Wednesday, December 07, 2011

What Is Economics According To Keynes?

This might be an appropriate way to end the semester. I will not be keeping to my regular schedule until the next semester starts. Here is the quote from Keynes:
“The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.”

I saw this in Know What You’re Protesting by Harvard Economis Greg Mankiw in Sunday's NY Times.

Economists also like parables and fables. Perhaps these are part of the apparatus or techniques that Keynes mentioned. So here is a post from January 2010 on this.

Nobel Prize winning economist Paul Krugman wrote the following in Slate magazine back in the 1990s:
“Economic theory is not a collection of dictums laid down by pompous authority figures. Mainly, it is a menagerie of thought experiments--parables, if you like--that are intended to capture the logic of economic processes in a simplified way. In the end, of course, ideas must be tested against the facts. But even to know what facts are relevant, you must play with those ideas in hypothetical settings.”

Here is the link to the article the quote is from: The Accidental Theorist. He has a brilliant example of how labor saving technology does not increase unemployment.

University of Rochester economist Steven Landsburg wrote the following in his book The Armchair Economist: Economics & Everyday Life:
“But as Aesop discovered some time ago, the details of reality can disguise essential truths that are best revealed through simple fictions. Aesop called them fables and economists call them models." (p. 34)

And
"Economists love fables. A fable need not be true or even realistic to have an important moral. No tortoise ever really raced against a hare, yet “Slow but steady wins the race” remains an insightful lesson.” (p. 40)

So when you see an economics professor draw PPFs on the board which show the tradeoff between houses and cars or when we draw supply and demand curves, we know that these are "simple fictions." But, by assuming, for example, that there is a society that makes only two goods and has one resource (labor, say), we can learn something important, like the The Law of Increasing Opportunity Cost.

Sunday, December 04, 2011

Keynes vs. Hayek

Probably most people have seen this video or know about it. We watched it in my macro classes this week. There are actually two videos. Here they are in order. My class saw the second one. Then there is a link to readings over these issues.

Fear the Boom and Bust

Fight of the Century: Keynes vs. Hayek Round Two

Get the Story Behind the Fight of the Century

If you want to tell Russ Roberts, the economics professor who made the video, what you think, go to Fight of the Century in the classroom

Fight of the Century with Polish subtitles

Friday, December 02, 2011

Economist Mark Thoma on making dollars available to troubled European banks

Mark Thoma teaches at the University of Oregon. This is from his Wednesday article at CBS Money Watch. See Will the Fed's move to help Europe hurt the U.S.? Here it is:

"(MoneyWatch) Central banks in the U.S., England, Canada, Japan and Switzerland along with the European Central Bank announced on Wednesday that they are taking steps to make dollars readily available to troubled banks in Europe. The plan is to reduce the cost of loans between central banks -- these are known as liquidity swaps -- so that dollars are cheaper to obtain.

What are the central banks doing?

The worry is that the financial troubles in Europe will cause problems similar to when Lehman failed in the U.S. An event such as a default on government loans, a bank failure or even just the fear that such events are just around the corner can cause short-term money markets to tighten up. If this happens, then it will be harder for banks to obtain the money they need to fund their operations. Many banks make money by borrowing short and lending long, and make a profit on the spread between short and long interest rates. When the short-term money markets dry up, these banks lose the ability to obtain the money they need to stay liquid and that puts them in danger of failing.

Why are the central banks taking this step?

One reason is to make sure that the banks have the liquidity they need to stay afloat. A widespread domino-like cascade of bank failures would be disastrous and this provides insurance against that possibility. In addition, even without bank failures a loss of liquidity is troublesome. As liquidity dries up, interest rates rise and the loans that businesses and consumers need become harder or impossible to get. That can have a large negative impact on economic activity.

How does the plan work?

These swaps are loans between central banks. For example, the Federal Reserve in the U.S. might swap dollars for euros with the European Central Bank, and then the European Central Bank can lend those dollars to banks that are in trouble.


Why can't the European Central Bank provide liquidity in euros? Why are dollars needed?

The dollar is still considered a safe haven, and when troubles erupt in financial markets, the demand for dollars goes up considerably. Providing extra euros doesn't help when the banks want to be in dollars.

Is there any possible downside? As a taxpayer, will it cost me money to help the Europe mess?

Since these are loans between central banks -- the U.S. Fed will not lend to any foreign banks directly -- there is essentially no risk to the U.S. If the Fed makes a loan to the European Central Bank, and the ECB lends the money to a bank that later fails, it is the ECB that is on the hook for losses, not the U.S. The European Central Bank would still be obligated to pay back the U.S. in full.

The other possible downside is that the short-term expansion in the Fed and other central bank balance sheets that would come with these loans will stoke inflation fears. But since these loans have an expiration date (i.e. the balance sheet will be expected to contract at some point in the future), this shouldn't be a big problem.

Finally, note that while this move can ease financial market conditions, it does nothing to address the underlying problems creating those conditions. So this is no substitute for the difficult decisions that Europe must make to overcome its troubles."

Wednesday, November 30, 2011

What has happened to the distribution of wealth in recent years?

Here are a couple of links that look at this quesion.

Ponds and Streams: Wealth and Income in the U.S., 1989 to 2007 by Arthur B. Kennickell of the Federal Reserve.

Go to page 34, Table 3. The gini coefficient for net worth went from .7863 in 1989 to .8120 in 2007. As the gini coefficient gets closer to 1, the distribution gets less equal (the gini coefficient can go from 0 to 1).



This link from the Cato Institute shows different estimates of what the top 1% owns. The EPI actually shows the top 1% owning less of the wealth in 2007 than it did in 1989 or 1998.

Cato link.

Here is some related information.

Click here to see the data

At this link you can see the gini calculated after taxes and transfers and, it seems, is adjusted for household size. For all people in the mid 2000s, the US has .38 and the OECD average is .31.

Here are the mid-2000s Ginis for household income in selected countries After taxes and transfers and accounting for household size. The U.S. is not that much different.

Australia 0.3
Canada 0.32
France 0.28
Germany 0.3
Italy 0.35
Japan 0.32
Korea 0.31
OECD Total 0.31
United Kingdom 0.34
United States 0.38

Sunday, November 27, 2011

Is Willpower An Untapped Resource?

In economics we say that there are three resources: land, labor and capital. Maybe willpower should be added as a fourth resource. See Willpower: It’s in Your Head by GREG WALTON and CAROL DWECK. Greg Walton is an assistant professor of psychology at Stanford. Carol Dweck, a professor of psychology at Stanford, is the author of “Mindset: The New Psychology of Success.” Excerpts:
"...attributing failures of willpower to our fixed biological limits justifies our procrastination as well as our growing waistlines. But are these theories correct?

We don’t think so."

"...we confirmed that willpower can indeed be quite limited — but only if you believe it is. When people believe that willpower is fixed and limited, their willpower is easily depleted. But when people believe that willpower is self-renewing — that when you work hard, you’re energized to work more; that when you’ve resisted one temptation, you can better resist the next one — then people successfully exert more willpower. It turns out that willpower is in your head."

"...we found that people who believed that willpower was not limited continued to perform well on the second task, making few mistakes, even after facing the difficult initial task. They were not “depleted” and kept on doing well."

"...we found that anyone can be prompted to think that willpower is not so limited."

"During stressful times, like final-exam week, students who believed that willpower was not limited reported eating less junk food and procrastinating less than students who did not share that belief. They also showed more academic growth, earning better grades that term than their “pessimistic” counterparts.

Furthermore, when we taught college students that willpower was not so limited, they showed similar increases in willpower."

"People who think that willpower is limited are on the lookout for signs of fatigue. When they detect fatigue, they slack off. People who get the message that willpower is not so limited may feel tired, but for them this is no sign to give up — it’s a sign to dig deeper and find more resources."

"...when people believe in willpower they don’t need sugar..."

"It’s also a question of what kind of people we want to be. Do we want to be a people who dismiss our weaknesses as unchangeable? When a student struggles in math, should we tell that student, “Don’t worry, you’re just not a math person”? Do we want him to give up in the name of biology? Or do we want him to work harder in the spirit of what he wants to become?"

Friday, November 25, 2011

Economists debate issues at new online policy forum

See IGM Economic Experts Panel. Here is the description:
"This panel explores the extent to which economists agree or disagree on major public policy issues. To assess such beliefs we assembled this panel of expert economists. Statistics teaches that a sample of (say) 40 opinions will be adequate to reflect a broader population if the sample is representative of that population.

To that end, our panel was chosen to include distinguished experts with a keen interest in public policy from the major areas of economics, to be geographically diverse, and to include Democrats, Republicans and Independents as well as older and younger scholars. The panel members are all senior faculty at the most elite research universities in the United States. The panel includes Nobel Laureates, John Bates Clark Medalists, fellows of the Econometric society, past Presidents of both the American Economics Association and American Finance Association, past Democratic and Republican members of the President's Council of Economics, and past and current editors of the leading journals in the profession. This selection process has the advantage of not only providing a set of panelists whose names will be familiar to other economists and the media, but also delivers a group with impeccable qualifications to speak on public policy matters.

Finally, it is important to explain one aspect of our voting process. In some instances a panelist may neither agree nor disagree with a statement, and there can be two very different reasons for this. One case occurs when an economist is an expert on a topic and yet sees the evidence on the exact claim at hand as ambiguous; although we try to word the statements carefully to avoid this, it will no doubt happen at times, and in such cases our panelists vote "uncertain". A second case relates to statements on topics so far removed from the economist's expertise that he or she feels unqualified to vote. In this case, our panelists vote "no opinion".

The panel data are copyrighted by the Initiative on Global Markets and are being analyzed for an article to appear in a leading peer-reviewed journal."

Wednesday, November 23, 2011

Did The Recession Help Lower The Birth Rate?

See Birth Rate Continues to Slide Among Teens by TIMOTHY W. MARTIN in the 11-18 WSJ.
"The birth rate among American teens fell to its lowest recorded level last year, according to a government report, a decline that experts attributed to more-effective sex education and the effects of a tough economy.

There were 34.3 births per 1,000 people 15 to 19 years old in 2010, a 9% drop from 37.9 births the previous year, the Centers for Disease Control and Prevention said Thursday. The rate has fallen in 17 of the past 19 years.

"We haven't seen a one-year decline like this since the mid-1940s," said Stephanie Ventura, a demographer for the CDC and a co-author of the study.

The nation's total number of births fell 3% last year, to four million from 4.1 million in 2009, the third straight year of declines.

The drop was steepest among teens, however. Teenage birth rates peaked in 1991, when there were 61.8 births per 1,000 teens. Over the past two decades, the rate has gradually declined. Fewer teenagers now report having had sexual intercourse than in previous decades. And those who are sexually experienced are more likely to have used contraception than teens in the past, according to CDC data.

In recent years, the federal government has invested millions of dollars in more than 30 sex-education programs that research has shown to lower teen birth rates, according to teen-pregnancy experts. In previous decades, it was unclear which approaches would work and which wouldn't, said Bill Albert, chief program officer at the National Campaign to Prevent Teen and Unplanned Pregnancy, a nonprofit, nonpartisan group.

The programs now have "become less of a body-parts conversation and more talking about relationships," he said.

The rough economy may also dissuade teens from wanting children, because they see their parents or older relatives struggling financially, Mr. Albert said.

Birth rates fell for most ages and all races, a sign that the sluggish economy is leading more women to delay having children. Birth rates fell during previous economic downturns, Ms. Ventura of the CDC said.

Women in their 20s and 30s reported declines, and only women aged 40 to 44 years old saw a rise, increasing 2% to 10.2 births per 1,000 women.

The nation's total fertility rate—the number of children any woman is expected to have in her lifetime—dropped to 1.9, slipping under the 2.1 rate that demographers agree is required for a population to replace itself.

The rate of caesarean deliveries dropped for the first time in 1996. Ms. Ventura said that was an encouraging sign, as the surgery carries more risks than conventional birthing and is costlier."

Sunday, November 20, 2011

Did The Housing Crisis Bring Benefits To College Students?

See Animal McMansion: Students Trade Dorm for Suburban Luxury from the 11-12-11 NY Times. Excerpts:
"While students at other colleges cram into shoebox-size dorm rooms, Ms. Alarab, a management major, and Ms. Foster, who is studying applied math, come home from midterms to chill out under the stars in a curvaceous swimming pool and an adjoining Jacuzzi behind the rapidly depreciating McMansion that they have rented for a song.

Here in Merced, a city in the heart of the San Joaquin Valley and one of the country’s hardest hit by home foreclosures, the downturn in the real estate market has presented an unusual housing opportunity for thousands of college students. Facing a shortage of dorm space, they are moving into hundreds of luxurious homes in overbuilt planned communities."

"The finances of subdivision life are compelling: the university estimates yearly on-campus room and board at $13,720 a year, compared with roughly $7,000 off-campus. Sprawl rats sharing a McMansion — with each getting a bedroom and often a private bath — pay $200 to $350 a month each, depending on the amenities.

Gurbir Dhillon, a senior majoring in molecular cell biology, pays $70 more than his four housemates each month for the privilege of having what they enviously call “the penthouse suite” — a princely boudoir with a whirlpool tub worthy of Caesars Palace and a huge walk-in closet, which Mr. Dhillon has filled with baseball caps and T-shirts."

"A confluence of factors led to the unlikely presence of students in subdivisions, where the collegiate promise of sleeping in on a Saturday morning may be rudely interrupted by neighborhood children selling Girl Scout cookies door to door.

This city of 79,000 is ranked third nationally in metropolitan-area home foreclosures, behind Las Vegas and Vallejo, Calif., said Daren Blomquist, a spokesman for RealtyTrac, a company based in Irvine, Calif., that tracks housing sales. The speculative fever that gripped the region and drew waves of outside investors to this predominantly agricultural area was fueled in part by the promise of the university itself, which opened in 2005 as the first new University of California campus in 40 years."

Friday, November 18, 2011

60 Minutes: Insider trading is legal for members of Congress-but it is nothing new, it started in 1790

See Congress insiders: Above the law?. Here is a brief excerpt:
"* Members of Congress have bought stock in companies while laws that could affect those companies were being debated in the House or Senate.

* At least one representative made significant stock purchases the day after he and other members of Congress attended a secret meeting in September 2008, where the Fed chair and the treasury secretary informed them of the imminent global economic meltdown. The meeting was so confidential that cell phones and other digital devices were confiscated before it began."

But legislators acting on their self interest is not new. Charles Beard wrote about this in his book An Economic Interpretation of the Constitution of the United States. He argued that self-interest was a big force in how the framers wrote the constitution.

In the 1950s, Forrest McDonald wrote a book called We the People : The Economic Origins of the Constitution, in attempt to refute Beard. But more recently, economic historian Robert A. McGuire wrote a book called To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution. He used modern statistical analysis to show that the Beard thesis may be legitimate.

My students might recall that I talk about this on the first day of the semester. Congressmen in 1790 voted on the "Funding and Assumption Act" based on how much money they would receive if that bill passed. The bill paid back all of the debts (bonds or securities) from the Revolutionary War at full value (they were not getting paid back before the Constitution was passed because under the Articles of Confederation all states had to agree to a tax increase-this did not happen much so taxes were never raised to pay back the money the government borrowed to finance the war). But under the Constitution if both the House and the Senate passed a tax increase and the president signed it, it became law.

The debts were securities or bonds. Some congressman owned them. I found how much about half the congressmen owned in these bonds from McDonald's book. The ones who voted yes on the bill had an average of about $6,800 while the ones who voted no had about $764. So it is possible that money influenced the vote.

Here is a passage from John Spencer Bassett's book about the "Funding and Assumption Act" The Federalist System, 1789-1801:
"All the speculating class, in Congress and out of it, were zealously in favor of the scheme; and while it was till being debated they were trying to by all the means known to their class to buy up, even in the remote parts of the country, the old bonds at the depreciated values."

Here are they guys who voted yes and their dollar value of their bond holdings:

AMES 35
BASSETT 0
BURKE 5252
BUTLER 0
CLYMER 14000
DALTON 12
DCARROLL 227
ELLSWORTH 5985
FITZSIMMONS 2668
GALE 4252
GERRY 50000
GROUT 0
IZARD 20865
JOHNSON 0
KING 10000
LANGDON 27921
MORRIS 11000
PARTRIDGE 2195
PATERSON 0
READ 341
SEDGWICK 1680
SHERMAN 7729
STRONG 10903
STURGES 189
SUMTER 0
WADSWORTH 1625
WHITE 1619
WLSMITH 11910

Now the no votes

BALDWIN 2500
COLES 0
FEW 640
GILMAN 1025
GRIFFIN 0
HARTLEY 0
LIVERMORE 0
MADISON 0
MATHEWS 0
MJSTONE 3814
MOORE 0
MUHLENBERG 0
SCOTT 127
WILLIAMSON 2600

Wednesday, November 16, 2011

The San Antonio College Student Newspaper, "The Ranger," Has A Front Page Story On "Occupy Wall Street"

Here is the link:

Occupy movement only beginning, political science professor says

I submitted an op-ed piece in reply. It is below. I guess I will find out on Monday if they print it.

I am very concerned about the front page article the Ranger did on the Occupy Wall Street Movement.

I can understand and sympathize with the protesters. Unemployment is especially high for young people. I got my B.A. in 1982, a year when the unemployment rate was over 9%. It was again the next year. In fact, both unemployment and inflation averaged 7.7% over the nine years from 1975-1983. I began college in the middle of that difficult economic period. It was also a time of bailouts. The government bailed out Chrysler and Continental Bank.

The article said that "the movements' focus is big business and the government's failure to regulate big business." They also seem to be concerned about inequality and how much money the top 1% makes. I believe that the movement is either wrong about these issues or overstates their importance. And their solutions could harm the economy in the long run. How exactly regulations and taxes can harm the economy is not widely understood. So let me try to explain.

Let's take regulation. Many feel that it was a lack of regulation that caused the financial crisis. This is a highly debatable point. Experts like Nobel Prize winner Gary Becker, Peter Wallison, Jeffrey Friedman, Columbia University economist Charles Calomiris and Stanford University economist John Taylor have written on how it was regulations that were the main cause. Banks were told to lower their lending standards which caused the demand for houses to reach unsustainable levels. Even the business writer for the New York Times, Gretchen Morgenson, has written a book which lays at least part of the blame on the government created Fannie Mae and Freddie Mac.

It also may not be true that we don't have enough regulations. Federal spending by regulatory agencies is about nine times higher today than it was in 1970 (adjusted for inflation). Thousands of pages of new regulations are added every year.

But if we did add even more regulations, how will we make them work? Does each regulator do more work or do we hire more regulators? If the latter, we run into what economists call "the law of increasing opportunity cost." We have to keep taking better and better workers out of the private sector to join government agencies. Fewer goods and services will be produced. The cost of regulation will grow exponentially.

Regulators are also subject to "capture" by the interests they are supposed to be monitoring. They end up not serving or protecting the public since they may have already worked in that industry and regular people don't have time to watch what government agencies do.

Regulations cost about 8% of the national income each year since we need to pay the cost of the government agencies and businesses must spend money to comply with regulations.

Much has been made of the growing inequality problem. One way to measure this is the "Gini coefficient." The higher it gets, the less equal the distribution of income (it ranges from 0 to 1). Yet the Gini coefficient for full-time workers only rose from .31 in 1970 to .40 in 1994. It has basically been unchanged since then. So by that count, then, inequality is not especially worse now.

It is true that the top 1% of earners have seen their share of income rise. But 57% of those in the top 1% in 1996 were not there in 2005. The incomes of the top 1% fell about 16% from 2007-09 while the median income fell just 1.5%. The number of people making $1 million or more per year fell 40%.

People are also not stuck at the bottom. Of those in the lowest one-fifth of incomes in 2001, 44% had moved to a higher "quintile" by 2007. That may not be enough income mobility for some, but I think it is still quite a bit. More people might move between income brackets in Europe than the U. S., but the generally lower incomes in Europe make that easier.

Those at the bottom of the income ladder may be doing better over time than is commonly believed. To measure incomes over time, we need to adjust for inflation. But economists have discovered that we should not use the same price index for the rich and poor. The one for the poor has not risen as much over time. Once this is taken into account, we can see that incomes have not stagnated as much as is normally believed.

Many propose higher tax rates on the rich to deal with inequality. Yet this can lead to problems when recessions hit. The higher income earners are now seeing their incomes fluctuate more and they go down more than for most people in recessions. If we rely too much on them for tax revenue, it will mean extra large budget deficits in recessions, as many states have seen recently. In 2007, the top 1% paid about 37% of all federal income taxes. The more we rely on them for revenue, the bigger the problem will be in the next recession.

Taxes have another problem. They cause increasingly exponential damage to economic efficiency. Taxes distort economic activity. If I normally buy a shirt for $20 and then if that shirt is taxed, say, $5, I may choose not to purchase it. That is a loss for me and for the seller. Our total losses are called the "deadweight loss." It turns out that if you double a tax, the amount of inefficiency or deadweight loss quadruples. So every one-percentage point increase in taxes causes more harm to the economy than the previous one.

The damage to the economy from extra regulations and higher tax rates does not have to be great. Even if incentives to work and produce are only slightly diminished and inefficiency rises marginally, the costs in the long-run can be great due to the compounding effect.

The per capita GDP from 1980-2009 grew 1.95% in the US and 1.83% in the EU. That difference may seem small. But, if, for example, per capita income was 20,000 in both the US and EU in 1980, the per capita income (or GDP) now would be 35,015 in the US and 33,839 in the EU, a difference of $1,176. Maybe not a big difference, but it might matter to many families. But after 100 years the US income level would be 12% higher. After 200 years it would be 26% higher.

We also have to realize that recovery from a recession caused by a financial crisis takes more time than in other recessions. This is what research by economists Carmen Reinhart and Kenneth Rogoff has shown.

So I think we should be careful about adding more regulations or higher tax rates to our economy. Let's not rush into anything based on what the Occupy Wall Street movement says. The occupiers would probably site other statistics or interpret them differently. But let's recognize that theirs is not the only valid view on these issues.

Sunday, November 13, 2011

Vehicle Exhaust Linked To Brain-Cell Damage, Higher Rates of Autism

See The Hidden Toll of Traffic Jams by ROBERT LEE HOTZ, science writer for the WSJ. In my macro classes earlier this semester I talked about externalities like pollution. The ideal policy to me would be to tax any activity equal to the costs it imposes. This article shows what some of the damages are. Excerpts:
"New public-health studies and laboratory experiments suggest that, at every stage of life, traffic fumes exact a measurable toll on mental capacity, intelligence and emotional stability."

"So far, the evidence is largely circumstantial but worrisome, researchers say. And no one is certain yet of the consequences for brain biology or behavior. "There is real cause for concern," says neurochemist Annette Kirshner at the National Institute of Environmental Health Sciences at Research Triangle Park in North Carolina. "But we ought to proceed with caution.""

"Recent studies show that breathing street-level fumes for just 30 minutes can intensify electrical activity in brain regions responsible for behavior, personality and decision-making, changes that are suggestive of stress, scientists in the Netherlands recently discovered. Breathing normal city air with high levels of traffic exhaust for 90 days can change the way that genes turn on or off among the elderly; it can also leave a molecular mark on the genome of a newborn for life, separate research teams at Columbia University and Harvard University reported this year."

"Children in areas affected by high levels of emissions, on average, scored more poorly on intelligence tests and were more prone to depression, anxiety and attention problems than children growing up in cleaner air, separate research teams in New York, Boston, Beijing, and Krakow, Poland, found."

"The evidence is growing that air pollution can affect the brain," says medical epidemiologist Heather Volk at USC's Keck School of Medicine. "We may be starting to realize the effects are broader than we realized.""

"...children born to mothers living within 1,000 feet of a major road or freeway in Los Angeles, San Francisco or Sacramento were twice as likely to have autism,..."

"Scientists believe that simple steps to speed traffic are a factor in reducing some public-health problems. In New Jersey, premature births, a risk factor for cognitive delays, in areas around highway toll plazas dropped 10.8% after the introduction of E-ZPass, which eased traffic congestion and reduced exhaust fumes, according to reports published in scientific journals this year and in 2009. The researchers, Princeton University economist Janet Currie and her colleagues at Columbia University, analyzed health data for the decade ending 2003."

Friday, November 11, 2011

M1 and M2 show big gains in the last 12 months

For the data, see Money Stock Measures from the Federal Reserve.

From October 2010 to October 2011, M1 was up about 21% while M2 was up about 9.9%.

From November 2009 to November 2010, M1 was up about 8.1% while M2 was up about 3.1%.

So the last 12 months have seen much bigger increases than in roughly the previous 12 months.

The CPI was up about 3.87% from September 2010 to September 2011. From November 2009 to November 2010, the CPI was up only 1.1%. From September 2009 to September 2010 it was also up only 1.1%. Maybe all the extra money is leading to some inflation.

It seems like the big increases in the CPI came early in this year. The numbers below show the annualized rate of inflation for each month (from the previous month). For example, if the price rise from January 2010 to February 2010 lasted 12 months (compounding, of course), the annual rate of inflation would have been just .30%. Obviously we had some big increases from January to May this year. When May ended, prices were 3.1% higher than at the end of December. If that rate were to last a whole year, we would have an inflation rate of about 7.6%. So it looks like things have slowed down a bit. But who knows for sure with all the money out there. It does depend on the velocity, too. The Sept. 2011 CPI was only about .4% higher than the May 2011 CPI.

2010
Feb. 0.30%
Mar. 5.04%
Apr. 2.10%
May 0.93%
June -1.17%
July 0.25%
Aug. 1.67%
Sep. 0.70%
Oct. 1.50%
Nov. 0.51%
Dec. 2.08%

2011
Jan. 5.87%
Feb. 6.08%
Mar. 12.35%
Apr. 8.01%
May 5.79%
June -1.28%
July 1.07%
Aug. 3.36%
Sep. 1.84%

Click here to see CPI figures

The numbers below show the annualized rate of increase in both M1 and M2 for each month (from the previous month). First M1.

2010
Feb. 17.13%
Mar. 6.30%
Apr. -8.81%
May 3.66%
June 14.07%
July 2.18%
Aug. 15.14%
Sep. 16.92%
Oct. 7.07%
Nov. 28.78%
Dec. 7.58%

2011
Jan. 15.43%
Feb. 14.65%
Mar. 11.25%
Apr. 6.27%
May 21.99%
June 10.01%
July 43.05%
Aug. 83.32%
Sep. 15.98%
Oct. 9.01%

Now M2

2010
Feb. 10.05%
Mar. -3.04%
Apr. 1.52%
May 5.71%
June 4.17%
July 2.26%
Aug. 6.53%
Sep. 6.82%
Oct. 5.73%
Nov. 5.36%
Dec. 4.65%

2011
Jan. 3.40%
Feb. 8.66%
Mar. 3.86%
Apr. 4.40%
May 7.16%
June 12.30%
July 30.07%
Aug. 34.42%
Sep. 6.08%
Oct. 3.59%

Wednesday, November 09, 2011

U.S. exports and imports as a percentage of total output, 1869-2005

Below is a graph from Macroeconomics (6th Edition) by Andrew B. Abel, Ben S. Bernanke and Dean Croushore. A question about this came up in my micro class this week. Here is how they describe the graph in the book:


"U.S. exports and imports,1869-2005 The figure shows U.S. exports (black) and U.S. imports (red), each expressed as a percentage of total output. Exports and imports need not be equal in each year: U.S. exports exceeded imports (shaded gray) during much of the twentieth century. During the 1980s, 1990s and early 2000s, however, U.S. exports were smaller than U.S. imports (shaded red). Sources: Imports and exports of goods and services: 1869-1959 from Historical Statistics of the United States, Colonial Times to 1970, pp. 864-865; 1960-2005 from FRED database, Federal Reserve Bank of St. Louis, research.stlouisfed.org/fred2/series/BOPX and BOPM; output is from Fig. 1.1."

The output data from Fig. 1.1 comes from an article by Christina Romer.


“The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869-1908.” Journal of Political Economy 97 (February 1989): 1-37.

The percentages seem a little higher than other sources, though. Click on the graph to see a much larger version.

Sunday, November 06, 2011

Does It Pay To Be A Garbage Miner?

This past week in my microeconomics class, we read a chapter about trash in the book The Economics of Public Issues. It raised the issue of how can we reduce the amount of trash we have and how do we get rid of the trash we do have.

For some people, though, going through garbage is a job. See Guatemala's trash 'miners' risk lives to find gold by ALBERTO ARCE of the Associated Press. Excerpts:

"A torrent of gray, toxic water spews from a drainage tunnel and surges along the ravine, tumbling along garbage that has fallen from the Guatemalan capital's main landfill 1,000 feet (300 meters) above.

Despite the foul odors, the danger of unstable piles of garbage collapsing and the chance for heavy rain to suddenly raise the water level, dozens of people are busily at work searching for jewelry and other metal scraps knocked loose from the trash."

One worker said:

""I found a bracelet with 9 grams (0.32 avoir ounces) of gold. I got 2,000 quetzals ($256) for it."

It may not seem like much, but it's almost as much as the monthly $270 minimum wage in this Central American nation."

"If the scavengers don't find jewelry, they collect screws, faucets and other recyclable metal items that they can sell for 85 cents a pound. That amounts to twice the minimum wage for an average trip.""

Friday, November 04, 2011

What happened to income of the top 1% from 2007-2009?

See The Rich Get Poorer by Greg Mankiw, Harvard economics professor. Here is his blog post:
"Here is a fact that you might not have heard from the Occupy Wall Street crowd: The incomes at the top of the income distribution have fallen substantially over the past few years.

According to the most recent IRS data, between 2007 and 2009, the 99th percentile income (AGI, not inflation-adjusted) fell from $410,096 to $343,927. The 99.9th percentile income fell from $2,155,365 to $1,432,890. During the same period, median income fell from $32,879 to $32,396."

That works out to a 1.5% drop in median income and a 16.1% drop in income for those in the top 1%.

Mankiw also mentions a paper that shows "that high-income households have riskier-than-average incomes." That is, incomes for the top earners fluctuate alot more than for everyone else. That paper is The Increase in Income Cyclicality of High-Income Households and its Relation to the Rise in Top Income Shares by Jonathan A. Parker and Annette Vissing-Jorgensen, both of Northwestern University. Here is the abstract:
"We document a large increase in the cyclicality of the incomes of high-income households, coinciding with the rise in their share of aggregate income. In the U.S., since top income shares began to rise rapidly in the early 1980s, incomes of those in the top 1 percent of the income distribution have averaged 14 times average income and been 2.4 times more cyclical. Before the early 1980s, incomes of the top 1 percent were slightly less cyclical than average. The increase in income cyclicality at the top is to a large extent due to increases in the share and the cyclicality of their earned income. The high cyclicality among top incomes is found for households without stock options; following the same households over time; for post-tax, post-transfer income; and for consumption. We study cyclicality throughout the income distribution and reconcile with earlier work. Furthermore, greater top income share is associated with greater top income cyclicality across recent decades, across subgroups of top income households, and, in changes, across countries. This suggests a common cause. We show theoretically that increases in the production scale of the most talented can raise both top incomes and their cyclicality."

Wednesday, November 02, 2011

The Deficit Trials 2017 A. D.

I recall a commercial like this back in 1985 or 1986. It paints a bleak picture of America in the future, presumably caused on the growing national debt ($2 trillion then, almost $15 trillion now). I think this thing is way over the top but there may be some real dangers from the debt that I mention below. You might have to watch a brief commercial for some product first. We have been covering the deficit and debt this week in my macro classes. If the embedded video does not appear, use the link below it.


Ridley Scott - W. R. Grace Deficit Trials by angelseyth

Real problems the national debt might cause

1
. About 28% of the debt is owed to foreign citizens (that is according to the textbook by Tucker-it is probably closer to 30% now). When they get paid back, they come and buy American goods. That leaves fewer goods for Americans (who can't afford to buy as much due to higher taxes that were needed to pay back the debt). BUT THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE.

People borrow money all the time to buy houses and cars. Then they pay it back to a person outside of their family or household. We don’t consider this a burden since the money was put to good use. Right after World War II, the national debt was 120% of the GDP. This was much higher than it is now and we survived. No one complains that we borrowed to win the war.

2. Raising taxes might hurt economic incentives. At higher tax rates, people might want to work and invest less. Fewer businesses might expand and fewer news ones created since you will get to keep less profit. But again, THIS MIGHT NOT BE A CONCERN IF WE ORIGINALLY BORROWED THE MONEY FOR A GOOD PURPOSE. Also, if taxes only go up a little, and the debt is slowly paid off each year (like after WW II), it may not hurt too much.

3. We may have fewer government services in the future if we pay back the debt by lowering government spending. But this means that we are trading more government services today for fewer in the future. THIS IS NOT NECESSARILY A BAD THING IF THE MONEY IS SPENT WISELY (which everyone not might not agree on).

For more info ee Reinhart and Rogoff: Higher Debt May Stunt Economic Growth from the WSJ blog last year.


"To all the reasons to worry about the rapid rise in government debt in the wake of the financial crisis, add another: It’ll stunt our growth.

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.

The relationship between government debt burdens and growth is even stronger for emerging-market economies, Ms. Reinhart and Mr. Rogoff find. For countries above the 90% threshold, average annual growth was about three percentage points lower than for countries with public debt of less than 30% of GDP. The countries above the threshold also experienced much higher inflation: prices rose more than twice as fast as in countries with small debt burdens."

Sunday, October 30, 2011

What is the unemployment rate for people with college degrees?

4.2%. The median weekly income for college grads is $1,072 while it is $636 for high school grads. See Gloom Widespread as College Grads Face New Math By DAVID WESSEL of the WSJ. The news is not all great for college grads, though. Excerpts:
"On average, wages for workers with four-year college degrees fell by 8.6% adjusted for inflation between 2000 and 2010, according to government data."

"To be sure, data on wages and incomes don't give a complete picture. They don't count increasingly costly health benefits that many employers provide nor tax breaks enacted to cushion the recession's blow. Nor do they include aspects of life that don't show up in paychecks, from the iPhone to the growing odds of beating cancer.

And Bruce Meyer of the University of Chicago and James X. Sullivan of Notre Dame, who argue official income data paint an overly gloomy picture, note that Americans managed to keep spending in the 2000s while incomes lagged. In an American Enterprise Institute working paper, they cite consumer surveys that suggest inflation-adjusted spending of the typical household (excluding out-of-pocket medical care, education costs and retirement savings) rose 16% in the 1990s and another 16% in the 2000s—some of that fueled by an unsustainable borrowing binge."

"The unemployment rate for recent college grads is 10.7%. More than 14% of Americans between 25 and 34 (5.9 million in all) are living with their parents, up significantly from before the recession. Nearly a quarter of them have bachelor's degrees."

Friday, October 28, 2011

Untangling the Long-Term-Unemployment Crisis

Click here to read this article by David Wessel of the WSJ. Excerpts:
"...according to Fed governor Daniel Tarullo...there is little evidence that the bulk of today's unemployed would still be unemployed if the economy were growing faster or that the bulk of today's unemployment is, in the jargon of economists, "structural.""

""Most of the difference between the prerecession and current unemployment rates is attributable to an aggregate demand shortfall," said Mr. Tarullo"

"The Labor Department counts 14 million unemployed and 3.1 million job openings, or 4.6 jobless workers per job opening. Before the recession, the ratio was 1.5. If every opening were filled instantly, there would still be many unemployed."

"Wages aren't rising. "We don't see rapid wage growth almost anywhere, which is what you would expect if firms were bidding up the wages of qualified workers and were unable to find qualified workers among the unemployed," said Harvard University's Lawrence Katz."

"We had a fast-advancing economic decline with layoffs and hiring freezes in a broad range of sectors of the economy. That is not consistent with an increase in structural unemployment being the big explanation," Mr. Tarullo said."

"Data gleaned from help-wanted ads, surveys and government tallies did hint at a growing mismatch during the recession between skills jobless workers have and those employers want, but that "mostly has receded since 2009," says Mike Elsby, a University of Edinburgh economist."

"...between 12% and 33% of the five-percentage-point increase in the unemployment rate is due to this mismatch."

"...there was reasonable speculation that those who couldn't sell their houses wouldn't move to where the jobs are. But the latest data suggest that phenomenon is, as Mr. Elsby puts it, "quantitatively negligible.""

Wednesday, October 26, 2011

Women and the pay gap

This is a post from April 2007. This issue came up in one of my micro sections this week.

The American Association of University Women issued a report. One of the things it says is:

"Ten years after graduation, women fall further behind, earning only 69 percent of what men earn. Even after controlling for hours, occupation, parenthood, and other factors known to affect earnings, the research indicates that one-quarter of the pay gap remains unexplained and is likely due to sex discrimination."

I emailed them the following question but have not heard back (not even now as of October 26, 2011):
"So the 69 percent means that women earn 69 cents for every dollar that men make ten years after college. That makes the gap 31 cents. But when these other factors are accounted for, one-quarter of the gap remains. Since one-quarter of 31 is 7.75, that means when all other factors are held constant, women earn 92.25 cents for every dollar that men make. Is my interpretation correct? How does this compare to what other studies have found? Is this gap changing over time? Were any other causes for the remaining 7.75 cents examined besides sexual discrimination?"

An article by Steve Chapman gives a different view than the American Association of University Women on this issue. Here is a passage from his article:
"I asked Harvard economist Claudia Goldin if there is sufficient evidence to conclude that women experience systematic pay discrimination. "No," she replied. There are certainly instances of discrimination, she says, but most of the gap is the result of different choices. Other hard-to-measure factors, Goldin thinks, largely account for the remaining gap -- "probably not all, but most of it.""

Sunday, October 23, 2011

Will Dropouts Save America?

Click here to read this interesting article from today's NY Times. Excerpts:
"...nearly all net job creation in America comes from start-up businesses..."

"If start-up activity is the true engine of job creation in America, one thing is clear: our current educational system is acting as the brakes. Simply put, from kindergarten through undergraduate and grad school, you learn very few skills or attitudes that would ever help you start a business."

"...most students learn nothing about sales in college; they are more likely to take a course on why sales (and capitalism) are evil."

"You don’t learn how to network crouched over a desk studying for multiple-choice exams. You learn it outside the classroom, talking to fellow human beings face-to-face."

"True, people with college degrees tend to earn more. But that could be because most ambitious people tend to go to college; there is little evidence to suggest that the same ambitious people would earn less without college degrees..."

"AFTER all, there is not one job market in America, but two. The formal market we always hear about — jobs that get filled through cold résumé submissions in reply to posted ads — accounts for only about 20 percent of jobs.

The other 80 percent get filled in the informal job market."

"You don’t need a degree (and certainly not an M.B.A.) to start a business and create jobs, nor is it even that helpful, compared with cheaper, faster alternatives."

Friday, October 21, 2011

Should companies give healthy workers a break on their health care costs?

The issue of who deserves government financed health care came up in one of my classes a couple of weeks ago. Megan McArdle had a post at her blog that reminded me of that called Give Me Liberty and Give Me Death?. Here it is:
"Ezra Klein has an interesting article about the Cleveland Clinic's move to cut its own health costs by somewhat curtailing the choices that its employees can make about their lifestyle:
That left enforcement. The clinic tracks its employees' blood pressure, lipids, blood sugar, weight and smoking habits. If any of these are what the clinic calls "abnormal," a doctor must certify that the employee is taking steps to get them under control. Otherwise, no insurance rebate. The idea is to force employees to have regular conversations with their doctors about wellness. If they participate, they can lock in the rates they were paying two years ago. The savings amount to many thousands of dollars.

It appears to be working. Not only has the clinic cut its health-care costs, but its employees are also getting healthier in measurable ways. Workers have lost a collective 250,000 pounds since 2005. Their blood pressure is lower than it was three years ago. Smoking has declined from 15.4 percent of employees to 6.8 percent.

In one sense, the clinic has achieved the health policy ideal: cutting health-care costs by making people healthier. But consider how the clinic has done it -- tying premiums to personal decisions, firing smokers, tracking employee metrics, eliminating popular sodas and foods from campus. By making it harder and more expensive for employees to be unhealthy, the clinic has radically overstepped the traditional, laissez-faire approach of employers to their workers' personal habits.

It also opens the door to onerous forms of discrimination. The clinic no longer hires smokers. Will the obese eventually face similar hurdles? What about fans of fast food? The experiment might work at a famed medical center where the CEO plausibly argues that aggressive leadership in health care is central to the institution's mission. But would it work at General Motors? Caterpillar? Wal-Mart? Medicaid and Medicare?

Roizen thinks it can -- and should. He estimates that an aggressive program could cut federal health spending by $300 billion to $600 billion a year. If he's right, then simply instituting such wellness reforms could cut the federal deficit by far more than the Simpson-Bowles commission or the congressional supercommittee would.

Perhaps unsurprisingly, I'm pretty skeptical. Let's start by asking what the selection bias was. Cleveland fired two high-profile doctors who wouldn't quit smoking. One imagines that employees who do not want their employer nannying them about their gym time and alcohol consumption probably decline to work at the Clinic.

Selection bias will produce good results for the selecting organization, but you cannot replicate its results on a nationwide scale; fat, smoky people have to work somewhere (or go on welfare). If this became common, you'd see legislative pushback in the form of discrimination lawsuits and legislation. I'm betting there are more obese workers/voters than there are people who hit the gym five days a week.

There's also the question of lifetime cost profile. Cleveland mostly isn't covering people in that expensive last year of life; that honor tends to go to Medicare and Medicaid. Cleveland saves money if its workers have fewer smoking-related problems, but if that keeps them alive long enough to get Alzheimer's, their lifetime health cost may go up.

Now, you can certainly argue that it's still a net gain--people live longer, healthier lives. And I agree that longer and healthier lives are a worthy goal. But from a cost perspective, I suspect that there's less to the Cleveland model than meets the eye."

Wednesday, October 19, 2011

Can Economists Learn To Be Ethical?

I'm not sure you can teach this old dog a new trick like that. See Economists Pen a Code of Ethics By JUSTIN LAHART of the WSJ. Excerpts:

"Academic economists are moving closer to adopting a code of ethics in response to criticism that ethical lapses in the profession helped precipitate the 2008 financial crisis.

Many economists work with companies, financial firms, governments and other organizations that are eager to tap their expertise. That has opened them up to charges that the often lucrative consulting fees they were receiving first blinded them to the risks to the economy heading into the financial crisis and then steered them toward offering policy responses that benefited their clients. But because the potential conflicts of interest weren't generally known, government officials, the news media and the public took their assessments at face value.

The American Economic Association, the largest professional society for economists, decided last January to consider creating ethical guidelines for its membership. That is something that other academic associations, such as the American Sociological Association, have already done, but that the AEA for years resisted.

The group's change of heart was partly motivated by the public attention the documentary "Inside Job"-winner last February of an Academy Award-drew to the consulting relationships of several influential economists. Among them: Harvard University's Martin Feldstein, who served on the board of American International Group Inc. in 2008, when the government saved it from the brink of collapse, and Columbia Business School's Frederic Mishkin, a former Federal Reserve governor, who in a 2006 report sponsored by the Iceland Chamber of Commerce painted a bright picture of that remote country's economy, two years before it collapsed."

"The group is focusing on providing disclosure guidelines to economists when they face conflicts of interest, Mr. Solow said."

These are related articles that discuss Adam Smith and moral sentiments:

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

Adam Smith vs. Bart Simpson

Adam Smith vs. Ace Ventura

Sunday, October 16, 2011

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

Life is full of tradeoffs, as we often say in economics. But a recent study suggests that couples who make money and material things less of a priority have better marriages. So it looks like you can trade money for love. See Materialism May Erode Couples' Relationships. Excerpts:
"Couples who place money and material things high up in their order of priorities are generally less happy than couples who believe money and possessions are not important, researchers from Brigham Young University, Utah, USA reported in the Journal of Couple & Relationship Therapy. The authors say their research confirms The Beatles lyrics "Can't Buy Me Love" holds true - "the kind of thing that money just can't buy is a happy and stable marriage"."

"Their statistical analysis found that couples who did not feel money and possessions were important scored approximately 10% to 15% higher on marriage stability and other relationship measures, compared to those who did."

"...the detrimental effects of materialism occur despite income levels - i.e. it has a negative effect on those with and without money."


See earlier posts on related topics:

What Do Men In China Need To Get A Bride?

Adam Smith, Marriage Counselor

A Special Valentine's Message On Romantic Love

Can You Put A Price Tag On Love?

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

Return of the Love Headhunters

Friday, October 14, 2011

Was Steve Jobs A Hero?

I provide some thoughts and links below, but first, a brief commercial message:



If you understand the title of this blog, you know I that I think that Jobs was a hero.

The NY Times recently said that Steve Jobs isn't particularly heroic

They had an interesting article about teaching character in schools but they had the following passage:
"The CARE program falls firmly on the "moral character" side of the divide, while the seven strengths that Randolph and Levin have chosen for their schools lean much more heavily toward performance character: while they do have a moral component, strengths like zest, optimism, social intelligence and curiosity aren't particularly heroic; they make you think of Steve Jobs or Bill Clinton more than the Rev. Martin Luther King Jr. or Gandhi"

See "What if the Secret to Success Is Failure?"

Here is an article which says Jobs was a hero:

Why Steve Jobs is my hero by Sunil Sethi

Here is an article which says Jobs was not a hero:

Jobs no hero to working class by Harold Meyerson

Wednesday, October 12, 2011

Some Information On This Year's Winners Of The Nobel Prize In Economics

See Nobel Winners Saved Macroeconomics After Keynes by Edward Glaeser, writing for Bloomberg (Edward Glaeser is an economist as well). The winners were Thomas Sargent, of New York University, and Christopher Sims, of Princeton University, for work on “empirical macroeconomics.” The article mentions some things that we have been discussing or will soon discuss in macro:

John Maynard Keynes

The business cycle

Milton Friedman

Phillips curve

The relationship found between unemployment and inflation

Expectations

Sunday, October 09, 2011

Economics Helps Swedish Poet Win The 2011 Nobel Prize in Literature

See Swedish Poet Transtromer’s ’Translucent Images’ Win Nobel from Bloomberg Businessweek. Excerpts:
"Tomas Transtromer, a Swedish poet and translator known for his depiction of nature and his economy of form, won the 2011 Nobel Prize in Literature.

He won the prize “because, through his condensed, translucent images, he gives us fresh access to reality,” the Swedish Academy said today in Stockholm."

"His lyrical, surreal works explore the natural world, “falling somewhere between dream and nightmare,” the Griffin Trust for Excellence in Poetry said on awarding him a Lifetime Recognition Award in 2007."
(some students might not be surprised to see economics and nightmare go together)

Friday, October 07, 2011

How Much Tax Revenue Could Legalizing Marijuana Raise?

This question came up in class this week and a student sent me a link about it. See The Budgetary Implications of Marijuana Prohibition by Harvard economist Jeffrey A. Miron. Here is the Executive Summary:
•Government prohibition of marijuana is the subject of ongoing debate.
•One issue in this debate is the effect of marijuana prohibition on government budgets. Prohibition entails direct enforcement costs and prevents taxation of marijuana production and sale.
•This report examines the budgetary implications of legalizing marijuana – taxing and regulating it like other goods – in all fifty states and at the federal level.
•The report estimates that legalizing marijuana would save $7.7 billion per year in government expenditure on enforcement of prohibition. $5.3 billion of this savings would accrue to state and local governments, while $2.4 billion would accrue to the federal government.
•The report also estimates that marijuana legalization would yield tax revenue of $2.4 billion annually if marijuana were taxed like all other goods and $6.2 billion annually if marijuana were taxed at rates comparable to those on alcohol and tobacco.
•Whether marijuana legalization is a desirable policy depends on many factors other than the budgetary impacts discussed here. But these impacts should be included in a rational debate about marijuana policy.

Thursday, October 06, 2011

"Data guys" More Important In Business Due To "Moneyball"

See When Data Guys Triumph by CADE MASSEY and BOB TEDESCHI, NY Times business section, 10-2-11.

Oakland A's general manager Billy Beane and author Bill James are entrepreneurs who created a whole new way of running baseball teams based on statistics and this creative spirit is starting to have an impact in the business world.

The Nobel prize winning physicist Richard Feynman said that "science is the belief in the ignorance of the experts." By challenging the experts in baseball, Beane and James were true scientists, asking questions and looking at data in new ways. Excerpts:
"JOSHUA MILBERG has plenty of business cred: an M.B.A. from Yale, experience in the mayor’s office in Chicago, a job as a vice president for an energy consulting firm. But all of that, Mr. Milberg says, matters less than his reputation as “the data guy” — someone who can offer insights through statistical analysis. And for that, he and a growing number of young executives can credit none other than “Moneyball: The Art of Winning an Unfair Game,” by Michael Lewis."

The book "...examines how the Oakland Athletics achieved an amazing winning streak while having the smallest player payroll in Major League Baseball. (Short answer: creative use of data.)

These managers are savvier with data and more welcomed in business circles in part because of the book."

"At its heart, of course, “Moneyball” isn’t about baseball. It’s not even about statistics. Rather, it’s about challenging conventional wisdom with data."

"This evangelism has created opportunities for the analytically minded."

The article calls this work "creative empiricism."
"But “Moneyball” dramatized the principles behind these forces: a reliance on data to exploit inefficiencies, allocate resources and challenge conventional wisdom — and thus broadened their appeal.

“Moneyball” traces Billy Beane’s use of unorthodox analytics to the work of Bill James. Working as a baseball outsider, Mr. James began self-publishing his analysis and commentary in 1977 and built a passionate following."

"Once people see the value of a batter’s O.P.S. — on-base plus slugging percentage, a key measure in the book — it’s a short step to applying similar principles in their own organizations."

"Generation Moneyball isn’t yet in charge. But as the Nobel laureate Max Planck once said, “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”"

Sunday, October 02, 2011

How Well Do You Really Know The Rules of Acquisition?

Where would the economy of this quadrant of the galaxy be without the entrepreneurial spirit of the Ferengi? What is the foundation for their insatiable thirst for profits? It must be the aphorisms, guidelines, and principles called the Rules of Acquisition.

Rule number 1 is "Once you have their money, you never give it back."

My two favorites are

Rule 34: War is good for business

Rule 35: Peace is good for business.

And the one that has saved me more times than I can count

Rule 59: Free advice is seldom cheap.

Friday, September 30, 2011

A Reversal Of Structural Unemployment?

See Supermarkets start bagging self-serve checkouts: More supermarkets bagging do-it-yourself checkout lanes in name of customer service by Stephanie Reitz of the Associated Press. Excerpt:
"Big Y Foods, which has 61 locations in Connecticut and Massachusetts, recently became one of the latest to announce it was phasing out the self-serve lanes. Some other regional chains and major players, including some Albertsons locations, have also reduced their unstaffed lanes and added more clerks to traditional lanes.

Market studies cited by the Arlington, Va.-based Food Marketing Institute found only 16 percent of supermarket transactions in 2010 were done at self-checkout lanes in stores that provided the option. That's down from a high of 22 percent three years ago.

Overall, people reported being much more satisfied with their supermarket experience when they used traditional cashier-staffed lanes.

Supermarket chains started introducing self-serve lanes about 10 years ago, touting them as an easy way for shoppers to scan their own items' bar codes, pay, bag their bounty and head out on their way. Retailers also anticipated a labor savings, potentially reducing the number of cashier shifts as they encouraged shoppers to do it themselves.

The reality, though, was mixed. Some shoppers loved them and were quick converts, while other reactions ranged from disinterest to outright hatred -- much of it shared on blogs or in Facebook groups.

An internal study by Big Y found delays in its self-service lines caused by customer confusion over coupons, payments and other problems; intentional and accidental theft, including misidentifying produce and baked goods as less-expensive varieties; and other problems that helped guide its decision to bag the self-serve lanes."

Here is what I say about in class (which we covered this week):
"Structural unemployment: unemployment caused by a mismatch between the skills of job seekers and the requirements of available jobs.

One example of this is when you are replaced by a machine. We don’t have as many bank tellers any more because people use ATMs. Another example is when there is a fall in demand for your product, so you get laid off, like with typewrites since people now use computers. A third example is geographical, when the jobs are not in your region of the country."

Sunday, September 25, 2011

College degrees that can attract employers

Click here to read the article. Here are the top 5 they listed:

Degree #1 - Bachelor's in Business Administration

Degree #2 - Bachelor's in Computer & Information Sciences

Degree #3 - Master's in Business Administration (MBA)

Degree #4 - Bachelor's in Health Care Administration

Degree #5 - Bachelor's in Marketing/Communications

Of course, by the time you graduate, things may have changed. Maybe too many people will go into these majors, lowering the potential salary.

Friday, September 23, 2011

Will There Be A Pumpkin Shortage This Year?

See The Great Pumpkin Shortage: Stormy Summer Limits Supply In Northeast By MEGAN GIBSON of Time.com. Here is an excerpt:
"As much as we hate to admit we need pumpkins - NewsFeed answers to no vegetable - this time of year we really do. Unfortunately for those of you in the Northeast, pumpkins might not be so readily available for your Halloweening needs.

Thanks to Tropical Storm Irene and an especially stormy summer, there are severe reported shortages in pumpkin crops across the region as bad weather conditions have led to higher numbers of rotten vegetables. Which means that pumpkin seekers could be paying double for their Jack-o'-lantern canvases in some places and, in others, they could be out of luck entirely.

What's a Halloween lover to do? Now just because you didn't see this shortage coming, doesn't mean there's no hope for you. Now that you know, however, your first course of action should be to move quickly. David Dumaresq of Farmer Dave's told CBS that you should "[b]uy your pumpkins soon for the best availability because there's not going to be too many around this year.""
Of course, if everyone tries to "move quickly," that could make the price rise sooner. This relates to one of the shift factors of demand, expectation of future price. If buyers expect higher prices in the near future, demand today increases which will cause the price to rise.

Then sellers will reduce supply in anticipation of the higher price, further speeding up the price increase. My guess is that sellers try to project consumer behavior on this and will raise the price based on this.

But if the price actually doubles, then that would eliminate the shortage. We have the supply line moving to the left, raising the price and lowering the quantity bought and sold. Yes, fewer people will get pumpkins this time of year, but there is no shortage.

Sunday, September 18, 2011

Josh Hamilton’s grand slam causes a flooring and countertop shortage

Click here to read the story. Or just read it here:
"ARLINGTON, Texas (AP)—A Dallas carpet company has had trouble with its website much of the day, thanks to Texas Rangers slugger Josh Hamilton(notes).

The Rangers beat Cleveland on Wednesday night, helped by Hamilton’s grand slam. It just so happened that CC Carpet was offering free flooring and countertops to customers in September if the Rangers outfielder hit a grand slam.

Hamilton did his part and the company has to pay up. Not long after the hit, the company’s website crashed and it’s been spotty Thursday.

CC Carpet president Steve Fitzgerald says the promotion will cost his company about $500,000 but it’s covered by insurance."

Friday, September 16, 2011

Could Those Hours Online Be Making Kids Nicer?

What would Adam Smith say, especially the one from Wednesday's post? Click here to read the Wall Street Journal article about this. Maybe Facebook and Twitter have positive externalities. Excerpts:
"Time spent online may be helping people learn to be more empathetic and make more friends in real life.

A growing body of research indicates the widespread use of texting, emailing or posting on social-media sites has social benefits."

"...digital communication can lead to more or better friendships online and off, greater honesty, faster intimacy in relationships and an increased sense of belonging, in addition to practical social benefits like an expanded circle for networking."

"...technology appears to enhance real-world relationships..."

"People use digital communication primarily to interact with people they are closest to offline, not with strangers. The communication tightens the bonds between them..."

"... technology-driven communication may be particularly helpful for people who are shy or anxious in social settings."

"Anxious students reported greater shyness and discomfort than non-anxious students in face-to-face groups. In the chat room, however, they said they felt significantly less shy, more comfortable and better accepted by their peers."

"Socially anxious participants were more likely to make decisions and lead the group when they were in the chat room than when face-to-face with others."

"Frequent communication online could serve as practice for in-person social interactions..."

"...empathy could indeed be recognized and communicated through written, online communication."

"Digital communication also appears to bolster individuals' sense of community and group identity..."

"Students reporting low self esteem who actively used Facebook were more likely to say they felt a part of the Michigan State community than low self-esteem individuals who didn't use Facebook as intensely..."

Wednesday, September 14, 2011

Adam Smith vs. Bart Simpson

In March of 2010, I attended a lecture by Paul Zak, a neuro-economist from Claremont Graduate University, at the Mind Science Foundation. This week in my micro class I talked about utility and how consumers behave. neuroeconomics is all about looking inside our brains to see what makes us tick.

Zak 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.

Where does Bart Simpson come in? Professor Zak showed a video clip from the "The Simpsons" that illustrated sympathy, a concept that Adam Smith wrote about in the above mentioned book. To watch a lecture by professor Zak (very similar to the one he did here in San Antonio), go to The Moral Molecule. The Bart Simpson clip starts at the 7:40 mark. Bart's mom tells him to look at his sister and try to feel what she feels. Exactly the kind of thing Adam Smith talked about.

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

Sunday, September 11, 2011

Some Reasons Why Firms Are Not Hiring

See What's Wrong With America's Job Engine?: Wary Companies Rely on Temps, Part-Timers, Hire Overseas by DAVID WESSEL, WSJ 7-27-11. Excerpts:
"That's largely because the economy is growing much too slowly to absorb the available work force, and industries that usually hire early in a recovery—construction and small businesses—were crippled by the credit bust.

Then there's the confidence factor. If employers were sure they could sell more, they would hire more. If they were less uncertain about everything from the durability of the recovery to the details of regulation, they would be more inclined to step up their hiring."

"Something else is going on, too, a phenomenon that predates the recession and has persisted through it: Changes in the way the job market works and how employers view labor.

Executives call it "structural cost reduction" or "flexibility." Northwestern University economist Robert Gordon calls it the rise of "the disposable worker," shorthand for a push by businesses to cut labor costs wherever they can, to an almost unprecedented degree.

Looking back at the percentage of Americans with jobs in the 1990s (rising) and the 2000s (falling), Princeton University economist Alan Krueger estimates that 70% of today's job shortage is simply cyclical, the result of a disappointing recovery from a deep recession. But he attributes 30% to changes in the job market that began a decade or more ago."

"In the most recent recession and the previous two—in 1990-91 and 2001—employers were quicker to lay off workers and cut their hours than in previous downturns. Many also were slower to rehire."

"Between the end of 2007 (when American employment peaked) and the end of 2009 (when it touched bottom), the U.S. economy's output of goods and services fell by 4.5%, but the number of workers fell by a much sharper 8.3%."

"At the worst of the 1980-82 recession, 1 in 5 of the unemployed were "temporary layoffs." In the recent recession, the proportion of temporary layoffs never exceeded 1 in 10. In part that's because fewer Americans work in factories, where production can be stopped and restarted; if a restaurant doesn't have enough customers, it goes out of business.

"When layoffs are temporary, subsequent recalls can take place quickly," say economists Erica Groshen and Simon Potter of the Federal Reserve Bank of New York. When layoffs are permanent, job recovery is slower, they say. If the employer wants to hire, there's the time-consuming chore of sifting through applications.

Corporate employers, their eyes firmly fixed on stock prices and the bottom line, prize flexibility over stability more than ever. The recession showed them they could do more with fewer workers than many of them previously realized."

"58% of employers expect to have more part-time, temporary or contract workers over the next five years and 21.5% more "outsourced or offshored" workers.

"Technology," McKinsey says, "makes it possible for companies to manage labor as a variable input. Using new resource-scheduling systems, they can staff workers only when needed—for a full day or a few hours."

Temporary-help agencies are playing an ever-larger role"

"Workers, in short, now can be hired "just in time.""

"Because they can hire temps almost instantly, there's little need to hire in anticipation of a pickup in business."

"When they do hire, big U.S.-based multinational companies are more able and more willing to hire overseas, both because wages are often cheaper there and because that's where the customers are."

"some employers insist they can't find workers with the skills they need at wages they can afford."

"difficulty in hiring workers "with specialized technical skills, particularly in the health-care and technology sectors."

But workers without college degrees find well-paying jobs scarce."

Friday, September 09, 2011

Links To Differing Opions On President Obama's New Economic Policy Proposals

First, here is a link from the White House about the proposal:

Fact Sheet: The American Jobs Act.

Here is a quick summary from Megan McArdle (who writes for The Atlantic Monthly):

Tax cuts: $250 billion

•Payroll tax rebate on first $5 million in payroll, which the president says will reach 98% of American companies, plus complete rebate for new hires or raises
•Extending payroll tax cut
•Extending 100% expensing of business investment
•(A bunch of regulatory streamlining that is likely to have little effect and is bizarrely classed as a tax cut)
•Tax credits for hiring unemployed veterans, particularly those with service-connected disabilities
•$4,000 per worker for hiring workers who have been unemployed for more than six months

Infrastructure: about $100 billion

•$50 billion for new infrastructure projects
•$10 billion for an infrastructure bank
•$15 billion to rehab vacant and foreclosed homes/businesses
•Some undisclosed sum for getting high speed wireless to "98% of American"
•$25 million to rehab schools

Direct assistance: About $100 billion (?)

•Continuing the extension of unemployment benefits
•Various retraining/wage support ideas that are supposed to help the structurally displaced to transition into new careers.
•$35 billion for preserving/hiring teachers, cops and firefighters
•Federal assistance in refinancing to current mortgage rates

Now links to the various opinions:

Obama's Job Plan: Mostly More of the Same (by McArdle)

Obama’s Jobs Bill: A Reasonable Plan (by Justin Wolfers, economics professor at the University of Pennsylvania)

Obama’s Costly, Unaffordable, Harmful New Stimulus: The “American Jobs Act” (by Hans Bader of the Competitive Enterprise Institute)

A missed opportunity (by Scott Sumner, economics professor at Bentley University)

Obama’s Job Speech Full of Bad Ideas (by Chris Edwards of the Cato Institute)

Obama’s Jobs Speech: Bolder Than Expected (by Mark Thoma, economics professor at the University of Oregon)

Jobs plan may create 1 million jobs - economists (from CNN)

Republicans make nice, but wary of Stimulus 2 (from CNN)

Wednesday, September 07, 2011

Your Co-Workers Might Be Killing You

Interesting article by Jonah Lehrer, from The Wall Street Journal, 8-20-11. Click here to read it. Here are some excerpts:
"...jobs don't just take a physical toll—they also exact a mental price. When people experience chronic levels of stress—and this is precisely what happens when our workplace is unpleasant or demanding—their risk of suffering from a long list of ailments, such as Alzheimer's, heart disease, depression and even the common cold, is dramatically increased."

"..."psychosocial" factors, such as work-related stress, are the single most important variable in determining the length of a life."

"...the factor most closely linked to health was the support of co-workers: Less-kind colleagues were associated with a higher risk of dying."

"...middle-age workers with little or no "peer social support" in the workplace were 2.4 times more likely to die during the study."

"...worst kind of workplace stress occurs when people have little say over their day. These employees can't choose their own projects or even decide which tasks to focus on first. Instead, they must always follow the orders of someone else."

"...a lack of control at the office was deadly—but only for men. While male workers consistently fared better when they had some autonomy, female workers actually fared worse. Their risk of mortality was increased when they were put in positions with more control."