• Income inequality dilemmas are timeless whether looking now or at 1623 Plymouth.

    A Bigger (Thanksgiving) Pie or Equal Slices?

    Nov 27 • Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, Labor, Macroeconomic Measurement, Regulation • 24 Views

    Our annual Thanksgiving post:

    Sort of like today, in 1623, Governor William Bradford had income inequality dilemmas.

    Two years after the first Thanksgiving, Plymouth Colony Governor William Bradford increased their food supply. The problem, he concluded, was that people shared whatever they produced. Because they expected “able and fit” young men to work harder and then give their food to others, all worked less. As Bradford explained, ”So they began to think how they…could…obtain a better crop than they had done…At length…the Governor…so assigned to every family a parcel of land…This had very good results for it made all hands very industrious…”

    In 1623, the questions were about redistributing the food supply from those who produced it to those who needed it. Now income redistribution questions are about spending on the Affordable Care Act, entitlement programs like Medicare and Social Security, and marginal tax rates.

    But still, like Governor Bradford and the people of Plymouth, we are talking about the size of the pie and how unequal each slice should be.

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  • Everyday economics of an OPEC myth

    Why OPEC is Not as Powerful as You Think

    Nov 26 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Government, International Trade and Finance, Regulation, Thinking Economically • 73 Views

    When you think of OPEC, be sure to remember Jim Hogg. Jim Hogg (yes, his daughter was Ima), was the Texas governor who established the Texas Railroad commission in 1891. With farmers complaining about how the railroads were overcharging them, the Texas governor wanted a commission that would have jurisdiction over rates charged by railroads, terminals, express companies and wharves.

    Texas Governor Jim Stephen Hogg:

    Texas governor Jim Hogg's Railroad Commission was the prototype for the OPEC cartel.

    Where are we going? To tomorrow’s OPEC meeting.

    But first…

    Compressing a good story, we can fast forward to the 1930s. After the federal government had pretty much taken over the Commission’s transportation oversight, its authority shifted to oil. Still called the Texas Railroad Commission, the group began to oversee “proration,” the process through which oil producers are told “allowable” production days on a field-by-field basis. You can see where this is heading. By keeping production low enough, they could elevate prices.

    OPEC’s Power Problem

    The Texas Railroad Commission was supposed to have been the model for OPEC when it formed in 1960.

    I can remember OPEC’s 1973 oil embargo. Even though odd and even license plates alternated days, gas station lines still endlessly snaked from block to block. Since then, just mention OPEC and don’t you think of a cartel that can control the price of oil?

    One Brown University scholar, though, says we have been misled. While it might appear that OPEC has the power to manipulate world oil prices, a look at each member’s behavior reveals a different story. Members have the incentive to “cheat” because compliance requires costly production changes and it is tough to do more than correlate OPEC policy with oil price fluctuations when many other variables could be the reason. Most amazing though is that OPEC members do not produce less on average than non-members even though OPEC has quotas.

    Then why do most of us believe in OPEC’s power? Sort of like the “Emperor’s New Clothes,” maybe OPEC likes to perpetuate the myth and politicians like to have a reason for high oil prices.

    Our Bottom Line: Enforcement

    The Texas Railroad Commission could enforce its decisions. OPEC cannot.

     

     

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  • Everyday economics of the unemployment rate

    What An Unemployment Rate Does Not Tell You

    Nov 25 • Behavioral Economics, Economic Growth, Economic History, Economic Thinkers, Labor, Macroeconomic Measurement • 105 Views

    As the father of fractal geometry, Benoit Mandelbrot told us that the closer you look at Great Britain’s coastline the more you see. From a distance, it is a curved line. However, looking closely, we see countless indents and zigzags.

    Where are we going? To the “indents and zigzags” that a simple-sounding unemployment rate hides.

    Below, these eurostats compare unemployment in Europe, the U.S. and Japan.

    Unemployment rates compared

    From: Eurostats

    Japan’s Recession

    Idyllic sounding at 3.6 percent, Japan’s unemployment rate tells a different story from a GDP that says they are in a recession. Below, you can see Japan’s GDP contracted at an annual rate of 7.3 percent during the second quarter and 1.6 percent in the third quarter. With consumption leading the plunge, April’s 3 percent sales tax hike might indeed have been a reason.

    Japan's recession with low unemployment rate

    From: http://philippewaechter.en.nam.natixis.com/2014/11/17/3-graphs-on-the-japanese-recession/

    Disparate European Unemployment Rates

    For European statistics, what I found most interesting was the huge regional discrepancies. Although the overall unemployment rate is near 10 percent, looking closely reveals massive differences ranging from 2.6 percent in Oberbayern, Germany to 36.3 percent in Andalucía, Spain. You can see below, it is not easy being green.

    Unemployment rate disparity in European regions

    From: Vox using Eurostat data

    The U.S. Employment Recovery

    Finally, with a U.S. unemployment rate that was 10 percent in October 2009 and now is 5.8 percent, we can smile as the longest period of diminishing unemployment is continuing to unfold. However, when we compare this employment recovery to others, except for 2001, it does not look quite as good. The graph below compares current employment growth to five other recoveries.

    Unemployment rates: U.S. recoveries compared.

    Our Bottom Line: Unemployment Rates

    Like the length of the British coastline, behind one unemployment number, there are countless zigs and zags when we look more closely. Then though, as behavioral economist Dan Ariely tells us, “…So we either simplify the problem and offer a solution, or embrace the complexity and do nothing.”

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  • Everyday economics of football and marginal cost

    The Bills in Detroit and Elsewhere

    Nov 24 • Businesses, Economic History, Entertainment, Government, Labor, Lifestyle, Sports, Thinking Economically • 155 Views

    At first the Buffalo Bills offered free tickets and $10 an hour for helping to remove 220,000 pounds of snow from Ralph Wilson Stadium. Maybe because of the car ban Buffalo declared after its 88-inch snowfall, the plan did not work out. So, tonight, the Buffalo Bills-Jets game will be played in Detroit.

    It wasn’t be as easy as it sounds.

    Transporting the Buffalo Bills to Detroit is much more than a plane ride. There were the snowmobiles that brought the players to the team’s HQ, the buses that went to the airport and the charter flight for the coaches, staff and 53 players. An inexpensive Motel 6 was not an alternative because the team needs conference rooms that only a Hilton, a Marriott or some other business-oriented venue offers. Then, you need meal accommodations. Depending on the player, diets vary, even down to the cut of meat and the amount of carbs. Doing all of this at the last minute means a 30 percent hike to an already expensive line on the team’s balance sheet.

    The wife of starting tight end Scott Chandler shared these pictures of the snowmobile pickup:

    Marginal cost of  Bills' travel to Detroit

    From: Buffalorumblings.com

    Where are we going? To spending at the margin.

    The High Marginal Cost of Travel

    Like the pros, college teams spend a lot on travel. When one journalist compared college football teams’ spending in 2011 and 2012, she found that Alabama’s expenses rose by $4.5 million, Notre Dame, by a whopping $6.6 million and Stanford, $6.1 million. Saying that teams are playing more non-conference away games that will increase because of the newly launched College Football Playoff, this journalist attributes the cost hike to travel.

    Below you can see what schools spend on their teams.

    Marginal Cost college football

    From: Forbes

    From: Forbes

    Even high schools have to absorb big time travel expense. School budgets in Texas were inflated by as much as $140,880 when the four schools that qualified for the playoffs had to travel by chartered bus across West Texas. When we add the bands and drill teams that accompanied the teams, altogether we had 1198 students joining what for some were multi-day festivities.

    Our Bottom Line: Marginal Cost

    Defined as the line beyond which we do something extra, the margin is everywhere in our daily lives. Creating cost and benefit, decisions at the margin involve when to stay in bed for an extra half hour and by how much to exceed the speed limit. Similarly, pro football team owners, college athletics, and municipal school districts each are experiencing cost and benefit at that margin when they decide how much extra to spend on travel.

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  • Everyday economics of an oligopoly

    How To Make a $200 Sneaker Worth $8000

    Nov 23 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Innovation, Labor, Lifestyle, Sports • 194 Views

    Called the sneaker riots, the response to the re-release of the Air Jordan Retro 11s was like the Pigeon Dump. For both of these limited edition events, the lines were long and the supply was low. Many of those who could buy one or two pair resold them on eBay for double, triple or more. Now also for the new LeBrons that retailed for $250, sneakerheads hoped to get $900.

    Where are we going? To how Nike differentiates itself.

    Shooting for High Prices

    On eBay, the Nike limited edition market totals close to $200 million annually. Below you are looking at average secondary market prices. The Lebron 10 What the MVP, originally a $200 pair of sneakers averages more than $2000 on eBay. Astonishingly, for the $250 Air Yeezy designed by Kanye West, 24 people paid more than $8000.

    Oligopoly competition from Nike

    From FiveThirtyEight

    Fascinated that a size 13 could add value, I’ve included a graph about sneaker size from a sneakerhead website:

    Nike's limited editions and Oligopoly competion

    Marketing Power

    With more than $200 million to be made in the secondary sneaker market, observers ask, “why?” Why would Nike forfeit so much money? After all, to diminish the scarcity, it could add to supply. But you can also see how limited edition hype generates “social signaling,” a cool image and less discounting.

    Our Bottom Line: Oligopolistic Competition

    The markets in which oligopolies like Nike compete are composed of few sellers and millions of buyers. While those sellers have price making power and huge production capability, many of them face the challenge of product differentiation. Isn’t Nike saying, “We are different” through their limited editions?

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