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.

This was a post from December, 2010. Here are the growth rates in real GDP for the years 2011-2015

1.60%
2.22%
1.49%
2.43%
2.38%

Now here are the unemployment rates for the years 2010-2015

9.6%
8.9%
8.1%
7.4%
6.2%
5.3%

So unemployment has fallen quite a bit despite sluggish growth. But the employment picture might not be that great. We see a drop in the unemployment rate of 4.3 percentage points but the increase in the percentage of 25-54 year olds employed was much smaller.  Only 2.26 percentage point increase or only about half of the fall in unemployment. Here are the numbers for the percentage of 25-54 year olds employed for the years 2010-2015.

75.08%
75.13%
75.73%
75.89%
76.71%
77.24%

Federal Reserve Economists May Have Discovered Another Cause Of Bankruptcy

See Why You Might Go Bankrupt If Your Next-Door Neighbor Wins the Lottery by Ben Leubsdorf at The Wall Street Journal blog. In case that link does not work, try Here’s why winning the lottery makes your neighbors go broke by the same author in The New York Post. Excerpts from the WSJ blog:

"Winning the lottery can be hazardous to your neighbors’ financial health.

Research released this month by the Federal Reserve Bank of Philadelphia found a significant jump in bankruptcies among households living near someone who won a big lottery jackpot. The economists theorized that people may have seen the good fortune next door and felt pressure to accumulate more assets of their own, especially flashy purchases like cars, that they simply could not afford.

“Income inequality induces poorer neighbors to consume more visible (rather than invisible) commodities to signal their abilities to ‘keep up with the Joneses’ to their richer neighbors,” economists Sumit Agarwal, Vyacheslav Mikhed and Barry Scholnick wrote. “This tendency can lead to additional and unsustainable borrowing among the relatively poor to finance this additional conspicuous consumption, which can eventually result in financial distress and bankruptcy.”"

"The headline finding: For every $1,000 increase in the lottery prize, there was a 2.4% increase in bankruptcy filings by the winner’s neighbors over the next few years. “These results are more pronounced for low-income neighborhoods and high income-inequality areas,” they wrote.

Why would someone winning the jackpot cause someone living down the street to go bankrupt a year or two later? The economists argued that people who feel they are poorer than their peers may spend more in a conspicuous fashion, financing their purchases with debt. But that debt will need to be repaid, potentially leading to financial difficulties and even bankruptcy.

Messrs. Agarwal, Mikhed and Scholnick analyzed the Canadian bankruptcy data and found “evidence that those who filed for bankruptcy after a larger lottery win of a close neighbor have significantly larger holdings of visible assets (e.g., cars, motorcycles, houses) relative to the holdings of these same visible assets by those who filed for bankruptcy after smaller lottery wins of a close neighbor,” they wrote. There was no similar difference for “invisible assets” like cash or pensions, they said.

In other words, when someone wins a big lottery prize, neighbors appear more likely to buy cars and remodel their houses to show that they can keep up—and go broke in the process."

I put conspicuous consumption in red because that is a well known term in economics and sociology. See Thorstein Veblen and What is Conspicuous Consumption .Veblen first coined the term over 100 years ago. The idea is that rich people buy things just to show how rich they are.

Adam Smith may have beaten Veblen to the punch. In The Wealth of Nations, he wrote:

"With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eyes is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves. In their eyes the merit of an object which is in any degree either useful or beautiful, is greatly enhanced by its scarcity, or by the great labour which it requires to collect any considerable quantity of it, a labour which nobody can afford to pay but themselves. Such objects they are willing to purchase at a higher price than things much more beautiful and useful, but more common." (the entire book is online)

See also an earlier blog post I did called Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!) . See also Doctoral Thesis Says Rich People Spend More on Conspicuous Things

A Special Valentine's Message On Romantic Love

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

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

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

Now the economic definition of romantic love.

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

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

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

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

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

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

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

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

More links:

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

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

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

What Do Men In China Need To Get A Bride?

Adam Smith, Marriage Counselor

A Special Valentine's Message On Romantic Love

Can You Put A Price Tag On Love?

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

Return of the Love Headhunters

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

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

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

Dollars & Sex: The Blog of Marina Adshade

U.S. Economy Added 151,000 Jobs in January; Unemployment at 4.9%

See Click here to read the NY Times article.

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers.

We could look at the employment to population ratio. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work). Click here to see this data from the BLS.

The percentage of 25 to 54 year olds employed went from 77.4% in Dec. to 77.7% in Jan. It was 79.7% in Dec. 2007, the month the recession started. So there might still some catching up to do. But it was good to see a 0.3% increase in one month

Who Is Most Likely To Default On Their Student Loans?

See Should Anyone Be Eligible for Student Loans? by Josh Mitchell of The Wall Street Journal. Excerpt:

"For decades, the federal government has imposed no underwriting standards in its student-loan program. Just about any American can borrow as much as $57,500 for college—and essentially unlimited amounts for graduate school—with little regard for the person’s ability to repay. Everyone taking out federal loans in a given year pays the same interest rate.

Supporters of that no-questions-asked policy say it guarantees every American a shot at a degree and a secure middle-class income. Imposing underwriting standards would deny a higher education to many poor people who can’t get loans from private lenders, they argue.

But a sharp rise in delinquencies in the $1.2 trillion federal student-loan program is drawing comparisons to subprime mortgage lending, which added to the housing crisis. It is also stirring debate on other ways to allot student aid.

New research shows a preponderance of the millions of borrowers who have defaulted on student loans in recent years are poor, were unprepared for college, and attended troubled schools that offered little hope of leading to a decent job.

“It’s not a gift to a poor person who is not going to be able to complete a degree program to give them a loan,” said Caroline Hoxby, a Stanford University economics professor, who calls the soaring load of student debt “a self-inflicted wound on the part of the federal government.

As of Sept. 30, just over 7 million borrowers had gone at least a year without making a payment on their federal student loans, Education Department figures show.
 
The student-loan delinquency rate has jumped to around 12%, roughly double its level before the recession, according to the New York Federal Reserve. When excluding borrowers still in school, roughly a quarter of all student debt is at least 90 days behind on payments. The comparable number for home-mortgage debt never exceeded 9% after the housing crash.

A recent Brookings Institution study by Treasury Department economist Adam Looney and Stanford’s Constantine Yannelis attributes the rise in both borrowing and defaults since the recession largely to “nontraditional students” who enrolled at for-profit schools and community colleges. Those schools typically have low or no academic standards for enrolling.

Such students made up more than two-thirds of defaults among those who left school in 2011, the study found, analyzing government tax records and student-loan figures. The defaulted borrowers tend to be older, from lower-income families, and more likely to be first-generation college-goers compared with students who attend four-year schools.

Likewise, an October paper by Federal Reserve researchers linked defaults to those who had weak credit scores. About 30% of those who had credit scores of between 500 and 599 a year before they left school eventually became delinquent on their loans. But among those with a score of 680 to 729, only 9% became delinquent, according to the paper, by Fed economists Alvaro Mezza and Kamila Sommer."

Another Semester Has Started

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

If that link is not working try this one

The San Antonio Express-News Printed An Article By Me On Terrorism

It does not seem to be online anywhere. It is titled "Fight Terror With Entrepreneurship." It is in the Monday, Dec. 21, 2015 edition on page A11. Here is what I sent them:

Last year the Peruvian economist Hernando de Soto wrote an article in The Wall Street Journal titled The Capitalist Cure for Terrorism Military might alone won’t defeat Islamic State and its ilk. The U.S. needs to promote economic empowerment . He favored promoting economic empowerment in less developed countries.

In his research, de Soto has documented the great difficulties poor people face in legally starting a business and establishing titles to property. When you can’t get title to a property and establish that you own it legally, it makes it hard to get credit at a bank. That limits your business’s size and income.

Any business a poor person starts remains in the underground economy and can’t grow and flourish to its full potential. Just starting a business legally in a less developed country can take months of filling out a great deal of paper work, something only the well off and well educated can do easily.

In Egypt, de Soto says in another article, Egypt's Economic Apartheid “To open a small bakery… would take more than 500 days” and “an aspiring poor entrepreneur would have to deal with 56 government agencies.”

He explained how the Shining Path terrorists were defeated in Peru. A change in policy “gave indigenous entrepreneurs and farmers control over their assets and a new, more accessible legal framework in which to run businesses, make contracts and borrow.”

This led to more economic growth than the rest of South America as well as a faster growing middle class. He recommended doing the same in Arab countries.

In the Arab Spring in 2010, the big problem was small entrepreneurs being harassed by government bureaucrats who constantly demanded bribes and payoffs to let them continue operating their businesses.

James Surowiecki wrote a similar article in The New Yorker in 2011 called The Tyrant Tax. He argued that the stifling of entrepreneurship was especially hard on young people since it limits their opportunities and slows down economic growth.

That just increases their chances of turning to terrorist groups like ISIS. But given we have a case, Peru, where terrorism was successfully fought through the expansion of entrepreneurship, we should again be looking at it as a viable policy option.

The views of de Soto and Surowiecki are supported by more widespread research done by economists William Easterly and Ross Levine. They found that institutions matter more for economic growth than natural resources.

What are those institutions? They include, along with political stability, protection of property, security of contracts and freedom from regulatory burdens.

How much difference can this make? If Mexico had the same institutions as the U.S., its per capita income would be just as high, instead of only being about one-third as much.

If there were greater opportunities in Arab countries because regulatory burdens were eased, then maybe fewer young people would turn to terrorism.

Fighting terrorism through reduced regulations might seem farfetched. But George McGovern, the very liberal democratic candidate for president in 1972, told of how the regulatory burden affected him.

He ran an inn after he left the senate. It went bankrupt and he wrote in a Wall Street Journal article that costly regulations may have played a role. He also noted that we should make sure policies are not “choking off those opportunities” for entrepreneurs.

If someone like McGovern had problems with regulations, just imagine how hard it is for a poor entrepreneur in a less developed country who faces even more bureaucracy, delays and red tape. We get slow growth economies that fall short of opportunities for young people, creating a breeding ground for terrorism. Hernando de Soto shows us this can be reversed.

***********

A good resource on these issues is the book Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity By William J. Baumol, Robert E. Litan, Carl J. Schramm

What Anthropologist Melvin Konner Fails To See When He Criticizes Economists And Their Views On Gift Giving

See What Economists Fail to See in the Act of Gift-Giving: New research suggests why holiday gifts—unlike purchases for oneself—have a value far higher than some economists previously thought from the WSJ. Here is a letter I submitted to the WSJ:

"Melvin Konner takes economists to task because they ignore the fact that gifts symbolize your friendship with someone else and instead focus only on their efficiency ("What Economists Fail to See in the Act of Gift-Giving," Dec. 5.) He argued that gifts have sentimental value, too. That may be true, but we could just as easily see gift giving as an example of what economists call signals. If I spend money on a gift for you, that signals that I am willing to incur a cost to show to you that I am truly your friend. You would not spend money on another person if you did not think you were friends. Konner actually hints at this when he says we feel cheated if we give gifts to a friend but they never reciprocate. Their not spending money on us signals their lack of feelings for us."

 To me, just the very fact that we spend money to prove to another person that we are their friend shows that economics is a very significant part of gift giving. Konner did not mention this possibility at all.

The unemployment rate held at a 7-1/2-year low of 5 percent

See Sturdy U.S. employment report a green light for December rate hike.

One weakness of the unemployment rate is that if people drop out of the labor force they cannot be counted as an unemployed person and the unemployment rate goes down. They are no longer actively seeking work and it might be because they are discouraged workers.

We could look at the employment to population ratio. But that includes everyone over 16 and that means that senior citizens are in the group but many of them have retired. The more that retire, the lower this ratio would be and that might be misleading.

But we have this ratio for people age 25-54 (which also eliminates college age people who might not be looking for work). Click here to see this data from the BLS.

The percentage of 25 to 54 year olds employed went from 77.2% to 77.4% in Nov. It was 79.7% in Dec. 2007, month recession started. So there might still some catching up to do.

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

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

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

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

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

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

When Dorothy’s twister-tossed house comes to rest in Oz, it lands squarely on the wicked Witch of the East, killing her instantly. The startled girl emerges from the abode to find herself in a strange land of remarkable beauty, whose inhabitants, the diminutive Munchkins, rejoice at the death of the Witch. The Witch represents eastern financial-industrial interests and their gold-standard political allies, the main targets of Populist venom. Midwestern farmers often blamed their woes on the nefarious practices of Wall Street bankers and the captains of industry, whom they believed were engaged in a conspiracy to “enslave” the “little people,” just as the Witch of the East had enslaved the Munchkins. Populists viewed establishment politicians, including presidents, as helpless pawns or willing accomplices. Had not President Cleveland bowed to eastern bankers by repealing the Silver Purchase Act in 1893, thus further restricting much-needed credit? Had not McKinley (prompted by the wealthy industrialist Mark Hanna) made the gold standard the centerpiece of his campaign against Bryan and free silver?"

Now an excerpt from Tucker:

"Gold is always a fascinating story: The Wonderful Wizard of Oz was first published in 1900 and this children's tale has been interpreted as an allegory for political and economic events of the 1890s. For example, the Yellow Brick Road represents the gold standard, Oz in the title is an abbreviation for ounce, Dorothy is the naive public, Emerald City symbolizes Washington, D.C., the Tin Woodman represents the industrial worker, the Scarecrow is the farmer, and the Cyclone is a metaphor for a political revolution. In the end, Dorothy discovers magical powers in her silver shoes (changed to ruby in the 1939 film) to find her way home and not the fallacy of the Yellow Brick Road. Although the author of the story, L. Frank Baum, never stated it was his intention, it can be argued that the issue of the story concerns the election of 1896. Democratic presidential nominee William Jennings Bryan (the Cowardly Lion) supported fixing the value of the dollar to both gold and silver (bimetallism), but Republican William McKinley (the Wicked Witch) advocated using only the gold standard. Since McKinley won, the United States remained on the Yellow Brick Road."

But not everyone agrees with this. Economist Bradley Hansen wrote an article titled The Fable of the Allegory: The Wizard of Oz in Economics in the Journal of Economic Education in 2002. Here is his conclusion:

"Rockoff noted that the empirical evidence that Baum wrote The Wonderful Wizard of Oz as an allegory was slim, but he compared an allegorical interpretation to a model and suggested that “economists should not have any difficulty accepting, at least provisionally, an elegant but controversial model” (Rockoff 1990, 757). He was right—we did not have any difficulty accepting it. Despite Rockoff’s warning, we appear to have accepted the story wholeheartedly rather than provisionally, simply because of its elegance. It is as difficult to prove that The Wonderful Wizard of Oz was not a monetary allegory as it is to prove that it was. In the end, we will never know for certain what Baum was thinking when he wrote the book. I suggest that the vast majority of the evidence weighs heavily against the allegorical interpretation. It should be remembered that no record exists that Baum ever acknowledged any political meanings in the story and that no one even suggested such an interpretation until the 1960s. There certainly does not seem to be sufficient evidence to overwhelm Baum’s explicit statement in the introduction of The Wonderful Wizard of Oz that his sole purpose was to entertain children and not to impress upon them some moral. The Wonderful Wizard of Oz is a great story. Telling students that the Populist movement was like The Wonderful Wizard of Oz does seem to catch their attention. It may be a useful pedagogical tool to illuminate the debate on bimetallism, but we should stop telling our students that it was written for that purpose."

I found a review of the book in the NY Times from 1900 and it does not mention anything about OZ having political or economic meaning. The book was also made into a musical a few years later and none of the reviews of the musical mention any political or economic meaning.

What Is Is the Richest City in America?

See This Is the Richest City in America by Alexandra Mondalek of Time. Excerpts:

"According to data compiled by Bloomberg, the newest reigning metropolitan area for wealth and productivity is San Jose, Calif., the third-largest city in the state and a hub of Silicon Valley. The 2014 gross metropolitan product (GMP) per capita—which is a technical way of saying economic output per resident—in the San Jose metro area was $105,482, more than double the national average.

Since the Great Recession, technology hot spots have inched their way forward in attracting the smartest and most highly compensated residents, surpassing the East Coast centers of the financial elite. To be sure, the other coast is well represented: cities like Boston and Philadelphia still rank highly, and Bridgeport, Ct., comes in second on Bloomberg’s list, with a per-resident GMP of $94,349."

The article later says: 

"Good news to those living in some of Bloomberg’s top-ranked cities (looking at you, Boston, San Fran, and Seattle): Your towns are among MONEY’s best places to live for rich singles."

I'm usually skeptical of any "best places" lists because if those places are so great, more people will move there, driving up the cost of living. Then it might not be such a great place.

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

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

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

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

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

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

The Deficit Trials 2017 A. D.

This was a commercial back in 1986. It paints a bleak picture of America in the future, presumably caused on the growing national debt ($2 trillion then, about $18.6 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

Real problems the national debt might cause
1. About 34% of the debt is owed to foreign citizens. 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).

If taxes and interest rates are higher in the future due to the debt, that will lower our future economic growth rate. We will still probably grow, but not as much.

How Are Colleges And Universities Like Nightclubs?

Is College Tuition Really Too High? The answer depends on what you mean by college by ADAM DAVIDSON of the NY Times.

"But probably the single most important factor behind the rise in tuition is one that few other businesses share: Students are not just customers; they are also an integral part of the core product. When considering a school, potential students and their parents often look first at the characteristics of past classes: test scores, grade-point averages, post-college earnings, as well as ethnic and gender mixes. School admissions officers call the process through which they put together their classes the ‘‘shaping’’ of the student body. Kevin Crockett is a consultant with Ruffalo Noel Levitz, a firm that helps colleges and universities set prices. He says that the higher the prices that schools charge, the more options they have in recruiting exactly the students they want.

‘‘I’ve got to have enough room under the top-line sticker price,’’ he says. A school that charges $50,000 is able to offer a huge range of inducements to different sorts of students: some could pay $10,000, others $30,000 or $40,000. And a handful can pay the full price.

There’s a provocative analogy to be made with how another industry does its pricing. I called Paul Norman, who owns a company that promotes high-end dance clubs in London, and he agrees that his clubs have much the same challenge as colleges and universities. Their appeal to new customers is based, in large part, on the mix of customers who are already there. The biggest spenders are wealthy men from Russia and the Middle East. But they won’t spend a lot of money in a club filled with people just like themselves. Women who have the right look — posh in Chelsea, a bit more flash in Mayfair — are admitted free and are offered free drinks, but only if they arrive early in the evening and happily mingle and dance. He said that clubs do their own version of enrollment shaping. ‘‘It’s good for the crowds if you have a mix of ethnicities,’’ Norman told me. On any given night, he said, about a quarter of the clubs’ guests get in free. It’s an odd model: giving your most valuable product away to some and charging a lot to others. But, Norman said, if everybody paid the same price, nobody would want to come, and in a few weeks clubs wouldn’t be able to charge anyone anything.

Similarly, if an elite school like Harvard or Princeton insisted on admitting only students willing to pay the full freight, they would soon find they weren’t so elite. Many of the best teachers would rather go elsewhere than stay in a gated, rich community. The most accomplished rich kids could be lured away to other schools by the prospect of studying with the best students and teachers. So, a school with the same high sticker price for everyone would be unlikely to have the attributes — high test scores, Nobel Prize-winning faculty, a lively culture — that draw national or international attention.

While blue-chip schools charge the most, their economic fundamentals suggest that they are, if anything, underpricing their product. According to the National Center for Education Statistics, the average bill at the top-tier schools is just over $50,000 a year. Yet these schools spend considerably more than $100,000 a year educating each student, with the difference made up from government funds, grants, alumni gifts and their often-huge endowments. Fewer than half of their students pay even that discounted amount. Most of the top-tier private schools say they won’t factor in an applicant’s ability to pay when considering admission and promise that everyone admitted will be given the financial aid necessary to attend. Generally, parents pay no more than 10 percent of their income. Students whose parents make less than $65,000 (or, at Stanford, $125,000) usually pay no tuition. And there are generous aid packages available to all but the very wealthiest students."

What Kind Of Unemployment Might Be The Problem In The Labor Market?

See Employers struggling to find workers with needed skills by Ty-Eshia Johnson of The Ranger, the San Antonio College newspaper. Excerpts:

"Employers are struggling to find skilled workers, the head of Bexar County Economic Development said while giving an in-depth analysis of the 10 Metrocom cities and what the future will bring to Northeast Bexar County.

Executive Director David Marquez delivered the forecast Sept. 18 at Northeast Lakeview College.

Metrocom cities are suburban municipalities surrounding Northeast Lakeview College. Each contributed representatives to an oversight committee during planning for the college.

“We’ve got some challenges in our community on the horizon for workforce, and we’re feeling already the early stages of it,” Marquez said. “It’s not too late to fix it."

"The challenge is a shortage and mismatch in job skills that employers are looking for, Marquez said. Applicants and employees lack basic skills essential for future training in higher paying jobs. “These topics are timely and important,” he said. “If we don’t resolve these issues, our goal to recruit high-paying jobs here is severely unreasonable.”

The jobs are available, but people are having difficulty finding work, he said. “We need to work with those of you who provide those skills to make sure that we’re meeting the needs of the employers, not only the ones that are here, but those we hope to attract,” Marquez said."

"Marquez said the community depends on a high-skilled and high-quality workforce. Middle skilled workers, for jobs requiring an education beyond high school, but less than a bachelor’s, are in high demand.

Professional and technical certifications are also acceptable. However, employers are becoming frustrated with the shortage of skilled workers, which is their primary complaint."

This is what we call Structural unemployment since it deals with the "mismatch between the skills of job seekers and the requirements of available jobs."

Below are the four types or causes of unemployment:

1. Seasonal-Unemployment due to seasonal changes in employment or labor supply.

People who work in amusement parks, lifeguards, farm workers, etc. only work during certain seasons. In the off-season, they are unemployed.

2. Frictional-brief periods of unemployment experienced by people moving between jobs or into the labor market.

An example of this is when you move to a new city with your spouse because they got a better job. For a period of time you will be looking and that period without a job you will be unemployed. Another example is the period of time when you are looking for your first job after you graduate from college.

3. Structural-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 typewriters since people now use computers. A third example is geographical, when the jobs are not in your region of the country.

4. Cyclical-unemployment caused by a fall in GDP. This comes from the idea of the business cycle. We assume that when GDP falls, the unemployment rate goes up (companies need fewer workers since their sales have fallen). And that when the GDP rises, the unemployment rate goes down.

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