Dave Brubeck, Economist

Okay, he isn't an economist. But he is one of my favorite musicians and composers. He did say something related to economics, though, in a recent Wall Street Journal article. See Ranching's Loss, Jazz's Gain. Brubeck has been in the news lately because he celebrated his 90th birthday on Monday, Dec. 6. Here is the quote:

"Mr. Brubeck also has taken heat for prospering in a profession that isn't supposed to pay well. "It never has," he responded dryly. "My wife Iola and I were always very careful with our money. When I started out, Joe the butcher in our San Francisco neighborhood would ask me weekly if I wanted beef bones for our dog. He knew we didn't have a dog. I'd take them to make soup. I'd also go to the farmer's market to pick up discarded fruits and vegetables. We saved every penny.""

Here are some links so you can watch and hear some of his music performed:

Take Five

Blue Rondo à la Turk

The saxophonist is Paul Desmond. Eugene Wright on base and Joe Morello on drums.

Okun's Law

In my macro classes when I talk about how the unemployment rate falls when GDP increases (because greater output usually requires more workers), I usually say something like "but we probably need at least some minimum increase in GDP to see the unemploymet rate go down." This where Okun's Law might come help out. See Mr. Okun Saw This One Coming: Jobs Report Follows His 'Law'.

This is the key passage:

""Okun's Law," as it came to be known, has been tweaked over the years, and now states that for every two percentage points the economy grows above its long-term trend annually, unemployment falls by a percentage point.

Most economists peg the economy's long-term trend rate at about 2.5%, which is roughly where economists polled by The Wall Street Journal estimate growth stands in the current quarter.That means, according to Okun's Law, that the economy isn't growing fast enough to bring down unemployment."

See also Arthur M. Okun from the Library of Economics and Liberty.

And Is Okun’s Law Really Broken? By JUSTIN WOLFERS.

Thrift Might Be Okay Nowadays

See In a tough economy, old stigmas fall away. For example, more people are using layaway, even the wealthy.

"The old stigmas are the new realities," says Emanuel Weintraub, a New York-based retail consultant. "Now, people don't have a problem saying, 'I can't afford it.' It's a sign of strength."

Here is some evidence:

"Store-branded groceries now make up 22 percent of total sales, up from 20 percent before the recession, according to The Nielsen Co. The private-label business is worth $500 billion a year, so even a 2 percentage point change means $10 billion."

"At an Aldi location in Chicago on a recent evening, shoppers didn't care that the only recognizable brands were the Splenda sweetener, a Butterball turkey and a few kinds of candy.

Six no-name grocery items - macaroni and cheese, potato chips, cream cheese, sour cream, olive oil and guacamole - cost about $10. The same six brand-name items cost $22 at the nearby Dominick's."

"New research from American Express found that the super-affluent, which it defines as those who put at least $7,000 a month on their credit cards, spent 24 percent more on fast-food last spring than the year before. They spent 12 percent more on fine dining."

See an earlier post, Frugal Is The New Sexy.

Does Wealth Make Us Happier?

In my micro class, the last chapter we covered dealt with incomes and wealth. The question "does money buy happiness?" is perennial. Matt Ridley wrote a column about some new happiness research recently in The Wall Street Journal. See Wealth Makes Us Happier, But Why? Here is an exerpt:

"As Buddhists have long recognized, attaining our desires doesn't seem to bring satisfaction, just further restlessness. This is no surprise to evolutionary psychologists. Natural selection shaped human nature to be ambitious, not to settle for contentment. The person who kept striving to be successful left more offspring behind than the Epicurean hedonist.

So the pursuit of happiness turns out to be as frustrating as hunting the holy grail. Forcing people to be jolly seems to be counterproductive. Having children, which we do to make ourselves happy, generally makes us a bit unhappier in practice.

If you ask people whether suffering a disabling accident would make them unhappy a year after the event, they say "of course." But if you ask people who were disabled in an accident a year before if they are unhappy now, they say "no." For some people at least, happiness almost seems to have a thermostat: After good or bad things happen, we return to our own personal levels of contentedness.

Nonetheless, people say they've been getting slowly happier. In 45 of 52 countries, happiness has risen during the past 30 years. This coincides with people getting richer. Contrary to myth, rich countries have slightly happier citizens than poor countries. Of course, it's possible to be rich and unhappy, as many a celebrity deliciously reminds us. A study done in the 1970s bolstered the cheering (for the rest of us) notion that rich people are not necessarily happier, but it has since been challenged by larger statistical samples, especially in the work of Betsey Stevenson and Justin Wolfers at the University of Pennsylvania.

What is it about prosperity that brings happiness? Rather than having more "stuff," it is probably the freedom that wealth buys, letting us make choices about our lifestyle—where to live, who to marry, what to wear. The political scientist Ronald Inglehart argues that the big gains in happiness come from living in a society that frees you to be yourself—"

Another interesting article is The pursuit of happiness: Author seeks to take its measure and find where people are most content. It quotes former University of Chicago psychologist Mihaly Csikszentmihalyi. He said "Without dreams, without risks, only a trivial semblance of living can be achieved."

Some earlier posts on happiness:

Does Or Can Money Buy Happiness?

Interesting Book: Stumbling on Happiness

Does Money Make You Mean?

I wonder if you can be mean and happy at the same time.

Robot Journalists-A Case Of Structural Unemployment?

In macroeconomics, the definition of "structural unemployment" is usually something like "unemployment caused by a mismatch between the skills of job seekers and the requirements of available jobs." One example is when machines replace workers. Now there is a company that has created computer programs that will look at the statistics in the box score of college basketball games and then write a story about it. If any sports writers lose their jobs, they will be structurally unemployed.

See When the Software Is the Sportswriter by Randall Stross of The New York Times. It explains how StatSheet, the company involved, does it: "it just uses template sentences and a database of phrases that numbers about 5,000 for now." Here is one story written by the computer software based solely on the statistics of the game:

"Ohio State has already started living up to monumental expectations with a good first game. On November 12th on their home court, the Buckeyes waxed the Aggies, 102-61. The game lacked a lot of drama, with Ohio State up 52-25 at halftime and never letting up.

Ohio State was able to win by overpowering North Carolina A&T in rebounding and assists.

Ohio State used a big advantage on the boards to win the possession battle with 60 rebounds to 22 for North Carolina A&T. Ohio State spread the ball around and got 24 assists compared to 8 for North Carolina A&T.

Deshaun Thomas was the leading scorer for the Buckeyes with 24 points in 20 minutes. Jared Sullinger contributed 14 big rebounds.

Ohio State has incredible expectations for this season, and this victory over the Aggies was a good start.

When we look to our next game, we see a tenacious team in Florida on November 16th."

Some researchers at Northwestern University have been working on this, too. It was mentioned in a The Robots Are Coming! Oh, They’re Here
. by David Carr. Sportswriter King Kaufman had some interesting observations in the comments section.

This is okay as long as computer programs can't write blog entries:)

The Robots Are Coming! Oh, They’re Here

Who Was Alex P. Keaton's Favorite Economist? Milton Friedman

Click on the following video link to find out:

Who Was Alex P. Keaton's Favorite Economist?

You will only have to watch a few minutes to find out. It is from the 1980s sitcom "Family Ties." Michael J. Fox played Alex Keaton. In this episode he tells another character that Milton Friedman was his favorite economist.

Friedman came up in macro recently while discussing the money supply and the differences between Keynesians and monetarists.

Here is what IMDB has to say about the show:

"A couple who were ardently leftwing political activists in the sixties face the problems of raising a family with children who have strongly conservative views."

Click here to go to the IMBD page about the show.

Were The Pilgrims Capitalists Or Socialists?

See The Pilgrims Were ... Socialists? from The New York Times. There seems to be some controversy. One story has them owning property in common and not doing well until they went with private property. Not everyone agrees with that version of history. Here is what seems to be the most interesting thing from the report:

"Historians say that the settlers in Plymouth, and their supporters in England, did indeed agree to hold their property in common — William Bradford, the governor, referred to it in his writings as the “common course.” But the plan was in the interest of realizing a profit sooner, and was only intended for the short term; historians say the Pilgrims were more like shareholders in an early corporation than subjects of socialism.

“It was directed ultimately to private profit,” said Richard Pickering, a historian of early America and the deputy director of Plimoth Plantation, a museum devoted to keeping the Pilgrims’ story alive."

So when you eat turkey tomorrow, you might really be celebrating that great American institution...the corporation. Makes me feel real patriotic.

This part was interesting too.

"The competing versions of the story note Bradford’s writings about “confusion and discontent” and accusations of “laziness” among the colonists. But Mr. Pickering said this grumbling had more to do with the fact that the Plymouth colony was bringing together settlers from all over England, at a time when most people never moved more than 10 miles from home. They spoke different dialects and had different methods of farming, and looked upon each other with great wariness."

"“One man’s laziness is another man’s industry, based on the agricultural methods they’ve learned as young people,” he said."
"Bradford did get rid of the common course — but it was in 1623, after the first Thanksgiving, and not because the system wasn’t working. The Pilgrims just didn’t like it. In the accounts of colonists, Mr. Pickering said, “there was griping and groaning.”"

"“Bachelors didn’t want to feed the wives of married men, and women don’t want to do the laundry of the bachelors,” he said.

The real reason agriculture became more profitable over the years, Mr. Pickering said, is that the Pilgrims were getting better at farming crops like corn that had been unknown to them in England."

Adam Smith vs. Ace Ventura

Well, sort of. See 'Liar Liar,' 'Nutty Professor' Director's Life Has Taken Quite The Turn. It is about Tom Shadyac who also directed "Ace Ventura: Pet Detective." He stopped liking what was going on in Hollywood. Here is an exerpt:

"So he sold his Pasadena mansion and most of his possessions, moved to a trailer park in north Malibu and began work on his documentary "I Am." What's "I Am" about? It's about how human beings are too competitive, about whatever is hard-wired in our brains that makes us want to work against each other rather than cooperate."

That last part, about competition and cooperation, is something that "neuroeconomics" studies.

Earlier this year, I attended a lecture by Paul Zak, a neuro-economist from Claremont Graduate University, at the Mind Science Foundation. He has studied how our behaviors are affected by the presence in our brains of a chemical called oxytocin, which can affect how generous we are. The more oxytocin you have have, the more generous and empathic (or sympathetic) you are. So he calls oxytocin "the moral molecule." It helps us identify with others and understand their feelings and situatons. Oxytocin can also increase when people trust you or are generous to you.

What does this have to do with Adam Smith? He 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. This is directly related to oxytocin. In September 2009, I had a post on this called Science Proves That Adam Smith Was Right Over 200 Years Ago (sort of). That will provide you with more details.

To watch a lecture by professor Zak (very similar to the one he did here in San Antonio), go to The Moral Molecule.

Oxytocin also facilitates trust. Economies need trust because not everything can be put into a law, a contract or be monitored. Your boss can't watch you every second to make sure you don't slack off on the job. We trust banks and our pension funds not to take the money and blow it all in Vegas. We trust our government officials not to accept bribes. Yes, we have rules and regulations against these things. But if we had to have a rule for everything and if everyone was being watched constantly, it would be too costly to our economy. Trust helps quite a bit.

Here are two articles about professor Zak's lecture from the San Antonio Express-News:

Emerging field offers insight into human virtues

Humans release ‘niceness' chemical

More information about neuroeconomics can be found at:

Neuroeconomics Explained, Part One

Neuroeconomics Explained, Part Two

Click here to read the latest findings from the Center For Neuroeconomics Studies

Rare Video Interview Of Karl Marx

It provides some interesting insights into his theories. It is about 4 minutes long.

Click here to go to the You Tube page that has it

Coming Soon To A Theater Near You: Night Of The Living Shopping Zombies!

See Making Ads That Whisper to the Brain from this past Sunday's New York Times. Here is the opening:

"WHAT happens in our brains when we watch a compelling TV commercial? For one thing, certain brain waves that correlate with heightened attention become more active, according to researchers who have used EEGs, or electroencephalographs, to study the brain’s electrical frequencies."

"Neuromarketers" are studying what happens to people's brains when they look at ads and watch commercials to see how they react unconciously. This will allow them to find out what we all really like, deep down. It is hard for us to express in words our unconcious desires. Now the companies will be better able to figure out what we like. Will this make us all happier? Who knows. Maybe companies will make less of what we don't want and more of what we really do want.

The article goes on to ask:

"But should we worry that a technique that probes subconscious brain patterns might be used to unduly influence consumers, turning them into shopping robots without their knowledge and consent?"

Some feel that neuromarketing should be regulated to prevent "brand washing." Other experts think that neuromarketing may not be that affective and will not turn us into shopping zombies.

What Do Vampires And Innovation Have In Common?

Maybe not much. But a paper on vampires and a book on innovation both use an article I wrote as a reference. The article of mine that they both cite is "Mythology, Joseph Campbell, and the Socioeconomic Conflict”, from The Journal of Socio-Economics, Volume 23, No.4, 1994.

The paper on vampires is "Shadow of the Vampire: Understanding the Transformations of an Icon in Popular Culture" by Michelle Bohn of Texas State University. It is very interesting, using history and psychology to explain when and why vampire stories become popular. It even occassionally mentions economics (the Industrial Revolution, for example).

The book is Unleashing Innovation: How Whirlpool Transformed an Industry by Nancy Tennant Snyder & Deborah L. Duarte.

Vampires have been linked to economics before. Here is a passage from Crisis and Leviathan: Critical Episodes in the Growth of American Government by Robert Higgs:

"Without embarassment, Karl Marx wrote about the capitalists' "were-wolf hunger for surplus-labour" and their "vampire thirst for the living blood of labour."

There is an article called THE POLITICAL ECONOMY OF THE DEAD: MARX’S VAMPIRES by Mark Neocleous. Here is the abstract:

Abstract: This article aims to show the importance of the vampire metaphor to Marx’s work. In so doing, it challenges previous attempts to explain Marx’s use of the metaphor with reference to literary style, nineteenth-century gothic or Enlightenment rationalism. Instead, the article accepts the widespread view linking the vampire to capital, but argues that Marx’s specific use of this link can be properly understood only in the context of his critique of political economy and, in particular, the political economy of the dead.

World War I Finally Ends

Yesterday was Veteran's Day. But at one time it was called Armistice Day because World War I ended on Nov. 11, 1918. Once the war was over, the allies made Germany pay war reparations, which turned out to be fairly expensive. Just last month, they made the last payment. See Why Did World War I Just End? from Time magazine (Hat Tip: Devon of the The 1982 Topps Baseball Card Set blog). Here is an excerpt:

""Large parts of Belgium and France were so destroyed by trench warfare that they looked desolate, like moonscapes, just huge areas of land where nothing remained," explains Stephen Schuker, professor of history at the University of Virginia and author of American "Reparations" to Germany, 1919-33. "They needed money to help rebuild the area."

But how do you put a price on war? Is it the property value of destroyed buildings? Rounds of ammunition shot? The cost in human life? It took two years for the international Reparations Commission to assess damages in relation to Germany's national wealth — after all, the payment plan needed to be affordable — and decide how much the government owed. The first reparation demands were 266 gold marks, which amounted to roughly $63 billion then (close to $768 billion today), although this was later reduced to $33 billion (about $402 billion today)."

The economist John Maynard Keynes said this would cripple the German economy. The Germans simply printed money to pay the first installment. That lead to hyper-inflation. Charles Dawes, an American banker, came up with a plan to convert the debt to bonds. He won the Nobel Peace prize but not long after that Germany defaulted on the bonds. Then Hitler decided not to pay. In the 1950s, West Germany said they would repay the money if their country was ever again united. Well, the Berlin wall fall and in the 1990s they started paying again and finally made the last payment in October.

Here is the "Pepper ... and Salt" comic from the 11-11 Wall Street Journal.

A Good Spanish Blog On Economics By Noé Hernández Cortez

Noé Hernández Cortez is a professor at Universidad del Valle de México, Campus Coyoacá. Here is the link to his blog: Noehernandezcortez's Blog. A recent entry dealt with the "2010 Human Development Index." To read a traslation of that entry (translated by google), click on this link: 2010 Human Development Index.

The index takes into account life expectancy, education and gross national income per person. The top ten countries were:

1. Norway 0.938
2. Australia 0.937
3. New Zealand 0.907
4. United States 0.902
5. Ireland 0.895
6. Liechtenstein 0.891
7. Netherlands 0.890
8. Canada 0.888
9. Sweden 0.885
10. Germany 0.885

To read the Wikipedia article on this go to Human Development Index.

How Can The Average Major League Baseball Player Salary Be $3.3 Million A Year?

In my microeconomics class this week I talked about monopsony, when there is only one buyer. Before 1976, baseball players could only play for one team, the one they were currently under contract to. Starting in 1965, each player coming out of high school or college was drafted by one of the teams. That player could never leave that team and try to make a deal with another team. Before 1965, they could sign with the team that gave them the best offer. But then they were tied to that team for as long as they played baseball or until they were traded.

An economist in the 1970s, Gerald Scully, wrote an article showing that players were getting paid alot less than the revenue they generate (their "marginal revenue product"). Why would teams pay less? They could get away with it since they had monopsony power. Other teams could not outbid them for the player. But after players with seven years in the major leagues were allowed to become "free agents" and could negotiate deals with other teams, salaries shot up.

Where do teams today get the money to pay such high salaries? Major league baseball had about $7 billion in revenue in 2010. With 30 teams, that works out to about $233 million each. Each team has 25 players. At $3.3 million per player, that is an average payroll of $82.5 million. Subtract that from $233 million, and the average team has about $150 million left over. See Baseball's picture bright amid economic gloom.

During the World Series, FOX was able to charge $450,000 for each 30-second commercial. New team owners are willing to pay alot to buy a ball club. The Cubs were sold for $845 million and the Rangers were sold for $593 million.

How Our Brains Help Create Financial Bubbles

See Microscopic Microeconomics. It was in last Sunday's New York Times magazine. It described research where people were given money to invest in a stock market simulation (that actually mimicked real history). How people felt about the changes in the market and the money they were making was monitored. Here is a description of the expirement and the results. It seems like we get excited about the gains, the primitive part of our brains get a little fearful, realizing that the stock prices are too much, but the rational part of our brain tries to come up with reasons to explain why (it reminds me of the book This Time Is Different: Eight Centuries of Financial Folly-here is a review Recession, You Look Familiar)

"Montague’s experiments go like this: A subject is given $100 and some basic information about the stock market. After choosing how much money to invest, the player watches as his investments either rise or fall in value. The game continues for 20 rounds, and the subject gets to keep the money. One interesting twist is that instead of using random simulations of the market, Montague relies on real data from past markets, so people unwittingly “play” the Dow of 1929, the S&P 500 of 1987 and the Nasdaq of 1999. While the subjects are making their investment decisions, Montague measures the activity of neurons in the brain.

At first, Montague’s data confirmed the obvious: our brains crave reward. He watched as a cluster of dopamine neurons acted like greedy information processors, firing rapidly as the subjects tried to maximize their profits during the early phases of the bubble. When share prices kept going up, these brain cells poured dopamine into the caudate nucleus, which increased the subjects’ excitement and led them to pour more money into the market. The bubble was building.

But then Montague discovered something strange. As the market continued to rise, these same neurons significantly reduced their rate of firing. “It’s as if the cells were getting anxious,” Montague says. “They knew something wasn’t right.” And then, just before the bubble burst, these neurons typically stopped firing altogether. In many respects, these dopamine neurons seem to be acting like an internal thermostat, shutting off when the market starts to overheat. Unfortunately, the rest of the brain is too captivated by the profits to care: instead of heeding the warning, the brain obeys the urges of so-called higher regions, like the prefrontal cortex, which are busy coming up with all sorts of reasons that the market will never decline. In other words, our primal emotions are acting rationally, while those rational circuits are contributing to the mass irrationality.

This is a costly mental mistake. Montague notes that investors who listened to the prescient dopamine neurons would earn much more money than the typical subjects, largely because they would get out of the market before it was too late. “It’s crazy to think that there’s a signal in our head that’s so much smarter than we are,” Montague says."

Don't Forget That Today Is Day Of The Deadweight Loss

Has another year gone by already? Today is "Day of the Deadweight Loss." On this day, economists mourn all the social welfare that has been lost in the last year. That social welfare is lost and we will never get it back. The important question is what is the best way to commemorate this day? I'm open to suggestions.

Deadweight loss is the loss of social welfare caused by that dreaded demon, inefficiency. Examples are monopoly and externalities. To learn more, go the following links (which are all different)

Deadweight_loss
Deadweight_loss
Deadweight_loss

One good way to commemorate this day would be to cut out the deadweight loss triangle from a monopoly graph (like the one shown below) and burn it, to symbolize all of the lost social welfare. Doing so is both a life-changing and life-affirming ritual.

Are College Costs Actually Falling?

They might be. Report: Net cost of college has dropped from the Washington Post. The basic idea is that although the stated price (tuition) has been rising, so has financial aid. Here are some exerpts:

"The average yearly net price of public four-year universities in tuition and fees, after discounting grant aid and tax benefits, declined from $2,080 to $1,540 in inflation-adjusted dollars between 2005-06 and 2010-11, according to data from the national College Board survey.

The net price for private colleges declined in those years from $12,750 to $11,320. Add the cost of room and board, and public university students pay an average of about $10,000 a year, a few hundred dollars more than five years ago. Private university students pay a little over $20,000, a bit less than in 2005-06."

I wrote about this earlier in the year. See As college costs rise, sticker shock eased by student aid. It mentions how financial aid is really just a form of price discrimination.

The Myth Of The Ring Of Gyges And Insider Trading By Congressional Staffers

This week in one of my macro classes we read a chapter about investing in the stock market in the book The Economics Of Macroissues. Part of it was about insider trading. It turns out that congressional staffers can buy stock and they can do so based on their knowledge of what bills will pass and won't pass.

See What Conflict of Interest? How Power Blinds Us to Our Flaws from The Wall Street Journal. As the article says "...prohibitions on insider trading generally don't apply to Congress." And they only have to report their trades once a year. They can make trades based on information most people don't have. Here are some exerpts from the article:

""Power makes people feel both psychologically invincible and psychologically invisible," adds Adam Galinsky, a professor of organizational behavior at Northwestern University's business school.

Power, explains Prof. Galinsky, focuses people on their own internal goals—blinding them, in the process, to how others may view them. In Plato's "Republic," Socrates invokes the myth of the ring of Gyges, which conferred upon its wearer the power of being invisible to others. If we wear such a ring at will, Socrates says, "No man would keep his hands off what was not his own when he could safely take what he liked."

Being in a position of power also may make people feel that they can do no wrong. In recent experiments, Dana Carney, a psychologist at Columbia University's business school, has found that acquiring power makes people more comfortable committing acts they might otherwise be reluctant to commit, like lying or cheating. As people rise to a position of power, she has shown, their bodies generate more testosterone, a hormone associated with aggression and risk-taking, and less cortisol, a chemical that the body generates in response to stress.

"Having power changes you physiologically, reducing your body's internal feedback that tells you which actions are good or bad," says Prof. Carney. "Power temporarily intoxicates you.""

The Drug War In Mexico Is Not Working

In my micro class this week, we read a chapter from The Economics of Public Issues about drugs.

Read Saving Mexico: To weaken the cartels, some argue the U.S. should legalize marijuana, let cocaine pass through the Caribbean and take the profit motive out of the drug trade. It was by DAVID LUHNOW and appeared in the 12-26/27-09 WSJ, page W3.

"In the 40 years since U.S. President Richard Nixon declared a "war on drugs," the supply and use of drugs has not changed in any fundamental way. The only difference: a taxpayer bill of more than $1 trillion."

"...the horrific drug-related violence in Mexico that has claimed around 15,000 lives in the past three years."

"In the late 1980s and early 1990s, the U.S. government cracked down on the transport of cocaine from Colombia to U.S. shores through the Caribbean, the lowest-cost supply route. But that simply diverted the flow to the next lowest-cost route: through Mexico. In 1991, 50% of the U.S.-bound cocaine came through Mexico. By 2004, 90% did."

"...Colombia waged a successful war to break up the country's Cali and Medellin cartels into dozens of smaller suppliers. Both moves helped the Mexican gangs,..."

"...Mexican drug gangs are a one-stop shop for four big-time illicit drugs: marijuana, cocaine, methamphetamines and heroin."

"...illegal drugs are the most successful Mexican multinational enterprise, employing some 450,000 Mexicans and generating about $20 billion in sales, second only behind the country's oil industry and automotive industry exports."

"One drug lord's accountant who was arrested in 2006 had a mid-level job at Mexico's central bank for 15 years."

"Mexican customs has stumbled upon a long list of ingenious methods to transport cocaine, including one shipment of liquefied cocaine smuggled in red wine bottles. Another recent bust yielded 800 kilos of cocaine—worth an estimated $40 million—stuffed inside a batch of frozen sharks.

After Mexico restricted the importation of pseudoephedrine to slow the manufacture of methamphetamines, drug gangs found another way to make the drug using different, unrestricted chemicals widely used in the perfume industry."

Will Economies Of Scale Bring Down The Cost Of Producing Electric Cars?

See High Battery Cost Curbs Electric Cars: Unlike Other Devices, Power Packs May Not Enjoy Major Economies of Scale from The Wall Street Journal. Experts don't all agree.

Economies of Scale (Increasing Returns to Scale) = A situation in which long-run average total cost declines as the firm increases its level of output. The percentage increase in Q is greater than the percentage increase in TC.

Suppose a company like GM makes and sells only 1 car a year. Then the average cost of making a car will be very high. But if they make thousands of cars a year, the high cost of building and maintaining the plant or factory is spread over all those cars and they can sell the car at a reasonably low price. This is what the government is hoping for with the batteries that run these new electric cars. The batteries account for about half the cost of the car.

According to the article "The U.S. Department of Energy has set a goal of bringing down car-battery costs by 70% from last year's price by 2014." If you buy an electric car, you can get a tax credit of $7,500. Perhpaps the government is trying to help the market achieve economies of scale. But there is a problem:

"Unlike with tires or toasters, battery packs aren't likely to enjoy traditional economies of scale as their makers ramp up production, the scientists and engineers say. These experts say increased production of batteries means the price of the key metals used in their manufacture will remain steady—or maybe even rise—at least in the short term."

The article discusses various other parts and inputs into the batteries and why their costs are not likely to fall. Some experts think a there will be a big fall in cost but others are doubtful.

Germany, Muslims, Christian Values And Technical Expertise: How Economics Is Connected To Everything

See Merkel says German multi-cultural society has failed. Here is the intro:

"Germany's attempt to create a multi-cultural society has failed completely, Chancellor Angela Merkel said at the weekend, calling on the country's immigrants to learn German and adopt Christian values.

Merkel weighed in for the first time in a blistering debate sparked by a central bank board member saying the country was being made "more stupid" by poorly educated and unproductive Muslim migrants."

Merkel also said: "the concept that "we are now living side by side and are happy about it," does not work" and "that immigrants should integrate and adopt Germany's culture and values" and "Those who don't accept [Christian values] don't have a place here."

The article mentions that Germany does not have enough engineers to achieve the maximum growth in its GDP. So they rely partly on immigrants, many of who are Muslims. But that is causing tensions now and many Germans think that, on balance, they are hurting the economy. So they want the immigrants to try harder to integrate into society and learn more about the German language and culture. Immigrants also receive subsidies and some feel that weighs down society.

What Are The Best And Worst College Majors?

See College Degree Winners and Losers. The criteria included "...what's hot and what's not with with HR recruiters...salary data, job security, and employment projections for different college degrees and careers."

The top 5 were:

1. Finance
2. Business
3. Medical Assisting (Associate's Degree)
4. Information Technology
5. Nursing

The bottom 5 were:

1. Social Work
2. Horticulture
3. Art
4. Athletic Training
5. Music

Economists assume that people maximize their utiltiy. It is possible that you might end up with more utility if you major in art if you enjoy being an artist. Also, in the future, the supply of the top 5 might increase if many beginning students decide to major in those fields. That increased supply will lower the salaries and those degrees will become less desirable.

Do any of my students know if SAC has a Medical Assisting degree and how well those graduates do with it?

What The 2010 Nobel Prize Winners Studied

The winners were Peter Diamond, Dale Mortensen, and Christopher Pissarides. See Markets with search costs. That is the announcement from the Nobel Prize committee. The very short reason why they won was "for their analysis of markets with search frictions." My macro students should recall discussing "frictional" unemployment a few weeks ago. There is more information at Markets with search costs (yes, it is the same title as above but it provides different information). Here is an exerpt:

"Why are so many people unemployed at the same time that there are a large number of job openings? How can economic policy affect unemployment? This year’s Laureates have developed a theory which can be used to answer these questions. This theory is also applicable to markets other than the labor market.

According to a classical view of the market, buyers and sellers find one another immediately, without cost, and have perfect information about the prices of all goods and services. Prices are determined so that supply equals demand; there are no supply or demand surpluses and all resources are fully utilized.

But this is not what happens in the real world. High costs are often associated with buyers’ difficulties in finding sellers, and vice versa. Even after they have located one another, the goods in question might not correspond to the buyers’ requirements. A buyer might regard a seller’s price as too high, or a seller might consider a buyer’s bid to be too low. Then no transaction will take place and both parties will continue to search elsewhere. In other words, the process of finding the right outcome is not without frictions. Such is the case, for example, on the labor market and the housing market, where searching and finding are essential features and where trade is characterized by pairwise matching of buyers and sellers.

This year’s Laureates have enhanced our understanding of search markets. Peter Diamond has made significant contributions to the fundamental theory of such markets, while Dale Mortensen and Christopher Pissarides have further developed search theory and made it applicable to analysis of the labor market. The three laureates’ achievements help us to comprehend a number of important economic questions in general, and the determinants and development of unemployment in particular.

The basic idea in search theory is that participants in a market look for cooperative partners in order to implement joint projects. This may involve simple cases of a buyer and a seller of a product, as well as more complex relations between employers and job seekers or between firms and their suppliers.

As usual in the case of basic research, there are many conceivable areas of application. The housing market, for instance, is a clear-cut parallel to the labor market in that both the number of vacancies and the time it takes to sell a home vary over time. Search theory has also been used to study issues in monetary theory, public economics, regional economics and family economics."

Finding The Right Price Is Not Always Easy, Even For Wal-Mart

See Walmart Rolls Back Rollbacks: Food Prices at Two-Year High.

One thing I usually say when I lecture on supply and demand is that firms can set the wrong price, at least temporarily. If running a business were easy, we would all be millionaires running our own business. Many decisions have to be made, including deciding what price to charge.

As the article discusses, Wal-Mart recently cut prices quite a bit on some items yet same store sales fell. This sounds like their total revenue (TR) fell. In microeconomics, we show that when a firm is in the inelastic portion of its demand line, cutting price will actually reduce TR. Maybe that is what happened to Wal-Mart. Prices have to be raised to increase TR. If you are on the elastic part of the demand curve, you need to lower price to increase TR.

Crime and Punishment: Required Reading in My Economics Class

Okay, it is not the book Crime and Punishment by Fyodor Dostoevsky (this is a link to the entire book online). I will come back to this book. My students are required to read a chapter by this name from the book The Economics of Public Issues. It is only 5 pages long while the famous book is over 500.

One of the interesting things mentioned in this chapter is research by Steven Levitt. It deals with the question of whether or not more police officers means less crime, everything else being held constant. The problem is that cities with high crime rates will have to hire more police officers (it is the opposite for low crime cities). So it is hard to find a meaningful correlation. But this paragraph from the book shows how he got around that problem:

"In the case of police, Levitt has found that election cycles tend to have a strong independent effect on the size of police forces, enabling him to identify the impact of police on crime rates. Because crime is such a hot political issue, both mayors and governors have strong incentives (and the ability) to push for more police funding in election years. The result is that even though police forces in major cities tend to remain constant in nonelection years, they grow by about 2 percent in an average election year. Although this may sound small, it is (1) large enough to have a significant impact over several election cycles, and thus (2) large enough to detect clearly in the data."

So we can see that crime goes down when more police get hired in election years. Each city gets compared to itself, so the problem mentioned above is avoided.

Now back to the Dostoevsky book. Below are two passages that relate to economics and one sounds like the invisible hand.

"But Mr. Lebeziatnikov who keeps up with modern ideas explained the other day that compassion is forbidden nowadays by science itself, and that that's what is done now in England, where there is political economy." (economics used to be called political economy)

"if I were told, 'love thy neighbour,' what came of it?" Pyotr Petrovitch went on, perhaps with excessive haste. "It came to my tearing my coat in half to share with my neighbour and we both were left half naked. As a Russian proverb has it, 'Catch several hares and you won't catch one.' Science now tells us, love yourself before all men, for everything in the world rests on self-interest. You love yourself and manage your own affairs properly and your coat remains whole. Economic truth adds that the better private affairs are organised in society--the more whole coats, so to say—the firmer are its foundations and the better is the common welfare organised too. Therefore, in acquiring wealth solely and exclusively for myself, I am acquiring, so to speak, for all, and helping to bring to pass my neighbour's getting a little more than a torn coat; and that not from private, personal liberality, but as a consequence of the general advance."

More online versions of the book.

Genetically Engineered Corn Has Positive Externalities

See Study: High-tech corn cuts pest damage far afield. Here is an excerpt:

"Corn that's been genetically engineered to resist attacking borers (insects) produces a "halo effect" that provides huge benefits to other corn planted nearby, a new study finds. Since the borers that attack the genetically modified crops die, there are fewer of them to go after the non-modified version.

Given that the corn borer has cost U.S. farmers $1 billion a year, the economic benefits are dramatic, according to the report in Friday's edition of the journal Science."

This is what economists call a "positive externality." Here is the definition I use in class:

Positive Externalities-Benefits received by third parties due to other’s actions.

For example, if you get vaccinated against a contagious disease, other people benefit because you will not infect them. A scientist who discovers that eating vegetables helps prevent cancer aids others.

In this case, farmers who did not use the modified corn are benefiting from those who did since their are fewer pests. In fact, the other farmers received 62% of the net benefit, which was $6.9 billion.

This excerpt might be my favorite:

"David Onstad of the University of Illinois said a strength of the study is that the large team of researchers involved included not just entomologists but people from other disciplines such as economics."

How About $57,556 For A Year Of College?

That is what it would cost at Sarah Lawrence College and it includes tuition, room and board, and fees. See
America's Most Expensive Colleges and Universities. Last week in my micro class we read a chapter about college costs in the book The Economics Of Public Issues. It mentioned that colleges compete over, among other things, their amenities like the quality of dorms, dining halls and rec centers.

Sarah Lawrence does offer alot of seminar type classes where students get one-on-one attention. Many of these schools offer financial aid but the article actually did not say how big the typical discount was. Surprisingly, costs at private schools are still rising and their enrollments are up. Could be the demand curve shifting to the right.

The financial aid amounts to basically charging different students different prices based on their ability and willingess to pay (a discount). Economists call this price discrimination.

Why price discrimination raises profits

1. If a firm can get a higher price from some customers than others they increase their profits.
2. If a firm can lower the price for others who might not have bought the product to begin with, they also increase their profits.

Necessary Conditions for Price Discrimination

1. The firm must face a downward sloping demand. Monopolies do but firms in perfect competition do not (their demand, also their MR line, is flat).

2. The firm must be able to readily (and cheaply) identify buyers or groups of buyers with predictably different elasticities of demand (senior citizens have a more elastic demand and will shop around more since they have more time so restaurants might give them a discount).

3. The firm must be able to prevent resale of the product or service. If a student can buy a movie ticket for $6 while everyone else pays $8, the firm will lose money if the students turn around and sell their tickets for $7. So the theater can prevent resale by checking student IDs to make sure people holding the lower price ticket really are students.

The article also said that "The University of Chicago estimates that a year's study will cost $56,640." Luckily it was not that high when I went there nearly 30 years ago. I might not be able to afford it now. But it was also one of the 25 best colleges besides being one of the top 25 most expensive.

A Reminder To My Students To Copy Your Notes (Besides The Extra Credit, It Makes You Smarter)

See the Wall Street Journal article How Handwriting Trains the Brain: Forming Letters Is Key to Learning, Memory, Ideas. Besides the notes, I also encourage my students to write down complete answers to all the study questions. Doing all this will help you remember and learn better. Here are exerpts from the article:

"writing by hand is more than just a way to communicate. The practice helps with learning letters and shapes, can improve idea composition and expression, and may aid fine motor-skill development"

"could be a good cognitive exercise for baby boomers working to keep their minds sharp as they age."

"there's real value in learning and maintaining this ancient skill, even as we increasingly communicate electronically via keyboards big and small."

"Recent research illustrates how writing by hand engages the brain in learning. During one study at Indiana University published this year, researchers invited children to man a "spaceship," actually an MRI machine using a specialized scan called "functional" MRI that spots neural activity in the brain. The kids were shown letters before and after receiving different letter-learning instruction. In children who had practiced printing by hand, the neural activity was far more enhanced and "adult-like" than in those who had simply looked at letters."

"Adults may benefit similarly when learning a new graphically different language, such as Mandarin, or symbol systems for mathematics, music and chemistry, Dr. James says. For instance, in a 2008 study in the Journal of Cognitive Neuroscience, adults were asked to distinguish between new characters and a mirror image of them after producing the characters using pen-and-paper writing and a computer keyboard. The result: For those writing by hand, there was stronger and longer-lasting recognition of the characters' proper orientation, suggesting that the specific movements memorized when learning how to write aided the visual identification of graphic shapes."

"Other research highlights the hand's unique relationship with the brain when it comes to composing thoughts and ideas. Virginia Berninger, a professor of educational psychology at the University of Washington, says handwriting differs from typing because it requires executing sequential strokes to form a letter, whereas keyboarding involves selecting a whole letter by touching a key."

"She says pictures of the brain have illustrated that sequential finger movements activated massive regions involved in thinking, language and working memory—the system for temporarily storing and managing information."

New Biography Of Adam Smith

Nothing gets an econ prof more excited (that is, if we could get excited). It is called Adam Smith: An Enlightened Life by Nicholas Phillipson. It is reviewed in today's New York Times business section. Go to The Wealth of an Intellect by NANCY F. KOEHN. Here are some exerpts:

"According to Mr. Phillipson, Smith was, first and foremost, concerned with developing “a genuine Science of Man” — an effort that began when Smith was a student at Glasgow University. There he studied the classics, jurisprudence, logic and metaphysics; he also met the philosopher Frances Hutcheson and the mathematician Robert Simson. These experiences helped Smith cultivate a respect for placing philosophy on a scientific basis and a compelling interest in thinking systematically."

"The two fruits of this effort were “The Theory of Moral Sentiments,” published in 1759, and “The Wealth of Nations.” In the earlier book, Smith set out to understand the motivations of human behavior and the development of moral principles within individuals. At the heart of Smith’s analysis lies the concept of sympathy (what we know today as empathy), which he saw as the bedrock of all forms of human communication, including commercial exchange. It is sympathy, he writes, that ultimately accounts for “that great purpose of human life which we call bettering our condition.”"

"...he married man’s ineluctable drive for improvement with the concept of self-interest to set forth the primary driver of all economic activity..."

" Smith regarded restraints on imports and other trade restrictions as a function of “the wretched spirit of monopoly” that had afflicted economic activity throughout history."

"The best evidence for Smith’s argument, Mr. Phillipson demonstrates, was the rapid progress of the American colonies, where cheap land and the absence of high taxes and other restraints had helped create a thriving society and a robust domestic market."

I'm glad that the article mentioned Adam Smith's first book The Theory of Moral Sentiments. That was mainly a work of philosophy. But it may be just as important as The Wealth of Nations. I have posted a two entries before about this. Go to:

Science Proves That Adam Smith Was Right Over 200 Years Ago (sort of).

Adam Smith vs. Bart Simpson

The Percent Of The Civilian Noninstitutional Population Employed Since 1970

I talked about unemployment in my macro classes yesterday. If you go to this site by the Bureau of Labor Statistics called Employment status of the civilian noninstitutional population 16 years and over, 1970 to date, you can see unemployment rates going back to 1970. It also shows the percent of the civilian noninstitutional population that is employed. The graph below shows how that has changed over time.


The general trend since 1975 has been up, although it has flutctuated. Unfortunately, it has been going down for a couple of years and we are well below the high of 64.4% in the year 2000. It was 59.3% in 2009.

But the average for the years 1970-84 was 58%. So we are still above that. That does not mean what we have is good. But it just puts what is currently going on in perspective.

Some will say that we have a large prison population, so they are not part of the figures and that prison population has been growing. In 2008, the U. S. prison population was 1,610,446. See Prisoners in 2008. Suppose we increase the number of people in the civilian noninstitutional population by that amount. Right now it is 235,801,000. The new figure will be 237,411,446. Now let's keep the number employed the same, at 139,877,000. That would 58.9% employed, still higher than the average from 1970-1984.

Now there were some tough economic times in that earlier period. But we survived and we weren't exactly destitute. So although the economy is not doing well right now, maybe things are not so bad.

An Idea For A New Kind Of College: Where All The Professors Have Two Master's Degrees Instead of Ph. D.'s To Foster Interdisciplinary Learning

At this new college, professors would not have Ph. D.'s but two master'sdegrees. For example, in the economics department, everyone would, of course, have a Master's degee in that field. But one professor would also have a master's in history, another psychology, another anthropology, another sociology, etc. Then everyone in sociology would have a master's in that field but each professor would also have a master's in another field like in economics. Every academic department at the school would be like this.

Obviously not all schools can be like this. But if we had just a few schools like this, they could attract some unique and curious students. They could be a whole new type of idea incubator. Just imagine if some wealthy person like Bill Gates were to fund a college like this. Then he would announce it would open in a few years. It would give current professors all a chance to get that second master's degree. People still in graduate school could go for that 2nd master's instead of getting a Ph. D.

The new faculty would have an incredible sense of mission. Maybe alot of young graduate students would want to teach at the new school and they would bring enthusiasm and the latest thinking in their fields.

Teachers would teach regular classes but they would would contsantly enrich their lectures with what they know from other fields. Students would get interested in inter-disciplinary research early on and if they wrote a senior thesis, it would be inter-disciplinary. Guest lecturers and public speakers would be experts doing cutting edge inter-disciplinary research. Think of the clubs students could form. It would be a whole new way of learning and a whole new educational experience. It could revolutionize education.

Cuba to cut 500,000 gov't workers, reform salaries

Click here to read the story. Here is the first paragraph:

"Cuba announced Monday it will cast off at least half a million state workers by early next year and reduce restrictions on private enterprise to help them find new jobs — the most dramatic step yet in President Raul Castro's push to radically remake employment on the communist-run island."

This is about 10% of the labor force and currently, 95% of the labor force works for the government. I had a post about a month ago called Cuba Allows Some Market Reforms. It will be interesting to see how this all works out and how much freedom the government actually allows. Cuba is usually one of the examples I site when I talk about command economies on the first day of the semester.

An Entertaining Economics Music Video

That may sound hard to believe, but it is fun. Go to "Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem. It shows the opposing views of two economists, John Maynard Keynes, who tended to think that the government needed to guide the economy, and FA Hayek, who tended to think that the government should just let markets work. That may be too simplfied, but I just want to give the general idea. (Hat Tip: Ryan Castro).

Here are links to good articles about each economist:

Keynes

Hayek

NBER Says The Recession Is Over!

It ended in June 2009, according to the National Bureau of Economic Research. See Recession Over in June 2009 from the Wall Street Journal.

Click here to see a video of the announcement that the recession is over. You need to see this to get the full story.

Click here for more important and essential information on this issue. You also need to read this to get the full story.

Another Cost Of A Cleaner Environment: Dirtier Dishes

Economics tends to stress that life is full of tradeoffs. If you want to go to more Spurs games, you might have to go to fewer movies. If you want to eat more hamburgers, you might have to eat less pizza.

Now, an attempt to clean the water might mean dishes that aren't as clean as we would like. See the New York Times article Cleaner for the Environment, Not for the Dishes. Here is what happened:

"Responding to laws that went into effect in 17 states in July, the nation’s detergent makers reformulated their products to reduce what had been the crucial ingredient, phosphates, to just a trace."

So when people put their dishes in their dishwashers, they don't get as clean as they used to. The phosphates "...have long ended up in lakes and reservoirs, stimulating algae growth that deprives other plants and fish of oxygen." Other problems include "...chemicals and fragrances can pose respiratory and allergy problems as well as pollute waterways."

But consumers are starting to notice dirtier dishes coming out of their dishwashers and one of them remarked:

"“Low-phosphate dish detergents are a waste of my money,” said Thena Reynolds, a 55-year-old homemaker from Van Zandt County, Tex., who said she ran her dishwasher twice a day for a family of five. Now she has to do a quick wash of the dishes before she puts them in the dishwasher to make sure they come out clean, she said. “If I’m using more water and detergent, is that saving anything?” Ms. Reynolds said. “There has to be a happy medium somewhere.”" (See The Law Of Unintended Consequences)

But one expert said that you can get dishes clean with "vinegar, baking soda or the newer cleansers." At a hospital in New York, "Reports of burns, rashes, dizziness and scratchy throats among housekeeping employees have plummeted" as a result of the newer cleaning products.

I will leave the final word to Consumer Reports:

"But in its September issue, Consumer Reports reported that of 24 low- or phosphate-free dishwasher detergents it tested, including those from environmentally friendly product lines that have been on the market for years, none matched the performance of products with phosphates.

The magazine did note that the formulas were improving, and it rated seven detergents “very good,” including two of six Cascade products it tested. Susan Baba, a spokeswoman for Cascade, said that while most Cascade customers had not noticed any change, Procter & Gamble was modifying the formulas of some products in response to complaints."

If You Lower The Excise Tax On A Good By $1.00, Does A Firm Save $1.00 On Each Unit Sold?

Probably not. This issue came up in an article that I linked on Wed. One of the things it said was:

"Crapo's bill would cut the federal excise tax on brewers' first 60,000 barrels of beer in half to $3.50, saving brewers up to $210,000 a year."

One thing we know in economics is that if we enact a tax in the first place, most likely some of the tax is paid by the seller and some is paid by the buyer. We can see this by looking at the following graph. Suppose an excise tax of $1.00 is imposed on this good. The immediate effect is to shift up the supply curve by $1.00. As you can see, the new price is now $6.00 where as before the tax it was $5.50. That means the buyer is paying $0.50 more than before. Then the seller gets $0.50 less.

Before the tax, when a consumer bought the good, they paid $5.50. Now they pay $6.00. But the seller has to give the government $1.00 of that, leaving them with $5.00 or $0.50 less than they got before. Now how this relates to the barley tax is explained below the graph.


Suppose, initially, for the sake of simplicity, that in the market represented by the graph above, the government now eliminates the $1.00 tax on the first 20 units sold. That basically means that we are back to S1 and a price of $5.50. The sellers collectively save $5.00. Why? Because they lost $0.50 per unit before the tax was eliminated and they sold 10 units. Now they sell 11 units and pay no tax. So they are $5.00 better off. But, if we went along with the way the article reads, we would say that the sellers save $10. That is impossible, since they did not lose $10 to begin with. So it would be impossible for the barley growers to save $3.50 per unit sold if that is how much the tax was reduced.

But let's try eliminating the tax on the first 5 units sold, kind of like the proposed change to the barley tax. So there will only be a $1.00 tax on units 6-10. It think that part of the supply curve shifts down by $1.00, but only up to a Q of 5. Then the rest of the supply line is still S2. The graph below shows this. The equilibrium price is still $6.00 and the equilibrium quantity is still 10. Businesses pay $0.50 per unit from the tax on the last 5 units sold so their total cost from the tax is $2.50. So cutting the tax only saves them $2.50 since before this change of not taxing the first 5 units, they paid $5.00. Now they pay $2.50 or $2.50 less than before.

This means that the barley growers cannot save $3.50 per unit over 60,000 units for a total savings of $210,000. It will be less than that.

Does Economics Trump Religion?

See Abstinent Mormon farmers grow barley for beer. It seems like maybe some of these farmers care more about economics than their religious beliefs. They don't seem to want to acknowledge any conflict and they will say whatever it takes to justify what they do. Maybe that just shows they are human like everyone else. Here is the intro:

"Idaho Sen. Mike Crapo might seem like an unlikely person to be pushing a bill to cut federal taxes on small beer-makers: A member of The Church of Jesus Christ of Latter-day Saints, he abstains from alcohol.

But Crapo's effort, with senators from Oregon, Massachusetts and Maine, illustrates the deep bond between Idaho Mormons and the beer industry.

Mormon farmers raise barley for Budweiser and Negra Modelo beers, and last year, Mormons in the Idaho Legislature helped kill a plan to raise beer and wine taxes to fund drug treatment, fearing it could hurt farmers."

The article also says:

"Idaho's Mormon barley farmers acknowledge an ambiguity in what they grow.

"I've often wondered about the correctness of doing it," said Scott Brown, president of the Idaho Grain Producers Association and a Mormon who grows barley on 5,000 acres near Soda Springs. "But somebody is going to grow it, whether members of the LDS church do.""

You could say the same thing about selling cocaine. The article also says:

"Coors has bought barley from Idaho's Mormon growers for going on four decades."

and

"With the brewers offering good prices, the crop just makes sense, said Kelly Olson, Idaho Barley Commission administrator.

"I know of some LDS growers who won't raise malt barley, because they know it's ultimately destined for malt brewers," she said. "But by and large, most farmers make planting decisions based on economics.""

and

"Clark Hamilton, a Mormon farmer originally from Utah, was harvesting 3,000 acres of barley near Ririe last week. The golden, rice-sized cereal grain was destined for companies that make Natural Light and Corona beers. He's heard the question before.

"People will look at me and say, 'You're a Mormon, why do you grow barley?' " he said. "I just don't have a problem with it. I don't think people who drink beer are bad.""

Should You Break Up With Your Fiancé If They Have Too Much Debt?

See How Debt Can Destroy a Budding Relationship from the New York Times. Here is an exerpt:

"Nobody likes unpleasant surprises, but when Allison Brooke Eastman's fiancé found out four months ago just how high her student loan debt was, he had a particularly strong reaction: he broke off the engagement within three days.

Ms. Eastman said she had told him early on in their relationship that she had over $100,000 of debt. But, she said, even she didn't know what the true balance was; like a car buyer who focuses on only the monthly payment, she wrote 12 checks a year for about $1,100 each, the minimum possible. She didn't focus on the bottom line, she said, because it was so profoundly depressing.

But as the couple got closer to their wedding day, she took out all the paperwork and it became clear that her total debt was actually about $170,000. "He accused me of lying," said Ms. Eastman, 31, a San Francisco X-ray technician and part-time photographer who had run up much of the balance studying for a bachelor's degree in photography. "But if I was lying, I was lying to myself, not to him. I didn't really want to know the full amount.""

The article then discusses the types of issues couples should discuss before they get married, like pre-nuptial agreements. They may not seem romantic, but it forces people to start thinking about what their future lives might be like and how they both handle money. Money is often one of the biggest problems in marriages.

Austan Goolsbee Once Laughed At Me

Austan Goolsbee was just named the new chairman of the President's Council of Economic Advisers. See Who Is Austan Goolsbee? How many people can say the President's top economic advisor laughed at them?

Here is what happened: I was at a book symposium in 2006. Steven Levitt (who, like Goolsbee, is a University of Chicago economist) was about to autograph my copy of his best selling book Freakonomics when I told him that I had emailed him a few months earlier with some analysis that I did about the viewer ratings for the movie Snakes On A Plane at the Internet Movie Data Base. There seemed to be something funny about the numbers, as if someone was gaming the system to get the movie a higher numerical rating.

When Levitt got my email with my analysis, he asked if he could post it on his blog. I said yes. So he posted it and here is the link: Snakes on the internet, too? So while Levitt is autographing the book, I said I couldn't think of anyone else in the world who would have been interested in what I had to say about Snakes On A Plane accept maybe the Freakonomics guys. That is when Mr. Goolsbee, who was sitting next to Levitt, laughed.

Levitt wrote: "Long live the snakes" in my copy of his book.

Can You Beat Unemployment With A College Degree?

People with college degrees or more had a 4.4% unemployment rate as of June 2010. It was 10.8 percent for those with only a high school education. See Want To Avoid Unemployment?: Statistics show a clear link between education level and employment.

Now it may not be that simple. People who graduate from college may be smarter and harder working than others (being smart and hard working helps you get through college). And people who are smart and hard working will probably get better jobs and have lower unemployment rates. That would be true of a world that had no college degrees.

But most likely, ceteris paribus, education helps. The article also mentions some high paying careers.

The Federal Government Favors Some States Over Others

The Federal government spends $10,548 on each person in the United States. See Federal spending up record 16% amid recession. "The biggest chunk of funds went to Medicare, Medicaid and Social Security, entitlement programs that are projected to consume ever larger portions of the federal budget as the population ages."

But the rate per person varies quite a bit across the states. Here are the highest and lowest:

Alaska $20,351
Virginia $19,734
Hawaii $19,001

Nevada $7,148
Utah $7,435
Georgia $8,538

The article did not explain or discuss why there are such big differences. But this other article from the Washington Post does, at least a little. It says:

"Virginia was pushed to the forefront of federal spending by the high number of defense contractors and service members living in the state. It saw $67 billion in military spending, a large chunk of the $155 billion the federal government spent in the state in 2009. Only California, New York and Florida got more money overall.

Much of the federal money went to private contractors. In Fairfax County, for instance, almost $40 billion of the $46 billion the federal government spent in the county went to contractors.

In Maryland, federal spending in fiscal 2009 rose 15 percent, to $92 billion. Maryland's ranking reflects in part a large number of residents who are federal employees. Montgomery County, for example, got $28 billion in federal funds, including $4.6 billion in salaries, almost $3 billion in retirement checks and $17.5 billion in government contracts for various vendors."

But I don't think that explains all of it.

Would You Go To A College That Gets A Grade Of D+?

And that is a grade that they gave themself! Their new ad has a big "D+" in it. See Great moments in collegiate marketing: Drake University’s ‘D+’ campaign. Here is an exerpt:

"If you were going to spend tens of thousands of dollars on a higher education, would you want the end result to be known as a "D+" education?

Probably not.

And therein lies the problem some have with Drake University's new marketing campaign.

Touting the ways it can help students "be transformed by an experience that puts opportunity into action and gives purpose to your passion," the Des Moines, Iowa-based school has elected to dub its added pedagogic value the "D+ Advantage" campaign. The tagline for the promo campaign: "Your passion + our experience."

The administration tried to justify it by saying:

"...the ad blitz [was] "edgy and intriguing" and the campaign "was designed to catch the attention of high school students who are bombarded with college and university materials to the point that they are often in information overload and unable to differentiate among the many institutions that have contacted them.""

There may be something to that. Information is costly to obtain and maybe many of the brochures and webstites that students look at end up looking pretty much the same. So how does a school get your attention? By having a very different kind of ad. But this might not have been the best way to go about it.

Decoding Airline Ticket Costs

Airline prices vary alot. The price if you fly from Boston to Long Beach, California is 6 cents per mile. If you fly from Boston to Philadelphia, it is $1.22 per mile. That seems incredible. But The Wall Street Journal article You Paid What for That Flight? It Can Cost More to Fly to Hartford Than Barcelona. What Airlines Consider in Setting Prices has an explanation. Here are some reasons:

"The price you pay for a ticket is driven by a number of variables: competition, types of passengers, the route and operating costs. But the biggest factor, by far, is whether discount airlines fly in a market. Low-cost carriers often set the price in markets because competitors feel compelled to match that price or risk losing customers and flying empty seats. And when they aren't there, big airlines behave radically differently when setting prices.

"It's the number of competitors and the quality of the competition," said airfare analyst and consultant Bob Harrell.

The kinds of travelers in a market heavily influence what prices airlines charge as well. If the route has lots of business travelers—like Hartford to Washington—then airlines set prices high knowing customers will be less sensitive to higher prices. If the route is populated by price-sensitive travelers —think Florida cities and Las Vegas—then airlines set prices low in order to fill up planes."

And

"And when there's not low-fare competition, prices soar. The most-expensive average domestic ticket in the first quarter was $786 for round-trip flights between San Francisco and Philadelphia, according to the DOT. That 2,521-mile route is dominated by United and US Airways, who are competitors but also partners in the Star Alliance. Fly to Boston from San Francisco—183 miles farther by air than Philadelphia—and you paid an average $296 less round-trip in the first quarter, according to DOT. The difference: JetBlue Airways has 17% of the San Francisco-Boston market, but none of the San Francisco-Philadelphia market.

High fixed costs do make short routes more expensive, per mile. But airport costs like terminal rents and landing fees and even the expense of buying or leasing jets, pale in comparison to the two biggest expenses at airlines: labor and fuel. Both go higher as flights get longer."

And

"High prices do catch the attention of low-priced competitors. In the first quarter this year, the most expensive market in the country, per mile, was Boston to Philadelphia, a US Airways-dominated route, where the average fare was a whopping $684. Southwest began serving that route in June.

And now? US Airways' highest coach fare is $281 round-trip—$400 less than its first-quarter average fare."

I like the part about high fixed costs. Suppose a plane costs $500 million. If it flys a 100 mile route, say 1,000 times, that is $5,000 per mile. If it flies a 1,000 mile route 1,000 times, that is $500 per mile. Of course, that is not the only cost. But it does make a difference.

Costs, Benefits And Environmentally Friendly Energy

In my first lecture, I usually define what we mean by "rational" in economics. It means "no one intentionally makes themself worse off." Or, a rational act is one where "the benefit is greater than the cost." Of course, the benefit is in the eye of the beholder. If you go to a Radiohead concert, it might bring you alot more benefit than it would bring me. And costs and benefits are not always known. But this is more or less what rational means.

So we should be rational in our energy use. That is where the article Green Energy: Why We're Still Not Using It comes in. Here is an exerpt:

"The total cost to research, build and operate new green energy plants combined with storage and transmission expenses is significantly higher than traditional coal burning plants. According to the U.S. Energy Information Administration, the average cost of solar power is almost four times as much as traditional coal burning electric generation. The costs are difficult to compare due to the widely disparate nature of individual technologies but the net result is that startup costs are steep."

[wind power]"...is still 50% more expensive than coal-powered electrical plants. Offshore turbines are almost twice as expensive."

There could be some environmental benefits that would change the accounting. Those were not esitmated in the article. But those would have to be very high to tilt the balance toward some of these alternative fuels.

Cuba Allows Some Market Reforms

See Cuba eases property laws, could open door to golf. In my classes this week, I went over some basics of economics, like the different economic systems, tradition, command and market. I said that there were not very many examples left of countries that used the command economy. North Korea and Cuba are two possibilities.

But now Cuba's government is loosening its grip on economic behavior. Here are the changes:

"Cuba has begun allowing foreign investors to lease government land for up to 99 years, a step toward a future that could be filled with golf courses ringed by luxury villas, beachfront timeshares and vacation homes for well-heeled tourists."

and

"A measure appearing the following day expanded self-employment, letting Cubans grow and sell small amounts of farm products out of their homes or special kiosks."

These are only small steps, of course. But they are in the right direction.

The article also mentions:

"The law marks the first major expansion of self-employment since Castro said in an address to parliament Aug. 1 that his government would reduce state controls on small businesses and private enterprise — a big deal in a country where about 95 percent of people work for the state.

Cubans already sell fruit, pork, cheese and other items on the sides of highways across the country, fleeing whenever the police happen past. The new measure legalizes such practices by letting Cubans grow whatever they wish and sell it, while bolstering state coffers with new taxes on their earnings."

Update 8-29: Cuba is also no longer going to subsize cigarettes. See No Smoking: Cuba drops cigarettes from ration book. It says:

"A program that provided state-subsidized smokes to Cuban seniors is headed for the ash heap.

The communist government announced Wednesday it is cutting cigarettes from its monthly ration books effective Sept. 1, the latest in a series of small steps toward fully eliminating subsidies for food and other basic items that impoverished islanders depend on.

Cubans 55 and older had been eligible to receive three packs of "strong" cigarettes and a pack of milds -- 80 cigarettes altogether per month -- for 6.50 pesos, or the equivalent of about 30 cents, using their ration books at state-run distribution centers.

The island's lowest-quality cigarettes, the only kinds subsidized, normally cost 7 pesos, or about 33 cents, per pack, while imported or topflight domestic brands can go for $3 or more apiece.

Until the 1990s, all Cubans 18 and older received a monthly allotment of cigarettes, but the loss of billions of dollars in annual subsidies from the collapsed Soviet Union forced officials to scale back subsidized smoking. Now even older smokers are out of luck."

Frugal Is The New Sexy

Well, okay, maybe it isn't. But how do you make being careful and responsible with your money into an exciting, if not sexy, personality trait? The article How to Be Frugal and Still Be Asked on Dates discusses the issue. The article opens with:

"Saving may be making a comeback, but it still hasn’t gotten its sexy back, particularly if you’re a man.

Earlier this month, the Commerce Department reported that the personal savings rate in June was a much-improved 6.4 percent and that the number had risen as high as 8.2 percent in the depths of the stock market doldrums in the spring of 2009.

Those who are single may not have been rewarded for their parsimony, though. Now comes some survey data from ING Direct, the people who would like you to save more money in their online savings accounts. In June, the company asked 1,000 people which words would come to mind if someone was fixing them up on a blind date with someone described as frugal.

Just 3.7 percent answered “sexy,” while 15 percent picked “boring” and 27 percent chose “stingy.”"

So the cheapskates among us have their work cut out. But the most interesting thing to me was what went into newspaper personal ads way back in 1860. Here is what one ad says:

"“A young lady, rather good looking, and of good address, desires the acquaintance of a gentleman of wealth (none other need apply), with a view to matrimony.”"

Here is an ad from a man in 1860:

"“The advertiser, a successful young business man of good education, polite manners and agreeable address, having recently amassed a fortune and safely invested the same, wishes to meet with a young lady or widow.""

Do men still need to be wealthy today to meet that special woman? Does more money help? If you are not willing to spend alot on your girl friend hurt a guy?

There is actually a blog about how to save money shopping called Frugal Is The New Sexy!

Then there was this funny cartoon from the Wall Street Journal. It was originally at Pepper...and Salt.