rules and organizations) that develop as a response to what happened.

Given that economic systems are the collection of institutions that are constructed to affect choices; the next question is how will this experience change existing economic systems? Here are two thought-provoking pieces (HT from Arts & Letters Daily).

The first asks how capitalism might change. It's interesting because it is a wide-ranging view. The author recognizes that capitalism is more than a collection of formal rules and organizations. It is a result of choices and actions, usually entered into and created voluntarily. The question of whether capitalism will be our servant instead of our master was particularly interesting. I would submit that capitalism always has been and will continue to be our servant because it is our construct.

The second examines how command systems might change. Of the two, the second is more pessimistic because it predicts that many of the command systems may not survive. That idea is not new. Thomas Friedman discussed the same idea in his book The World is Flat. In that book, he talks about how increased globalization (communication and technology) will make it harder for command economies to keep control. The argument in the second article is somewhat different. Because the people in many countries where command is the dominant characteristic have experienced some improvement because of growth, there may be a backlash if those systems become more repressive. (I should note there are also examples of protest and anger directed at the U.S. in those same countries.)

Regardless, these articles are interesting and may well be worth your time if you like to have your students think about or discuss such ideas in your class. I'd welcome your thoughts on these articles. Do you think they would be useful in your classes?

This post relates to the following Keystone Economic Principle:
4. Economic systems influence choices.

Resignation at AIG

The kerfuffle over the AIG bonuses seems to subsiding. But here is a thought-provoking item from yesterday's edition of The New York Times (HT to Greg Mankiw). If you spent any time discussing the ins and outs of the AIG situation, this might make an interesting follow-up. And if you're looking for a question, a good place to start might be "How did the institutions (rules) affect choices of this individual and others in Congress, and others at AIG?" The second could be how might changing the institutions positively/negatively affect future choices of this individual and others affected by the AIG collapse?

I look forward to your thoughts.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.
4. Economic systems influence choices.
5. Incentives produce “predictable” responses.
and
7. Economic thinking is marginal thinking.

Start Your Day with a Chuckle

It's always fun to start the day off with a cartoon that helps explain an economic concept. Today's Non Sequitur offers just such an opportunity.

(I must admit, I'm reminded of the time a criminal (Machine Gun Kelly?) was asked why he robbed banks. His alleged response was "That's where the money is.")

This post relates to the following Keystone Economic Principles:
5. Incentives produce “predictable” responses.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

Wednesday, March 25, 2009

Some Visual Resources for Middle & High School

Mike Fladlien, a colleague in Iowa, has a blog titled Mikeroeconomics. It's on my link list for a reason. He found a couple excellent resources that I think are appropriate for High School and Middle School.

The first is a simple visual depiction of what $1 Trillion dollars looks like. Despite all the discussion of stimulus, budgets and debt that reference that amount, it is hard for any of us to really fathom just how much money that is. We can joke - there was a congressman in the sixties who is reported to have said, "a million here, and million there and the next thing you know you're talking about real money." Or it may have been billion. Regardless, you can now help your students visualize a trillion. I can only say, it's a powerful and somewhat scary image.

The second resource is a clever YouTube video titled "Cash in the Hat." Mike has also embedded the video on his web site in case you can't access YouTube. It's a clever take off on a Dr. Seuss favorite that your students should be able to identify. The video (just under six minutes) talks about saving and credit in a fun way that could enhance a junior high or high school personal finance unit.

Thanks Mike.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.

and
8. Quantity and quality of available resources impact living standards.

Tuesday, March 24, 2009

Cul-de-sac Revisited

A couple years ago, prompted by a piece on National Public Radio, I posted on the issue of cul-de-sacs. I questioned whether urban planning experts and governments had "better" knowledge than participants in the market who prefer homes on cul-de-sacs.

Fast forward a couple of years, and I have moved to Virginia and now live on a cul-de-sac. I like it, but I must admit I wonder about the ability of emergency vehicles, etc. to respond - I know how hard it is for a school bus to get in and out of our cul-de-sac to pick up and deliver my son.

Now the state of Virginia is legislating that all future housing developments require through streets and avoid cul-de-sacs to facilitate access and egress and minimize the volume on secondary roads, improving response time and maintenance. There is some push-back, as might be expected.

And while I appreciate the civic/social concerns, I still think the market is a better indicator of people's preferences. A better solution may be how we price and tax homes that require more resources to maintain. This may be an example of a negative externality that needs to be properly accounted for. Or as one of my old teachers used to say, “internalize the externality.”

I look forward to your thoughts.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
and
4. Economic systems influence choices.

Some Resources for the Classroom

I suspect many of you are already aware of these and may even use them. But for those of you who are just getting into economics, here are a couple of resources you might want to check out.

The first is by the folks at Scholastic. It is a collection of their online articles and activities for upper elementary and middle school that relate to economics, with an emphasis on current events. It's a good starting point for introducing topics or concepts.

The second is from CNN for Students. They have assembled a glossary to help students understand the current financial crisis. Again, if you or your students are unfamiliar with the terms being used, a visit to this glossary could be in order. It will familiarize everyone with the terms of the debate, and should help as they follow the economic news.

Please let us know if you use these, and share your thoughts.

This post relates to the following Keystone Economic Principles:

5. Incentives produce “predictable” responses.
and
8. Quantity and quality of available resources impact living standards.

Monday, March 23, 2009

Economics and Foreign Aid

There was a very interesting article from the Saturday, March 21 edition of The Wall Street Journal about Why Foreign Aid is Hurting Africa (content is currently free). It is a longer piece, but it speaks to the importance of institutions and politics. There are also a number of related podcasts from EconTalk: Easterly on Growth, Collier on the Bottom Billion, and Barro on Growth. You may not want to assign these, but you could play portions of the podcasts as part of a classroom discussion. You may also want to listen to each of the interviews in their entirety as they cover a wider array of topics than just foreign aid.

There is also this interesting discussion between Gary Becker and Richard Posner from their blog. And I was trying to cast a wider net, I ran across this older article from the Yale Global Online Magazine that, in part, voices the same concerns.

All of them seem to come to the conclusion that the answer is not in throwing money at less developed countries, but in helping those countries develop institutions to combat various failures within their current systems. At least that's what I see as a common thread. The downside is that changing institutions (rules) takes time. Not that a law can’t be rewritten and passed quickly, but that it takes time for the changes to become part of the internalized structure of decision-making.

Another component that I see frequently is the need for some kind of oversight and accountability, not just within the countries but within the organizations providing the aid.
There’s a lot of information here, so you can pick and choose. But when the topic turns to foreign aid, these resources can provide an economic view of the issue. I would also welcome any suggestions for other articles or sources on the topic. And I welcome your comments.

This post relates to the following Keystone Economic Principles:

1. We all make choices.
4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

Second Powell Webinar

The Powell Center for Economic Literacy will host its second webinar for teachers on Tuesday, April 7 at 4:00 p.m. EDT. This program will feature William Strauss of the Federal Reserve Bank of Chicago with an overview of the current economy.

Strauss is a sought-after speaker and always brings a wealth of current information to his presentations. Registration information can be found on the Powell website.

Friday, March 20, 2009

Remember...People Respond to Incentives

This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

Earlier this week, I was listening to an interesting podcast on EconTalk about the Political Economy of Public Transportation. Of particular interest was an anecdote about how the bus system of Santiago, Chile was transformed after going from a myriad of private companies to a single, government-run entity.

The "system" went from generating an annual profit of some $60 million, to an annual loss of $600 million. Average commute time went from 40 minutes to 2 hours. Now that information doesn't tell us much, but other information in the interview does - specifically how drivers were compensated under both systems. Without giving away the story, let me just say that "Incentives produce predictable responses."

While the podcast was interesting, I was hoping something else would come along that I could link it to. I now direct your attention a story from today's edition of The Wall Street Journal. (Story is currently free content. I can't say for how long.)

The headline reads "Raters See Windfall in Bailout Program." It seems the credit rating agencies that played an important part in the current financial situation, are now in a situation where they may again benefit. What I find interesting is the incentive system has not changed, from what I can tell in the article. Prior to the financial problem, credit rating agencies were paid by the institutions issuing the securities. One could make a case that it would be in the interest of the agencies to give the securities a good rating - perhaps indicating a conflict of interest.

If I read the story correctly, those same agencies will now be hired by firms taking Term Asset-Backed Securities Loan Facility (TALF) money to rate the new securities. The TALF program lends money to investors to facilitate the purchase of certain asset-backed securities. (The financial firms issuing the securities will be required to get ratings by two credit-rating agencies.) Critics of the program seem to feel that the incentive would still be to rate the bonds highly to move the product. The rating firms are countering that they have taken steps to make sure the problem is not repeated. But, superficially, the incentive system does not seem to have changed.

The question for you and your students is this. "Might there be a better incentive for the credit-rating agencies if payment was based on something other than the sale of the securities by financial firms?"

I admit I haven’t been following all the details of the many programs that have been put in place. And I may be missing something. I welcome your thoughts.

Thursday, March 19, 2009

Quantitative Easing

This post relates to the following Keystone Economic Principles:
3. All choices have consequences.
4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

Given the decision of the Federal Reserve to purchase long-term bonds, you might be looking for a resource to explain quantitative easing.

There's a good graphic on the subject at the Financial Times website (HT to Greg Mankiw). The site seems to be a bit fussy (sometimes I've had no trouble getting to it, other times it wants me to subscribe). I hope you can get to it and that it's useful. It's quite good.

I look forward to your comments.

Smoot-Hawley Revisited?

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.
4. Economic systems influence choices.
6. Do what you do best; trade for the rest.
8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

There is a running story that, while important, hasn't been the top story in a lot of places. But if you teach about trade and trade barriers, it can provide a great current example.

The story is that, within the stimulus package, was an item which went back on part of the North American Free Trade Agreement which was passed during the Clinton Administration. Specifically, NAFTA called for Mexican truckers to be allowed to carry goods to and throughout the U.S. This aspect of the treaty has long been postponed under the guise of safety. However, a number of stories indicate that safety is no longer the issue. It may be that the real issue is competition. And in a down economy, peole are more reluctant to face competition.

Mexico (one of our largest trading partners) has warned that going back or further postponing this aspect of NAFTA could have repercussions in the form of tariffs being imposed against U.S. products. That has now come to pass.

I would consider approaching this from a couple of aspects. The first is changing institutions (rules). In this case, the rules were formal treaties/laws agreed to know but now withdrawn from. By changing the rules, people choose differently. In this case, the choice is demonstrated by the Mexican government. And Mexico's choice will have consequences which will affect the quantity and quality of resources in Mexico, just as our choice to back away from this provision of NAFTA will affect the quantity and quality of goods here in the U.S. And those changes will be reflected in higher prices for consumers on both sides of the border.

The second approach is to use this as an example of escalating trade barriers, similar to what was seen in the 1929 Smoot-Hawley Tariff (link to an excellent article in The Economist). What started as small focused tariff bill eventually became a larger, more extensive barrier that provoked responses. The resulting drop in world trade was one of the factors that led to the downturn we now refer to as The Great Depression. In that case, choices to change the institutions (rules) had consequences. And the consequences had an impact on prices and the standard of living.

I'm providing links to a number of news stories so you can get a sense of the issue. When I went to the links, they were free, but they may not remain that way for long. Continued access may require subscription or, at the very least, registration.

Opinion pieces and article from The Wall Street Journal
Washington Starts Another Trade War (opinion)
Mexico Strikes Back in Trade Spat (article)

Congress Doesn't Respect NAFTA (opinion)

Mexico Retaliates (opinion)


Opinion piece and articles from The Washington Post
Truck Stop (opinion)
Mexico Retaliates with Tariffs on 90 US Products (article)

U.S. Farm Exports at Risk over Mexico Truck Dispute (article)

Mexican Tariffs on 89 U.S. Products Take Effect (article)


Opinion piece from The New York Times
A Small and Dangerous Spat (opinion)


I look forward to your comments.

Wednesday, March 18, 2009

Chicago in June Can Be Very Nice...

For those of you who can take advantage of this opportunity, the University of Chicago is offering a teachers workshop on Globalilzation from June 22 - 24. The cost is $100 and professional development credit is being offered. If I wasn't already committed to another program here, I'd consider it.

(HT to Roseann at Collegiate for the heads up.)

A Lesson Plan for Elementary - Sweet Potato Pie

This post relates to the following Keystone Economic Principles:
6. Do what you do best, trade for the rest.
and
8. Quantity and quality of available resources impact living standards.

I reviewed the book Sweet Potato Pie just a few days ago. Now the Powell Center has an online lesson plan to accompany the book. Enjoy, and please share any comments about the lesson.

Financial Advice from SNL

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
and
3. All choices have consequences.

This video clip from Saturday Night Live features Steve Martin and is a humorous way to make a fundamental economic point - whether personal or national. Credit is a valuable tool and should be used as such. I’m not in favor of a society without credit - I don't think most of us would have homes or an education, quite frankly. But credit shouldn't be used thoughtlessly. Using credit is a choice that should demand our attention, and our recognition that its use has costs and consequences.

I welcome your comments.

Monday, March 16, 2009

The Future of Capitalism

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.

and
4. Economic systems influence choices.

For those of you teaching economic systems, or for whom economic systems is an ongoing part of your course, whether it's economics, current events or whatever, you should be aware of a new on-going series on The Future of Capitalism on the Financial Times website.

Already there are a number of interesting and relevant articles that can be used either as your background or provide the basis for classroom discussion, debate or other activity.

If you scroll down the page, you'll find two that interested me as a student of the history of economics, one by Amartya Sen on Adam Smith (although parts of it are reminiscent of his piece reviewed on this blog on March 11), and another by Paul Kennedy that proposes that policy-makers need to spend some time reviewing the "Big Four" economic thinkers: Smith, Marx, Schumpeter and Keynes. While I don't necessarily agree with Kennedy's reasons, I don't disagree with his prescription.

I have and I would recommend bookmarking the page as I think this will be an interesting source of future material, both personal and professional.

I look forward to your comments.

Friday, March 13, 2009

Books on Economics for Elementary School

This post relates to the following Keystone Economic Principles:

6. Do what you do best, and trade for the rest.
and
8. Quantity and quality of available resources impact living standards.

When school resumes next week, the Powell Center will begin one of its traditional activities at Collegiate School. Every spring, the Powell staff goes to the elementary school and does a "story time" session with the students to help them see economics through literature. One of the books we'll be using this year is Sweet Potato Pie by Kathleen D. Lindsey.

If you're unfamiliar with the book, it's about a family that faces a financial crisis. Their solution is to bake and sell sweet potato pies. I don't want to go into more detail than that, and I'm certainly not doing the book justice as a result. But the book provides a great way to examine how people (in this case a family) respond to incentives (in this case a negative incentive). But it is even better at providing a platform to discuss the production process and the factors of production: human resources, capital resources, natural resources and entrepreneurship.

We will be posting a formal lesson plan, with an accompanying presentation for classroom use sometime next week. I will post again when it is ready. But in the interim, check out the book and give it some thought. I think you'll find it a worthwhile resource for teaching some economics in the lower grades.

I look forward to your comments and suggestions.

What I've Been Reading

This post relates to the following Keystone Economic Principles:

1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.

5. Incentives produce “predictable” responses.
and
7. Economic thinking is marginal thinking.


For an intriguing idea for an economics book, I think you'd have to look for a long time to find anything like Castles, Battles, & Bombs: How Economics Explains Military History by Jurgen Brauer and Hubert Van Tuyll. Brauer and Van Tuyll are professors at Augusta State University, Brauer of economics and Van Tuyll of history. And while you may look at the title and think you're in for pages and pages of data on resource use, production levels, prices or even casualty rates, you'd be wrong.

Brauer and Van Tuyll's approach is to demonstrate how economic thinking may have affected the development of military theory over history. They use six basic economic concepts - opportunity cost, marginal cost/benefit, substitution, diminishing marginal returns, asymmetric information and hidden characteristics, and hidden actions and incentive alignments - and use these as tools to analyze basic questions in six periods of military history - the high middle ages, the Renaissance, the age of battle (1618 - 1815), the age of revolution (1789 - 1914), the World Wars, and the Cold War. The idea is to use economic thinking as a lens to examine the problems of each period, and whether doing so can provide any insights to the behavior of participants. And while they use one concept as a primary match for each period, they provide a full matrix integrating all the concepts at the end of each chapter. I found this to be particularly interesting and informative.

While I wasn't sure what to expect, I'm also not sure if I was totally satisfied. This may be because the authors’ style, while not riveting, left me wanting a bit more. I was intrigued by this demonstration of how economic thinking provides a different way of looking at problems.

I believe that those who pick up the book expecting a detailed account of campaigns or wars with some economic justification thrown will be disappointed. Those looking for something to trigger deeper thought and to provide reflection on the power of economic thinking will find the book interesting and a good investment on their time, even if they just read a few chapters and put the book down. At the very least, those of us interested in military history may find some new interesting questions to ponder.

I welcome your thoughts.

Thursday, March 12, 2009

Eco:nomics

This post relates to the following Keystone Economic Principles:

1. We all make choices.
2. There ain't no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
6. Economic thinking is marginal thinking.
and
8. Quantity and Quality of available resources impact living standards

On Monday of this week, The Wall Street Journal had a Special Report on the Economy and the Environment. It was a summary of a conference that included presentations by a number of people with excellent credentials at the interface of environment and the economic.

I found a number of the presentations interesting and thought-provoking, not least of all one by Vaclav Klaus - who provided a credible cautionary note about global warming and the "rush to judgment." Also of interest was an interview with T. Boone Pickens regarding his proposal to help the U.S. become more energy independent. And there are others, as well.

While I have no particular ideas on how to use this in the classroom at this moment, I'm sure some will occur to me and to you. A resource like this can provide an interesting platform for classroom debates about policy, the role of government, and the power of markets. I hope we can share some ideas.

Wednesday, March 11, 2009

A New Economist for Capitalism after the Crisis

This post relates to the following Keystone Economic Principles:

3. All choices have consequences.

4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

Economist Amartya Sen, who won the 1998 Nobel Prize in Economics, has an interesting piece in the New York Review of Books (HT to Arts & Letters Daily). In it, he discusses the economic debate that seems to focus on the works of Adam Smith and John Maynard Keynes.

Sen discusses some of the advantages and disadvantages of the capitalist system described by Smith in The Wealth of Nations (WN). And by adding insights from Smith's Theory of Moral Sentiments (TMS), he provides the more-rounded view that is frequently overlooked by critics of market capitalism who often have not read TMS, and more frequently are unfamiliar with the total of WN.

Sen also discusses Keynes, but largely as a way of introducing another economist - a contemporary of Keynes - Arthur Pigou. Pigou and Keynes not only knew each other, they taught together at Cambridge. Pigou was the heir of Albert Marshall and was the target of some of Keynes' criticisms of neoclassical economics. Other, post-Keynesians gave short-shrift to Pigou's work in other ways.

But Sen sees something in Pigou that is relevant to our current situation - the role of psychology in economics. This is important because the combined areas of psychology and economics are increasingly the subject of study. How they affect each other is at one of the frontiers of many behavioral studies. It seems that Pigou may have been on to something. And what he thought may be of more than just academic interest in the current environment.

I recommend the article, and I look forward to your comments.

Measuring Our Income: Growth & Development

This post relates to the following Keystone Economic Principles:

4. Economic systems influence choices.

8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

This post is about something I read last week, but I haven't gotten to for a number of reasons. Luckily, the information and the story aren't time sensitive.

Mark Perry at Carpe Diem has an interesting post on real prices. He had one of his graduate students at University of Michigan-Flint convert and compare prices for basic goods to work-time equivalents using prices from a Sears catalog in 1950 and prices at Sears in 2009, and average manufacturing wage. Basically, he was asking how long does it take to earn money to buy ...?

This is reminiscent of the 1997 Annual Report from the Federal Reserve Bank of Dallas. Using a similar method, the report compared prices in 1897 to 1997, again in work-time equivalents. In each case, the argument can be made that the wage factor chosen doesn't represent the majority of works - but it provides a basis for comparison. The reality is that most people don't have to work as hard to purchase comparable goods. And in most cases, we aren't working as hard to purchase better goods. It's an interesting observation to share with your students, and generally leads to a lot of "ah-ha" moments, especially given the “gloom and doom” we hear about in the media, generally.

I welcome your comments.

Monday, March 9, 2009

Marginal Analysis and Lean Management

This post relates to the following Keystone Economic Principles:
1. We all make choices.
2. There ain't no such thing as a free lunch.
3. All choices have consequences.
and
7. Economic thinking is marginal thinking.

One of the catchphrases in manufacturing has been "lean". It refers to a firm's ability to use the fewest resources (particularly workers) and to use them well. But what does that imply in slow economies? There's a good discussion of that question in this article from today's edition of The Wall Street Journal.

The article uses a plant in Spartanburg, South Carolina, to discuss the type of choices facing lean manufacturers as they deal with slumping demand for their product. When a firm runs with few employees, and those employees are highly-skilled and each contributes a substantial amount to the bottom line (we're not talking sales staff, we're talking line staff), losing even one of them could have serious repercussions on the ability of the firm to meet customer demand and expectations.

The article provides a good example of marginal thinking and the consequences of the choices faced by a business in a downturn. I highly recommend it.

Please feel free to share any thoughts and observations that you or your students may have.

Strong Dollar in a Recession

This post relates to the following Keystone Economic Principles:

6. Do what you do best; trade for the rest.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

When discussing the current economy, the focus frequently turns to the basic economic equation:

Consumer spending + Investment spending + Government spending + (exports - imports) = Gross Domestic Product (GDP).

The idea in a downturn is to increase GDP. Therefore anything that leads to a reduction in GDP must be bad, right? Well, we're reminded that President Truman searched in vain for a one-armed economist because he was tired of hearing "on the one hand...but on the other."

Here's a story from National Public Radio (NPR) that offers another example. The subject of the story is the strength of the dollar in international markets. The quick connection is that a strong dollar is better for importers (we get more for less) and less so for exporters (it costs foreign nations more of their currency to buy our products). This means that (exports - imports) trends farther to the negative, reducing GDP.

But here's the "other hand". Given the massive amount of deficit spending generated by the stimulus package, the government needs to borrow. If the government is going to borrow, it stands to increase its ability to borrow if the debt is denominated in a strong currency. It's an interesting argument and worth introducing into your classroom discussion.

I look forward to your thoughts/comments on the story.

Sunday, March 8, 2009

Fiscal Policy & Quantity Theory

This post relates to the following Keystone Economic Principles:
4. There ain't no such thing as a free lunch.
and
7. Economic thinking is marginal thinking.

As you might guess from the title of this post, I find the quantity theory of money (MxV=QxP) to be a valuable tool for explaining macroeconomics. But sometimes some find it hard to explain fiscal policy within that framework. Now there's a good post at Marginal Revolution that explains fiscal policy within a quantity theory framework. I found it helpful. Read it through and share whether it helps you or just confuses things further.

Rent-seeking - Captain Renault Division

This post relates to the following Keystone Economic Principles:

4. Economic systems influence choices.
and
5. Incentives produce predictable responses.

One of the questions about the stimulus plan is how effective it will be. Now we have an interesting story in today's edition of The Washington Post. Once again, I have to agree with Captain Renault, "I'm shocked."

Friday, March 6, 2009

Institutions and Prosperity

This post relates to the following Keystone Economic Principles:

4. Economic systems influence choices.

5. Incentives produce “predictable” responses.
and
8. Quantity and quality of available resources impact living standards.

For those of you interested in international economic development, William Easterly at NYU has an interesting post on the Aid Watch blog. It reviews some research that relates economic institutions and economic growth. Essentially, the cited research seems to show a connection between prosperity and respect for the individual (an informal institution).

Easterly admits to some oversimplifying, but the relationship is interesting. At the very least, it would seem to offer an interesting point of discussion for an economics class or courses that discuss philosophical or ethical systems. The research cited at the end of the blog can be found here and here, although they are probably too lengthy and advanced for most students. However, you may find them interesting. I hope to get to them during spring break.

What do you think of Easterly's post? I look forward to your comments.

Rent-Seeking - Captain Renault Division

This post relates to the following Keystone Economic Principles:

4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

I'm thinking this a good time to start a new category for certain stories, and I'll it dedicate to Claude Rain's character in Casablanca, Captain Renault. Really, is it news to find out that rent-seeking takes place in regulated markets? Incentives produce predictable responses; and economic systems (and institutions) are about setting up the incentives.

Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
[a croupier hands Renault a pile of money]
Croupier: Your winnings, sir.
Captain Renault: [sotto voce] Oh, thank you very much.

Today's nominee is this story from The Wall Street Journal.

I know I've missed a lot of other candidates recently. I'll try to do better.

Wednesday, March 4, 2009

Economic Cycles?

This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
5. Incentives produce “predictable” responses.
8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

Last week, I posted on an interesting article about bicycles in Paris. The government had provided bicycles for Parisians to use with the intention of reducing automobile traffic and to help people get around. The bikes were available at no charge through an agreement with a private firm. But circumstances were causing the firm to rethink the idea.

Now we have a different story (HT to Izzit). But we travel to Zambia for this story. In this case, a couple of entrepreneurs have set up a not-for-profit and are selling bikes at a subsidized price. The idea is to provide much-needed transportation in this African country - transportation that will allow many to improve their standard of living.

I have a couple questions that you can pose to your students about this.
1) What is different about how the bikes are provided?

2) Does the difference in providing the bicycles create a different incentive structure for the people using the bike?

3) How is the Zambian story an example of application of capital to a developing economy?

If you use this in class, please share your experience. I would think this would be a good example to use when discussing property rights as an institution to help economic development.

Barter and the Functions of Money

This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
6. Do what you do best; trade for the rest.

8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

There was an article in the March 1, 2008 edition of The Richmond Times-Dispatch that was recommended to me. The article is about the rising incidence of barter in the current economy. I posted on this phenomenon a couple of times last year, and there have been other articles on the topic in other publications.

But there was something in Sunday's article that was different and started me thinking. That something different was an insert that provided advice when making a trade. The hints listed were helpful, but to me they provided examples of why money functions better in an economic system. Specifically, I was reminded of the three basic functions of money: medium of exchange, measure of value and store of value. Allow me to explain.

The first guideline was to "be clear on the details." This would be important in a barter situation, and a monetary situation. The relevant money function might be "medium of exchange." Whether barter or money is used, there needs to be an understanding of what is received. However, when money is used, what is given is automatically clear. When bartering, we need to be more specific about what is given and what is received.

The second hint was to "carefully explain what you want and supervise the work. In my opinion, this is essentially a restatement of the first guideline, but it also made me think about the money function "measure of value." Since money provides a common language - a common measure of value - for goods and services, it is easy to determine whether something is properly priced for our needs. If the money price is low enough, we enter the trade voluntarily, believing that the value received is greater than the value given. In a barter situation, that needs to be monitored more closely.

The third guideline in the article was "don't assume anything." Again, the money function of measuring value came to mind. The article spoke about expectations, etc. and even suggested a written contract. While written contracts are the norm for large value items, for smaller value items, we depend on price to convey much of the necessary information because money provides a measure of value. What is received for that which is given?

The fourth idea mentioned is "know who will supply needed materials." Again, this would be standard in many contracts, but absent a contract the money price would serve as a measure of the value. A money price would convey much information (although it may not specify); and by acting as a medium of exchange, would provide a mechanism for purchase of materials.

The last thing mentioned is "paying taxes." Here I will defer to the function medium of exchange. To my knowledge, the Internal Revenue Service doesn't accept bartered goods or service for settlement.

I welcome your thoughts and comments.

Monday, March 2, 2009

Bank Nationalization and Three Fingers

This post relates to the following Keystone Economic Principles:
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.

and
5. Incentives produce “predictable” responses.

In case you haven't heard, Virginia and much of the eastern seaboard have been walloped by a late-season snow storm. Consequently, I'm home and I have some extra time to blog.

There has been some recent debate about nationalizing major banks. I ran across this opinion piece in The Wall Street Journal (HT to Planet Money). It is a piece about the last time the U.S. nationalized a bank - Continental Illinois - in the 1980s. I joined the Federal Reserve Bank of Chicago, which is located across the street from what was the Continental Illinois Bank, in 1991. Continental came out from under government supervision the summer of 1991 and there was a huge party on the street outside the bank.

But the years between the takeover and the party were not pretty. And the author of the article, William Isaac who was head of the Federal Deposit Insurance Corporation (FDIC), does not seem to think nationalization is a good idea. I'll leave it to him to tell you why. He had a much better view than I can provide.

In a somewhat related piece from NPR (HT to Planet Money, again), Alex Davidson and Adam Blumberg discuss the plusses and minuses of a bank bailout with a number of economists. And while there is a strong case against providing funds to a group of businesses that have made some significant errors of judgment, the point is also made that the rising debt load that tipped the economy in the first place is as much the fault of American consumers as it is the fault of American bankers. As I've pointed out to teacher and student groups alike, it often helps to remember that when we think we see a problem in the economy and we begin pointing fingers, three of them point back at us.

Both pieces are interesting, and if you discuss bailouts or nationalizing the banks as part of a unit on banking or the role of banks in the economy, either could make an interesting add-on.

I look forward to your thoughts.

Anecdotes Are Not Data, But....

This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

You can file this under the "anecdotes are not data" category, but it's interesting. As a result of the current recession, two interesting phenomena seem to have taken place. I submit both would indicate that people are choosing to learn more about economics and how the economy works, albeit in different ways.

First we have this NPR story about the rising popularity of economics on college campuses (HT to Greg Mankiw who may be seeing an increase in his class loads and textbook sales). If you see increased enrollments for next fall this may be a reason.

The second item is from the Marginal Revolution blog. There appears to be an increase in the sales of Ayn Rand's Atlas Shrugged. The current economy could be behind this. People may have heard of this novel (discussed previously in this blog here) about an economic collapse and seeking to understand the interaction of private and government sectors in economic activity. While the book is fiction, it lays out an interesting case regarding an overly-involved government.

I look forward to your comments.

A Case against Protectionism

This post relates to the following Keystone Economic Principles:
2. There ain’t no such thing as a free lunch.
4. Economic systems influence choices.
6. Do what you do best; trade for the rest.

and
8. Quantity and quality of available resources impact living standards.

While I know case for globalization is a familiar one for most readers of this blog; it never hurts to revisit the basics. And if it is in a well-written piece, it has additional value. (We can discuss marginal utility another time.)

This past weekend saw a very well-written, albeit somewhat lengthy piece in The Wall Street Journal. The author, Jeffrey Garten, is a professor at Yale, and has held economic and foreign policy posts under four presidents - two Republican and two Democratic in case you're wondering.

Garten's piece, The Dangers of Turning Inward, starts with a scenario that would be familiar to anyone who's read Friedman's The World is Flat, comparing what we could easily call "the two India's": one globalized and prosperous, the other isolated from the outside world and drastically poor. The difference in the quality of life that can be attributed to trade is significant. But the portion of the article that focusses on the differences is small. More time is spent discussing the concept on a wider scale. Garten uses data, some general, some specific to construct the argument that economists are familiar with, but that escapes others outside of the profession. He also discusses the institutional framework surrounding trade that has changed since the Great Depression. This information is important because of the constant repeated comparison between that period and this. More importantly, the comparison sets a background for the examples of rising protectionism that are beginning to creep into the policies of advanced economies - economies that should know better, but that are comprised of frightened consumers and producers who maintain that concepts like comparative advantage and gains from trade "work well in theory but don't represent reality." Our response needs to be, theories don't survive unless they represent reality. Trade theory does

I would strongly recommend the article to your attention. Whether or not you develop something from it for use with your students, I will leave to you. You know best your students' abilities and reading levels. But given the rising concerns about protectionism and the costs connected with that course, it's good to have a resource such as this at hand.

I look forward to your comments.