Wednesday, May 24, 2017

What Is The Full-Employment Unemployment Rate According To The Fed?

A recent article says 4.7%. See Fed Likely to Go Ahead With Rate Hikes Despite Trump Turmoil by Rich Miller of Bloomberg. Excerpts:

"Officials in March projected that the economy would grow 2.1 percent both this year and next, above their 1.8 percent estimate of its long-run cruising speed. They also reckoned that a 4.7 percent jobless rate was equivalent to full employment. Unemployment in April was 4.4 percent."

"Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said the course of inflation over the coming months will be more important in shaping the Fed’s plans than the political tumult in Washington.

Consumer-price inflation has slowed more than forecast in the last couple of months, raising questions about whether the Fed remains on track to achieve its 2 percent inflation target.

Feroli said the fundamentals point to inflation resuming its upward trend, with import and unit labor costs rising and the dollar falling.

As a result, he expects the Fed “to look past” the recent weakness in prices and raise interest rates again next month."

Here is some more information to help explain this issue.

We can see how this works in the following graph:



A GDP of $9 trillion is the "full-employment" GDP (QF). That gives us the lowest rate of unemployment compatible with "price stability" (price stability is an an annual inflation rate of 3% or less-although the article says 2% since that is what the Fed seems to be using these days). As GDP increases, more workers are hired, so unemployment falls. But if GDP is below QF, firms cannot raise prices. There is slack or "excess capacity" in the economy. That means that there will be very little pressure on prices. Resources are not very scarce and product prices don't have to be increased (or increased very much) to call them back into service.

But as GDP increases, resources become more scarce as more bidders want them. The more GDP increases, the faster prices increase. Also, less efficient resources get called into service and less efficiency means greater cost. The higher costs get passed along to the consumer in higher prices.

So, if there is a danger of AD going past QF the FED will raise interest rates to slow down private spending (both consumption and investment) to keep AD from moving too far to the right and prevent the higher rates of inflation.

Thursday, May 11, 2017

Interesting New Book On Trade And Tariffs By Marc-William Palen

See The 'Conspiracy' of Free Trade: The Anglo-American Struggle over Empire and Economic Globalisation, 1846-1896. Here is the Amazon description:

"Following the Second World War, the United States would become the leading 'neoliberal' proponent of international trade liberalization. Yet for nearly a century before, American foreign trade policy was dominated by extreme economic nationalism. What brought about this pronounced ideological, political, and economic about-face? How did it affect Anglo-American imperialism? What were the repercussions for the global capitalist order? In answering these questions, The 'Conspiracy' of Free Trade offers the first detailed account of the controversial Anglo-American struggle over empire and economic globalization in the mid- to late-nineteenth century. The book reinterprets Anglo-American imperialism through the global interplay between Victorian free-trade cosmopolitanism and economic nationalism, uncovering how imperial expansion and economic integration were mired in political and ideological conflict. Beginning in the 1840s, this conspiratorial struggle over political economy would rip apart the Republican Party, reshape the Democratic Party, and redirect Anglo-American imperial expansion for decades to come."

Here is the author's bio

"Dr. Marc-William Palen is a historian at the University of Exeter. He specialises in the intersection of British and American imperialism within the broader history of globalisation since c. 1800. His commentary on historical and contemporary global affairs has appeared in the New York Times, the Australian, History Today, Time Magazine, Newsweek, the Globalist Magazine, the History News Network, History & Policy, Foreign Policy in Focus, and Common Dreams, among others. He is co-founder of History & Policy's Global Economics and History Forum. He is also the founding editor of the Imperial & Global Forum, the blog of the Centre for Imperial & Global History at the University of Exeter. You can follow him on Twitter @MWPalen"

Dr. Palen is from San Antonio. Here is a related post from a few months ago:

Mark Twain, Economist?

Thursday, May 04, 2017

Adam Smith On Jeopardy

Here is the clue for Final Jeopardy on April 28:

Category: HISTORIC WORKS' FIRST LINES

Clue: "The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life"

On Jeopardy, they give you the answer. So your response has to be in the form of a question.

The correct question: What is the Wealth of Nations?

Two of the three players got it right. One said Das Kapital (which was by Karl Marx)

Go to

Jeopardy, April 28, 2017. Scroll down to the bottom for Final Jeopardy.

Wednesday, April 19, 2017

Why Did The Value Of The Dollar Rise More Than 20% From July 2014 To March 2015?

On June 30, 2014 , the Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) was 75.7 (the index starts in 1973 at 100, so the dollar was lower in value compared to other major currencies in 2014 than it was in 1973).

See Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) from the St. Louis Federal Reserve Bank.

But by March 16, 2015, it was at 93.1, just about a 23% increase in value.

Why did the dollar rise? Here is what The Economist magazine said:
"The principal reasons for the greenback’s rapid strengthening are simple to grasp. With Europe and Japan stuck in the doldrums, and China and other emerging markets slowing, America’s economy looks relatively strong. The IMF expects it to grow by 3.6% this year. The Federal Reserve has already begun to tighten monetary policy, by stopping its programme of asset purchases, and is now preparing the ground to go further. This week the Fed altered the wording it uses to describe its plans (see article), giving itself room to raise interest rates later this year—the first rise since 2006. With American monetary policy tightening, and other central banks still loosening, investors can make higher returns from dollar-denominated assets. In capital floods, and up the dollar goes."
See Mismatch point: The rise of the dollar will punish borrowers in emerging markets.

Here is another view from Andrew Hecht. He is an international commodity trader, an options expert and analyst.
"There are many reasons that the dollar has appreciated over recent months. The U.S. economy is still the largest in the world. Despite demographics, the U.S. remains the strongest economic nation in the world. The U.S. remains a powerful nation even though less than five percent of the world's population live within U.S. borders. The dollar is the reserve currency of the world. Many other nations hold dollars as a key part of their reserves due to the political and economic stability in the United States. Dollar strength has been the result of moderate growth in the U.S. economy. While European growth remains lethargic, the nation that experienced the highest degree of growth in recent years, China, has seen its growth rate slow. The Chinese economic has shifted from heavy manufacturing to a consumer based economy. As the size of the Chinese economy swells, it becomes harder to grow on a percentage basis as it has in the past.

Think of it this way, it is easier to make a seven percent return on one million dollars than it is to make a commensurate return on one trillion dollars. The sheer size of the Chinese economy makes the percentage growth rate seen in years past almost impossible to sustain. Therefore, Chinese economic growth has slowed on a percentage basis.

Relative strength of the U.S. economy, when compared to those of Europe and China, is a positive factor for the dollar.

A bear market in commodity prices has also been supportive for the dollar. The U.S. is a major consumer of raw materials and lower prices amount to stimulus for the American economy. At the same time, the currencies of nations that depend on commodity revenues have suffered because of lower prices. Canada, Australia, Brazil, Russia, South Africa as well as other commodity producing nations have seen their currency values depreciate alongside raw material prices.

Another positive influence for the dollar is the relative rate of interest paid on the U.S. currency when compared to other currencies. For the first time in nine years, the U.S. central bank raised short-term interest rates in the United States in December 2015. The Federal Reserve also stated their intention that rates will continue to head higher in the months and years ahead. Short-term interest rates in the U.S. went to zero in the aftermath of the housing and global financial crisis in 2008. Growth in the U.S. economy no longer supports such accommodative monetary policy. As the dollar has offered the opportunity for capital growth, in terms of its appreciation versus other currencies since May 2014, higher interest rates add additional support in that they increase the yield on the currency for holders."

Friday, April 14, 2017

Is There Economic And Political Meaning In "The Wizard of Oz?"

We covered international trade in my micro class recently and the text book has something about this in that chapter.

To get a handle on this, you can read Money and Politics in the Land of Oz By Quentin P. Taylor. Also, for my students, there is an article in chapter 15 of the micro book by Tucker and in chapter 18 in the macro book.Below is an excerpt from the Taylor paper:

"Dorothy, the protagonist of the story, represents an individualized ideal of the American people. She is each of us at our best-kind but self-respecting, guileless but levelheaded, wholesome but plucky. She is akin to Everyman, or, in modern parlance, “the girl next door.” Dorothy lives in Kansas, where virtually everything-the treeless prairie, the sun-beaten grass, the paint-stripped house, even Aunt Em and Uncle Henry-is a dull, drab, lifeless gray. This grim depiction reflects the forlorn condition of Kansas in the late 1880s and early 1890s, when a combination of scorching droughts, severe winters, and an invasion of grasshoppers reduced the prairie to an uninhabitable wasteland. The result for farmers and all who depended on agriculture for their livelihood was devastating. Many ascribed their misfortune to the natural elements, called it quits, and moved on. Others blamed the hard times on bankers, the railroads, and various middlemen who seemed to profit at the farmers’ expense. Angry victims of the Kansas calamity also took aim at the politicians, who often appeared indifferent to their plight. Around these economic and political grievances, the Populist movement coalesced.

In the late 1880s and early 1890s, Populism spread rapidly throughout the Midwest and into the South, but Kansas was always the site of its most popular and radical elements. In 1890, Populist candidates began winning seats in state legislatures and Congress, and two years later Populists in Kansas gained control of the lower house of the state assembly, elected a Populist governor, and sent a Populist to the U.S. Senate. The twister that carries Dorothy to Oz symbolizes the Populist cyclone that swept across Kansas in the early 1890s. Baum was not the first to use the metaphor. Mary E. Lease, a fire-breathing Populist orator, was often referred to as the “Kansas Cyclone,” and the free-silver movement was often likened to a political whirlwind that had taken the nation by storm. Although Dorothy does not stand for Lease, Baum did give her (in the stage version) the last name “Gale”-a further pun on the cyclone metaphor.

The name of Dorothy’s canine companion, Toto, is also a pun, a play on teetotaler. Prohibitionists were among the Populists’ most faithful allies, and the Populist hope William Jennings Bryan was himself a “dry.” As Dorothy embarks on the Yellow Brick Road, Toto trots “soberly” behind her, just as the Prohibitionists soberly followed the Populists.

When Dorothy’s twister-tossed house comes to rest in Oz, it lands squarely on the wicked Witch of the East, killing her instantly. The startled girl emerges from the abode to find herself in a strange land of remarkable beauty, whose inhabitants, the diminutive Munchkins, rejoice at the death of the Witch. The Witch represents eastern financial-industrial interests and their gold-standard political allies, the main targets of Populist venom. Midwestern farmers often blamed their woes on the nefarious practices of Wall Street bankers and the captains of industry, whom they believed were engaged in a conspiracy to “enslave” the “little people,” just as the Witch of the East had enslaved the Munchkins. Populists viewed establishment politicians, including presidents, as helpless pawns or willing accomplices. Had not President Cleveland bowed to eastern bankers by repealing the Silver Purchase Act in 1893, thus further restricting much-needed credit? Had not McKinley (prompted by the wealthy industrialist Mark Hanna) made the gold standard the centerpiece of his campaign against Bryan and free silver?"
Now an excerpt from Tucker:
"Gold is always a fascinating story: The Wonderful Wizard of Oz was first published in 1900 and this children's tale has been interpreted as an allegory for political and economic events of the 1890s. For example, the Yellow Brick Road represents the gold standard, Oz in the title is an abbreviation for ounce, Dorothy is the naive public, Emerald City symbolizes Washington, D.C., the Tin Woodman represents the industrial worker, the Scarecrow is the farmer, and the Cyclone is a metaphor for a political revolution. In the end, Dorothy discovers magical powers in her silver shoes (changed to ruby in the 1939 film) to find her way home and not the fallacy of the Yellow Brick Road. Although the author of the story, L. Frank Baum, never stated it was his intention, it can be argued that the issue of the story concerns the election of 1896. Democratic presidential nominee William Jennings Bryan (the Cowardly Lion) supported fixing the value of the dollar to both gold and silver (bimetallism), but Republican William McKinley (the Wicked Witch) advocated using only the gold standard. Since McKinley won, the United States remained on the Yellow Brick Road."
But not everyone agrees with this. Economist Bradley Hansen wrote an article titled The Fable of the Allegory: The Wizard of Oz in Economics in the Journal of Economic Education in 2002. Here is his conclusion:
"Rockoff noted that the empirical evidence that Baum wrote The Wonderful Wizard of Oz as an allegory was slim, but he compared an allegorical interpretation to a model and suggested that “economists should not have any difficulty accepting, at least provisionally, an elegant but controversial model” (Rockoff 1990, 757). He was right—we did not have any difficulty accepting it. Despite Rockoff’s warning, we appear to have accepted the story wholeheartedly rather than provisionally, simply because of its elegance. It is as difficult to prove that The Wonderful Wizard of Oz was not a monetary allegory as it is to prove that it was. In the end, we will never know for certain what Baum was thinking when he wrote the book. I suggest that the vast majority of the evidence weighs heavily against the allegorical interpretation. It should be remembered that no record exists that Baum ever acknowledged any political meanings in the story and that no one even suggested such an interpretation until the 1960s. There certainly does not seem to be sufficient evidence to overwhelm Baum’s explicit statement in the introduction of The Wonderful Wizard of Oz that his sole purpose was to entertain children and not to impress upon them some moral. The Wonderful Wizard of Oz is a great story. Telling students that the Populist movement was like The Wonderful Wizard of Oz does seem to catch their attention. It may be a useful pedagogical tool to illuminate the debate on bimetallism, but we should stop telling our students that it was written for that purpose."
I found a review of the book in the NY Times from 1900 and it does not mention anything about OZ having political or economic meaning. The book was also made into a musical a few years later and none of the reviews of the musical mention any political or economic meaning.

Thursday, April 06, 2017

How Odysseus Started The Industrial Revolution

Factory work may have been a commitment device to get everyone to work hard. Odysseus tying himself to the mast was also a commitment device. Dean Karlan, Yale economics professor explains how commitment devices work:

"This idea of forcing one’s own future behavior dates back in our culture at least to Odysseus, who had his crew tie him to the ship’s mast so he wouldn’t be tempted by the sirens; and Cortes, who burned his ships to show his army that there would be no going back.

Economists call this method of pushing your future self into some behavior a “commitment device.” [Related: a Freakonomics podcast on the topic is called "Save Me From Myself."] From my WSJ op-ed:
Most of us don’t have crews and soldiers at our disposal, but many people still find ways to influence their future selves. Some compulsive shoppers will freeze their credit cards in blocks of ice to make sure they can’t get at them too readily when tempted. Some who are particularly prone to the siren song of their pillows in the morning place their alarm clock far from their bed, on the other side of the room, forcing their future self out of bed to shut it off. When MIT graduate student Guri Nanda developed an alarm clock, Clocky, that rolls off a night stand and hides when it goes off, the market beat a path to her door."
 See What Can We Learn From Congress and African Farmers About Losing Weight?

Something like this came up recently in the New York Times, in reference to factory work and the Industrial Revolution. See Looking at Productivity as a State of Mind. From the NY Times, 9-27. By SENDHIL MULLAINATHAN, a professor of economics at Harvard. Excerpts:
"Greg Clark, a professor of economics at the University of California, Davis, has gone so far as to argue that the Industrial Revolution was in part a self-control revolution. Many economists, beginning with Adam Smith, have argued that factories — an important innovation of the Industrial Revolution — blossomed because they allowed workers to specialize and be more productive.

Professor Clark argues that work rules truly differentiated the factory. People working at home could start and finish when they wanted, a very appealing sort of flexibility, but it had a major drawback, he said. People ended up doing less work that way.

Factories imposed discipline. They enforced strict work hours. There were rules for when you could go home and for when you had to show up at the beginning of your shift. If you arrived late you could be locked out for the day. For workers being paid piece rates, this certainly got them up and at work on time. You can even see something similar with the assembly line. Those operations dictate a certain pace of work. Like a running partner, an assembly line enforces a certain speed.

As Professor Clark provocatively puts it: “Workers effectively hired capitalists to make them work harder. They lacked the self-control to achieve higher earnings on their own.”

The data entry workers in our study, centuries later, might have agreed with that statement. In fact, 73 percent of them did agree to this statement: “It would be good if there were rules against being absent because it would help me come to work more often.”"
The workers, like Odyssues, tied themselves to the mast to resist the temptation of slacking. This made it possible for factories to generate the large output of the Industrial Revolution.

Wednesday, March 29, 2017

Joseph Schumpeter And Me

Jeffery S. McMullen of Indiana University just published an article in the academic journal "Business Horizons." It is titled

"Are we confounding heroism and individualism? Entrepreneurs may not be lone rangers, but they are heroic nonetheless."

I have some information below on how to access this article.

McMullen cites a paper I wrote in the 1990s and mentions my name in the same sentence as Joseph Schumpeter, an important economist from the 20th century.

Click here to read a short bio of him

A few years ago I wrote a post called "My Favorite Economist Is Joseph Schumpeter."  Here it is

""Why is this blog called The Dangerous Economist? Back in the early 1990s, I wrote a paper called "The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?" It compares the entrepreneur in capitalism to the hero in mythology. I was never able to get it published in an academic journal. One referee even said the idea was dangerous. I doubt much harm would have befallen the U.S. economy had this paper been published. It is now online at

Creative Destroyers

A shorter version is at

Shorter Version

If you clicked on the link about why I chose this name for my blog and then these articles and read them you would have discovered some of the things that I list below and they would have pointed you to Schumpeter.

The process whereby innovations occur was called "Creative Destruction" by Schumpeter in his book Capitalism, Socialism, and Democracy. "Creative Destruction" was

"The opening of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation if I may use that biological term-that incessantly revolutionizes the economic structure from with in, incessantly destroying the old one, incessantly creating the new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in" (p. 83).

In his book The Hero with a Thousand Faces, Joseph Campbell described the action of the hero with

"The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return: which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder: fabulous forces are there encountered and a decisive victory is won: the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man. "(p. 30)

Campbell (1968) also has a section called "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero" (p. 38). The connection to Schumpeter's theory of creative destruction is clear. A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. But even more to the point is the fact that the hero finds that the world "suffers from a symbolical deficiency" (p. 37) and that "the hero appears on the scene in various forms according to the changing needs of the race" (p. 38). The changing needs and the deficiency may directly correspond to the changing market conditions or the changing desires for products. The entrepreneur IS the first person to perceive the need or opportunity for market profits.

Joseph Campbell's book inspired George Lucas to make the Star Wars movies."

Now here is the info on how to access the McMullen article.

The first link below is just some general info about the article. But the article itself is not readable online (unless you want to pay $35). If you go to the second link at ResearchGate, you can see his article listed. If you sign up for the service (it is free) you can request that the author send you a copy (that is how I got mine).

General info about the McMullen article

The second link at ResearchGate to request the article

Friday, March 24, 2017

How Long Have Economists Known About The Shortcomings Of GDP?

I occasionally hear about people who say we need a better measure of our economic welfare than GDP. But economists are not blind to its shortcomings. The textbook I use for my macro class includes a discussion of these issues. For example, GDP does not take into account how the quality of goods changes over time or how much leisure time we have and how that has changed over time.

There is also production that takes place outside of the market place. Economists have been aware of this since GDP was first created.

See What's the Value of US Household Production? by Timothy Taylor, Managing editor of the Journal of Economic Perspectives. He presents some comments made by economist Simon Kuznets in 1934. Kuznets was the author of the 1934 report to Congress "National Income, 1929-1932." He also won a Nobel Prize in Economics in 1971.

Here is one part of that report, from Mr Taylor's post:

"Kuznets wrote in 1934:
"The volume of services rendered by housewives and other members of the  household toward the satisfaction of wants must be imposing indeed,  when totaled for the 30 million families comprising the population of  this country; and the item is thus large enough to affect materially any estimate of national income. But the organization of these services  render them an integral part of family life at large, rather than of the specifically business life of the nation. Such services are, therefore, quite removed from those which gainfully occupied groups undertake to perform in return for wages, salaries, or profits. It was considered  best to omit this large group of services from national income, especially  since no reliable basis is available for estimating their value. This  omission, unavoidable though it is, lowers the value of national income  measurements as indexes of the nation's productivity in conditions  of recent years when the contraction of the market economy was accompanied by an expansion of activity within the family. ... Thus, the estimates submitted in the present study define income in such a way as to cover primarily only  efforts whose results appear on the market place of our economy.  A student of social affairs who is interested in the total productivity  of the nation, including those efforts which, like housewives' services,  do not appear on the market, can therefore use our measures only with some qualifications.""
Taylor also mentions "The value of household services was equal to about 37% of GDP in 1965, but is currently equal to about 23% of GDP."

Click here to learn more about Kuznets' contributions to economics

Friday, March 10, 2017

The percentage of 25-54 year-olds employed increased in February

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers. The lower unemployment rate can be misleading in this case. People dropping out of the labor force might indicate a weak labor market.

We could look at the employment to population ratio instead, since that includes those not in the labor force. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading. It would not necessarily mean the labor market is weak.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work)

The percentage of 25-54 year-olds employed is 78.3% for February. It was 78.2% in January. It is still below the 79.7% in December 2007 when the recession started.  Click here to see the BLS data. The unemployment rate was 4.7% in February. Click here to go to that data.

Here is the timeline graph of the percentage of 25-54 year-olds employed since 2007. Notice how we had been rising before 2016 but it seems to be flattening out.



Here it is going all the way back to 1948

Thursday, March 02, 2017

What Industries Have The Highest Profit Rates?

See The Most Profitable Industries in 2016 by Mary Ellen Biery of Forbes. A student asked about profit rates in class recently since this comes up when we cover market structures. For example, we expect firms in perfect competition to earn an average profit rate or rate of return because, if they are above average, more firms enter, driving prices and the profit rate back down. When there is not enough competition, firms can stay above average. Excerpts:

"Which U.S. industries are the most lucrative? The answer depends on how it’s measured, but based on pre-tax net profit margin, the top money-makers include specialty service providers in accounting, law, health care and real estate, according to the latest ranking from Sageworks, a financial information company.

Accounting-related companies (accounting, tax preparation, bookkeeping and payroll service companies) are the most profitable, with net profit amounting to 18.3 percent of sales, on average, based on a financial-statement analysis for privately held companies for the 12 months ended June 30.  Legal services firms and real-estate leasing companies are tied for second and third in profitability, with average net profit margins of 17.4 percent. These industries often make the cut for Sageworks’ annual ranking.
Sageworks Most Profitable Industries 2016

“Some businesses tend to have healthier bottom lines by the very nature of the industries that they operate in,” said Sageworks analyst James Noe. Many of the most profitable industries sell services rather than products, he noted, so their operations don’t require raw materials or other up-front costs that would wind up in the middle of their income statements and eat into the bottom line. “They don’t sell or produce finished goods,” he said. “They don’t make the tractors to sell to farmers or they don’t buy groceries to sell to consumers. In other words, you don’t need plastic to provide an audit for a company; it’s just mostly human capital that’s being utilized, and that lends to a high margin generally.”

Among privately held companies across all industries, the average net profit margin for the 12 months ended June 30 was 7.7 percent. Through its cooperative data model, Sageworks collects and aggregates private-company financial statements from accounting firms, banks and credit unions. Net profit margin has been adjusted to exclude taxes and include owner compensation in excess of their market-rate salaries. These adjustments are commonly made to private-company financials in order to provide a more accurate picture of the companies’ operational performance."

Here is the 2015 list

Here is another good link on profit rates

Thursday, February 23, 2017

Is it okay to propose to your sweetheart with a diamond that was made in some drab office park?

See Forget the ring: Lab-grown diamonds are a scientist’s best friend by Sarah Kaplan of The Washington Post. It provides not just some of the economics of the industry but also some insights on the techniques of the process and the scientific uses of these lab created diamonds.

One of my classes this week read a chapter about cartels in the book The Economics of Public Issues. It included a short discussion about De Beers and what has happened to their monopoly power in the diamond market. It declined over time as more countries started mining diamonds (they once had a 90% market share and it is now 31%). They also faced anti-trust issues for the ways they tried to control the market (see additional link at the end).

But now lab-grown diamonds are starting to have an impact as well. Here are excerpts from the The Washington Post article:
"At a drab office park in a Washington suburb, in an unmarked building's windowless lab, Yarden Tsach is growing diamonds.

Not rhinestones or cubic zirconia. Diamonds. Real ones. In a matter of eight weeks, inside a gas-filled chamber, he replicates a process that usually takes billions of years in the bowels of the planet. Carbon atom by carbon atom, he creates nature's hardest, most brilliant and — if decades of advertisements are to be believed — most romantic stone."

"Until the middle of the past century, all of the world's diamonds originated more than 1 billion years ago in the Earth's hot, dark interior. Tremendous temperatures and pressures forced the carbon atoms there to link up in a flawless, three-dimensional lattice that would prove incredibly strong and equally effective at bending and bouncing light. The result was a crystal — a gem in the rough that, once cut and polished, would dazzle with unmatched radiance.

Yet getting those stones up to the surface has required an enormous — and sometimes bloody — effort. The environmental impact of diamond mines is so sprawling that it can be seen from space. The humanitarian cost of some gems is also staggering: children forced to work in mines, “blood diamonds” sold to finance wars. The Kimberley Process, which certifies diamonds as “conflict free,” was established in 2003 to stem the flow of these stones into the global market."

"Traditional diamond producers say only a small fraction of diamonds are suspect these days because of steps they've taken to ensure that mines are socially and environmentally responsible. They push back against the appeal of lab-grown stones, suggesting the man-made versions aren't on par with those dug out of the ground. The most recent ad campaign from the Diamond Producers Association, which features hipster couples frolicking amid gorgeous nature scenes, is called “Real is Rare.”

Their argument is unspoken but clear: No one should propose to a sweetheart with a gem that was made in some drab office park."

"Scientists have been creating diamonds since the 1950s, mimicking the conditions deep within the Earth by heating carbon to extreme temperatures while squeezing it in a hydraulic press. But it took them several decades more to cultivate large gem-quality stones. These were still not as large or as clear as the best traditional diamonds, and most were colored yellow or brown from the nitrogen required to stabilize the growing process. Still, the traditional diamond companies were on edge.
“Unless they can be detected,” a Belgian diamond dealer told Wired in 2003, “these stones will bankrupt the industry.”

Today, nearly a dozen companies worldwide produce diamonds that are all but indistinguishable from mined stones"

"Sales of lab-grown stones make up about 1 percent of the global commercial diamond market, but a 2016 report from investment firm Morgan Stanley suggested that proportion could jump to 7.5 percent by the end of the decade. In one unlikely scenario, analysts said, lab diamonds might become so ubiquitous that the entire traditional market collapses.

After all, that market depends on sentiment and scarcity. The combination is what made De Beers's famous “a diamond is forever” campaign so potent. It turned diamonds into the ultimate symbol of eternal love, stones that were to be treasured and never — perish the thought — resold. The genius strategy has helped to ensure diamond companies control supply.

But lab-grown jewels shatter the illusion. They can be made on demand, in a matter of weeks, and they cost an estimated 10 percent to 40 percent less than a gem that comes out of the ground. Technology being what it is, it's likely they'll get even cheaper."

Here is the additional link:

De Beers – Rulers of the Diamond Industry:The Rise and Fall of a Monopoly by William Yu of The University of California at Berkeley

Thursday, February 16, 2017

San Antonio cracks top 25 on U.S. News and World Report's "Best Places to Live"

Click here to read the article. Excerpts:
"San Antonio is considered the 23rd best place to live in the United States, according to U.S. News and World Report.

The Alamo City cracked the top 25 in the magazine's 2017 edition of its Best Places to Live in the U.S. list, which ranks major metro areas on a number of factors including unemployment, annual household income, cost of living, education, health care and migration.

The magazine said the nation's seventh-largest city is "as comfortable as an old pair of jeans. It offers big-city amenities and world-renowned attractions coupled with a relaxed and inviting atmosphere." It also said that San Antonio residents benefit from living in a destination city in that they have year-round access to attractions such as Six Flags Fiesta Texas and SeaWorld San Antonio, while also being complimentary of its arts and culture, citing the Majestic Theater, the Tobin Center for the Performing Arts and the McNay Art Museum, along with the Alamo and the rest of the historic Spanish missions. The report on San Antonio also noted that the missions have been designated a World Heritage Site by UNESCO."

"Here are the top 10 cities on this year's list:
  1. Austin
  2. Denver
  3. San Jose, California
  4. Washington, D.C.
  5. Fayetteville, Arkansas
  6. Seattle
  7. Raleigh-Durham, North Carolina
  8. Boston
  9. Des Moines, Iowa
  10. Salt Lake City"
I'm usually skeptical of any "best places" lists because if those places are so great, more people will move there, driving up the cost of living. Then it might not be such a great place.

Suppose that San Francisco is 6 times better to live in than Omaha, Nebraska (as of 2015). That is about how many times higher the median home price is in San Francisco. There is definitely more to do and more great sights in San Francisco, but it costs alot more to live there.

If SF were so great, everyone would leave Omaha and head to SF. But they don't. This is where  the "Indifference Principle"comes in.

If people really believe that SF is better many of them go there, but things won't be very fun due to the crowds (which reminds me of something that Yogi Berra said about a restaurant: "nobody goes there anymore, it's too crowded").

Prices of everything will be bid up. This also illustrates what economist Steven Landsburg calls the "Indifference Principle." "Except when people have unusual tastes or unusual talents, all activities must be equally desirable."

This applies to SF. Once everyone sees it as a good deal or great place, they start going there. Only people with unusual tastes will really enjoy it. That is, you will have to like what that SF has to offer alot more than the average person or the crowds and congestion and high prices will erode your enjoyment. It won't be any better than anywhere else to live. Other places will be just as desirable.

If home prices were only twice as high in SF, then lots of people will move there because it is such a great place. But then that drives up the home prices and eventually there is no advantage to moving to SF. All of its extra benefits are eaten up in higher costs of living. 

Friday, February 10, 2017

A Special Valentine's Message On Romantic Love

The first one is Researchers at AAAS Annual Meeting Explore the Science of Kissing. The following quote gives you an idea of what it is all about: "Kissing, it turns out, unleashes chemicals that ease stress hormones in both sexes and encourage bonding in men, though not so much in women." I guess economists call this "interdependent utility functions." Meaning that what brings one person pleasure brings brings the other person pleasure, and vice-versa.

The other is Cocoa Prices Create Chocolate Dilemma. The article opens with "Soaring cocoa prices are creating a Valentine's Day dilemma for chocolate makers. They don't want to raise retail prices when recession-weary consumers are trying to limit their spending." The problem is crop diseases in Ivory Coast and Ghana. You might need to be a WSJ subscriber to read the whole article.

Here is a new article from yesterday's San Antonio Express-News (2-13-2011). Romance in bloom at workplace: Survey indicates 59% have taken the risk-filled leap. It seems like many people admit to having a romance at work and/or meeting their spouse at work. So what starts out as economic activity leads to some other needs being met.

Now the economic definition of romantic love.

 Abstract: "Romantic love is characterized by a preoccupation with a deliberately restricted set of perceived characteristics in the love object which are viewed as means to some ideal ends. In the process of selecting the set of perceived characteristics and the process of determining the ideal ends, there is also a systematic failure to assess the accuracy of the perceived characteristics and the feasibility of achieving the ideal ends given the selected set of means and other pre-existing ends.

The study of romantic love can provide insight into the general process of introducing novelty into a system of interacting variables. Novelty, however, is functional only in an open system characterized by uncertainty where the variables have not all been functionally looped and system slacks are readily available to accommodate new things. In a closed system where all the objective functions and variables must be compatible to achieve stability and viability, adjustments in the value of some variables through romantic idealization may be dysfunctional if they represent merely residual responses to the creative combination of the variables in the open sub-system."

The author was K. K. Fung of the Department of Economics, Memphis State University, Memphis. It was from a journal article in 1979. More info on it is at this link. The entire article, which is not too long, can be found at this link.

Then there was this related article: Love really is blind, U.S. study finds. Here is an exerpt:

"Love really is blind, at least when it comes to looking at others, U.S. researchers reported on Tuesday.

College students who reported they were in love were less likely to take careful notice of other attractive men or women, the team at the University of California Los Angeles and dating Web site eHarmony found.

"Feeling love for your romantic partner appears to make everybody else less attractive, and the emotion appears to work in very specific ways in enabling you to push thoughts of that tempting other out of your mind," said Gian Gonzaga of eHarmony, whose study is published in the journal Evolution and Human Behavior.

"It's almost like love puts blinders on people," added Martie Haselton, an associate professor of psychology and communication studies at UCLA."
More links:

How to Be a Better Valentine, Through Economics by economist Paul Oyer.

Here’s what science says is the secret ingredient to making your love spark 

Can Giving Up Money And Material Things Lead To More Love?

What Do Men In China Need To Get A Bride?

Adam Smith, Marriage Counselor

A Special Valentine's Message On Romantic Love

Can You Put A Price Tag On Love?

Do Opposites Attract? Not Usually, Except Maybe When It Comes To Money

Return of the Love Headhunters

eHarmony To Provide Personal Counselors To Help You Find Mr. Or Ms. Right

Economist Paul Zak, aka Dr. Love (he studies the brain with "neuroeconomics")

This is your brain on love   (brain scans and biology seem to confirm the economic definition given above)

Dollars & Sex: The Blog of Economist Marina Adshade

Do Women Really Value Income over Looks in a Mate? by Marina Adshade

Friday, February 03, 2017

The percentage of 25-54 year-olds employed was unchanged in January

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers. The lower unemployment rate can be misleading in this case. People dropping out of the labor force might indicate a weak labor market.

We could look at the employment to population ratio instead, since that includes those not in the labor force. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading. It would not necessarily mean the labor market is weak.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work)

The percentage of 25-54 year-olds employed is 78.2% for January. It was also 78.2% in December. It is still below the 79.7% in December 2007 when the recession started. . Click here to see the BLS data. The unemployment rate was 4.8% in January. Click here to go to that data.

Here is the timeline graph of the percentage of 25-54 year-olds employed since 2007. Notice how we had been rising before 2016 but it seems to be flattening out.


Here it is going all the way back to 1948

Friday, January 27, 2017

The Dalai Lama Says It Is Sometimes OK To Be Selfish

This is mostly a post from November, 2013. But there was another article about something similar involving the Dalai Lama this week. So I have a bit about that at the end of this post.

And of course, Adam Smith said when people act selfishly they are led, as if by an invisible hand, to make society better off.

So when might it be OK to be selfish according to his holiness? When caring for others.

Wait, how can that be selfish? Or is this some kind of Zen riddle like what is the sound of one hand clapping? No, it's biology and evolution. See Lending a hand does a body good by Jessica Belasco, from the San Antonio Express-News, 10-25-2013.

She talked to Dr. James R. Doty, a neurosurgeon at the Stanford University School of Medicine and founder of Stanford's Center for Compassion and Altruism Research and Education. Excerpts:

"Practicing compassion — recognizing someone else is suffering and wanting to help relieve that suffering — just might be as important for health as exercise or a healthful diet, some scientists believe.

When we respond to another person's needs, our body responds in turn:

We become relaxed and calm.
Our blood pressure goes down.
Our stress level goes down.

Practicing compassion is associated with lengthened telomeres, the DNA that protects the ends of your chromosomes and is a marker of longevity.

To understand why humans are hard-wired for compassion, Doty said, just look at human evolution: Caring for others was essential to the survival of the species. Humans developed powerful neuropathways associated with nurturing and bonding with their offspring as motivation to care for them in a hostile environment; otherwise their genes could not be passed on. The same was true beyond the nuclear family when humans formed hunter/gatherer tribes.

A few hundred millennia later, our need for compassion remains strong. We may not be facing predators as our ancestors did, but frequent low-level stressors — work deadlines, traffic noise, our cellphone buzzing with texts — keep our fight-or-flight response continually engaged. That releases stress hormones, which raises the risk of disease.

When we're responding to others' needs, though, we engage the “parasympathetic nervous system,” relaxing us, Doty said. Stress hormones decrease, and the immune system is boosted. In fact, that occurs even if we just think about performing a good act for someone.

That's why intervening when someone needs help — whether in the form of a hug, reassurance, financial help or something else — has a powerful impact not just on the person being helped but on the helper.

Studies also have shown that volunteering, which is a way to practice compassion, helps increase longevity — but with an important exception. Study subjects who said they were volunteering to impress somebody or for some other benefit, not because they authentically wanted to help others, didn't enjoy the same benefit."
Adam Smith wrote a book called The Theory of Moral Sentiments. One point he made there was that we are able to sympathize with other people by trying imagine what they are going through (and I wonder if we need to be good storytellers to be able to do that). Neuroeconomist Paul Zak has been studying how the hormone oxytocin plays a role in making us feel good when we have empathy for others (beware: Zak is a big hugger). See an earlier post Adam Smith vs. Bart Simpson for more details.

There is an interesting book called Paleopoetics: The Evolution of the Preliterate Imagination. It relates storytelling to evolution.

Click here to go the Amazon listing. It is by Christopher Collins, professor emeritus of English at New York University. Here is the description:
"Christopher Collins introduces an exciting new field of research traversing evolutionary biology, anthropology, archaeology, cognitive psychology, linguistics, neuroscience, and literary study. Paleopoetics maps the selective processes that originally shaped the human genus millions of years ago and prepared the human brain to play, imagine, empathize, and engage in fictive thought as mediated by language. A manifestation of the "cognitive turn" in the humanities, Paleopoetics calls for a broader, more integrated interpretation of the reading experience, one that restores our connection to the ancient methods of thought production still resonating within us.

Speaking with authority on the scientific aspects of cognitive poetics, Collins proposes reading literature using cognitive skills that predate language and writing. These include the brain's capacity to perceive the visible world, store its images, and retrieve them later to form simulated mental events. Long before humans could share stories through speech, they perceived, remembered, and imagined their own inner narratives. Drawing on a wide range of evidence, Collins builds an evolutionary bridge between humans' development of sensorimotor skills and their achievement of linguistic cognition, bringing current scientific perspective to such issues as the structure of narrative, the distinction between metaphor and metonymy, the relation of rhetoric to poetics, the relevance of performance theory to reading, the difference between orality and writing, and the nature of play and imagination."
Click here to read a longer description by Collins himself.

Here is the new article from this week The Dalai Lama Explains Why Being Kind to Others is the Secret to Happiness. Excerpt:
"Have you ever wondered why it matters that you care for other people?

It seems commonsense that this is a good way to live life. But there are dominant philosophies today that suggest we need to maximize our own individual self-interest.

This comes from economic theories of capitalism that suggest when people look after their own self-interest, then society is better off.

The Dalai Lama explains why this doesn’t make sense in the beautiful passage below. As he says, it’s an obvious fact that your own sense of wellbeing can be provided through your relationships with others. So it’s best to start cultivating practices of kindness and compassion."
Then the article has a long statement from the Dalai Lama on this philosophy. But some economists might say that you can't run a successful business if you don't care about others and try to learn their wants and desires. Here is what Adam Smith said in The Wealth of Nations
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities, but of their advantages”

Thursday, January 19, 2017

My Spring Semester Has Started

Welcome to any new students. The entries usually have something to do with a basic economic principle that is related to a recent news story. If you want to learn more about me go to Why is college so hard? (you may have to be patient with this site but the article is not long)

If that link is not working try this one

Thursday, January 12, 2017

You Might Have To Swear To Keep That New Job You Just Got

See The Telltale Sign a New Hire Isn’t Fitting In​: Newcomers who stick around and thrive use language styles similar to those of co-workers, researchers say by Joann S. Lublin of the WSJ. Excerpts:
"A team of California researchers" reviewed "10.2 million internal messages" to find this out.

"individuals with low cultural fit had a four-times-higher risk of getting fired after three years.

Researchers scrutinized 64 categories of language style, including curses, expressions of positive emotion and the use of concrete imagery.

Salespeople at the tech firm frequently swore, for instance. New colleagues eager to fit in “had to swear a fair amount in their email,” recalled Sameer B. Srivastava, an assistant management professor at University of California-Berkeley’s Haas School of Business.

By contrast, the study reported, fired recruits “fail to accommodate their colleagues linguistically from the moment they join the organization.’’"

Wednesday, January 11, 2017

How Supply And Demand Have Affected Beef Prices Recently

See Beef prices down — but still lagging cattle price drop. There have been multiple forces over the last couple of years causing supply and demand to shift in both directions at different times. Excerpts:

"With the perfect storm of drought and disease-caused scarcity of not only beef but also chicken and pork now over and foreign demand tempered by the high dollar, U.S. consumers have seen their dollar stretch further at the meat case than two years ago, when beef prices were at record highs."

So with drought and disease over, supply increases pushing price down. The high dollar reduces foreign demand, which also lowers price.

"Although cattle prices may have dropped 40 percent over 2016, consumers haven’t seen that kind of price drop as retailers remain in holdout mode and market forces such as competition with other proteins and global demand remain volatile."

If beef producers are not sure what the competition will look like, they might be betting it is better not to lower prices any more. Same thing with foreign demand. If they think that might come back, then there is no reason to lower prices any more than they have.

"consumers can expect about a 10 percent reduction from 2014 highs of about $6 per pound for beef, but other animal proteins such as chicken or pork still might seem like relative bargains."

"“Pork and chicken kind of ramped up their production very quickly, and then basically we saw a historic downturn in the cattle market,”"

So if supply of pork and chicken go up, then that lowers their prices. Then beef producers have to cut theirs or not raise them.

"“Overall, the retail price of beef in general is currently lower than the price last year at this time,” H-E-B spokeswoman Dya Campos said in an email. “Consumers will see lower prices on beef items, particularly grinds where we have on average 50 cents lower retail prices than last year.”"

"“Although food commodity costs have declined in recent months, certain chain restaurants continue to face a challenging environment, which includes increases in labor costs around the country,” Rob Green, executive director of the National Council of Chain Restaurants, said in an email. “Competitive pressures remain as well, as segments of the industry are facing headwinds resulting from an uneven economic recovery and increasing competition for a consumer’s food dollar.”"

Higher labor costs reduce supply which in turn raises prices. So that might be offsetting some of the price decreases.

"producers,... are ... hoping the new administration will cut trade pacts that are more profitable than the ones Trump criticized on the campaign trail. For example, import tariffs with Japan are now at about 38 percent.

"“As these developing countries, as their economy improves, they all want beef on their plate"

If foreign demand can come back up, that would raise prices

"By way of review, it was weather that caused the 2014 price shock. Prolonged drought had caused pastures to wither across a wide swath of U.S. cattle country, and ranchers were forced to move cattle to whatever green pastures they could find or quickly liquidate their herd."

"The end of the drought led ranchers to start rebuilding. Since it takes roughly two years from pregnant cow to feedlot fattening, no one in the industry was surprised to see supplies rebound by the close of 2016."

So the bad weather reduced supply that caused prices to rise. But then supply increased as the drought ended, helping to lower prices.

"At the same time ranchers were rebuilding, chicken and pork producers were dealing with problems such as porcine epidemic diarrhea and the Midwestern bird flu epidemic that wiped out their stocks."

So if pork and chicken producers saw disease problems, that reduces their supply and raises price. Then beef producers don't have to lower theirs.

"“Pork, once they got all their issues straightened out, they’re able to turn around production in about three months. Chicken can turn their production in around 10, 11 weeks. … All of a sudden we just had these proteins coming in, and I think when you throw that combination together, we just saw prices decline,”"

But then supply increased after the diseases were gone from pork and chicken. So that increases supply and lowers price. Then beef producers have pressure to lower theirs.

"Cattle dropped $34 per hundredweight during 2015, selling for $132 per hundredweight last January. Feedlot operators that were losing $300 to $400 a head on expectations of continued high returns started paying less in 2016, Texas A&M AgriLife Extension Economist Jason Johnson said. That brought 2016’s average down to $124. For 2017, the projections are expected to drop a bit more, to an average of $121."

Tuesday, January 10, 2017

New Book On W. Edwards Deming Mentions My Research

The book is called The Symphony of Profound Knowledge: W. Edwards Deming's Score for Leading, Performing, and Living in Concert by Edward Martin Baker. Deming was a world renown management expert.

It discusses my article "The Calling of the Entrepreneur" on how entrepreneurs are like heroes in mythology. One thing the book says is "Morong's interpretation of the hero myth aligns with Deming's view that joy in work comes from intrinsic motivation, not from the compulsion of extrinsic forces."

A longer version of my article is called The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?

Sunday, January 08, 2017

The Noise-to-signal Ratio as a Metaphor for the Deadweight Loss of Taxes

That is the name of an article of mine that was posted at the "Library of Economics and Liberty" site. Click here to read it. It is an elaboration and expansion on a letter to the editor of the WSJ I had published in 2007. Deadweight loss is a way for economists to show inefficiency of things like taxes and negative externalities. Deadweight loss increases at an increasing rate with taxes, similar to what I said in my letter.

Click here to go to my letter. Or you can read it here.
"Stephen Moore did a great job explaining how complicated our tax code is and how high taxes have gotten relative to what was originally promised in 1913. One other way to see the insidiousness of taxes is to realize that they are just as much the "noise" in the economy as prices are the "signals." The income you get paid is the price for your services and therefore signals the value of those services. But taxes reduce the clarity of that signal (hence, they are noise) by reducing how much of your pay you actually get to keep. As taxes increase, the noise-to-signal ratio in the economy increases even more, meaning distortions, and the misallocation of resources they cause increases disproportionately. For example, if the income tax rate is 10%, you keep 90% of your income. The noise-to-signal ratio is .111 (or .1/.9). But if the tax rate goes up by .10, or to 20%, the noise-to-signal ratio goes up even more, by .15 to .25 since you keep 80% of your income. The .25 comes from .20/.80 equaling .25. Another .10 increase in the tax rate increases the noise-to-signal ratio by .179 from .25 to .429. Then going from a 30% tax rate to a 40% tax rate makes it go up by .238, from .429 to .667. Every tax increase causes increasing damage to the economy's ability to efficiently allocate resources."

Saturday, January 07, 2017

How Parents Might Get Their Kids To Eat Vegetables

Pay them. As economists like to keep saying, incentives matter. See Here’s Why You Should Pay Your Children to Eat Their Vegetables: Study finds short-term cash incentives yield more-healthful eating habits in the long term by Beckie Strum of the WSJ. Excerpt:
"The strategy not only works in the short term, but can create healthful eating habits in children in the long run if the little bribe is carried out consistently for several weeks, according to a study published earlier this year in the Journal of Health Economics.

“As a parent, imagine that there’s something to do that might be worth my effort, and I get the long-term benefit,” says Joseph Price, associate professor of economics at Brigham Young University. He co-wrote the paper with George Loewenstein, professor of economics and psychology at Carnegie Mellon University, and Kevin Volpp, professor of medicine at the University of Pennsylvania.

For a year and a half, the researchers carried out a study of 8,000 children in first through sixth grade at 40 elementary schools to test whether short-run incentives could create better, and lasting, eating habits in children.

At lunchtime, students who ate at least one serving of fruit or vegetable, such as an apple, fresh peaches, pineapple, side salad or a banana, received a 25-cent token that could be redeemed at the school’s store, carnival or book fair.

The researchers saw an immediate spike in consumption, Dr. Price says. “These small incentives produced a dramatic increase in fruit and vegetable consumption during the incentive period,” the researchers wrote. “This change in behavior was sustained.”

Two months after the incentives ended, many more students than before the program started were still eating a fruit or vegetable at lunch. For schools that provided the 25-cent incentive for three weeks, 21% more children were eating at least one serving of fruit or vegetable at lunch than before."

Friday, January 06, 2017

What Brings More Happiness, More Time Or More Money?

Ben Franklin said that time is money, implying that one can be traded for another. You could work a part-time job in addition to your full-time job, for example. You would have more money but less free time.

More money allows you to purchase more goods and services. But if you have to work more, you have less time to enjoy the additional goods you now own. So each of us has to find the mix of free time (leisure time) and goods that makes us happiest.

Anyway, the NY Times had an interesting article on this a few months ago. See What Should You Choose: Time or Money? by HAL E. HERSHFIELD and CASSIE MOGILNER HOLMES. Hal E. Hershfield is an assistant professor and Cassie Mogilner Holmes an associate professor at the Anderson School of Management at the University of California, Los Angeles.

Excerpts:
"we found that most people valued money more than time. Sixty-four percent of the 4,415 people we asked in five surveys chose money."

"Is money the right choice? We had also asked our survey respondents to report their level of happiness and life satisfaction. We found that the people who chose time were on average statistically happier and more satisfied with life than the people who chose money.

So money may turn out to be the wrong choice.

But maybe this result simply shows that the people who chose money are more financially constrained and therefore less happy. To check this, we also asked respondents to report their annual household income along with the number of hours they work each week (to measure how much time they have).

We found that even when we held constant the amount of leisure time and money respondents had (as well as their age, gender, marital status, parental status and the extent to which they valued material possessions), the people who chose time over money were still happier. So if we were to take two people who were otherwise the same, the one who chose time over money would be happier than the one who chose money over time."

"more income is positively related to happiness up to a certain point ($75,000, in the United States) and that life satisfaction continues to increase with income beyond that point."

"The people in our studies who chose time over money thought about the resources differently and had different intentions for how they would spend the time or money gained. Unlike those who chose money, who were more likely to be fixated on not having enough, people who chose time focused more on how they would spend it, planning to “spend” on wants rather than needs (e.g., cultivating a hobby versus completing chores at home) and on other people rather than themselves"

Thursday, January 05, 2017

The San Antonio Express-News Printed An Article By Me On How Well The Economy Is Doing

See Forget the numbers — economy is sluggish. The print version has a different title ("Look to past to gauge the economy")

Re: “President-elect is inheriting a great economy,” Catherine Rampell, Other Views, Dec. 30:

I think Catherine Rampell overestimates how well the economy is doing. Rampell stated, “Stocks have reached all-time highs, with the Dow Jones industrial average on the cusp of 20,000.”

It is true that the Dow grew 13.4 percent over the last year and is in record territory. But it was down about 2 percent in 2015.

The important question is, how well is it doing in the long run? Let’s compare 2016 to 1999, when the Dow also was pushing toward record heights.
The Dow grew about 3.2 percent compounded annually from 1999 to 2016. That beat the average increase in the consumer price index, which grew about 2.1 percent annually, by only about 1 percentage point.

But compare that to the previous 17 years, when the Dow increased about 15 percent per year. The CPI increased about 3.3 percent per year in that period.

So, yes, the Dow is close to all-time highs now, but its recent growth rates are not great compared to inflation. If it had grown just 5 percent per year since 1999 (still sluggish), it would be about 26,350 instead of just 19,942.16.

Rampell also said, “The most recent jobs report shows the unemployment rate down to 4.6 percent. It hasn’t been this low since August 2007, several months before the Great Recession began.”

Everyone knows the unemployment rate can be misleading because it declines if people drop out of the labor force.

The labor force participation rate averaged about 59.7 percent in the first 11 months of last year. It was 63 percent in 2007, when the recession began, was above 62 percent every year back to 1994, and has been below 60 percent every year since 2009.

This comparison might be unfair since so many baby boomers are retiring. But what if we look at 25- to 54-year-olds only, those in their prime working years? The percentage of them employed this year has been 77.9 percent. It was 79.9 percent in 2007 and less than 76 percent every year from 2009 to 2013. It was above 80 percent every year from 1996 to 2001.

Comparing 2016 to 2007 on this measure and assuming, say, 100 million 25- to 54-year-olds, that is 2 million not employed. That’s not great.

The recovery since the recession has been week. Economist Robert Barro said that “on average, during a recovery, an economy recoups about half the GDP lost during the downturn.”

What do the numbers say, according to Barro? “The growth rate of U.S. per capita GDP from 2009 to 2011 should have been around 3 percent per year, rather than the 1.5 percent that materialized.”

What about more recently? Barro says, “The growth rate of GDP per worker from 2010-15 was 0.5 percent per year, compared with 1.5 percent from 1949 to 2009.” Again, recent performance has not been great compared to other periods.

One final concern is for the future. Here, also, things could be better because we used to see a higher rate of growth of small business.

Jeffrey Sparshott of The Wall Street Journal reported in October that “the share of private firms less than a year old has dropped from more than 12 percent during much of the 1980s to only about 8 percent since 2010. In 2014, the most recent year of data, the startup rate was the second-lowest on record, after 2010.”

To say an economy is great, it has to be compared to past performance. Unfortunately, we have been falling a little short.

Tuesday, January 03, 2017

Mark Twain On Labor Markets And How Wages Should Be Decided-By Government Fiat Or By Markets?

This is another in a series of posts about A Connecticut Yankee in King Arthur’s Court. This is also from chapter 33 "SIXTH CENTURY POLITICAL ECONOMY." The time traveler, Hank Martin, has discussion with Dowley. Twain seems to think that the government should not dictate wages or who works for whom or for how long. A seemingly chaotic idea in the 6th century, yet law and sense will still prevail.
"Brother Dowley, who is it that determines, every spring, what the particular wage of each kind of mechanic, laborer, and servant shall be for that year?"

"Sometimes the courts, sometimes the town council; but most of all, the magistrate. Ye may say, in general terms, it is the magistrate that fixes the wages."

"Doesn't ask any of those poor devils to _help_ him fix their wages for them, does he?"

"Hm! That _were_ an idea! The master that's to pay him the money is the one that's rightly concerned in that matter, ye will notice."

"Yes--but I thought the other man might have some little trifle at stake in it, too; and even his wife and children, poor creatures. The masters are these: nobles, rich men, the prosperous generally. These few, who do no work, determine what pay the vast hive shall have who _do_ work. You see? They're a 'combine'--a trade union, to coin a new phrase--who band themselves together to force their lowly brother to take what they choose to give. Thirteen hundred years hence--so says the unwritten law--the 'combine' will be the other way, and then how these fine people's posterity will fume and fret and grit their teeth over the insolent tyranny of trade unions! Yes, indeed! the magistrate will tranquilly arrange the wages from now clear away down into the nineteenth century; and then all of a sudden the wage-earner will consider that a couple of thousand years or so is enough of this one-sided sort of thing; and he will rise up and take a hand in fixing his wages himself. Ah, he will have a long and bitter account of wrong and humiliation to settle."

"Do ye believe--"

"That he actually will help to fix his own wages? Yes, indeed. And he will be strong and able, then."

"Brave times, brave times, of a truth!" sneered the prosperous smith.

"Oh,--and there's another detail. In that day, a master may hire a man for only just one day, or one week, or one month at a time, if he wants to."

"What?"

"It's true. Moreover, a magistrate won't be able to force a man to work for a master a whole year on a stretch whether the man wants to or not."

"Will there be _no_ law or sense in that day?"

"Both of them, Dowley. In that day a man will be his own property, not the property of magistrate and master. And he can leave town whenever he wants to, if the wages don't suit him!--and they can't put him in the pillory for it."

 "Perdition catch such an age!" shouted Dowley, in strong indignation. "An age of dogs, an age barren of reverence for superiors and respect for authority!"

Monday, January 02, 2017

Chapter 33 Of Mark Twain's A Connecticut Yankee in King Arthur’s Court Is Titled "SIXTH CENTURY POLITICAL ECONOMY" And Deals With "Money Illusion"

This is another of a recent series of posts on the book. Economist Eric Crampton had a great post on this a few years ago at Money Illusion in King Arthur's Court. Money illusion basically means that if prices go up 5% and you get a 5% raise, you think you are better off (you are actually no better off).

Wikipedia has a good summary of what it means. In the book, Hank Martin (the time traveler) tries to explain that although you might get paid twice as much as people in another region, if the prices you pay for goods are more than double, you are worse off (the audience wasn't buying it). Here is Crampton's post from 2013:
"Mark Twain channels the frustration of thousands of future Econ 104 lecturers confounded by popular unwillingness to note the difference between the nominal and the real.

Twain's Connecticut Yankee tries to explain to some local freemen that the combination of high wages and high prices in their part of the country, still protected by tariffs, makes them worse off than the combination of lower wages and lower prices in his part of the country, where they have been easing towards free trade.*

After explaining, in what he thought was a crusher, that wages were twice as high in the protected region but that prices were more than twice as high, his audience still preferred higher nominal wages.

"Wait!  Now, you see, the thing is very simple; this time you'll understand it. For instance, it takes your woman 42 days to earn her gown, at 2 mills a day—7 weeks' work; but ours earns hers in forty days—two days short of 7 weeks. Your woman has a gown, and her whole seven weeks wages are gone; ours has a gown, and two days' wages left, to buy something else with.  There—now you understand it!"
He looked—well, he merely looked dubious, it's the most I can say; so did the others. I waited—to let the thing work. Dowley spoke at last—and betrayed the fact that he actually hadn't gotten away from his rooted and grounded superstitions yet. He said, with a trifle of hesitancy:
"But—but—ye cannot fail to grant that two mills a day is better than one."
Shucks! Well, of course, I hated to give it up. So I chanced another flyer:
"Let us suppose a case. Suppose one of your journeymen goes out and buys the following articles:
  "1 pound of salt; 1 dozen eggs; 1 dozen pints of beer; 1 bushel of wheat; 1 tow-linen suit;    5 pounds of beef; 5 pounds of mutton.
"The lot will cost him 32 cents. It takes him 32 working days to earn the money—5 weeks and 2 days. Let him come to us and work 32 days at half the wages; he can buy all those things for a shade under 14 1/2 cents; they will cost him a shade under 29 days' work, and he will have about half a week's wages over. Carry it through the year; he would save nearly a week's wages every two months, your man nothing; thus saving five or six weeks' wages in a year, your man not a cent. Now I reckon you understand that 'high wages' and 'low wages' are phrases that don't mean anything in the world until you find out which of them will buy the most!"
It was a crusher.
But, alas! it didn't crush. No, I had to give it up. What those people valued was high wages; it didn't seem to be a matter of any consequence to them whether the high wages would buy anything or not. They stood for "protection," and swore by it, which was reasonable enough, because interested parties had gulled them into the notion that it was protection which had created their high wages. I proved to them that in a quarter of a century their wages had advanced but 30 per cent., while the cost of living had gone up 100; and that with us, in a shorter time, wages had advanced 40 per cent. while the cost of living had gone steadily down. But it didn't do any good. Nothing could unseat their strange beliefs.
Well, I was smarting under a sense of defeat. Undeserved defeat, but what of that? That didn't soften the smart any. And to think of the circumstances! the first statesman of the age, the capablest man, the best-informed man in the entire world, the loftiest uncrowned head that had moved through the clouds of any political firmament for centuries, sitting here apparently defeated in argument by an ignorant country blacksmith! And I could see that those others were sorry for me—which made me blush till I could smell my whiskers scorching.
You'd think things would be better a few centuries later...


* It would be a fun exam question to have students lay out the conditions under which Twain's stylised facts could be true. The Boss has instituted a common coinage with lots of small change, so the big problem of small change doesn't apply. He also has been, region by region, easing back tariff protections and moving towards free trade. In Region 1, free trade is almost entirely in place; in Region 2, liberalisation hasn't started. Wages across all sectors are lower in Region 1, but prices are sufficiently lower to make real wages higher. Region 2 has higher nominal wages across the board. It is illegal under feudal structures for workers to move across regions, and it's close to illegal for them to change professions (though it seems to depend on the profession). So labour markets should only in the long term through Malthusean effects: sectors with higher real wages see higher population growth while sectors with lower real wages see starvation and decline.

I can, in that set up, see large wage effects in the import-competing sector under liberalisation. But Twain also has the wages of mechanics being lower. In the high tariff region, a master bailiff, master hind, carter, shepherd and swineherd earn 50 milrays a day: twice what they earn in the low tariff region (a milray is a hundredth of a cent). In the high tariff region, mechanics, carpenters, dauber, masons, painters, blacksmiths, and wheelwrights get a full cent a day; in the low tariff region, half. A woman labouring on a farm earns two mills a day (10 milrays, a tenth of a cent) in the high tariff region and half that in the low tariff region. So what in this counts as an import-competing sector? I'd say the shepherd to the extent that the sheep's main product is traded wool rather than non-traded meat (food preservation not yet in a state to allow meat transport across regions); the blacksmith to the extent that he makes wrought iron works for sale rather than repairs to farmers' carts; and farm labour to the extent that they work on transportable wheat and grain rather than livestock.

But Twain allows no variation in the ratio of wages between the high and low tariff regions across sectors. Maybe transportation costs in all of those sectors prevent those workers' product from moving anyway, but Twain has meat being less than half the price in the free trade region (either salt meat moves or forage does); eggs at less than half the price; wheat at 4/9ths the price; clothing at 6/13th to 1/2 the price. He also has beer being cheaper in the free trade region. And it isn't like wages in the non-traded sector are bid down by exit from the traded sector - labour mobility across sectors seems pretty limited. Maybe there's an auxillary unstated assumption that the Lords in the trade experiment regions are commanding that labourers make the appropriate movements across sectors such that we get to the observed equilibrium."