Thursday, January 21, 2021

Another 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.

Here is something I wrote for The Ranger (the school paper of San Antonio College where I used to teach) back in 2011 titled "Why is college so hard?"

Students might wonder why college, and SAC in particular, is hard. This might sound trite, but I think the faculty at SAC want students to achieve success in life and that means that classes have to be hard if you are going to learn and understand the concepts which provide a foundation for that success.

I think my own experience as a community college student over 30 years ago helps me understand this. My teachers took their subjects seriously and maintained high academic standards. They got me excited because of the expertise they brought to their teaching. Now that I have been a teacher for over 20 years, I can see how important that was.

After finishing my A.S. degree at Moraine Valley Community College (MVCC) in Palos Hills, Ill., I transferred to and graduated from the University of Chicago with a degree in economics. But it was my community college teachers prepared me to handle the rigors of the U. of C.

Later, I got a Ph. D. in economics from Washington State University. But I've accomplished some other things I never could have dreamed of when I began taking classes at MVCC and I think my teachers there paved the way for me.

In 2005, I had a letter to the editor published in The Wall Street Journal (I have now had five published there, three in The New York Times and three op-eds in the Express-News). This one was several paragraphs long, nearly as long as some of their op-ed pieces. It was the first letter in the letters section that day, and I got the top headline. It dealt with NAFTA and trade agreements.

As nice as that was, I got a big shock a few days later when I got a letter in the mail, on official stationery, from Richard Fisher, the president of the Federal Reserve Bank of Dallas. He complimented me on my letter and said it was superb. I had never even met him or ever tried to contact him before.

Wow. I graduated from high school with a 2.7 GPA, and when I started at MVCC, I had no idea what I would do with my life. If you had told me then that someday I would have a letter in the WSJ and get that kind of compliment, I doubt I would have believed you.

Then an adjunct professor at the business school at the University of Chicago contacted me a few years ago and wanted to know if it was OK for her to assign a paper I wrote on entrepreneurs for a class she was teaching on innovation. (Of course, I said yes).

That professor was Nancy Tennant Snyder. She has a Ph. D. from George Washington University and is a vice president at Whirlpool. Business Week magazine has called her one of the leading innovators in the world. She also cited two of my papers in one of her books.

Then I got an email from John Joseph, a professor at the University of Edinburgh. He is an expert on language and politics. He wanted to know if he could include an essay I wrote in a four-volume work he was planning. I again said yes and it was published last year (and it is called Language and Politics).

It is a collection of essays. Mine is titled "The Intersection of Economic Signals and Mythic Symbols." Other contributors include Jeremy Bentham and George Orwell. When I was a community college student, I never imagined being included along with the likes of those great thinkers.

The co-authors of the book The Economics of Public Issues have thanked me in each of the last three editions for my helpful suggestions. Almost all of the people they thank are from big universities. One of the co-authors of this book, Douglass North, is a Nobel Prize winner. Never imagined someone like that would value my input when I started out as a community college student.

Getting such recognition in cases like this gives me a sense of achievement. I know I have made a scholarly contribution to the world. And I want all SAC students to have a chance for this same kind of success (as an academic or any in line of work). I think all SAC faculty do. That is why school is hard, and that is why I'm thankful that my community college teachers were experts who maintained high academic standards.

Monday, January 18, 2021

Financial Rewards for College Students Could Help Curb the Pandemic

A new study suggests ways of structuring payments to persuade even impulsive students to behave more cautiously

By Seema Jayachandran She is an economics professor at Northwestern University. Excerpts:

"There are several ways such programs might work:

  • A university might announce that each week that students test negative, they will be paid $50. Once they tested positive, they would no longer be eligible for rewards.

  • The rewards could be structured as a one-time payment of $700 at the end of a 14-week semester if students test negative every week.

  • In a blend of these two options, students could receive $350 if they stayed negative for the first half of the term, then another $350 for staying negative for the second half.

Higher or lower sums might be preferred. The important thing is to find incentives that motivate as many students as possible in order to protect the broader population.

Rewards programs that pay people to be diligent about their health are already common. Many companies offer employees money if they exercise regularly, and addiction clinics pay people who stay drug-free."

In their study, the economists Shilpa Aggarwal of the Indian School of Business, Rebecca Dizon-Ross of the University of Chicago and Ariel Zucker at Berkeley experimented with an incentive program in India that encouraged diabetic adults to walk at least 10,000 steps a day. They found that several methods were successful in boosting exercise and improving health.

The economists found that an all-or-nothing contract — for example, paying students only if they stayed Covid-negative the whole term — worked especially well for people who hate to sacrifice short-term pleasure. Those are exactly the type of people who might be reckless in their social life and whose risky behavior a college would want to curtail.

The study measured how much each person was willing to sacrifice in the future to avoid a sacrifice today. Some people put a steep discount on whatever happened in the future, whether good or bad. These so-called impatient people want to have fun today and to push off unpleasant activities until later.

The researchers assigned the adults in India to one of two incentive contracts. Under the first, participants earned a reward each day they hit 10,000 steps. Under the second, they earned a reward only if they walked 10,000 steps at least five times in a week.

The researchers found that the second contract — what they call a “time-bundled” incentive — increased exercise more for people who were especially impatient.

It turned out that while it was hard for such people to sacrifice immediate pleasure, it was also true that forgoing pleasure in the future didn’t seem all that bad to them.

The clever feature of “time-bundled” contracts is that they persuade people to do something they dread by tying it to something that seems great. For a college student it might be very appealing to get a lot of money in exchange for a series of low-key Fridays in the future. The attractiveness of the overall bundle can persuade an impatient person to forgo short-term temptations, like going to a party tonight."

Sunday, January 17, 2021

Zombies might return and fighting them is art as well as science

See Zombies Could Stunt the Bank Recovery: Europe’s lockdown-support programs risk creating the kind of festering bad-debt problems that damaged its economy after the financial crisis by Rochelle Toplensky of The WSJ. Excerpts:

"The region’s generous lockdown-support programs and patchwork of insolvency laws could create so-called zombie firms—inefficient companies kept alive by cheap debt. Last month, the European Central Bank said this remains a risk."

"Following both the global financial crisis and the eurozone crisis, nonviable companies in Europe were kept alive by politicians worried about job losses and lenders hesitant to acknowledge bad debts. The zombies lowered markups, net investment and productivity in their markets as well as inflation in the wider economy, according to a recent report from the Federal Bank of New York—problems that have come back to bite their lenders too."

"Pandemic support programs, such as loans and bankruptcy moratoria, aspire to give businesses the time needed to secure their finances and pivot operations to better serve pandemic and post-pandemic customers. Sometimes, though, the support simply provides cheap funds that help unsustainable companies limp on. It is very hard for policy makers to get the timing right on these programs: Rolling back too early could hurt viable businesses, but too late can create zombies."

"New accounting rules aim to recognize loan losses earlier, but these estimates are art as well as science. Payment holidays make it particularly difficult to know who might be in genuine trouble"

I use the book The Economics of Public Issues in my micro classes. Chapter 1 is called "Death by Bureaucrat." It discusses how the Food and Drug Administration can make either a Type I error or a Type II error.

Type I error: The FDA approves a drug before enough testing is done and when people take it, there are harmful side effects.

Type II error: The FDA tests a drug longer than necessary to stay on the safe side. But people might suffer because the drug is not yet available. 80,000 people died waiting for Septra to be approved.

The FDA would usually rather make a Type II error because the public can blame the FDA if a Type I error occurs.

What if we think about government aid to business like a new drug. The passage in red in the article above indicates that the government cannot be sure which way to go: give assistance for too long and create Zombies (which seems like a Type I error because harm is caused by a policy that is too easy) or not long enough and lose good firms (which seems like a Type II error because good firms are not helped because a policy is too strict, like people not getting a drug in time).

Related posts:

Do We Have A Zombie Economy?

Saturday, January 16, 2021

The CPI increased 1.4% in 2020

The 1.4% means that the CPI in December 2020 (260.474) was 1.4% higher than what it was in December 2019 (258.811).

The 260.474 means that what cost $100 in 1982 cost $260.47 in December 2020.

Now the CPI can go up and down during the course of the year and the Bureau of Labor Statistics calculates it for every month. So if it increased every month but then fell quite a bit in December, it might not look like there was much inflation.

They also calculate an average CPI over the twelve months and then compare that to the one for the previous year. That inflation rate for 2020 was 1.2%. Those two figures are usually pretty close to each other, but not always. 

In 2008, the Dec.-Dec. method gives a 0.1% inflation rate while the monthly averaging method was 3.8%. In 2009, those numbers were 2.7% and -0.4%. So they can be pretty far apart.

To see this data (actually going back to 2013), go to Consumer Price Index Data from 1913 to 2021.

See also Prices, and Confusion, Set to Rise as Pandemic Fades: Price gains remain muted, but only because services demand is still depressed by the Covid-19 crisis by Justin Lahart of The WSJ. Excerpts:

"The things that have kept inflation low during the Covid-19 crisis are a lot different than the ones that used to keep it low. A whipsawing of prices when the pandemic passes is something to look out for.

The Labor Department on Wednesday reported that U.S. consumer prices rose 0.4% in December from November, putting them 1.4% above their year earlier level. Core prices, which exclude food and energy items to better capture inflation’s trend, rose 0.1% from November, and were up 1.6% on the year. 

The Federal Reserve’s aim is for 2% inflation, and the consumer price measures it follows run cooler than the Labor Department’s.

Under inflation’s hood, though, there are some big shifts. Prices for food at home—groceries and the like—remain elevated as a result of the pandemic, and were up 3.9% in December from a year earlier. Meanwhile, prices for lodging at hotels and the like were down 11.2%."

"Core goods prices were up 1.7% on the year last month" (excluding food and energy)

"Core services prices were up 1.6%"

Friday, January 15, 2021

Monkeys seem to be selfish and rational

From Marginal Revolution.

"At the Uluwatu temple in Bali, monkeys mean business. The long-tailed macaques who roam the ancient site are infamous for brazenly robbing unsuspecting tourists and clinging on to their possessions until food is offered as ransom payment.

Researchers have found they are also skilled at judging which items their victims value the most and using this information to maximise their profit.

Shrewd macaques prefer to target items that humans are most likely to exchange for food, such as electronics, rather than objects that tourists care less about, such as hairpins or empty camera bags, said Dr Jean-Baptiste Leca, an associate professor in the psychology department at the University of Lethbridge in Canada and lead author of the study.

Mobile phones, wallets and prescription glasses are among the high-value possessions the monkeys aim to steal. “These monkeys have become experts at snatching them from absent-minded tourists who didn’t listen to the temple staff’s recommendations to keep all valuables inside zipped handbags firmly tied around their necks and backs,” said Leca.

After spending more than 273 days filming interactions between the animals and temple visitors, researchers found that the macaques would demand better rewards – such as more food – for higher-valued items.

Bargaining between a monkey robber, tourist and a temple staff member quite often lasted several minutes. The longest wait before an item was returned was 25 minutes, including 17 minutes of negotiation. For lower-valued items, the monkeys were more likely to conclude successful bartering sessions by accepting a lesser reward.

Here is the full story, via David Curran."

Thursday, January 14, 2021

Car makers face ‘chipageddon’

See Ford, Other Auto Makers Cut Output, Idle Workers on Chip Shortage: Sector starts 2021 by idling plants, faces a ‘chipageddon’ with semiconductors in short supply by Ben Foldy of The WSJ. 

It is interesting that the demand increase for other products has affected the car market (see the passage in red below). Excerpt:

"A chip shortage that has disrupted vehicle production in other parts of the globe is reaching U.S. shores, stifling output for major car companies and dimming prospects for a smooth recovery from the pandemic.

Ford Motor Co. is planning to idle a Louisville, Ky., factory for a week starting Monday, because of parts shortages stemming from limited supplies of semiconductors now vital to everything from display screens to transmissions. The move will lead to the temporary layoffs of about 3,900 workers at the plant, which builds two popular SUVs, the Ford Escape and Lincoln Corsair.

Honda Motor Co. , Fiat Chrysler Automobiles NV and others are also wrestling with the shortage, leading them to reduce output on everything from big pickup trucks to compact sedans.

As manufacturers globally try to recoup production lost last spring because of the pandemic, many have been hit with sporadic parts shortages, shipping bottlenecks and other challenges related to the health crisis, such as high absenteeism.

Now, they are also dealing with chip shortages. The problem was first observed at Chinese factories late last year and is spreading to the rest of the world, as demand for electronics has surged during the health crisis, particularly with many people still spending most of their time at home. The global chip industry has struggled to meet demand."

Tuesday, January 12, 2021

Cold Snap Sparks Record Rise in Natural Gas Prices in Asia

Traders are struggling to secure enough vessels to transport LNG from the U.S. Gulf Coast to Asia in time to meet rampant demand 

By Joe Wallace of The WSJ

Good article illustrating supply and demand issues. It seems that an increase in demand and a decrease in supply are raising the price of LNG.


"A blast of cold weather in northeast Asia [the demand increase] and a shortage of ships for transporting gas have sparked a scramble for cargoes of liquefied natural gas, igniting a steep rise in prices [I don't think there is a shortage of ships just fewer ships available which has raised their price which gets passed on to the LNG customers-this is the price of a resource increasing (with shipping being a resource in getting LNG to customers) and that reduces supply. Remember that supply means producing and getting a good to customers-if it is stockpiled somewhere but not where the customers can get it does not count as supply]

Prices for LNG shipped to China, Japan and South Korea, all major importers, have surged from record lows to all-time highs in less than a year. The regional price benchmark assessed by S&P Global Platts rose to $28.221 per million British thermal units on Monday, and has shot up 87% so far in 2021.

LNG is 15 times more expensive than it was when coronavirus hammered demand for oil and gas in the spring of 2020, the nadir of a years long slump in gas prices globally. In some cases, prices paid on the ground for cargoes have exceeded the levels indicated by Platts.

“It is a perfect storm,” said Toby Dunipace, executive director for LNG at London shipbroker Simpson Spence Young. Stores of gas in East Asia were severely depleted after the mercury plunged, he added.

Despite outages for producers in Australia, Norway and elsewhere, there is no global shortage of LNG. The trouble is moving gas to where it is needed [I agree that there is no shortage of LNG-shortage would mean that price is below where supply and demand intersect and that quantity demanded is greater than quantity supplied-this is not the case because price has risen due to the increase in demand and decrease in supply].

Freezing weather in Asia—temperatures plumbed as low as minus 3 degrees Fahrenheit in Beijing last week, a half-century low—is creating more demand for gas, which is burned to generate electricity and warm homes and offices. A lack of available ships means gas can’t move fast enough from the U.S. and Europe, where it is plentiful, to sate this demand."

"But traders are struggling to secure enough vessels thanks to delays at the Panama Canal, which is dealing with a seasonal backlog of container ships that has been aggravated by the strong demand for consumer goods during the pandemic. Instead of waiting in line for over a week, some LNG carriers are taking the long route to Asia around the Cape of Good Hope. Circumnavigating the cape adds about 17 days to the voyage from the Gulf Coast to Tokyo" [This extra time again adds to the total production cost which reduces supply]

"Charter prices for vessels moving LNG from the Gulf Coast to Europe rocketed to $322,500 a day Friday from about $190,000 a day at the end of 2020" [This why I said earlier that there is no shortage of ships-there might be fewer ships delivering LNG than there used to be, but the price is higher due to the decrease in supply-quantity supplied still equals quantity demanded]

"Utilities are competing for a small number of cargoes that could be delivered by February. Traders are passing higher shipping rates onto end users."