Sunday, January 31, 2010

Labor as a Production Factor & Unemployment

For those of you in AP Macro who are in or near the chapters dealing with unemployment and factors of production, here are a couple of articles that may be of use. Even if you don't apply them directly in class, the conclusions are worth your consideration. Both of them come via the Federal Reserve System.

The first deals with "It's Jobs not Discouraged Workers" and is on Macroblog, courtesy of the Federal Reserve Bank of Atlanta. The article examines the recent concern about discouraged workers reentering the job force and slowing the reduction in the unemployment rate. Authors Hotchkiss and Graefe seem to be of the opinion that the worry is misplaced. After looking at this article, I would have to agree. But I will look for more on the topic.

The second is "A Historical Look at Labor Markets During Recessions" and comes from the Economic Letter of the Federal Reserve Bank of Dallas. Much has been done comparing this recession to the Great Depression and to other post-World War II recessions. And while Martinez-Garcia and Koech show that this recession is not on the same magnitude as the Depression, it is, in many measures, worse than other post-War recessions. They graph the unemployment rate, civilian labor force growth, and non-farm payroll losses (both pre and post 1970) among other measures. At the very least, they provide some solid up-to-date data for use in your classroom discussions.

I encourage you to take a look and to share your comments.

Price Discovery and the Power of the Market - Haggling

Today's issue of The Washington Post has this piece about the resurgence of haggling price in the current economy. It provides some nice examples of the dynamic process of "price discovery".

Please share your thoughts.

Saturday, January 30, 2010

Econ in Music

This one is a bit of stretch, but not much.  I was driving my son to school the other day and I heard "Time Won't Let Me" by The Outsiders.  Two concepts jumped into my mind - scarcity and margin.  If you can remember it, see if you agree.

Bits and Pieces for a Snowy (Here) Saturday

One of the more puzzling aspects of this recent downturn has been the rush to embrace traditional Keynesian economics and abandon other schools. I have been particularly interested in the loud denunciation of the "Chicago School". Yet, in this post, John Taylor offers some facts about the backgrounds of various policy-makers.

Next, Steve Landsburg offers this "quick lesson" in basic economics on the problem with taxing capital income, whether in the form of dividends, interest or whatever.

Finally, one of Greg Mankiw's readers shares an acrostic for teaching economics. I have to agree, if the students in our basic economics courses remember nothing else, this would be great.

I hope you will share your thoughts.

Friday, January 29, 2010

Economics of Cafeteria Food

Thanks to frequent reader, Dr. Mark, here is a cartoon that many students are probably facing regularly.
Issues of price, marginal analysis, etc. are all there for the illustrating.

Wednesday, January 27, 2010

Ahh, the Dangers of Identity Theft

Wizard of Id

World Economy: World Recovery?

Here are four related links that can be used a number of ways. They have possibilities for illustrating interdependence and globalization; the business cycle, growth and recession; and barriers to and benefits of trade. And I suspect there are more.

The first link is from an article in last week's issue of The Economist. The main point of the article is the recovery. It points out that the recession hit all countries. But so far, the recovery has not been evenly experienced. It makes the case that the uneven recovery could have ramifications (good and bad) for those countries that are lagging. And, as we like to point out to our students, this can have a potential impact on our own economy.

The next two links are graphs that can be used with the previously mentioned article (HT to Chartporn). The first chart is from The Economist, and illustrates the depth and length of the current recession in select economies. Some of the information is surprising. Of the countries illustrated, Canada fared the best. And the U.S. was third - I'm not sure many of us would have guessed that, given media coverage.

The second is from the UK newspaper, The Guardian. It's more comprehensive and interactive. So, it has a bit more "meat" to it. It shows the depth of the recession (measured peak to trough in the cycle) in most of the countries in the previous graph. And it shows the current state of the economy (in recession, out of recession, dodged recession) for a large selection of developed economies.

The last link is to an interesting article in The Financial Times (registration may be required - but it's free).
The article addresses a possible negative outcome to the uneven recovery - a turning away from globalization and trade. According to the author, as countries become more concerned about their economic condition, there is a tendency to focus inward, or to scramble outward to secure resources for themselves. Both can have significant negative implications, foreign and domestic, for growth.

I would welcome your evaluation of these resources as well as any suggestions on their use.

Tuesday, January 26, 2010

Okun's Law

The Federal Reserve Bank of St. Louis has just released its most recent issue of International Economic Trends. The cover essay is a clean, concise explanation of the relationship between changes in gross domestic product and unemployment, often referred to as Okun's Law after the economist Arthur Okun who first observed the empirical relationship.

It's a quick read and worth your time. It may even be something to keep in your electronic filing system. As always, the whole issue of International Economic Trends is full of well-presented data for anyone interested in teaching international economics. If you're not already subscribed (it's free), you should be.

I welcome your comments.

Birthday – John Bates Clark

One of the highest honors for an American economist under 40 is to win the John Bates Clark medal. But you may not know who John Bates Clark is. Since today is the anniversary of his birth, here's some background. Born in 1847, he was one of the leading figures of the marginalist revolution. He was one of few Americans to working on the idea at the time, and was a strong proponent of capitalism. You can read more about Clark here and here.

And here’s an interesting quote from Clark. Perhaps it’s something you can use – perhaps when introducing gross national product or just discussing the link between production and consumption.

If a man were living in isolation his income would be literally his product. Make him the monarch and owner of an island, and the fruits that he raises and the clothing that he makes constitute, in themselves, his income. This ceases to be true when trading begins.
I hope you’ll share your thoughts.

Monday, January 25, 2010

Hayek vs. Keynes Rap

I referred to this in a blog some time ago. 

It's available for your classroom use and it is G-R-E-A-T.  However, I expect some of you will not be able to show the video in class because of the context in which the rap is set.  However, download the song and the lyrics here and have at it.  At the very least, watch it yourself and develop some of those memonic devices to help you remember aspects of these theories.

I welcome your comments.  Better yet, go to the link and leave comments there.

The Role of Government

There is an excellent piece in The Economist (HT to Arts & Letters Daily). It examines the debate about the proper role of government in the economy. It does a particularly good job of putting the expansion in to a longer perspective - not just examining the reaction to the recent financial crisis, but providing a more balanced view of the expansion of government, it's power, and the resultant financial burden necessary to support that expansion.

You might want to consider giving it as an auxiliary reading when you discuss the concept with your classes. It's well-written (as so many of the pieces in The Economist are), and I suspect it will provide several points of departure to help students get their arms around the idea.

As always, I look forward to your comments.

Going 50/50

A couple days ago, The Wall Street Journal had this very interesting article in the regular column about student financial literacy in the personal finance section. It's about dealing with the "I wants" that accompany growing up. The idea is simple. If the youngster claims to want a specific item, particularly a pricey one, offer going half-and-half with them. They can use their allowance, birthday money from relatives, or money from their "jobs" for their portion. The lesson for the children is a good one. I have used this strategy a number of times, and it really does help my children prioritize those wants. It's amazing how something they absolutely "must have" can fade when it involves their own funds. And when they do purchase something that way, they frequently take better care of the item than they do with other things they received as gifts.

It actually reminds me of an old "Curtis" comic strip. In it, Curtis asks his mother if he can go see a film ("Gut-Eaters from Mars" comes to mind, but the title is not material). His mother suggests he use his allowance. His response? "But that's my money." Anyone else care to share their experiences?

This Is Very Clever

If you have students who are artistically inclined and love to put their imagination to work, you might want to try an "extra-credit" assignment like this one.

There is some very good work. What are your thoughts?

Saturday, January 23, 2010

Economics in the Movies

The Princess Bride is one of my favorite fun films. And it's loaded with opportunities to illustrate economic concepts. Probably the most often used is the famous “battle of wits” clip that can be used to illustrate how people choose. But there are more.

At the beginning of this clip, we learn that two of the characters need the help of the "man in black" - Wesley. He seems to have absolute advantage in several areas. At about the 8:00 minute mark, there is a fun example of negotiating prices, with all kinds of incentives thrown into the process.

This next clip begins with a continuation of the price negotiation. But about 1:35 into the clip, we watch Wesley demonstrate some entrepreneurial thinking, bringing his productive resources together in innovative ways to satisfy a need. And at about the 4:00 minute mark, Wesley explains how he can use asymmetric information to his advantage. We also see that wants (problems) are unlimited and can even arise from satisfying other wants. And about 5:00 in, we see the payoff to Wesley's "entrepreneurial" skills.

You can view the clips to see what I mean, but you really should consider purchasing a copy of the DVD. I’ve added it to my carousel at left, and I hope you’ll consider using that venue if you do choose to purchase.

I welcome your ideas and comments.

Not That I'd Use This in Class...

But it did make me think of "substitutes" and "inferior goods."

Wizard of Id

What do you think?

Friday, January 22, 2010

Price, Incentives and Performance

Yesterday's edition of The Wall Street Journal had a tease on the front page that directed readers to this story on page one of the second section.

The story is about Burger King and its franchisees and the fight about the $1 double cheeseburger. Corporate sees it as an edge in keeping the value-oriented customer; some franchisees say they can't sell it profitably at that price. The whole issue is now the subject of a possible lawsuit.

Initially, the most interesting part of the story (for me) was the photo of the burger on page one. But the more I thought about it the story, the more potential I saw. Here is my reasoning.

We usually teach about institutions (rules and beliefs) within the context of a nation or society, pointing out how the institutions can shape decisions. We also often discuss how personal beliefs can shape our choices. But we sometimes forget that rules in the workplace also have an effect and can thus be classified as institutions.

The rules in the workplace are meant to affect choices and decisions and to promote or inhibit certain behaviors. In the WSJ story, the choice of setting prices is something that is usually left up to individual franchisees - that's why advertising may include "at participating stores" as a tag-line. But what if the pricing is part of an overall corporate strategy? Or what if failure to adhere to pricing actually leads to an overall loss of business or market share?

Furthermore, go back to the basic idea of institutions - rules meant to influence choices and decisions. And add the fact that changing institutions is often a slow (at least within societies) process. Can we look at the group of franchisees as a "society?"

If we carry this a step further, couldn't the same reasoning be applied to issues like compensation at financial institutions. Compensation was structured to influence certain behavior (choices). Changing the rules is bound to cause backlash because it means changing behavior, behavior that may even be "second nature" by now. To have true change may take time.

Although one can make a case that firms are not democratic republics and government regulations can be imposed, it doesn't mean employees or franchisees won't vote with their feet.

I'm not sure what side of the issue I would come down on, but the discussion may allow your students to get their arms around the impact of institutions, and why they can be hard to change at any level. Just some things to consider - all from a double cheeseburger. I look forward to your comments.

Thursday, January 21, 2010

So Pedestrian It's Interesting

Often things we think of as pedestrian can offer a wealth of opportunity. This article from today's edition of The Wall Street Journal (free at this writing) is an excellent example.

The story is about a skywalk that was built in Mumbai, India. It's just one of a network of 50 planned for the city. They are necessary because the city's population is growing. Mumbai is also, according to the article, one of the more pedestrian metropolises in the world.

The article offers several different points of departure: discussions about externalities, the role of government, resource constraints (scarcity), and unexpected consequences are all available. Additionally, there is video, a slide show, and an interactive graphic to help illustrate the problem.

I highly recommend the article. And I look forward to hearing how you think it can be used (or if it can be used) in your classroom.

Maybe He Missed "That 70s Show"

If you're old enough, you remember the one where a U.S. President imposed price controls to tame inflation and it didn't work. Anyway, Venezuelan President Chavez devalued the currency and then closed a large retailer because prices were raised.

Somebody doesn't understand one of the purposes of the price mechanism is to ration goods. Also doesn't seem to understand that prices send signals to producers and consumers. (HT to Dr. Mark for the lead.)

I see "Kelso" playing the role of the Venezuelan President. I welcome your thoughts.

Tuesday, January 19, 2010

Excellent Point!

Last night, before dinner, we were discussing Haiti relief.  Both my wife and I said that we had seen news stories, blog posts, and heard commentators talking about sending cash instead of stuff for relief.  This post at AidWatch does a superb job of explaining why. And the most compelling argument is in the first paragraph. (HT to David Henderson at EconLog for the link.)

Once again, "markets" provide answers.

Monday, January 18, 2010


The second volume (first book) of Alan Meltzer's History of the Federal Reserve is now available.  Even without reading it, (which I will as soon as I get it) I whollly endorse this book (I enjoyed and learned a lot from the first volume).  I've added it to my carousel at left.

If you're considering purchasing this book, I hope you'll consider doing it through my carousel.

Sometimes It's So Obvious

Here is something for those personal finance courses.
Arlo & Janis
Information is helpful, but it cannot solve the problem alone.

As always, I welcome your comment.

Kenneth Boulding

Today is the anniversary of the birth of Kenneth Boulding. Boulding is a harder person to categorize than many. His interests and studies ranged across the social sciences. And his academic career was also wide-ranging.

My interest in Boulding stems from his idea of psychic capital, alluded to here. The idea that we can be motivated to act by seeking to accumulate positive feelings or avoid negative feelings is intriguing. For me, it has a resonance to the utilitarianism of Jeremy Bentham, but with a less quantifiable aspect. I also suspect it can provide some foundation for behavioral economics. And to the extent that feelings have social foundations, may even provide a basis for some personal beliefs that affect our decision-making.

I also find this quote of his to be insightful.
"Theories without facts may be barren, but facts without theories are meaningless."
I would welcome any comments.

Sunday, January 17, 2010

George Joseph Stigler

Today is the anniversary of the birth of economist George Stigler. Stigler won the Nobel Prize for Economics in 1982. He was an important member of the group of economists that brought recognition to the University of Chicago.
His areas of expertise were wide and included history of thought, price theory, and economic regulation (see here). But his teaching ability and his sense of humor were also well-respected.  (In fact, those of you who value humor in economics may want to take notes.)

While I never had a chance to hear him, his autobiography Memoirs of an Unregulated Economist is among one of my favorite books about economists (he writes some great stories about Milton Friedman, one of his contemporaries in Chicago) and about the department. (I've added it to my carousel at left.) If you want an insight into a brilliant mind and the inner workings of an academic department that epitomizes excellence in economics, you'd be hard pressed to find better.

You can also learn about him at the Library of Economics and Liberty's Concise Encyclopedia of Economics.

I would welcome additional comments.

Thursday, January 14, 2010

Haiti Earthquake

Disasters like this frequently bring follow-up stories that hint that there is an economic upside to the catastrophe - that the new building and new investment is going to somehow be "better".  While I've not heard this yet. (I suspect the event is still too close.) I have no doubt that someone, somewhere will mention it.  This, of course, is the broken window fallacy.

Unfortunately, some people will forget that the assets used to rebuild may have had other uses.  And many of the assets that were destroyed (both human and capital) are irreplaceable.  To help us remember that, here are a number of links to videos, slideshows and news stories to help us remember.

Courtesy of CNBC.

Courtesy of The Wall Street Journal - Warning, some photos are disturbing.
Courtesy of the BBC - Warning, some photos are disturbing.

Guilt as an Institution

There are many "non-economic" choices we make every day. Yet economic thinking provides insights to these choices. And these insights help us understand what we do. That point was brought home by this article from The Chronicle of Higher Education (HT to Arts & Letters Daily).

Many of our choices are the result of feelings we have - whether they be guilt, pride, or whatever - and the feelings are, in part, the result of our socialization process as we mature. And the feelings become integrated into our beliefs. These beliefs help form the institutional structure that helps us make choices - some economic, some "non-economic". The beliefs are some of the "rules" that influence our decisions, whether it is how we act while waiting in line, as explained in the article, to how we view other social and cultural issues.

The article even redirected my thinking to Adam Smith's The Theory of Moral Sentiments and the role of his "impartial spectator."  While I don't think we can connect that role to guilt, it is possible to connect to our desire to seek approval of others, which is alluded to in the article.

I think the article can help us explore the role of beliefs as institutions, and the influence they can have on our decision-making. Please share your thoughts.

Wednesday, January 13, 2010

The Fed's Earnings

Yesterday, there were several spots on "talk radio" about the Federal Reserve's earnings. None of the pundits I heard mentioned that the numbers were the result of outside calculations based on public documents. The Fed’s official annual report has yet to be released.

Now, I admit I listen to talk radio. I sometimes need a laugh, and it's one of the best indicators of the need for economic education - and that goes for both sides of the political spectrum. But, I was amused and appalled by what I heard: amused by the overblown hysteria, appalled by the total lack of understanding and factual knowledge of how the Fed works.

Anyway, here is a story from The Washington Post that puts things in a better perspective. Although, I suspect it was the story that kicked off the whole kerfuffle. It points out that the money the Fed earns, after expenses, goes to the U.S. Treasury

Anyway, just one more example of why we need economic education. I welcome your comments.

Sunday, January 10, 2010

Is This a Positive Externality?

Arlo & Janis

It depends on how fussy you want to be about the definition...and your point of view.

Saturday, January 9, 2010


I'd say this sums up the idea of globalization pretty succinctly. What do you think?

Markets in Organs

I suspect one of the more interesting ways to get students to discuss the ins and outs of markets is to bring up the idea of markets for human organs. And Alex Tabarrok of George Mason University has an engaging piece in today's issue of The Wall Street Journal.

Of particular interest to me were the countries that have already enacted some kind of harvesting mechanism, whether it be a market, or some other incentive structure like "no give, no take" which moves people who opt out organ donation to the bottom of the waiting list should they ever require a transplant. The takeaway is institutional changes change behavior, but it takes some time.

There are a number of engaging podcasts available on the topic. You can find Richard Epstein of the University of Chicago talking about the topic with Russ Roberts on Econ Talk, as well as Duke University professor Mike Munger on the same site, and this discussion with Alvin Roth of Harvard on

I’d be interested in hearing from any of you who have had this topic pop up in class, either through your intent, or through student interest.

Friday, January 8, 2010

Consumer Spending & Economic Growth

Thanks to the folks at Chartporn, I ran across a very engaging area graph from VisualEconomics.Com. It shows a breakdown of consumer spending on various categories over the past 100 years. There are a number of items that are of particular interest: the significant decline in spending for food and apparel, the significant increase in spending for transportation, growth in entertainment, the growth of spending for housing, and the relatively small increase in the percentage spent on health care.

However, its value to me resides in the fact that it opens the door to discuss not only quantitative change but qualitative change. (I expect the latter, along with an increasing shift from renting to purchasing accounts for much of the growth in spending for housing.

And I would also like to know why book spending is not included with entertainment. And I also wonder what is/was included in the category of "other."

Regardless, this article can be used in economics class to introduce the idea of real growth, as well as in a personal finance class when discussing how budgets change. I would also recommend combining this graph with some of the information contained in a couple of publications from the Federal Reserve Bank of Dallas: the 1993 Annual Report and the 1997 Annual Report. While the dates don't match up at the end of the period (the information in the annual reports ends in the 80s and 90s), they do present some trends that offer some insights.

I would be glad to hear your thoughts.

Thursday, January 7, 2010

Say on Trade

I ran across a very thought-provoking quote (HT to The Night Watchman) by Jean Baptiste Say that, I think, can be helpful to students trying to grasp the idea of comparative advantage. Here it is:
A nation that should export to the value of 20,000 dollars, and import to the value of 24,000 dollars wholly in goods, without any money passing on either side, would make a profit of 4,000 dollars, in direct contradiction to the theory of the partizans of the balance of trade.
It's advantage is that it forces us to focus on the real flows, and not the nominal. Now, you may ask why a nation would import less than it exports.  To this, remember the concept of value and how it is in the eye of demander.  Furthermore, this is what comparative advantage is about. Produce what has a low opportunity cost and trade for what has a higher opportunity cost.

What do you think?

Choice, Value and Marginal Analysis

I think the cartoon below presents opportunities to discuss choice, value and marginal analysis.
What do you think?

Tuesday, January 5, 2010

Nothing Deep, Just Some Perspective

This is interesting (HT to ChartPorn). I suspect that what makes the HP ink so "expensive" is the delivery technology. But if you remove that bar, it still offers some intriguing perspectives. Just a thought to share.

Jean Baptiste Say

Today is the anniversary of the birth of John Baptiste Say. Say was a contemporary of Thomas Malthus and David Ricardo. Many of us may not even mention Say, but if we do, it is likely in reference to what has become "Say's Law." Oddly enough, we probably use James Mill's abbreviation "Supply creates its own demand." Some of us, who look at things in the short run, may dismiss this, largely because it implies that gluts are not possible. Others of us, who look at things in the longer view, may agree with Say because over the long-run what is produced is ultimately consumed.

But another important part of Say's work was his view on value. Whereas many, Ricardo included, posited a labor-theory of value that stated the value of a good or service came from the amount of labor it cost to produce; Say believed that value was ultimately derived from the utility perceived by the buyer. This would lay the foundation for the marginal revolution. He also was a strong believer in the role of the entrepreneur, presaging Schumpeter, going so far as to list entrepreneurship as a fourth factor of production.

You can find some excellent background on Say here and here. I hope you find his thoughts interesting - or at least of VALUE. And, as always, your estimate of VALUE is welcome.

Economic Thinking and "Non-Economic" Choices

Many of us teach our students that economic thinking helps us make "non-economic" choices. What we usually mean by that is that the analytical tools we gain from understanding economics can help us make choices beyond the financial sphere.

Today's edition of The Wall Street Journal has an excellent example of applying economic reasoning to what many would consider a non-economic or even a moral choice.

This opinion piece focuses on a choice we make as "a civilization". I won't quibble about whether "civilization" or "society" is more appropriate. But the upshot is how we react to threats to our security. It is a complex issue and this article does not go as deep as it could. But it does provide a framework for discussion, using what I would call an "economic way" of thinking - posing costs and benefits for judgment.

I highly recommend it. And I look forward to your thoughts.

Another Take on the Health-Care Issue

There is a second opinion piece in today's edition of The Wall Street Journal that also is worth reading.

We frequently talk about the "unintended consequences" of our choices. This essay addresses what may be an unintended consequence of the health-care reform legislation currently being worked out by Congress in conference. And while it comes from a highly interested source, it raises an interesting economic question.

Most economists would agree that dropping the price of accessing the health care system will result in increased demand. But what is being done to augment supply? The author is specifically concerned with the supply of doctors. If demand rises and supply does not shift, the market would correct by raising prices. But if prices are fixed, what is the result?

I'll leave it to you to take this the rest of the way with your students. Just graph it. And share your thoughts.

Sunday, January 3, 2010


Friend and fellow blogger Mike Fladlien at Mikeroeconomics has a pointer to the Wikipedia page on "Globalization."  I found the history section particularly engaging. I have long believed and taught that globalization is a much older phenomenon than many others believe.  I highly recommend the Wikipedia article and Mike's blog.

I welcome your thoughts.

Institutions, Incentives and Prosperity

M.I.T. professor Daron Acemoglu has an engaging opinion piece in Esquire (HT to Arts & Letters Daily). One intriguing aspect is a graphic that compares "How Governments Affect the Wealth of Nations." And while I wish it were more interactive - perhaps showing details for more countries as you mouse over them - it tells makes a convincing case.

My only complaint with the article is that I wish it was longer. (I suspect the limitation was due to space.) For example, I would like more explanation of his comparison of Nogales, a city on the U.S.-Mexican border that is split by that border. While I have no doubt that differing institutions lead to differing incentives, I would like to know Acemoglu's assessment of how quickly an improvement in the institutional structure on the Mexican side would take effect. I think many institutions need time to become ingrained in a society before they have a full effect. Otherwise, the members may be reluctant to change their behavior for fear of another, counter-veiling change.

I welcome your thoughts.

Saturday, January 2, 2010

Economic Thinking, Economic Behavior and Free-riders

There's a superb article in today's edition of The Wall Street Journal (HT to Dr. Mark for the "heads-up"). While I'm not sure I agree that economists are generally less generous when it comes to charitable contributions, I'll admit to some of the other behaviors highlighted. How about you? Do you recognize any part of yourself in the examples?

Friday, January 1, 2010

Happy New Year and "Happy Birthday"

First, let me wish a "Happy New Year" to all of you. I've had better years than 2009, and I'm hoping for one of those better years in 2010.

Given my interest in the history of economic thought, I also want to note the birthdays of two economists (HT to AEA Calendar): Moses Abramovitz, a pioneer in the field of economic growth; and Vernon L. Smith, who won the 2002 Nobel Prize in Economics, along with Daniel Kahneman, for his work in experimental economics and alternative market mechanisms.

Abramovitz's work focused on cycles and productivity. You can find two interviews with him here and here. I find his views interesting and, if you find yourself drawn economic cycles as I am, the interviews are worth your time.

Smith's work on experimental economics has connections to institutional economics, which explains my interest. He examines the effect of the institutions on the choices people make. You can find a very good one-hour interview with him here, and two others on EconTalk with Russ Roberts here.

I welcome your comments.