During dinner this evening, my friend said that she loves her local post office. A very small branch in a teeny building, they know her name, her needs, and are a neighborhood institution.

But, is it worth $1 billion a month?

During the first 3 months of 2012, the USPS lost $3.2 billion. First class mail volume is down and their retiree expenses are massive.

Changes have been proposed and opposed in Congress. Close 252 mailprocessing facilities? Lose jobs and still 235 remain. Stop Saturday deliveries? Let’s gradually do it during several years. Close my friend’s post office and hundreds of others in rural communities? Just let them remain open for fewer hours. Change the rules for prepaid pensions and maintain pension benefits? Attrition might work.

My bottom line: I keep returning to the Congressional oversight that makes innovative leadership impossible. Maybe we should just say that the USPS is such a valuable institution that we are willing to accept the huge expense and mediocre business model.

After all, I really would hate to lose the small and friendly post office near my home.

Your opinion?

The Washington Post’s “Federal Insider” is a perfect source of information on the USPS as the issues evolve.

Our story starts when Ikea’s founder, Ingvar Kamprad, left Sweden during the 1970s. It ends with Sweden’s current finance minister saying that taxes were the reason.

Associated with a more humane form of capitalism, Sweden was the prototype for the welfare state. But then a real estate bubble burst during the early 1990s. Government spending soared as the economy sank.

Sounds familiar.

Sweden’s response included less public sector involvement through deregulation of industries like postal services and electricity. They eliminated a wealth tax, inheritance tax and gift taxes. They cut the size and duration of unemployment benefits. With retirement options at 61, 65 and 67, their political leadership has suggested 75 years old.

Because the Swedish economy has been relatively healthy, it is being cited as a country that coped with contraction by cutting taxes, diminishing spending, and vastly improving its debt to GDP ratio. Economist Ed Yardeni says that Sweden’s story proves that more spending is not necessarily the answer to recession and unemployment.

And that takes us back to Ikea. Sweden’s finance minister says that his goal is to attract people like Ikea’s Ingvar Kamprad to start businesses, grow them, and remain in Sweden because it is business friendly.

Our Bottom Line: Don’t we always seem to return to the Smith/Hayek v. Keynes debate? Do we need more business friendly environments or more government spending?

To read about how Sweden’s economy is changing, you might want to look here in the Globe and Mail while here is what The Economist has to say and here is The Spectator’s discussion.  For a more academic consideration of the changing Swedish economic model, this Harvard paper is a possibility. And, here is the “Ease of Doing Business” rank for Sweden.

When North Carolina’s voters rejected same sex marriage, they were not thinking economically.

Traditionally, marriage has been about specialization. With the husband in the labor force and the wife at home, their division of labor resembled a small factory. He supplied the income and she was the “domestic specialist.” As in the factory, specialization led to a more productive household.

No more.

Marriage has become a different kind of economic unit. In many households, both partners earn income and both (or none) cook. Washing machines, dishwashers and microwave ovens minimize chores. We have day care and take-out.

With the division of labor changing, so too has the institution. Previously marriage was based on shared production. Now, increasingly, marriage is all about shared consumption. Marriage has become what economists Betsey Stevenson and Justin Wolpers call “hedonic.”

As a result, the demand and supply sides of contemporary marriage markets in which people find partners reflect new values. Correspondingly, the contemporary household as a production unit increasingly is designed for companionship and “consumption complementarity.”

And this returns us to North Carolina and same sex marriage. The new economics of marriage has changed the characteristics of the people who enter marriage markets and of the households they form. Inexorably, new incentives are leading to new choices. As more households change, will politics follow?

University of Pennsylvania economists Betsey Stevenson and Justin Wolpers (who live together and have a child but are not married) explain a lot more about the new economics of marriage here and here and here. If you want to continue further, Ezra Klein’s Washington Post Wonkbook  also discusses Stevenson and Wolpers and how their view of marriage relates to the North Carolina vote.

Sometimes it’s better to be at the bottom than the top.

Explaining, Harvard’s Clay Christensen starts his story with the huge integrated steel firms and ends with the mini mill. Relatively cheaply, the mini mills melted scrap in electric furnaces but their steel was inferior. Responding, the big mills said, “Great. We can make the expensive profitable stuff for cars and washing machines. You can have the low end of this business.”

But it did not work out that way.

The mini mills got increasingly better at steel making until they too could make the high quality products. Imagine a stairway to the top that the mini mills were climbing. Step by step they made more of what the bigger guys produced, gradually improving quality for a lower cost.

Dr. Christensen believes the mini mill lesson is universal. The firm at the top wants to continue making distinctive goods. Meanwhile, though, the firms at the bottom with lower costs and lower quality make cheaper products that are easier to use. Because most customers think they are good enough, they gradually engulf market share.

In a recent interview, Dr. Christensen presented example after example. He talked about disk drives moving from 14 inches down to 5 1/2; the bigger ones were better but the smaller ones became more popular. During the 1950s, the first  Sony transistor radios were not as good as RCA or Zenith but, starting with teenagers, they spread. Even phone cameras, at first so bad but still so handy, they improved. You could also add to the list cell phones replacing traditional landlines, discount retailers moving in on department stores, retail medical clinics taking business from traditional doctors’ offices.

You see where this is going. Called disruptive innovation, it all begins at the bottom where, because the product is cheaper, vast numbers of consumers enter a market that had been too expensive for them.  The stories are fascinating and told in much greater detail in an excellent New Yorker article, at Dr. Chistensen’s website, and in books he has written that include The Innovator’s Dilemma.

Dr. Christensen reminds me also of Joseph Schumpeter and creative destruction. Whether moving from the bottom up or from an upstart entrepreneur, new ideas destroy the old and fuel capitalism.

By Mira Korber, guest blogger.

Throughout the college process, you probably think about how disparate institutions are the right fit for you financially. But consider the equation in reverse…

From solely an economic standpoint, three categories of students might comprise the college’s right fit:

(1)  The independently willing and able to pay for education.

(2)  The students who rely on merit scholarships and grants to attend.

(3)  Those who secure long term loans to pay for their degrees.

I wonder if colleges are counting on the coupon effect. People willing to expend the time and energy looking for coupons pay less. But businesses still can take advantage of the group who, ignoring the coupons, are willing to pay more. Again, the business owner can benefit. She does not have to offer lower prices to everyone.

Are colleges dividing their admissions pool the same way by separating those who seek aid and those who do not?

My investigation into costs of college and rising tuition led me to several interesting sources:

NPR Planet Money. Another Econlife post on the subject of college costs and government intervention. NY Times on college costs, here and here. Not entirely related, but interesting nonetheless. Finally, the middle class college “squeeze.”

This law is about pools but it relates to much more.

Here are the facts:

Until now, many of the country’s 256,000 public pools have provided access to portable lifts that help people with disabilities. On May 21, instead, the Americans With Disabilities Act will require permanent lifts or ramps. The new lifts will cost spas, hotels and municipalities with neighborhood pools $3,000 to $10,000 plus installation. An alternative solution, ramps, is more expensive.

As you would expect, no one seems to disagree that it would be good for people with disabilities to use public pools with greater ease. And pool owners have known for years that the mandate would be taking effect. But, citing cost, danger for young children, and a law whose wording is not entirely clear, some are saying, “Not Now.” Others are concerned that the mandate will prevent cash strapped municipalities like Vineland NJ from opening neighborhood pools.

I wonder if we are really talking about more than pools. Deciding whether to support the mandate’s immediate implementation involves the broader issue of the role of government, the extent of entitlements and what should be delayed when the economy is sluggish.

Also, as economists, it takes us to considering the opportunity cost because as always, “choosing is refusing.” If we say install the devices now, we sacrifice the benefits of waiting or canceling the mandate.  By contrast, delay or cancellation mean the benefits of handicap assistance are foregone.

For many more specific facts about the law and the response, here, here and here are articles.

What is your opinion?  

Spirit Airlines is doing everything it can to charge us less for a seat on one of its planes. One gentleman paid $77 for a round trip seat between Chicago and Fort Lauderdale.

Just the seat.

How much more could he have paid? You might want to try matching each of the following Spirit Airlines fees to one of the items listed below.

The fees:

• 1. $100
• 2. $4
• 3. $28-$38
• 4. $3
• 5. $30-$45
• 6. $5
• 7. $75
• 8. $6
• 9. Free

The items:

• a. check bicycle
• b. buy water
• c. first checked bag
• d. get boarding pass a airport
• e. transport dog
• f. carry-on bag for overhead bin
• g. buy bag of nuts
• h. tuck items under the seat
• i. buy a beer

(Answers at the bottom)

On the surface, it just looks like passengers pay a fee and the airline generates more revenue. But there is more. Because of the carry-on and checked luggage charges, passengers pack less. Less luggage means lighter planes. Lighter planes need less fuel–a huge cost saving for airlines.

Spirit also eliminated reclining seats on their Airbus 320s so that they could fit approximately 40 more fliers onto the plane. Think about it. Whether flights are full or empty, they still need the plane, the fuel, the pilot. And they charge for almost everything else.  An extra passenger costs them very little.

An economist would say that Spirit was really good at thinking at the margin. Defined as the “extras,” the margin is where Spirit adds to revenue and saves on costs.

Thinking at the margin, Spirit probably even made money on the gentleman who paid $77 for his Chicago/Ft. Lauderdale round trip.

While my Spirit facts and the matching idea came from a WSJ.com article, I especially recommend this very clever interactive graphic that displays the shifting position of the major airlines since deregulation in 1978.

1e; 2g; 3c; 4b; 5f; 6d; 7a; 8i; 9h

The year was 1800 when a 65 year old, Paul Revere said, “I have engaged to build me a Mill for Rolling Copper into sheets which for me is a great undertaking, and will require every farthing which I can rake or scrape.”

Paul Revere had been a silversmith, a copper engraver, he could make the buckles on your shoes, your teapot, your false teeth, your church bells. He knew George Washington, John Hancock, John and Sam Adams. During the Revolutionary War, he helped produce gunpowder and cannon, he made that midnight ride, and, protected by a military guard, he printed the money that paid for soldiers and supplies (and his own labor).

With $25,000 of his savings (but not the money he printed), and a $10,000 loan from the federal government with 19,000 pounds of copper, he started his copper foundry. After helping to make the first ships for the U.S. Navy, he had to write a “distressed” note to the US government asking for the $25,000 that was overdue.

Whereas in 1800, the US government helped Revere & Sons grow, now it is helping their descendant survive. Yes, the same firm that Paul Revere started and others like it again need government subsidies. New York State, where Revere Copper Products  now resides, is giving the firm cheap electricity. Governments at every level are providing loans, grants, tax breaks, and other kinds of support to help businesses compete against China’s lower cost producers.

An economist might display the story of Revere’s relationship with the government in 1800 and now through one demand and supply graph. You just need to shift your supply curve to the right to show how subsidies lower cost and thereby increase production.

A classic and the source of my information, Esther Forbes’s 1942 biography of Paul Revere is wonderful . For the current Revere Copper Products story, the NY Times presents a good picture of what small manufacturers say they need from government.

This page was edited after it appeared. I changed Tom Hancock to John Hancock because the latter was well known.

In Boca Raton, Florida, during the early 1990s, a group of JP Morgan bankers gathered for an “offsite” weekend. Have some fun, get some sun, do some brainstorming. They had hoped to create a new product.

And they did.

Their new product involved selling the risk that a bond might default. For example, if JP Morgan owned an Italian bond, it could pay an investor to take over the risk that Italy would default. No default? Then JP Morgan pays the investor a fee. Default? Then the investor pays JP Morgan. As one journalist said, “…it was a win-win deal: JP Morgan reduced its risk, and the investors could earn nice returns.” They called it a “first to default” swap.

Just like silly putty, the aircast or the Model-T, in finance also, someone has an idea that becomes a product. At one time, the junk bond, the money market fund, checking accounts, futures options, hedge funds and adjustable rate mortgages (ARMs) were all innovations. We could go on and on. Someone invented each new financial product.

And that takes me back to JP Morgan–now JPMorgan Chase. Reporting the bank’s unexpected investment losses, yesterday, the Washington Post indicated heavy investments in an index of credit default swaps (descendants of those “first to default swaps) might have been related.

Our Bottom Line: Especially with the controversy surrounding complex financial products, we should remember that financial innovation can fuel economic growth when it moves money and credit productively.

For more about that JP Morgan Florida weekend, the evolution of credit default swaps and the source of my quote, this FT article by Gillian Tett is excellent. And, for more about financial innovation, you might want to look at this Brookings article.

Did you ever wonder who created the trash can icon on your computer? It came from a designer working on the first Macintosh.

The year was 1981. No one really knew what a computer should look like and what it should do. Steve Jobs told the team developing the first Macintosh that it had to be “friendly.” One designer said, “To be honest, we didn’t know what it meant for a computer to be ‘friendly’ until Steve told us.”

Friendly meant everything from the shape and size of the computer to rounding the corners on rectangles on the screen. When his programmer said rounded corners were impossible, Jobs said it had to be done. Pointing to billboards, tabletops, car windows, a No Parking sign, he said, ”Rectangles with rounded corners are everywhere.” The next day, Jobs had his rectangles with rounded corners.

It is legend that Jobs was passionate about fonts because of the calligraphy class he audited at Reed after dropping out. But the story about font names is great. When Jobs learned that his designer had named them Merion, Ardmore, Rosemont, the stops on Philadelphia’s suburban commuter rail line, he complained that those places were unknown. “They ought to be world-class cities.” And so, the Mac’s first fonts became Venice, Geneva, New York, Toronto.

The calculator story is also wonderful. Returning day after day, he kept saying, too dark a background, then the lines are too thick, and then the buttons are too big. As a joke, the designer responded with, “The Steve Jobs Roll Your Own Calculator Construction Set.” Jobs played around with it and created the initial standard design for the Mac’s calculator.

Isaacson concludes the Mac story with a signing ceremony. Saying, “Real artists sign their work,” Jobs asked each of the project’s participants, 46 people including himself, to sign a piece of drafting paper so that an engraving of the signatures could be inside every Macintosh.

Perhaps the best commercial ever made, Apple’s 1984 introduced the Macintosh to the world at the Super Bowl. Here is is.

Our Bottom Line: The first Macintosh displays the reality of Joseph Schumpeter’s creative destruction. From one innovation to the next, Steve Jobs replaced existing technology with new devices. Eli Whitney’s cotton gin and interchangeable musket parts Henry Ford’s moving assembly line and Ray Kroc’s vision for McDonald’s, also display the impact of entrepreneurs.

My Steve Jobs stories and quotes are from the Walter Isaacson bio that I am still reading and loving. I also took a look at Insanely Great by Steven Levy. Moving beyond, Malcolm Gladwell explained in The New Yorker that Steve Jobs’s greatness came from being a “tweaker.”

By Mira Korber, guest blogger.

Two days ago I visited the Times Square Discovery TSX exhibition of the Terracotta Warriors. It is a fascinating display of history, art, and architecture, and I was particularly struck by some economic artifacts from 221 B.C – specifically, each of the currencies unique to the “Seven Warring States” of China: Qin, Qi, Chu, Yan, Han, Zhao, and Wei. Interestingly, each currency reflected the values of its province. For example, in provinces that valued agriculture, the coins were shaped similarly to spades for moving earth. Other currencies featured knife-like forms.

These disparate currencies were used by each of the seven provinces until the First Emperor of China (Qin Shihuangdi from the Qin province) united them all in 221 BC. His new currency was called the “half-liang” coin, and it was round with a square hole in the center because the shapes harmoniously interacted in a symmetry appealing to the Emperor. Additionally, the Emperor standardized weights and measures, and axles on carts so they would run smoothly down new roads and infrastructure. While he feared death and sought immortality, it seems that he was not entirely impractical after all.

It’s fair to say that this type of monetary union has been around for a while. And it has always had the same purpose. A unified currency simplifies the movement of people, goods, services, and capital because its universal acceptance eliminates calculations and conversions. A unified system of weights and measures similarly standardizes methods of calculation. Imagine a country where each state or province had its own unique system, yet tried to make transactions across borders. Chaos! The First Emperor of China seemed to think so too.

The Bottom Line? Monetary union and consistency of measurements lower transaction costs. The First Emperor of China was certainly onto something when he decided to standardize money and measurement during his rule. And while he’s buried surrounded by Terracotta Warriors, a unified currency lives on.

Related sources: Singleglobalcurrency.org. Facts about the warriors from TIME. NYT on the Discovery TSX exhibition. Photos of Chinese currencies.

Tomorrow is Euro Day and it reminds me of aspirin.

On May 9, 62 years ago, the French foreign minister proposed a limited economic partnership with West Germany. By the time the treaty was signed in 1951, the Netherlands, Luxembourg, Belgium and Italy had joined also to form a 6-nation coal and steel free trade zone. With people, services, goods and capital moving ever more effortlessly across European borders, that free trade zone grew and became a monetary union. Here, I would usually say that 19th century free trade advocate David Ricardo would be smiling.

Instead, aspirin comes to mind.

Imagine for a moment, a country with a sick economy. Lenders know it is ill so they ask for relatively high interest payments when that country borrows. Then though, the country joins the euro zone.  Rather like taking aspirin for a fever, being a euro zone member makes it look healthier than it really is. As a result, lenders let the country borrow more easily. But really, it was still sick. It needed an economic antibiotic to attack the disease rather than just an aspirin for the symptoms.

That country is Greece. And now, with its illness having resurfaced, Greece has been prescribed fiscal medicine that includes 11 billion euros of spending cuts. Based on current political turmoil, they believe it was the wrong prescription.

Our Bottom Line: Can euro zone monetary union work without nations being required to take fiscal–spending, taxing, borrowing– medicine?

The Economist has a superb series of maps that display, country by country, different euro zone debt, growth, unemployment in which Greece, Portugal and Italy stand out for their massive debt. This Chicago Tribune story from Reuters tells more about Greek political turmoil. And here, in a NY Times Magazine article, Paul Krugman clearly and logically talks about euro zone history and challenges.

The Indian economy is slowing down. Maybe it’s all about the ease of doing business.

Ranked #132 out of 183 countries in the World Bank’s “Ease of Doing Business Index,” India has a lot of red tape. Just starting a business involves 12 bureaucratic tasks, each taking days to accomplish. To initiate construction, there are 34 procedures including 3 Tree Authority permits.

And yet still, although down from an 8% projection, the Indian economy has an estimated 6.9% growth rate for 2012.

Reminded by economist Tyler Cowen that we keep an eye on India and its trajectory toward becoming one of the world’s largest economies, I wanted to add to our posts on India (linked below) some tea information that really is about much more.

First, nationalism. Because tea was associated with the British colonial rule, leaders like Mahatma Gandhi urged their countrymen not to drink it. Now, just the opposite has happened. Inexpensive, consumed daily by all classes, and India’s second largest industry, tea might be named the national drink.

Next, the economy: With China first, India is the world’s second largest tea producer. A nation of tea drinkers, a lot of the crop remains at home. As a result, they are fourth on the world’s 2010 list of tea exporters but still, tea is a major source of foreign exchange. At the production level, with a labor force that is 50% female, the industry includes producers and their employees, retailers, distributors, exporters.

And finally, history: During the mid-19th century, hoping to diminish their dependence on Chinese tea, the British encouraged its development in India. Yes, the British East India Company was responsible.

Our Bottom Line: The world’s economic growth will increasingly depend on nations like India. And, keeping an eye on India involves the return of tea.

Here are the India section of the World Bank’s Ease of Doing Business Index and the Tyler Cowen column on India. And this article has all you ever wanted to know about the Indian tea industry. Finally, here is an interesting blog post from Scott Sumner about the future of the Indian economy.

At econlife, ranging from an identity program of eye and finger scans so people can prove who they are, to gasoline subsidies and the changing character of Indian queues, to India’s growing importance in the world economy, we have an interesting assortment of posts on India. In addition, our guest blogger, Ilya Sabnani gave us a first hand picture of Indian microfinance during her visit.

This post was minimally edited after it appeared.

Sometimes, one employee makes a huge difference.

In France, one extra worker can mean that a firm needs to create worker councils, establish profit sharing, and report to employee representatives when firing people for economic reasons.

BUT…that worker has to be #50.

As a result, there are 2.4 times as many businesses in France with 49 employees as with 50. When a growing enterprise hits 49 workers, a typical entrepreneur starts a second company rather than expand beyond 50. Or, that person avoids hiring #50.

During February 2010, software maker Viveo Group decided to lay off approximately 60 people from the 180 it employed. Required to present the plan to its worker councils, Viveo ultimately found itself in court with a rejected proposal because the company had forecast an 18% sales increase. But then, on May 3, the appeals court said a healthy company could lay off workers. If the firm had lost, it would have had to restore the jobs and pay 2 1/2 years of missed wages to its former workers.

Our bottom line: With the French youth unemployment rate at 23%, the issue is jobs and less of the labor market rigidity that government has perpetuated. Enable businesses to make their own firing decisions and then they will have more of an incentive to hire the 50th worker.

Looking at nearby French and German towns, this NY Times article contrasts their business cultures. For my facts about France’s labor market regulations, the Viveo example, and added facts about France’s labor market rigidities, this Bloomberg Businessweek article is a good source while this Reuters article describes the Viveo court decision. Also, you might want to look at eurostats for youth unemployment data.

Sometimes, deterrents won’t work.

Our story begins at several Israeli day-care centers. Because some parents were picking up their children after dismissal time, two economists suggested a fine. To their surprise, the number of latecomers more than doubled after it was announced. And even when the fine was eliminated, more parents were late.

Discussing the results, one of the economists shared a personal experience. Feeling uneasy about a late pick-up for his young child, he “drove like crazy” to the day-care center whenever he ran late. However, after they imposed a $3 charge for any delay, he said to himself, “It’s not worth risking your life for $3.”

You can see what happened. The cost changed. Initially, the dollar cost was zero but the moral or social cost was high. The $3 charge, though, “crowded out” the intangible cost and made a late pick-up “cheaper.”

Our Bottom Line: Newly articulated penalties can have unintended consequences. I wonder whether Dodd-Frank will surprise us.

To read more about the day-care experiment, you might enjoy this paper by economists Uri Gneezy and Aldo Rustichini, this article, and sections of Predictably Irrational and Freakonomics. A recent econlife post also looked at when dollars crowd out community values.

Reading about why people have a tough time delaying gratification, I started to think about countries.

First people…

A part of your brain–the insula–becomes more active when faced with an unpleasant task like dieting or seeing your team lose. Two MIT professors discovered that you can add paying with cash to the “unpleasant list” but not credit cards. As one of them said, “The nature of credit cards ensures that your brain is anesthetized against the pain of payment.” The result? You buy a lot more when you postpone payment (and pain) by charging it.

Next, countries…

Countries also have been postponing payment and pain. Greek and Spanish pension obligations will soar during the next 40 years. Currently averaging between 20-30 percent of GDP for most euro zone countries, entitlement spending on public pensions, health care, and unemployment insurance is rising.  Like cash vs. credit, aren’t overextended entitlement programs examples of current pleasure that will generate considerable future pain?

The Bottom Line: Will it ever be politically viable to realign incentives so that current gratification can be delayed in favor of future economic growth?

My facts about the insula and our shopping decisions, and my quotes, came from Jonah Lehrer in Wired and his book, How We Decide (p. 86).  For the graphs and analysis of overextended entitlements, I consulted this NBER working paper. You might also want to look at economist Allan Meltzer’s new book, Why Capitalism.

I’ve been wondering who should own an asteroid.

This takes me back, for a moment, to colonial Massachusetts. When many of the first colonists arrived, they farmed communal fields where some got less and others got more. Soon though, unhappy sharing, those with less moved westward. Their goal? Generate wealth on their own fields, farms, homes.

As a result, from one new settlement to the next, moving westward, public property became private property.

Maybe, an asteroid is rather similar.

A new firm, Planetary Resources, with funding from by Google’s creators and Avatar’s James Cameron, has its eyes on the wealth of the universe. Beginning with robotic earth orbiting observatories for collecting and selling data about asteroids, their ultimate objective is to mine asteroids.  Space based platinum could be worth billions. (A new statistic? GUP–Gross Universe Product)

One glitch might be the 1967 United Nations Space Treaty. Signed by the US and 99 other nations, the treaty says that, “Outer space, including the Moon and other celestial bodies, is not subject to national appropriation by claim of sovereignty, by means of use or occupation, or by any other means.” One researcher called outer space a “celestial commons.”

Does that include asteroids?

The Bottom Line: I am concerned about incentive. Everywhere, private property provides the incentive to innovate and develop resources.

And that returns us to the massive resource wealth of the US that entrepreneurs developed because it could become their private property.

Reading about Planetary Resources in these articles was such a pleasure, here, here, and here.

By Mira Korber, guest blogger.

It all sounded so tidy. I thought operating a food truck was simple. (1) Get up in the morning, (2) secure the best parking space, (3) sell food. I was wrong.

While the parking space is critical to a food truck’s success, there’s more to the story. 3,000 wheeled watering-holes take to the NYC streets each year, and financial feast or famine for the truck owners depends on a number of factors.  After listening to a Planet Money podcast, I thought wide sidewalks, the sunny side of the street, and someplace with few restaurants and hoards of hungry office employees would guarantee profits. According to interviewee and Rickshaw Dumpling truck driver Kenny Lowe, there exists a “mystical spot in midtown that every truck driver dreams of.”

But then, Lowe  went on to discuss the government’s rules:  no vending from metered spaces, avoid fire hydrants, remain 20 feet from entrances to public buildings, and 200 feet from any school. By the way, you may have to violate one or more of these rules to get a good spot for the day. If the spot is truly fruitful, parking tickets are a small transaction cost when you can make thousands thanks to the location. And one more thing about location: drivers have to watch out for agile food carts, which, in Lowe’s opinion “always win.”

Here’s another massive difficulty: securing a permit for the food truck, an issue of occupational licensing. It’s a question of markets vs. government regulation in the form of issuing permits. Food truck operators have to apply for permits validating the safety of their product, and only a limited number of permits are released each year.

Again, it sounded simple. It’s $200/year for a permit. But then the Wall Street Journal illuminated some complications. The waiting list for a permit is over 2,000 applications long. What happened next? Logically but regrettably, the black market blossomed. An illegally rented permit can fetch over $14,000/year. With protectionism (only 3,000 permits are allowed simultaneously), the black market is unlikely to disappear.

The Bottom Line: The food truck industry is more complicated than monopolistic competition on wheels.  Before that competition can even occur, drivers must contend with congested streets, parking restraints, government regulations, and acquiring fresh produce, not to mention the expanding black market for permits.

The greatest challenge may be to determine which regulations are valid regarding how much should these trucks be allowed to compete. Of course health and safety is the number one priority, but should other regulations prevent trucks from entering the business?

All you want to know about parking spaces and food trucks here, from Planet Money. NYC.gov on applying for a food truck permit. The WSJ on food truck permit black market prices. Thoughts on industry regulations from Slate. And an Econlife post about occupational licensing and markets vs. government.

By Mira Korber, guest blogger.

Do you have a coin jar? I do. It is home to my quarters for NYC parking meters.

Now, imagine if the dollar bill didn’t exist, but a dollar coin did. Coin jars would probably hold more than just quarters.  Why? The “coin jar effect.” But before we talk about that, let’s look at the background story.

1. Sens. Tom Harkin (D) 0f Iowa, and John McCain (R) of Arizona are leading the charge to vanquish paper dollar bills from existence. Calling coins the more cost-effective (and vending machine friendly) option, they have proposed a bill eliminating paper bills in the one dollar denomination.

Worth noting: Harkin and McCain both hail from states that would profit from producing coins instead of bills.

2. Douglas Crane and “Americans for George” oppose the coin groupies, and say that paper dollars are better.

Also worth noting: Mr. Crane gives the behemoth paper company “Crane and Co.” its name. Said company produces the paper on which dollar bills are printed.

Here’s the funny part: both sides point to the same Government Accountability Office report. And within the report, you can see that coins last about 30 years and each costs about 15 cents to make, which is .5 cents/year. Each bank note lasts about 4.5 years and costs about 2.7 cents to make, which is .6 cents/year.

Enter the “coin jar” effect. People simply don’t like carrying around a pocket of jangling change. So they put it into a jar, where it either sits idly, or perhaps feeds a few meters. For example, in Canada and the UK, the government had to produce 50% more one dollar coins than it did with dollar bills, simply because people stuffed their coins into jars and didn’t use them.

Paper starts looking more attractive, yes?

But here’s another twist: the very same GAO report recommends switching to coins, which would yield $4.4 billion net benefit to the government over 30 years, thanks to “seignorage.”

Seignorage is extra profit the government makes by putting more money into circulation. By buying bonds, the Fed releases its dollars into usage. Then, those bonds accumulate interest, which outweighs the cost of producing the dollars; there’s the seignorage, or extra money turned over to the government. Returning to the “coin jar effect,” more coins mean more interest, which means more seignorage and government profits.

According to Wake Forest University economist Robert Whaples, “The government can make profits in all sorts of bad ways.” He (and other economists) think seignorage is one of these “bad ways,” because here, an individual’s loss is government’s gain.

So, according to the economists, it looks like dollar bills “win” the bills/coins war.

The Bottom Line: Finally, this lobbying war over coins vs. bills points to one question: how should the US government make money? The “coin jar effect” doesn’t seem to hold the answer.

Most source material for this post can be found on NPR – here and here. The Washington Post pro-coin editorial is here. And the GAO report, here.

Just remember 4-2-1-whenever you think of Chinese demographics.

4 refers to 2 grandmas and 2 grandpas, 2 is their adult children and 1 is the next generation.

The social fabric of China is shifting. In rural areas, the elderly population is growing as the young leave their parents and move to the cities. For those in urban areas, families are smaller, many with one child. With families separated, their traditional caring network is uprooted.

What does all of this mean? A family centered culture will have fewer children with siblings. In the home, a nation with an inadequate old age pension system will have fewer adult children to care for the aged. Meanwhile, at work, there will be relatively fewer people in the labor force supporting a larger old age cohort.

Our Bottom Line: China is one of many nations that will have to cope with the economic implications of an aging population. As of 2011, neither China nor the U.S. was among the world’s 10 “oldest” countries with relatively large populations of people age 60+. At the top of the list is Japan (31%) and then Italy (27%) and Germany (26%). Greece is #7 (25%), and Portugal #8 (24%).

However, China is among a list of countries whose over 60 population will increase by the greatest percent. Between 2011 and 2050, Harvard researchers say that China’s aging population will rise 21% and represent 34% of their population by 2050.

And that returns us to 4-2-1.

I especially recommend this new World Bank report for up-to-date information on China’s aging population. Also, my facts about Chinese demographics came from a Working Paper from Harvard,  The Economist, here, the New England Journal of Medicine, here, and the Population Reference Bureau (PRB), here.

The number of bank robberies is plunging. Maybe it’s outsourcing…just like manufacturing?

During 2011, the number of bank robberies declined to a 9-year trough of close to 5000. The reason, according to one analyst, is technology.

As we spend more online and swipe more at Starbucks and elsewhere, we need less currency. Consequently, bank tellers need less cash. The result? Less to rob. A typical bank robbery now nets $8623. Three to five years ago, the total was between 10 and 15 thousand dollars. Maybe hacking, a more lucrative approach, is taking over the trade.

Our Bottom Line: Just like manufacturing, the skills needed for a successful bank heist are shifting. Economists might characterize the trend as structural unemployment. With jobs digitizing, the fundamental structure of the U.S. economy is changing. Whether it’s jobless buggy whip makers when the auto took over or unemployed typewriter workers because of computers, structural unemployment demands new skills.

Similarly, the skills needed by a successful bank robber or lower level assembly line worker have been replaced.

You can see some interesting data from the FBI on bank robberies here. Looking at the numbers, I wondered why Connecticut and Texas had a disproportionately high number of bank robberies. Also, Monday is the least typical day for a heist. For the analyst who formed the hypothesis about declining bank robberies, here is a Bloomberg interview from their “Weird Wall Street” series. And finally, for an historical summary of the structural changes in manufacturing, this Economist article on “The Third Industrial Revolution” was good.

Assume you just learned that your mother paid someone to write the (warm and loving) toast she expressed at your wedding. Is that okay?

During Bloomberg radio’s On the Economy, referring to a purchased wedding toast, Harvard professor Michael Sandel asked our opinion about what should be sold.

Should money let us…

• Move to the front of a line at airport security checkpoints?
• Upgrade to a nicer cell at a California prison? (It could cost $82 a night in Santa Ana, California.)
• Access a high speed lane during rush hour?
• Get accepted by a prestigious college?
• Avoid military service? (During the Civil War, it took a $300 payment to the government to be excused.)
• Buy U.S. citizenship?
• Get kids to read books?

Our Bottom Line: When, by paying for a good or a service, do the dollars crowd out a greater good for society?

Having been captivated by Dr. Sandel’s Bloomberg interview (4/25, On the Economy, iTunes), I looked for more. This Stephen Colbert interview was very funny. And then I found classes that were even better. I also recommend Dr. Sandel’s book, What Money Can’t Buy: The Moral Limits of Markets.

Hearing that Zimbabweans had a limited supply of coins, I recalled one person’s response to Starbucks’ price hike to $2.01 for a tall coffee in NYC: “I can’t believe it. Now I need to walk around with pennies?”

I guess we take change for granted.

When Zimbabwe replaced its currency with the U.S. dollar, happily, they no longer had to cope with (the unimaginable) 489 billion percent inflation rate. But, using the U.S. dollar meant they had limited ability to make change. No one would trust any currency minted by Zimbabwe. But where to get enough pennies or nickels or dimes? They couldn’t.

Imagine buying $15.76 worth of groceries. You expect 24 cents change. Most of the time in Zimbabwe, there is no coin to give as change. What to do? Many people just buy more. Gum. Candy. A pen. Something that will take the purchase to an even dollar amount.

Having the right amount of money circulating in the right denominations is tougher than we might expect. I have begun to read a fascinating tale from 18th century Birmingham, England when currency problems prevented button manufacturers from paying their employees. The reason was an insufficient supply of small denomination currency from the mint. Responding, the button manufacturers produced their own coins and their employees accepted them.

The Bottom Line: For a commodity to function as money, we have to accept is as a unit of value, a medium of exchange, and a store of value.  So, perhaps we are right to take the penny for granted. Although others elsewhere may need it, maybe we no longer do.

You might enjoy this NY Times article about the situation in Zimbabwe. Then, I recommend continuing with economist George Selgin’s charming tour of early 19th century Birmingham, England and its token (coin) makers and also looking at his book, Good Money.  For a shorter description, Marginal Revolution presents a good overview of small coin shortages. And finally, econlife talks about the “annoying penny.”

When you combine better health care with generous pensions you get (choose one):

• happy retirees
• happy politicians
• insufficiently funded national pension programs
• the eurozone
• the United States
• other

To select an answer let’s begin with 1935. Just passed, the Social Security Act will start giving benefits to people 65 and older in several years. With 41.9 workers for every retiree in 1945 and 16.5 in 1950, the revenue source was more than sufficient. Moreover, life expectancy was 58 for men and 62 for women. (Adults who reached 21 did have a 50-60 percent chance of reaching 65 and beyond.)

Fast forward to 2012. The average man lives until approximately 76 and the average woman, 81. The worker retiree ratio for 2012 is 2.8. And as more baby boomers retire, it will get worse.

The Social Security Trustees just announced that because current workers’ checks could not cover retirees’ obligations, the system had a deficit during 2010, 2011 and probably for 2012. The good news is that they have a Trust Fund to cover deficits. The bad new is that the Trust Fund will probably be empty in 2033. That means benefits will have to plunge or taxes soar or the age of eligibility change. Or maybe the unexpected will occur and all will remain okay.

More daunting, in Europe, by age 55, more than one third of the population of all countries has retired except for Sweden, Denmark and Finland. You know the eurozone situation– huge pension obligations, free access to health care, retirement length averaging 13-20 years, and unemployment averaging 10.8 percent in February.

Returning to the quiz, what might you fill in for “other?”

You might want to look at this historical chart of worker beneficiary ratios since 1945, pp. 52-53 in Trustees 2012 report and at the chart of life expectancy for Social Security in one of their historical documents. For Europe, I got my statistics from this article which uses Eurostats as its source.

By Mira Korber, guest blogger.

You probably know that where you live says quite a lot about the public education you receive. However, living in a geographical zone that touts quality schooling may cost more than you realize.

A new Brookings study shows a very large “price gap” relationship between expensive housing, low-cost housing, and education. For example, in the US’ most prominent 100 metropolitan areas, housing costs proved 2.4% greater than in other locations. (That’s $11k per year). Additionally, homes are clustered economically; when assessing high-income versus low-income housing, a disparity in standardized testing scores becomes evident.

Quoting the study directly: “Northeastern metro areas with relatively high levels of economic segregation exhibit the highest school test-score gaps between low-income students and other students.”

So, what does this mean for the cost of living near good public education? It actually may be cheaper to live in a low income neighborhood and send your kids to private school than moving to an expensive residential zone. Here are the numbers: in the NYC region, it costs $16k more per year to live near high-scoring schools than low-scoring ones. According to the NY Times, average private Catholic school tuition is $6k.

The Bottom Line? High-cost homes bring us to negative externalities (undesirable impacts on a third party due to a private transaction). Just as a factory near a once-clean stream contaminates the water source, expensive housing can negatively impact the surrounding communities. High housing costs are directly related to quality education; therefore, soaring prices prevent — negatively affect — the less affluent third party from accessing better schools.

Related sources:

The main source material for this post can be found here. The link to the Brookings study cited above. And a very interesting NYU study about the correlation between public housing and lower standardized test scores.

By Mira Korber, guest blogger.

Why might have most notorious fraudsters committed their crimes? The traditional answer seems obvious: severe character flaws, lack of ethics, unbridled greed. But there may be more to the picture than simply this “bad person.”

In a recent Planet Money podcast, economist Lamar Pierce of Washington University in St. Louis set out to discuss why people make unethical decisions. The story in question refers to Toby Groves, a seemingly upstanding citizen who later committed multimillion-dollar fraud crimes. Upon discovering his mortgage company was $250,000 in debt, Groves decided to mortgage his own home. Lying to the bank, he said his income was $350,000 when it wasn’t even close to that number. Later on, Groves needed more, so he solicited the” help” of his employees and a title company to fabricate and verify “air loans” — made-up mortgages for made-up people. Every employee he asked and the title company colluded with no hesitation.

Incentives are clearly at the heart of illegal decision making such as this; Groves needed to get his business out of debt and back on track however he could. When he sought help, it was readily available; perhaps his employees feared losing their jobs, or anticipated a bonus for “helping” to preserve the company.

According to Pierce, and a second economist on the podcast, Francesca Gino, decisions to help Groves were made because a short-term “favor” seemed far more tangible than potential future repercussions. Additionally, Gino theorized that as human beings naturally “like” each other, they are prone to assisting even immoral behavior.

This analysis brings me to Adam Smith’s The Theory of Moral Sentiments. Smith argues that a mutual sympathy between human beings causes us to empathize with each other, simply because “how selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him…” Smith continues, “the greatest ruffian, the most hardened violator of the laws of society, is not altogether without it,” “it” being a sense of kindred emotion.

Perhaps that shared feeling is what actually prompts said “ruffian” to perpetrate group fraud. We empathize through a self-centered perspective; only by imagining ourselves in equal agony can we feel sympathy for the one suffering in reality:

As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation. Though our brother is upon the rack, as long as we ourselves are at our ease, our senses will never inform us of what he suffers…By the imagination we place ourselves in his situation, we conceive ourselves enduring all the same torments…and thence form some idea of his sensations, and even feel something which, though weaker in degree, is not altogether unlike them. His agonies, when they are thus brought home to ourselves, when we have thus adopted and made them our own, begin at last to affect us…

Imagining ourselves “on the rack” might help us make a bad choice — say — fabricating mortgage papers?

The Bottom Line: While fraud predictably leads to questioning of the perpetrator(s)’ incentives, it also relates to a basic psychological tendency: mutual sympathy among people who identify with each other, or offering “favors” expected to be returned in the future.  Therefore, favors are not altruistic, but may be motivated by a mutual financial dependency later on.

Related Sources: Find the Planet Money podcast “Why People Do Bad Things” here. Adam Smith, here. And for a previous Econlife post on cheating, here. You also may wish to read “How We Decide” by Jonah Lehrer, which received a favorable NY Times review, and is on my future reading list.

If you have questions about Verizon and middle class income growth,  your conclusions might depend on the questions that you ask.

My story begins with a disastrous call to Verizon Wireless. One agent left and never returned, three said they could not help me, and the fifth person, hearing I had made no progress after 45 minutes said, “An iPhone is a luxury item; these things take time.” The sixth agent, realizing my problem had an easy solution, helped me graciously and quickly.
Soon after, Verizon asked me to evaluate their service in an automated survey. Using numbers from 1 to 10 to quantify my satisfaction, I was supposed to assess the last person with whom I spoke in a series of questions. Only in a separate optional comment at the end could I tell about the other five people.
I suspect Verizon’s computers will conclude they just made another customer happy because I gave agent #6 a “10″ for every question. And yet otherwise, my experience was far from ideal.

The Verizon survey reminded me of statistics about middle class income.

Researchers disagree about how much middle class income grew from 1979-2007. Citing a 3 percent total, economists Thomas Picketty and Emmanuel Saez say there was virtually no growth. By contrast, a group of Cornell scholars says middle class income grew 36.7 percent.

A 33.7 percent difference! How? Because the answers you get depend on what you ask.

Piketty, Saez and the Cornell group had to decide whether they would ask questions about a tax unit, a household, or a family. The former two economists chose the tax unit while the latter selected the household.  Then, the Cornell group considered whether to ask questions solely about returns from land, labor and capital or to include government transfers. And after that, questions about household size become relevant because people sharing a household–even if unrelated–benefit from each other’s income through shared spending.

The Botton Line: When Verizon, Picketty and Saez, and the Cornell group looked at the answers to their questions, their conclusions were totally accurate. Who is right? It all depends on which questions you think are appropriate.

The NY Times introduced Thomas Picketty and Emanuel Saez and their ideas in a front page story. Their paper with much more detail is here. For the Cornell group’s research, an Econtalk podcast provided an excellent description and a great summary comparison chart. Gated, their NBER working paper is here.

*The first sentence of this post was edited after it appeared.

Reading that a Venezuelan retiree did not mind the food lines, I started thinking about how President Chavez’s price controls have changed incentives. The retiree, who has more time than money, now has the incentive to stand in line. Meanwhile, a business owner, seeing profits erased by price controls has the incentive to produce less.
When a ceiling on prices increases the quantity that people demand while decreasing the quantity that producers supply, the result is Venezuelan shortages of the basics like powdered milk, beef, chicken, vegetable oil and sugar.

The bottom line: A government established price creates distorted incentives for buyers and sellers. The long lines, pajama tops without buttons, and grouchy salespeople that characterized the former Soviet Union are perfect examples of the results of distorted incentives.

This NY Times article tells more about price controls in Venezuela. Also, you might enjoy seeing this sign from a Venezuelan store that is posted here.

*This entry was edited after it was first posted.

I just learned that April 17 was Equal Pay Day. Assuming that the average woman earns 22 percent less than the average man, she would have to work until mid-April to equal his pay.

For women’s pay statistics, I like to look at the Institute for Women’s Policy Research (IWPR). In a recent paper, they say the gap is 17.8 percent because a typical woman’s median weekly earnings are $684 while for men, $832.

Calling it “occupational segregation,” the IWPR reports that jobs we associate with women pay less than “male occupations.” For example, female secretaries earn $651 a week and even that is $16 less than their male counterparts. Similarly, female cashiers earn $373 weekly and male cashiers, $411. You can see that in lower paying “female” jobs, still men earn more. (All amounts are for median weekly earnings.)

For the wage gap in occupations dominated by men, the IWPR shows that although the wages are higher, again, women take home less. The median weekly earnings for female drivers/sales workers/truck drivers is $511 a week. A male in the same category? $712. Female janitors/building cleaners? $418. Male janitors/building cleaners? $514. Female CEOs? $1464. Male CEOs? $2122.

Focusing on the wage gap for professional women, Harvard economists Clauda Goldin and Lawrence Katz cite children as the reason because women take more time off for child rearing and that time off decreases their lifetime earnings. Even women with career continuity tend to select lower paying specialties like general practitioners rather than neurosurgeons or salaried in-house council rather than a high pressure law firm. And, for working mothers with an MBA, 15 years after graduation, the gender pay gap is 25%.

Super Freakonomics tells us that women are subject to greater pay discrimination for being obese or having bad teeth.

The Bottom Line: Supply and demand for men and women differ in labor markets.

If you would enjoy reading more about the gender pay gap, the occupational charts are fascinating in the IWPR report. For a lighter approach,  the Freakonomics blog quotes Goldin and Katz. But, if you prefer seeing their conclusions firsthand, you can look at one of their papers here.

And finally, an interesting fact: It matters where you live. Washington, D.C. has the smallest wage gap while Wyoming has the largest. This Huffington Post article tells more.

To one group of economists, oral contraception is all about human capital.

1970 appears to have been a turning point. 40 years ago, increasingly, women started entering law school, medical school and other professional programs after college. Instead of majoring in education, more women became judges, physicians, dentists, architects, veterinarians. They entered professions that required years of their time.

As a result, female human capital–a woman’s accumulation of productive knowledge–became more valuable.

Asking why, some economists are saying one reason is oral contraception. The proliferation of birth control pills among unmarried women that started during the early 1970s helped them to time marriage and children. Once women could plan child birth, they could better determine when and how to develop their professional skills-their human capital. They could enter and complete longer educational programs, decide the duration of employment, and have control over professional goals. As a result, women entering labor markets could earn more. Earning more, their value climbed in marriage markets. And, because more women were marrying later, postponing finding a spouse was a less costly decision since, as economists Goldin and Katz express it, marriage markets for older women “thickened.”

Our bottom line: A recent economic study suggests that the pill helped to narrow the gender wage gap, to “upgrade” women’s career choices and to encourage later marriages and child birth. I wonder also whether it materially contributed to U.S. economic growth (but could not find data to confirm it.) Yes, oral contraception is a major social issue but its economic significance is probably considerable.

I started researching the economic impact of oral contraception after reading NY Times financial journalist, Annie Lowrey’s economix blog. That took me to papers by Goldin and Katz from 2002 and a group from the University of Michigan. I also looked at an interesting discussion of “The Efficiency of Gender Equity.”

I’ve just started to count the people I know who live alone. School friends, relatives, neighbors. Some are in their twenties and early thirties, unmarried. Others are divorced. Several are widowed.

31 million of us live alone. Almost one-third of all households in the U.S. are composed of one person. Five million adults, younger than 35, live alone.

In 1950, living alone was the exception. Not any more. Why?

Maybe because of affluence, feminism, and technology. An increasingly affluent society has increased our life spans. With one spouse outliving the other, a woman (more typically) or a man is left to live alone. Women working outside the home have less dependence on a spouse. Women can marry later (age 26.5 average) and leave a marriage more easily. Fifty percent of all mariages will probably end in divorce.

And with pets becoming family members and the proliferation of social media, are we really alone when living solo?

The bottom line? Ups, downs, and long term economic trends have touched the very essence of how we live. When the economy dipped, more college grads moved in with their parents. More people postponed marriage. More postponed divorce.  On the other hand, with the upward trajectory of the economy between 1940 and 2000, we became more of a live alone society.

This New Yorker article started me thinking about living alone and is the source of my statistics. In “The Boomerang Generation,” you might look at research from Pew for insight about multigenerational living and here is the census data that confirms the increase in single person households. Finally, for more about the impact of economic growth on our lives, I always love to return to Pursuing Happiness by Stanley Lebergott.

An interesting single household fact: In 2000, Utah had the fewest single person households and Washington D.C the most.

By Mira Korber, guest blogger.

Imagine Coca-Cola for a moment. Polar Bears, Santa Claus, a time when soda still came in refillable glass bottles…perhaps, for the health-conscious, high fructose corn syrup? And if you live in Singapore, you might even think of a “Hug Me” Coke vending machine.

As part of Coke’s new marketing campaign, it overnight-installed a unique vending machine at the University of Singapore. It gladly dispenses Coca-Cola — but only after the “customer” hugs the machine in a specific way does the drink pop out.  Therefore, Coke has sympathized with (and definitely capitalized on) Singaporean youth and its growing propensity towards public displays of affection, which have been traditionally repressed in Asia. Fuzzy feelings + soda = positive and pleasurable psychological association between the two…well, that’s Coke’s hope for future sales, anyway.

Engaging customers through the “Hug Me” machine is a perfect example of  Coke’s static advertising strategy morphing into interactive cultural experience. And this speaks volumes about a new marketing strategy; two fascinating videos the company produced explain a new “liquid linked” advertising plan and how consumers will largely shape how the Coca-Cola brand evolves. Traditional 30-second TV adverts are phasing out. Social collaboration with customers is moving in.

In the 1930s, the company invented the now iconic image of Santa Claus as rotund, bearded, jolly, and sporting a red and white suit. (Incidentally, he was chugging red-and-white clad soda bottles in every ad.) Now, Coke isn’t presenting its consumers with cheery content, but seeking their help, or hugs, to revamp its image.

The Bottom Line? Through unconventional marketing, such as the “Hug Me” machine or Coke “Happiness” truck and vending machines, Coca-Cola subliminally sparks positive feelings towards its product. By shifting its focus to popular culture infiltration and stimulation of “happy” feelings, Coke has linked a positive consumer reaction with its beverage.

Notes: The “Hug Me” Machine in action. How hugs are “gesture-based” marketing. A failed marketing trope. Coke’s sales are indeed up. Coke’s advertising strategy through the years – interesting.

By Mira Korber, guest blogger.

Just two days ago I bought a plane ticket to Panamá City International Airport in Tocumen. I will be participating in a classical music festival there, somewhat ironically studying music from centuries past as brand-new skyscrapers are erupting all around. Panamá is booming, and not just with music.

Panamá is among the fastest growing economies in all of Latin America; the 2011 GDP surged at 10.6%, up from 9.2% in 2010. A new, glittering skyline boasts the 70-story Trump tower. Central America’s first subway system project broke ground in 2011.  And a $5.25 billion construction project promises a third channel to the Panamá Canal.

As international trade has blossomed, the canal has connected the Americas and linked East with West for the past 100 years. Just since December 1999, when the US relinquished control of the canal to Panamá, it generated $6.6 billion in revenue.

Now, workers feverishly construct a larger, deeper channel to accommodate massive tankers and cargo ships coming from Asia –primarily China — heading to the United States consumer market. The project (if it doesn’t delay) is slated for completion in 2014, a century after the canal’s inaugural year. Once open for passage, the new channel will support 50% more traffic each day, and may encourage ships to travel east to Panamá from Asia, instead of traversing the Suez Canal in Egypt.

Amidst massive development projects and increasing foreign investment (+33% in 2011) lurk other concerns. Panamá’s history is blighted by crimes, perhaps most notably by ex-military dictator Manuel Noriega, whose 1983-1989 rule was marked by drug trafficking, money laundering, and murder of political opposition.

As this stigma looms, 40% of the population in Panamá lives in poverty, with an ever-growing divide between the wealthy and the poor. Even the development comes with concerns about an economic bubble – remember all those new skyscrapers? Most are dark — empty — at nighttime.

The Bottom Line? Panamá’s rapid growth is remarkable. The Economist likens its economic expansion to Singapore, although it’s not even 1/5 as wealthy (“on a per-person basis”).  However quickly Panamá may develop, the risk of corruption and interference with markets rises just as ominously. Case in point: Singapore ranks 2nd on the Index of Economic Freedom; Panamá ranks 55th.

PS. You’ll get a from-the-ground perspective on the Panamanian economic explosion when I see it in person this June.

Read about Panamá directly from El País, a Latin American newspaper (in English). NPR podcast on the subject. Delays in the construction of the new Panamá Canal channel?  NY Times offers insights on growth and Panamá’s military history.

I live in a town where I have to pay for garbage pick-up and recycling or I can dispose of it myself. The fire department is voluntary. Because there is no local high school, the town pays other school districts to educate our teenagers. In our town, government provides less and our property taxes are relatively low.

Harvard professor N. Gregory Mankiw might use my town as an example of competition among governments. People who want a local high school would not choose to live here. Using the same reasoning, Massachusetts might attract people who want universal health care while New Hampshire is for those who do not.

Dr. Mankiw said that municipal differences can elevate the quality of government because they lead to competition.  Concerned that its households and businesses are leaving, then a town, a city or a state will improve its services or lower its taxes.

By contrast, those of us who believe government is responsible for more services and a more equal society have to reject municipal competition. In order to give more to everyone, governments have to redistribute income. Then though, as Dr. Mankiw explains, When you… “take from Peter to pay Paul, Peter may well decide to leave.” How to prevent Peter’s departure? Make everyone more equal everywhere.

Do I want a national government that gives me what my town does not provide? The next U.S. presidential election will probably let me express my opinion.

To read more about the free and fair visions of government, you might enjoy this column by H. Gregory Mankiw.  For each side, “free” is defended in this econlife post while the opposite position is in this obituary for Harvard economist John Kenneth Galbraith. Also, you might want to see what Mitt Romney and President Obama have said about the debate.

Walking along 56th Street in NYC, maybe a half block before 5th Avenue, I always see people on line. (New Yorkers say on line. Almost everyone else says in line.) They are waiting to enter Abercrombie & Fitch.

Usually we associate an economic cost with a line. Time wasted. Irritation. Inadequate customer service. For Abercrombie, though, it might be a benefit.

Researchers from the University of Chicago Business School concluded that total queue length conveys the value of a product. The longer the line, the better it must be. In addition, they found that the number of people behind you is crucial. If we are ahead of many others, feeling a sense of accomplishment, we attribute more value to our goal. In one example, the researchers actually found that when there are many people behind us, we also tend to spend more.

Amazing. A long line snaking for blocks at an Apple store. And most of us think about the value of the product rather than the long wait.

Our Bottom Line: Queues are all about cost and benefit. If the vendor enables us to perceive a benefit, then a line like the one at Abercrombie can become a competitive strategy.

If you just want to enjoy hearing about lines, this 99% invisible podcast is a pleasure. For a more serious read, here is the U. of Chicago paper.

And a final thought… wasn’t it the lines that brought down communism? But that is a different story.

Ten chicks.

If I were teaching in Uzbekistan instead of Summit, NJ, I might have received 10 Serbian chicks as a part of my salary. According to Radio Free Europe, the Uzbek government partially paid certain teachers and doctors with chicks. Their goal was to increase domestic production of eggs, milk, other dairy products and vegetables.

Elsewhere also, chickens represent more than a meal.

During the 1990s, during a food shortage, Russia accepted massive exports of surplus dark chicken meat from the US. Still today, dark meat in Russia is called Bush legs and associated with neediness.

For U.S. chicken raisers, Chinese love of chicken paws was a life saver. As a Purdue representative explained it, U.S. consumers loved the white meat. What to do with everything else? For years, inexpensive pet food was the answer. However, when Purdue discovered that the Chinese especially loved U.S. chicken paws, suddenly, they had a money maker. Large (Purdue) chicken breasts mean juicy feet and the Chinese like juicy feet.

We’ve accounted for the breasts, dark meat and paws. What about the wings? Maybe the Super Bowl?

Our bottom line: Chicken shortages and chicken surpluses relate to international trade. Citing comparative advantage, David Ricardo (1772-1823) said that trade enables nations to optimize efficiency and thereby increase world production and well-being. For U.S. chicken producers, exporting what had been waste certainly created value. With the Uzbeks, though, payment in imported Serbian chicks rather than money is a step backwards.

Radio Free Europe and the Atlantic tell more of the Uzbekistan chicken story. For the China and Russian chicken situation, Businessweek and Freakonomics explain. And here, econlife looks at chicken wings.

Inflation is not only at the cash register.

Our story starts at H&M where an Esquire journalist tried on a size 36 pants that were too tight. He continued his search for pants with the 36″ waist label at Old Navy and they were too loose. After that, he sampled a pair of Dockers. Curious, this gentleman did the math. The H&M pants had a 37″ waist, Old Navy, 41″ and Dockers, 39.5″.

Women also have experienced some “downsizing.” Graphing size changes in the UK, The Economist concluded that women’s sizes have plunged by 2 numbers. If you wore a  size 14 several years ago, now it is labeled a 10. If you wore a 4 or a 6, your size might have declined to a double zero.

Size inflation–the trend toward smaller sizes getting larger—has its pros and cons. While smaller sizes make us feel good and might elevate retail sales, they enable us to ignore weight gain.

The bottom line: Price inflation also has pros and cons. Saying that inflationary policy helps borrowers, lowers unemployment, and makes holding cash less attractive, Paul Krugman supports expansionary Fed policy. By contrast, a more traditional view suggests that inflation is a hidden tax that distorts price signals, punishes savers, and creates a less stable business environment.

So, whether we are at the clothing rack or the cash register, we should think about inflation.

Here is the journalist who looked for the size 36″ waist, an Economist chart of size inflation, a Bloomberg columnist worrying about inflation and Paul Krugman asking for more. The CPI data is here.

Thinking about our fiscal woes, I keep returning to the fallacy of composition.

Here it is:

When one farmer harvests a huge crop and sells it, her profits soar. But if every farmer grows more and sells more, then the price drops. Similarly, if one person races out of a theater, she easily exits. When many do, it is tough to get out.

The point? Sometimes what is good for a single person becomes a problem when everyone does the same thing. Economists call it the fallacy of composition. Harrisburg, Pennsylvania’s fiscal plight reminds me of the fallacy of composition.

The Harrisburg story begins when they decide to retrofit their trash incinerator with borrowed money. If every garbage truck pays a fee, the incinerator business can be exceedingly profitable. At first though, the mechanics do not work and then the EPA says the facility does not meet federal standards. Each time, the community borrowed and upgraded. The result? The incinerator cost $326 million. A city with 50,000 people owes $326 million. And then the recession hits. The result? A debt crisis.

With local officials resisting, the governor of Pennsylvania mandates austerity. His representative says sell municipal parking garages, cut fire and police wages and pensions, sell the incinerator. But, the Harrisburg city council, a 4-3 vote, says no.

Responding to individual incentives, law makers reject the austerity policies that are best for their community. Individual law makers are each doing what is best for them. Anyone who supports tax hikes, wage freezes and pension cuts might not get re-elected. And then ultimately, as with a farmer’s bumper harvest or a fire in a theater, when enough law makers act similarly, everyone suffers. Sounds like the fallacy of composition.

My Bottom Line? For controlling Medicare and Social Security spending, do we have a fallacy of composition problem?

This article tells the whole Harrisburg incinerator story while NPR’s Planet Money tells the sad tale of the receiver who was sent to Harrisburg to solve their fiscal problems. As for Greek legislators, as this article tells us, the bribes that flowed to legislators will evaporate if they support austerity.

By Mira Korber, guest blogger.

Oppressive fluorescent lights, the antiseptic squeak of rubber soles on linoleum, and the omnipresent pulse of machines envelop you at the hospital. You’re anxiously awaiting the results of surgery on your beloved family member.

Her name is Harriet, she’s a hedgehog, and this actually happened.

This (just slightly) unusual medical story is the result of pet medical insurance. (NB: The purpose of any health insurance is not to pay for medical procedures, but rather to hedge against risk of medical disaster [see this Econlife post.])

Without the coverage, would Harriet would have undergone treatment? Maybe, maybe not. 

Why? The proliferation of pet health insurance demonstrates a changing series of behavioral incentives. Logically, the more coverage you have for your pet, the greater the incentive to supply costly care and medications. Then, will you see an incentive to own more pets because insurance covers advanced treatments? Disregarding the cost of vet school, will more students see a lucrative future in veterinary fields?

A segment from NPR “This American Life” episode 392  exemplifies how incentives change for pet owners with insurance. Quoting a report from the National Commission on Veterinary Economic Affairs, NPR reports, “‘with pet insurance, clients likely will use your services even more often and opt for more advanced medical procedures.’”…insurance can reduce  ‘price resistance on the part of the client…with cost concerns removed, clients become more engaged and more responsive.’”

Additionally, these statistics express the nature of a growing pet insurance market (cited from an informative USA Today article):

• Pet insurance costs from $15-$75/month, and covers 80-90% of claims
• Dogs are insured 4x more than cats
• 1% of American pets are insured, compared to Europe’s 20%
• In 2011, Americans spent $50.8 billion on pets; $14.1 billion was health related expenditure

The Bottom Line? By providing health insurance to four-legged family members, owners are more willing to leap for the big-ticket bills. By the same token, vets are more likely to prescribe expensive procedures.

Find some interesting reads and blog source material below:

Details on Harriet the hedgehog. Information on dogs and the American economy, here.
VPI Pet insurance. And finally, The cost of advanced procedures, without insurance.

By Mira Korber, guest blogger.

Pretend for a moment that you are mounted on a jumping horse approaching an obstacle full speed.  The next thing you know, you go hurtling through the air like some limp animal. What happened? Your ever-so-noble-steed has pulled a “dirty stop” at the last possible moment before takeoff.

Sounds like what some (non-horse) people are worrying about…regarding American jobs and the unemployment rate. So, what are the odds of an economic “dirty stop?”

In March, the US added 120,000 jobs, and the unemployment rate fell to 8.2%.  That’s showing “improvement” but hardly represents a panacea for ever-burgeoning recovery woes. Some economists expected 210,000 jobs added to the economy, and the unemployment rate to remain at 8.3% (accounting for people actively looking for work).

However, as the rate has fallen and a smaller than expected number of jobs have materialized, it seems that fewer people are looking for work. Another issue is that companies, while laying off less, are also hiring less. This accounts for a decrease in unemployment claims. You may expect those claims to demonstrate a healing jobs market, but they more accurately reflect a bottoming out of layoff activity (not necessarily an increase in hiring).

That’s numbers and analysis  according to an article from ABC News, but here’s a different perspective: things will get better with just a little more time.

The bottom line? Some say getting thrown from the financial carousel is likely. Others are optimistically waiting for the economic ride to improve. Either way, you’ve got to ride the horse you’re on.

By the way, see this Econlife post for more information on how employment and GDP are related.

Because cost is up and use is down, the Royal Canadian Mint stopped producing pennies and, during the fall, will stop distributing those that exist.

Should we also eliminate the penny?

Pennies are expensive. At 2 1/2 cents a piece, making and distributing them lost the Treasury $60.2 million last year. Proposals, though, for a cheaper coin, have always generated a flap. When, to save money, President Reagan proposed diminishing the copper in a penny in 1981, the uproar included a suit from the Copper and Brass Fabricator’s Council. However, the switch did take place and today’s penny is 97.5% zinc and 2.5% copper.

Now, we are debating whether to eliminate the penny, create a cheaper one, or do nothing. A penny phase-out has some people worrying that rounding up prices will be inflationary. Others say charities will raise less.  And some just like Abraham Lincoln. You can see that the arguments are not really convincing and yet all Congress has done is ask the Mint if it can make a less expensive small coin. Perhaps, tradition is the real reason that many of us feel penny loyalty.

My bottom line: Eliminating the penny might not be necessary. Soon it might no longer have the basic characteristics of money:

1. It is accepted as a medium of exchange. For example, you and I are willing to use the commodity in a supermarket. A peso or a tie is not a medium of exchange in the United States.
2. It is a unit of value. We all know how much purchasing power a penny represents but not necessarily the yen.
3. It is a store of value. We all like our money to retain its purchasing power if we do not spend it immediately.

My sources were this Huffington Post article, this NY Times article, an excellent New Yorker Magazine discussion from David Owen, and this from a Canadian newspaper.

Just an interesting post script: In 2001, the NYSE did the reverse. Replacing fractions with decimals, the trading price included pennies. For example, instead of 50 1/8, the price of a stock had to be expressed as $50.12 or $50.13.

Malawi is a small sliver shaped African nation.  Landlocked, it is sort of tucked into Mozambique, south of Tanzania and east of Zambia. Until recently, with tobacco and tea its major exports, and foreign aid that included Madonna’s $15 million school building project, economic growth touched 7%.

Now though, as its economic woes increase, Malawi remains among the poorest nations in the world. The value of their currency, the kwacha, went down when the world price of tobacco dipped and foreign aid declined. The crisis worsened when the UK froze foreign aid after the British ambassador was kicked out for saying the government was becoming increasingly authoritarian. In addition, Madonna scaled down her school building project to a $300,000 donation to a local NGO. And finally, perhaps creating a succession battle, the 78 year old Malawian president had a fatal heart attack last week.

And that returns us to Why Nations Fail. While there is much more of a Malawian story to be told, even these disparate facts point to basic reasons that certain nations are poor. In Why Nations Fail, economists Daron Acemoglu and James Robinson tell us that economic success does not depend on geography or natural resources, cultural traits or wise economic advice. Instead it is political institutions. “As political institutions influence behavior and incentives in real life, they forge the success or failure of nations.”

Our bottom line: Whether considering foreign aid or our own economy, we might more consistently assess how political institutions are shaping behavior. Or, as Dr. Acemoglu said in an econtalk podcast, “…prosperity is created by incentives, and incentives are created by institutions.”

My Sources: These WSJ articles here and here. Why Nations Fail by Daron Acemoglu and James A. Robinson. You might also enjoy this Thomas Friedman, NY Times Op-Ed on the book and also this econtalk podcast.

Has the value of a woman changed at Augusta National Golf Club?

Samuel Palmisano, Louis Gerstner and John Akers are former IBM CEOs with Augusta National Golf Club green blazers. Until now,  the CEOs of all major corporate sponsors of the Masters at Augusta were given club membership and the member’s green jacket.

Until now?

While the CEOs of the other 2 major sponsors, AT & T and Exxon Mobil, are expected to be wearing their green blazers, the new head of IBM will not. The reason? Virginia Rometty is the new CEO of IBM. Since it was founded close to 80 years ago, the club has refused to accept women.

Augusta’s policy started me thinking about the changing “value” of women. In The Price of Everything, Eduardo Porter says that as women increasingly entered the labor force, American society profoundly changed. One cause of the change was the new price of women’s labor. Once women worked outside the home, they became more “valuable.”

Our bottom line: Everywhere, as female labor force participation rates increased, labor markets, marriage “markets,” maybe even exclusive club memberships have been transformed by the changing “value” of women.

My sources: This Bloomberg article, the IBM website for CEO info, The Price of Everything by Eduardo Porter and The Essence of Becker.

Through 2 stories, I learned how the design of a road can convey information about the people who live nearby.

Here are the stories…

Baltimore:

• Greenmount Avenue in East Baltimore separates Waverly whose median income is $40,000 from Guilford, a much more affluent community. On the Waverly side, a right-angled grid of numbered streets continues and it is easy to make a turn to enter the community. Inside, you can park along the street. Meanwhile, accessing Guilford is much more challenging. Walking along more than a mile of Greenmount, you would find only 2 crosswalks. Driving, it is almost impossible to turn into the community from Greenmount because most of the streets are one-way, in the wrong direction. And once you did discover an entry point, you would soon be on narrow, winding roads that snaked unpredictably. To park, a permit is required.

Haiti:

• With fewer mosquitos and cooler breezes, up the hill from Port-au-Prince is where affluent Haitians live. Their roads, though, are terrible. Not really roads, they are just mud and gravel and ruts and rocks that only a 4-wheel drive can navigate. Economists Daron Acemoglu (M.I.T.) and James Robinson (Harvard) explain that residents do not want good roads. They know that they could pressure government to build a road or pay for one themselves. However, their government is unable to guarantee law and order. Bad roads obscure their affluence and make a criminal’s fast get-away somewhat daunting.

You can see the connection. In Baltimore and Haiti, by shaping access, roads reflect income and status.

Our bottom line: Inequality has been in the news. A recent report from the Organization for Economic Cooperation and Development (OECD) tells us that the gap between the rich and poor has widened. Even in Germany, Sweden and Denmark, traditionally egalitarian, the income gap has moved from 5 to 1 during the 1980s to 6 to 1 now. For Italy, Japan, Korea and the UK, the multiple is 10 to 1 while for the US, Israel and Turkey, it is 14 to 1. The biggest spread? Chile and Mexico at 25 to 1.

My Sources: The story about Haiti is from a blog by the authors of Why Nations Fail. You can listen to the Baltimore road story in this 99 % Invisible podcast and the Guilford real estate description is here. This is the OECD report on inequality.

No one wins a pizza war.

Having read a NY Times article about a pizza price war in NYC, I was curious about the supply side of the pizza business. So, this afternoon, I interviewed my local pizza counterman.

The pizza price war in midtown NYC involves 3 almost adjacent pizza places. Originally charging $1.50 a slice, one of the three dropped its price to an astonishingly low 75 cents and soon, a second shop did also.

One owner’s reaction, “I’m thinking, God help me.” Another was researching NYC pricing laws for pizza to see if 75 cents a slice was illegal. Still though, they said price could slide to 50 cents and less.

But here is the problem. Listening to my pizza man in NJ, I could see that climbing commodity prices affected him. Wheat for the flour, tomato for the sauce, 1500 pounds of mozzarella each week at $2 a pound, and a fuel surcharge for each delivery he receives. He estimated that the ingredients for a pie cost him $5 and that at best, 75 cents a slice was break even.

So why engage in a price war? Yes, there is minimal product differentiation, consumers are price sensitive and they exhibit little “brand” loyalty. However, a price war can be a negative sum game. In this war, no one wins.

The bottom line: Pizza shops compete in monopolistically competitive markets. While price competition is typical, they can engage in non-price competition by making their product unique.

My sources: Costs are from the counterman at Hickory Pizzeria in Chatham, NJ. Information about the NYC price war is from the NY Times. Discussion about the downside of price wars are from here and here and here.

Sometimes government guidelines can have unintended consequences.

Government travel guidelines:

At a networking reception, the General Services Administration spent $1900 on 400 “petit beef Wellington” snacks and $2000 on 400 “mini Monte Cristo sandwiches” and it (sort of) all made sense.

Called the government’s personal shopper by one journalist, the General Services Administration (G.S.A) is an independent federal agency that does some of the purchasing and building management for other government agencies. The uproar though, is over money that it spent on itself–close to $822,000–at a Las Vegas training conference for 300 people during 2010.

I checked the G.S.A. website for travel guidelines. There appears to be a lodging cost per diem limit of $99 for Las Vegas. According to all news articles, conference planners adhered to lodging cost constraints. From what I could discern, though, award ceremonies had no such ceilings. So the rooms were inexpensive. The unintended consequence?  The catered award ceremonies were extravagant.

Government nail guidelines:

For my class discussion of unintended consequences, a  9/10/90 New Yorker article about factory quotas in the former Soviet Union by economist Robert Heilbroner is perfect. As he described it, “If the output of nails was determined by their number, factories produced huge numbers of pinlike nails; if by weight, smaller numbers of very heavy nails. The satiric magazine Krokodil once ran a cartoon of a factory manager proudly displaying his record output, a single gigantic nail suspended from a crane.”

The bottom line: Whether looking at guidelines for health care, financial regulation, travel expenses or nail production, it is tough to shape human behavior because unpredicted incentives always seem to create unintended consequences.

My sources: From CNN and the NY Times for the Las Vegas Story; GSA travel expense guidelines document; the New Yorker archives for a 9/10/90 article from Robert Heilbroner.

The UK’s pasty (PASS-tee) tax battle is a good story. But, moving beyond the humor, it has considerable significance.

First the story:

Taxing the pasty has created a major flap in the UK. The pasty looks like meat in a pastry pouch, high in fat, maybe more than 500 calories, a take-out hand held basic. Because pasties cool before people buy them, they had been exempt from the 20% hot take-out sales tax. But not any more.

Part of the uproar relates to the current British government’s “upper crust” image as people who would view a pasty with distain. Pasty supporters say the Conservative government is out of touch. Pasties are the working man’s lunch.

Really though, the story is about…

1. How to generate revenue. The UK has .7% economic growth for 2011, 8.4% unemployment and a massive deficit. Hoping to maintain London’s allure as a financial center, they have lowered recently elevated tax rates for the most affluent. Called the granny tax, pension exemptions have been diminished. The pasty tax is expected to raise $167 million.
2. Whether you want a regressive tax. Defined as taxes that take a higher per cent of the earnings from those who earn less rather than those who earn more, a regressive tax is usually a sales tax. As a percent of the price, it is a different proportion of each purchaser’s income. By definition, the pasty tax is regressive.
3. And, KISS (Keep It Simple, Stupid). This is the law: “the tax now applies to food ‘heated for the purposes of enabling it to be consumed at a temperature above the ambient air temperature and which is above that temperature’ when purchased.” One news article asked if “the buyer could ask to have it cooled to get it tax-free?”

A final thought: The National Federation of Fish Fryers was delighted.

My sources: An AP article on the pasty tax. BBC articles here and here on UK economic stats. A Telegraph article on the granny tax.

Reading about John Maynard Keynes’s investing acumen in last Saturday’s Wall Street Journal, I wondered whether being a Keynesian could involve more than your attitude about the role of government.

So, as a teacher, I created this “Am I a Keynesian?” quiz:

1. When you get your lowest mark in economics on a standardized test, do you blame the test writers? On the British civil service examination that got him a job in the India Office in 1907, Maynard Keynes received the second best grade. Hearing that he had fared worst on the economics section of the exam, he said, “I evidently knew more about the Economy than my examiners.” And, he was right.
2. Do you own an auspicious art collection? Using profits from currency speculation in 1919 and 1920, Keynes purchased paintings by Seurat, Picasso, Matisse, Renoir and Cezanne.
3. Are you a good investor? Keynes was an extraordinary investor. Reacting to his mediocre record during the 1920s, he switched his investing style from a macro approach to a long term bottom-up stock picking perspective and his returns soared. The results have been cited as better than Peter Lynch, Warren Buffett and John Templeton.
4. During the morning, do you remain in bed to sip your tea, read reports, and call stockbrokers? Every day, for a half hour after awakening, Keynes started working in bed.
5. Would you like to marry a Russian ballet dancer? Described by Sylvia Nasar as, “a Russian ballerina with a voluptuous body and a droll sense of humor but no obvious intellectual interests,” Lydia Lopokova married Keynes in 1925. (The Keyneses honeymooned at her parents’ home in St. Petersburg. He had a lot to say about the Russian economy.)
6. Do you sound like a mathematician? Having met with Keynes during the early evening on May 28, 1934, FDR said, “he had ‘a grand talk with Keynes and liked him immensely’ but complained that he talked like a ‘mathematician.’”

During his talk with FDR and in a subsequent NY Times letter to President Roosevelt, Keynes recommended deficit spending to jumpstart the economy.  And that is why, today, those of us who supported the $800 billion, 2009 stimulus spending are Keynesians.

My sources: The Worldly Philosophers by Robert Heilbroner, Grand Pursuit by Sylvia Nasar, John Maynard Keynes by Robert Skidelsky, Keynes and Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott. And, this WSJ article.

Just some thoughts today about economics and the Supreme Court. Listening to Tuesday’s oral arguments,  I became concerned about some economic basics. Markets and insurance were key ideas. However, no one defined a market and insurance was initially mischaracterized.

In my  econ class, we define a market as a process. Determining price and quantity, markets have a demand and a supply side. On the demand side are buyers who are willing and able to purchase different amounts of a good or a service at different prices. Correspondingly, on the supply side are sellers who are willing and able to provide different amounts of goods and services at different prices. In class, we assess markets through the impact of the participants. However, Justice Ginsburg suggested that “…the people who don’t participate in this market are making it much more expensive for the people who do; …”

As for insurance, Justice Kagan said, “…health insurance exists only for the purpose of financing health care…We don’t get insurance so that we can stare at our insurance certificate. We get it so that we can go and access health care.” Accurately, the attorney for the respondents (opposing the individual mandate) said, “…I’m not sure that’s right. I think what health insurance does and what all insurance does is it allows you to diversify risk. And so it’s not just a matter of I’m paying now instead I’m paying later. That’s credit. Insurance is different than credit…”

Curious, I checked the Justices’ bios. Justice Kennedy attended the London School of Economics. Otherwise, I found little evidence of economics in anyone’s background.

My bottom line: Economic thinking provides a disciplined approach that would be meaningful when deciding the scope of the Commerce Clause and defining health insurance.

I have to admit that the Pulaski Skyway terrifies me. Driving across it, I always remember the Minneapolis bridge that collapsed during rush hour in 2007.

The Pulaski Skyway is an 80-year-old rickety looking structure. A sister to the Minneapolis bridge, the skyway is among the network of roads leading to lower Manhattan through the Holland Tunnel. With no trucks because of its narrow lanes and no tolls, it is the fastest and cheapest way for me to get into the city.

The congressional battle about transportation funding is what started me thinking about the Pulaski Skyway. Unable to agree on long term policy, Congress just approved a 90-day stopgap measure that temporarily funds ongoing transportation projects.  If Congress is unable to act and New Jersey has big budget problems, how to fund a $1 billion+ Pulaski Skyway project?

That took me to Harvard Professor Edward Glaeser. He says that during our (national) youth, we built the Erie Canal (1825), the first Transcontinental Railroad (1869), the Panama Canal (1914) and (as a young adult) the first interstate highway system (1956). But now we are middle aged. We have to forget about the romance of high speed rail. No longer can we dive into massive politically attractive projects with federal funding. Instead, we need “smart, incremental changes” with users paying the bills, congestion pricing, more private participation and more buses.

So yes, I would accept congestion pricing, a toll, and a higher NJ gas tax for a new Pulaski Skyway. (But the bus? Probably not.)

The grade that the Pulaski Skyway received? With 9 the best and 0, a shutdown, both the Pulaski Skyway and the (collapsed) Minneapolis bridge got a 4 for structure from federal inspectors.

Our bottom line: This about a lot more than the Pulaski Skyway. It is about a wise fiscal approach to an aging transportation infrastructure.

Please note that this entry was edited after it was first posted.

Using transcripts that say (Laughter) when some levity enters the proceedings, one legal scholar has concluded that the Supreme Court averaged 1.027 laughs per oral argument. The funniest justice is Anton Scalia who holds the record with a total of 77 “laughter episodes” during one year.

On Wednesday, he added to this year’s total. When one attorney suggested that the Court could decide which sections of the Affordable Care Act would survive if the individual mandate were eliminated, Justice Scalia responded, “…what happened to the Eighth Amendment? You really want us to go through these 2700 pages? (Laughter)…Or do expect us to give this function to our law clerks?…” (the Eighth Amendment prohibits cruel and unusual punishment.)

Another example of Scalia humor:

Soon after a light bulb went out with a loud pop during a 2005 oral argument, Justice Scalia said, “We’re even more in the dark now than before.”

Behind Scalia, Justice Breyer has been a close second and Justice Roberts is #3. Meanwhile, Alito and Ginsburg are far behind and, rarely speaking, Justice Thomas is 0 on the humor scale. Here are graphs of the “number of laughing episodes” per justice and “laughing episodes per argument.”

Recent appointees Kagan and Sotomayor have not yet been judged but Kagan is said to have considerable potential. As Solicitor General, Kagan mistakenly referred to Justice Scalia as Mr. Chief but within seconds corrected herself with, “excuse me, Justice Scalia–I didn’t mean to promote you so quickly.”

The Economic Lesson

Analysis that sums up Supreme Court sentiment on the serious side emphasizes the split between the liberal and conservative justices. Perhaps Nicholas Wapshott’s “The Clash That Defined Modern Economics“ conveys not only the conflict between the ideas of John Maynard Keynes and Friedrich Hayek” but also the conflict within the Supreme Court. Each supporting the survival of modern capitalism, Keynes believed that state intervention was necessary for the market’s health while Hayek said government constrained the market’s ability to create wealth.

Summarizing each man’s outlook, this rap video introduces Keynes and Hayek.

An Economic Question:  Does Keynes or Hayek represent your idealogical tendency?

In Zimbabwe, people are laundering money. Literally.

When their U.S. dollars look too gray and faded, Zimbabweans wash and dry them. In this Wall Street Journal photo, dollar bills, shirts and sheets are suspended with clothes pins along a line. Why?

First some history…

During September 2008, Zimbabwe’s inflation rate was 489 billion percent. One loaf of bread sold for what 12 cars had cost a decade earlier.  People were paying their rent with groceries because no one wanted currency. The price of a morning bus ride to work? Only for that trip because soon the fare would rise.  Forget saving. What you had today was worthless tomorrow. Freeze prices? Supply evaporated. And yes, everyone was a billionaire.

The solution was the U.S. dollar. Using the dollar as the basis of a multi-currency system in which the Zimbabwe dollar was banned, they attacked their hyperinflation. And that takes us to the laundry.

In the U.S., we have currency, checks, credit, the Fed to oversee the money supply and the U.S. mint to replace worn out bills. Not Zimbabwe. Zimbabweans have U.S. cash (or 4 other foreign currencies) and avoid their banks. As a result, they keep their cash and wash it when necessary.

The Economic Lesson

To be called money, a commodity needs 3 characteristics:

• It should be a medium of exchange. (People willingly use the commodity for exchange.)
• It should be a store of value. (In the future, it still will have relatively comparable purchasing power.)
• It should be a measure of value. (When someone says one dollar, you know what that means.)

Today, in the U.S., the basic money supply includes cash, currency, travelers checks and demand deposits (checks).

When, during 2008, Zimbabwe’s inflation rate was one of the highest among the 30 countries experiencing hyperinflation since 1790, its currency could not be called money.

An Economic Question: Specifically explain why the Zimbabwean dollar cannot be called money.

By Mira Korber, guest blogger.

You are like your neighbors, but not for the reasons you might think.

Here are some general assumptions about neighborhoods (all quoted from this Atlantic article):

“(1) Neighborhoods are important centers of American life. (2) The residents of American neighborhoods talk to each other. (3) Politics is an important topic of their discussions.”

Two researchers, Samuel J. Abrams and Morris P. Fiorina, have refuted the aforementioned assumptions; they interpreted a 2005 Georgetown University survey of 1,001 people, showing that only 1.8% of the participants “usually” discuss politics with their neighbors. Therefore, according to Abrams and Fiorina:

“Americans today do not know their neighbors very well…and they do not see themselves as swimming in a sea of like-minded people…even if geographic political sorting were ongoing, its effects would be limited by the preceding facts about contemporary neighborhood life.”

The researchers argued that neighborhoods house similar people because of shared interest in what the location itself has to offer. For example, people who value education, high-paying jobs, or a sophisticated social scene tend to congregate not because they know each other, but because they seek those community traits.

Your neighbor might want the same education for his daughter as you want for yours, but it doesn’t mean you know each other. Therefore, community “sorting” occurs, and income inequality gaps increase due to educational disparities among communities rather than social herding.

The Economic Lesson

Read the following Huffington Post charts, which show the steadily increasing income inequality gap in the US. A few notable figures include the child poverty rate (21.9%), which is second only to Mexico (24.8%), the average American CEO’s pay (1039 times greater than the average worker), and homelessness rate (1 in 5 people). Additionally, this Economist article explains who makes up America’s wealthiest “1%.”

An Economic Question: In what ways have you noticed an income gap between the rich and the poor?

By Mira Korber, guest blogger.

Hunger strikes. You desperately scan Main Street for any sign of your favorite food: tacos. There’s nothing in sight and your handy UrbanSpoon iPhone app has failed miserably in finding restaurants that serve food from anywhere south of Texas.

So you call in the Tacocopter.

OK, maybe it hasn’t really come into our lives yet, but one day your tacos may possibly fly right to your feet with this taco-toting-helicopter.  The basic idea of Tacocopter is simple and clever: you order tacos online through your smartphone, and have them delivered directly to you by an unmanned helicopter, which then flies back to a restaurant to fill more orders.

However, progress launching the Tacocopter has stalled (no pun intended) for a number of reasons. The US government is wary of pilot-less flying objects (officially dubbed “Unmanned Aerial Vehicles) hurling through the air for commercial pursuits. Also the potential risks of crashing with birds, injuring innocent bystanders, delivering to the right person, and spontaneous combustion all must be taken into account.

Speaking of advancing transportation technology, self-driving cars are in the works as well. And for a funny glimpse into the “future” of technology and food, take a look here.

The Economic Lesson

With technological advancement and innovation comes Joseph Schumpeter’s theory of creative destruction. As Marginal Revolution points out, the Tacocopter model could present a phenomenal variety of uses, including delivery of medications to the elderly and disabled.

Therefore, what would the Tacocopter mean for delivery services as a whole? What would happen to delivery people bringing food to your doorstep? Waiters and waitresses?

Look here for an interesting graph and article showing how technologies have increased exponentially since the 1400s.

An Economic Question: What other uses do you see for the Tacocopter model?

If you don’t have 3 days to spare and want to watch the oral arguments for the Affordable Care Act, you can hire a professional line-stander. Charging close to $36 an hour to wait outside the Supreme Court, they started the line last Friday.

There are approximately 400 seats in the courtroom. With each of the Justices allowed 9 people, and the Court staff, certain Congressional leaders, members of the Supreme Court Bar and the media attending, the room fills up quickly. In addition, 60 seats have been allotted to the public for each day’s arguments and another 34 for a 3 to 5 minute peek at the proceedings. With tomorrow (3/27) considered prime because of the individual mandate oral arguments, people might say no for their Monday seat and stay in line for another day.

If you cannot get in, and no radio, no TV, no commercial photos or video, how to be a part of history? Each day, the audio should be available here by 2:00 and you can see the schedule here for the case, formally called Department of Health and Human Services et al. v. State of Florida et al.

You can look at the issues at econlife.

The Economic Lesson

The alternative you sacrifice–your time if you stand in line or your money if you pay a line-stander–is the opportunity cost of the decision. Whatever the Supreme Court decides for Department of Health and Human Services et al. v. State of Florida et al, the opportunity cost will be considerable.

An Economic Question: What is the opportunity cost of a decision you recently made? (Remember that choosing is refusing.)

Reserves were low, demand was high and prices skyrocketed. No, not oil.

Butter.

Butter demand surged in Norway several months ago when a low carb high fat diet swept the nation. At the same time, the supply of butter plunged because wet weather diminished the quality of livestock feed. Worse feed meant less milk.

You see where this takes us. More demand, less supply, and not only will price rise, but for Norway, it also meant a devastating butter shortage.

Here, Stephen Colbert tells the whole story of Norway’s butter crisis and a Russian butter smuggler.

The Economic Lesson

Usually, Norway represents a happy economic story. Endowed with immense oil wealth, they used the proceeds wisely by establishing a Government Pension Fund to invest in the future. Recognizing the possibility that the value of their currency would soar because of oil demand, they discouraged people from buying relatively cheap imports by protecting domestic industries. One result was a dairy cooperative monopoly. So, when the butter crisis hit, there was no way to get extra butter until tariffs were lowered. Until then, supply contracted and demand soared.

As you can see, Norway’s butter crisis is a economic tale of oil wealth, monopoly, tariffs, supply and demand.

Here, Slate tells the whole economic story.

An Economic Question: How would a demand/supply graph represent the Norwegian butter price spike and quantity shortfall?

At a Christie’s auction, a painting of a candle by German artist Gerhard Richter sold for $16.5 million.

A recent documentary on this 80-year-old artist shows him painting in his studio and attending gallery and museum exhibitions of his work. Neither the film maker nor Mr. Richter say very much. We observe him as he very humanly and humbly assesses 2 paintings as he creates them. At exhibitions, sometimes his discomfort is evident.

While the movie is rather quiet, the art world has had an electric response to his presence. At exhibitions, photographers and adulation surround him. As the top selling living artist last year, his paintings sold at auction for a total of $200 million.

Why?

According to WSJ.com, the supply and demand sides of the market for Gerhard Richter paintings convey a typical success story. On the supply side is a prolific and talented painter whom art galleries and auction houses are “eager…to canonize.” With “a steady volume…but not a glut,” and a retrospective exhibit drawing massive crowds in Europe, the supply side appears to be ideally situated for high prices. Meanwhile, on the demand side, when an artist becomes a sensation, “tastemakers,” dealers, “status seekers” and collectors enter the market with considerable money to spend. Put the supply and demand sides together and you get astronomical prices. At the gallery that represents him in NYC, there is a waiting list for his multi-million dollar paintings.

The Economic Lesson

The Price of Everything, a very good book, explains high salaries. With limited supply, sufficiently affluent demand and a huge (adulatory) audience that technology can facilitate, 21st century markets for superstar painters or golfers or rappers can involve huge salaries. Here, a University of Chicago economist discusses the rationale and math behind superstar salaries.

In some ways, all pricey markets share the same characteristics, even with pigeons.

An Economic Question: Through a demand and supply graph for an artist superstar, how might you illustrate a high salary?

Our story begins with 3 Greek entrepreneurs who want to create an e-commerce business selling olive products. It ends as Oliveshop.com begins to flourish with orders from the U.S., Australia, Japan, Mongolia and beyond.

The middle of the story, though, is the problem.

Occupying 10 months, these entrepreneurs filled out an avalanche of forms, satisfied tomes of regulations, stood for hours on lines, and endured multiple inspections. The pension office needed proof that that their pension contributions were up-to-date. The Health Department required lung x-rays and stool samples. Greek banks would only process payments if they switched the language of the website from their clients’ languages to Greek. And, there was much more.

Our bottom line: Procedures ranging from forms to lines to inspections are called transaction costs. The higher the transaction cost, the less likely the activity.

The Economic Lesson

During 2011, the Greek GDP contracted by 6.9% while its debt climbed to 165% of GDP. Meanwhile, its unemployment rate is close to 20%. Greek statistics provide tangible evidence of how excessively high transaction costs can retard economic activity.

In a Teaching Company Course, “America and the New Global Economy,” economist Timothy Taylor tells us the nations with considerable regulation tend to have more corruption. Correspondingly, Transparency.org’s Corruption Perception Index 2011 gives Greece a low grade for 2011.

In the World Bank’s Doing Business Index 2012, for the “starting a business” category, Greece ranks 135 out of 183 countries. (The U.S. was #13 and New Zealand, #1.)

This 2012 McKinsey Report looks at Greece’s problems and its potential.

An Economic Question: How does one new business affect the 4 GDP components (business, consumer, government purchases and exports minus imports)?

By Mira Korber, guest blogger.

They say “cash is king.” But these days, perhaps cash was king.

Sweden is becoming a “cashless society.” Commuters pay bus fees via credit card and text message. Religious institutions take electronically transmitted donations.

The positives?  Certain crime statistics have decreased. In 2008, Sweden experienced 110 bank robberies. In 2011, that number had shrunk to 16.

The negatives? Cybercrime has increased. In 2000, computerized fraud cases totaled 3,304. In 2011: almost 20,000.

Being cash-free would certainly lead to a lighter pocketbook. Or might it lead to no pocketbook at all? What would happen to wallet sales? Money clips? Restaurant tips? Jewelry purchases (as in Italy, for example)?

Read here to learn the implications of a cash-free America.

The Economic Lesson

Paying with cash or credit/debit represents a tradeoff. While a cashless society would remedy tax evasion and counterfeiting, it would diminish cash-dependent transactions.

An Economic Question: When do you use cash and when do you use a credit/debit card? Why?

By Mira Korber, guest blogger.

Times have changed. Wendy’s is now the second largest fast food chain restaurant in the US.

This interesting Atlantic article describes how Wendy’s savvy marketing pushed BK from second place to third. By focusing on quality food instead of comic advertising, Wendy’s successfully finished 2011 with higher revenue than Burger King, though it claims 1,300 fewer restaurants.

Wendy’s marketed their product as the freshest on the market, while BK attempted to lure in young men to their restaurants by using the “king” image in advertisements. It backfired.

The numbers? BK end of year sales: $8.4 billion; Wendy’s end of year sales: $8.5 billion. Oh wait…McDonald’s devoured both BK and Wendy’s with total sales of $34 billion. That’s a lot of burgers.

Read this Econlife post from 2011, before Wendy’s officially overtook BK in the final numbers.

The Economic Lesson

Wendy’s has differentiated itself by touting its healthy ingredients. Demand for Wendy’s burgers increased because healthy food also increased the utility of the product. With higher utility, more people purchased Wendy’s burgers, and it moved to the #2 spot.

An Economic Question: How do advertisements affect your demand curve for fast food?

How to define commerce?

In 1824, the U.S. Supreme Court was asked to decide if New York State could give a monopoly to a steamboat operator. In his decision, Chief Justice John Marshall rejected the narrow “buying and selling” definition of commerce. Instead, he said that commerce included all economic intercourse. Consequently, New York could not confer an exclusive right to travel on interstate waterways because Congress had the power to regulate interstate transport.

That 1824 decision, Gibbons v. Ogden, was only the beginning. Used to strike down New Deal legislation and to support Civil Rights law, the interpretation of the Commerce Clause has been varied. Now, starting on March 26 with 5 1/2 hours of oral arguments, again the Supreme Court will probably tell us what commerce means.

The Commerce Clause directly relates to 1 of the 2 major sections of Obama health care legislation that the Court is considering. Called the individual mandate, beginning in 2014, most of us will be required to obtain health insurance coverage or pay a penalty. Does Congress have the authority to mandate coverage? The Commerce Clause will provide an answer.

Interesting: Reflecting the importance of the issues, the Supreme Court has allocated an unusually long 5 1/2 hours to oral arguments. Also, they will make audio recordings available within hours of their presentation.

Here, econlife describes the other Affordable Care Act issues that the Supreme Court will ponder.

The Economic Lesson

Hoping to promote a single national economy, the framers of the Constitution included a “Commerce Clause” that gave the Congress the power to, “regulate Commerce with foreign nations and among the several states, and with the Indian Tribes.” In Marshall’s Gibbons v. Ogden decision, he specifically says “commerce” includes trade and transportation.

Here, in an econlife post, you can see historic definitions of the “commerce clause.”

An Economic Question: How can opponents and supporters of the Patient Protection and Affordable Care Act each use the “commerce clause” to support their position?

Steve Jobs had been pruning Gravenstein apple trees at the All One Farm and was on one of his “fruitarian diets” when he and Steve Wozniak tried to figure out a name for their new firm. Rejecting Matrix, Executek and Personal Computers Inc., Jobs explained to Walter Isaacson that Apple, “…sounded fun…” and “would get us ahead of Atari in the phone book.”

In 1976, their first computer, the Apple I, was sold for $666.66 and cost them approximately $220 to make in the Jobs’s garage.

Retailing for $629 (16GB), the new iPad 4G’s components cost $309.

According to the BLS Inflation Calculator, $666.66 in 1976 has the same buying power as $2667.38 today.

The Economic Lesson

It is tough to quantify job creation in the U.S. but Apple recently tried.  With 47,000 employees, Apple says it has “created or supported” a total of 514,000 jobs (components makers, UPS drivers, apps developers, glass and plane makers…you see). One Harvard professor summarized the debate surrounding the specific numbers by saying, “Apple has a big effect and big is about as precise as I can make it.”

Similarly, economists continue to debate the jobs impact of the 2009 American Recovery and Reinvestment Act.

An Economic Question: Why might it be difficult to figure out how many new jobs a firm or a government program has created?

If you see women in long skirts at “sit-down” restaurants, then the economy is probably expanding.

Since 1926 when the hemline index was first expressed, economists have assumed that hemlines fall if the economy contracts and rise during prosperity. However, when economists at Erasmus University looked at fashion magazines and business cycle data from the NBER between 1921 and 2009, their conclusions were not exactly what everyone expected.

They identified a delayed connection between skirt length and the economy. 3 to 4 years after the GDP rises, then hemlines go up. And, if the economy slumps, it takes 3 to 4 years for skirt lengths to drop. Reminding us that the recent recession ended in 2009, one CNBC reporter says we should not worry about longer dresses at 2012 Fashion Week.

Financial journalist Floyd Norris was also upbeat. Because his “Where You Eat Index” for 1994-2012 shows that GDP and “sit down” restaurant attendance rise together, the January 2011 to January 2012 increase in “full service” restaurant business was good news.

Our bottom line? To assess the economy, you can look at we wear and where we eat.

Here, econlife looks at other uncommon economic indicators.

The Economic Lesson

Economic indicators can be categorized as leading, coincidental or lagging. Stock markets, reflecting investors’ perception of future profits, are leading indicators, the GDP, telling the current state of the economy, is coincidental, and the unemployment rate is a lagging indicator.

An Economic Question: Thinking of the recession that lasted from December, 2007 to June, 2009, which daily life economic indicators have you observed?

Our story ends with the recent 2030 Word Bank Report on Chinese economic growth. But we have to start with sunflower seeds.

There once was a poor Chinese farmer who believed he could excel at nothing but sunflower seeds. Traditionally sold in stores, in bulk with other types of nuts, sunflower seeds had been nothing unusual. But then calling them Idiot’s Seeds, the farmer, Mr. Nian stir-fried, salted, and packaged them. And soon, during the 1980s, millions of people in China were munching Idiot’s Seeds as they watched TV or played cards.

In Capitalism With Chinese Characteristics, an M.I.T. scholar uses Mr. Nian as an example of the prototypical 1980s Chinese entrepreneur. Saying that entrepreneurs like Mr. Nian initially fueled Chinese economic growth, he then takes the reader to the 1990s when SOEs (state owned enterprises) become dominant. Yes, he says, the GDP still grew but a closer look reveals that the impact on the population was harmful with education and income suffering.

Now, with China 2030, we see how important it will be for the Chinese economy again to “rebalance” the role of government in order to sustain economic growth. There are 3 versions of the report: an executive summary with 3 pages, a longer summary with 73, and then the entire 438 page report. All take us to the 6 strategic policy areas that need to change.

Here, econlife looks at China’s SOEs.

The Economic Lesson

In Good Capitalism Bad Capitalism, economists Baumol, Litan and Schramm name 4 categories (pp. 60-61) of capitalism:

• “state-guided” where government dominates
• “oligarchic” where small groups have power and affluence
• “big-firm capitalism” dominated by giant enterprise
• “entrepreneurial capitalism” with innovation from small firms the dominant force

When China 2030 talks about rebalancing the Chinese economy, they are referring to a state-guided capitalism that needs more so to emphasize entrepreneurial capitalism.

An Economic Question: Thinking of Adam Smith, is state-guided capitalism really a market economy?

Why is the average price of a gallon of regular gasoline in Wyoming close to $3.36 and New York, $4.00?

Location and regulation.

Wyoming produces oil, it refines it, and, its taxes are among the lowest in the country. Also because of good location and less regulation,  Texas, Oklahoma, Louisiana and Alaska have cheap gas.

By contrast, as a non-producer and high taxer, New York has relatively expensive gas. Sharing the #1 spot, California has high gas taxes while Indiana, Illinois, West Virginia and Michigan are close behind.

Here are some handy maps to see taxes, prices, and a list of producing states.

The Economic Lesson

Typically, when the world price of a commodity is higher than the domestic price, a country prefers to be an exporter. Using Brent Crude as a benchmark, the world price is higher than domestically produced West Texas Intermediate (WTI). However, logistics make exporting WTI at a competitive price relatively tough.

Today’s prices are approximately $125 for Brent and $105 for WTI. This explanation explains oil prices further and names other types including Nigerian Bonny Light and Algerian Saharan Blend.

An Economic Question: How might the price at the pump affect retail sales?

How to predict Olympic medal winners?

Economics.

It takes money to train a world class athlete. The most economically fit countries can afford to train their athletes. Also, the “host bounce” helps. In the past, host countries have enjoyed a 3 medal boost for the Winter Games and 25 medals for the Summer Games.

Predicting the big medal winners at the 2012 Olympics, a Colorado College economist focuses on per capita income, population, the “home court” advantage and any “nation specific” effects. For London 2012, he says the U.S. will win 34 gold medals,  China will leave with 33, and Russia, 25.  Dr. Johnson has averaged 93% accuracy.

Here, econlife looks at the GDP/Olympic connection to Greece’s economic woes.

The Economic Lesson

Called anthropometric history, the history of human height has become an economic field of study. Economists use height data to form hypotheses about GDP, national affluence, food consumption, real family income, wages and prices.

Making Olympic predictions, economists are flipping the approach. Instead of using height data to predict GDP, GDP data is used to make predictions about the capability of human capital. For example, might growth in U.S. GDP between 1939 and 1999 relate to the 7 inch increase, from 6’1″ to 6’8″, for an average forward on the University of Wisconsin’s basketball team?

An Economic Question: Knowing that certain Communist countries have targeted resources toward supporting Olympic athletes, what GDP connection might you hypothesize?

By Mira Korber, guest blogger.

Repairing the US employment situation will prove a long battle. As you read yesterday, at current growth rates, it could take eight years for American employment to fully recover.

Out of this labor morass, an unusual employment opportunity arose for 13 homeless people. BBH marketing company hired them as human 4G wi-fi hotspots at the South by Southwest technology conference this March. The company called its project a “charitable experiment.”

The job description? Go to densely packed places at the conference, and offer relief to overburdened cellular data networks. The pay? $20 per day, plus donations and the opportunity to share their homeless stories with conference attendees.

Controversy surrounds the program, with some critics calling it exploitative and inhumane. By contrast, homeless Shelter director Mitchell Gibbs noted that the “homeless hotspots” employment program had actually fostered an “entrepreneurial spirit” among homeless residents.  The participants themselves offer their (positive) feedback on the program here.

The Economic Lesson

Homeless people have long sold “street newspapers” as an avenue for advancement into permanent housing. Content of the papers usually pertains to poverty and homelessness; the price is usually $1.

The human wireless transmitter is a 21st century street newspaper model. Because the digital age has pressurized hard copy information sales, the street newspaper model faces a changing landscape.

Joseph Schumpeter’s theory of creative destruction applies. As technology minimizes newspaper sales, it maximizes the need for more Internet availability. Correspondingly, the “street newspaper” model is evolving into the “street wi-fi” model.

An Economic Question: Do you think BBH’s “homeless hotspots” program is exploitative or entrepreneurial?

By Mira Korber, guest blogger.

The U.S. economy added 227,000 jobs in February. That’s more than the 210,000 jobs economists forecast for the month, though the current unemployment rate is still high: 8.3%. (For a different take on the issue, read here.)

This analysis of the jobs report determines that with sustained growth of 250,000 jobs/month by November, election time employment will clock in at 8%.

Sunny news, right? Yes, but maintaining this growth rate would only bring employment back to pre-recession rates after a whopping eight years, according Michael Greenstone and Adam Looney of the Hamilton Project. Find their study on the “jobs gap,” including demographics, immigration, and generational variables, here.

Though slightly dated, this study shows why the average American may not “feel” as though things are getting better. The higher the GDP, the more quickly employment will increase, but the gap between what the US could produce and what it actually produces is ever broadening. Until the actual production catches up with potential production, employment cannot fully recover. Unfortunately, if growth hovers around 2%, employment won’t catch up at all.

And with a growing labor force, that proves a challenge.

The Economic Lesson

In the past decade we’ve experienced “jobless recoveries.” By contrast, we’re adding jobs right now, but can it last with a sluggish GDP? Read here for financial journalist David Leonhardt’s opinion.

An Economic Question: Do you think high unemployment is a positive incentive for young people to start their own business ventures, as this TIME article suggests?

The Tibetan town of Namche Bazaar has yaks, donkeys and cell phones. Located along the route to a Mt. Everest base camp, the town attracts local traders who provision climbers. With the former carrying products and the latter, market information, the animals and phones are an interesting combination.

Between 2001 and 2012, cell phone subscriptions in India and China have soared. Currently approaching one billion in these 2 BRIC countries, the increase far exceeds the minimal upward trend in developed nations like the U.S.

The Economic Lesson

By “moving” information, cell phones enable people to share prices and negotiate transactions. Cell phones have also become the foundation of mobile banking networks. Instead of cash, text messages are used to make purchases at local stores, to make deposits, and to transfer money. Because cell phones create information and financial infrastructures in 21st century developing economies, they propel economic growth.

Another growth yardstick? Beer consumption.

An Economic Question: In addition to facilitating market transactions, how might cell phones contribute to economic growth in an emerging economy?

With the price of gas marching skyward, more of us might become eco-drivers. Based on a report from the University of Michigan Transportation Research Institute (UMTRI), here are some (slightly irreverent but accurate) rules for eco-driving:

1. During warm weather, don’t use the air conditioner and don’t open the windows. At certain speeds, the wind is a drag that uses up more fuel.
2. Occupy every seat with short skinny people. Weight and occupancy make a big difference.
3. Avoid hills.
4. Only drive on highways, preferably at 50 mph. Sort of like the porridge from Goldilocks and the Three Bears, driving too slowly and too fast use more fuel while a medium speed is just right.
5. Don’t drive aggressively.
6. Keep an eye on your oxygen sensor, your tires and your engine oil.

However, even if you violate every suggestion, by driving one of the most fuel efficient cars you will still receive a higher eco-driver rating than being eco-observant in the least fuel efficient cars.

So, what really counts? The car.

And this takes us to where economists always go: Incentive. Is price enough of an incentive to affect how and what we drive?

The Economic Lesson

Economists hypothesize that at more than $4.00 a gallon, we are close to a gasoline price that provides the incentive to conserve more and drive less. When buyers have a considerable response to a price change, economists say that their response is elastic. Our minimal reaction to the rising gasoline price indicates that thus far, our quantity demanded has been inelastic.

An Economic Question: If, in 1923, average mpg were 14.0, why has gas mileage not improved substantially since then?

Looking forward to your daily Double Chocolaty Chip Frappuccino, you see that the calorie count sign says 500 calories. Change your mind? Most studies indicate that knowing a calorie count has little if any impact on purchasing decisions.

Then, you stroll to your local Whole Foods to pick up some fruit juice flavored carbonated drink. Defined by legislators as sugary, the beverage’s price includes a 7% “soda” tax.  The 7% extra does not dissuade you from making your purchase. Researchers have concluded that the threshold is a penny an ounce tax. Any less and people still buy.

Next stop, the doctor’s office where you happily notice that those thick folders of paper records are gone. The practice has fully digitized and now will save all of us money by following the cost saving precepts of the Affordable Health Care Act. Yes? Maybe not. One study from Harvard says that physicians who have fully digitized tend to order more medical tests, thereby increasing costs.

Mandating calorie count information, taxing sugary drinks and digitizing health records… each is supposed to pull down health care spending. But they might not work.

The Economic Lesson

Stanford University health policy expert Victor Fuchs says we need massive policy change to depress health care spending that averages $8000 a person, double Europe’s average. Why so high?

• Too many specialists.
• Equipment with excessive “standby capacity.”
• Inadequate support for the poor who are chronically ill.
• Drug prices.
• Physician income.

A NY Times bubble interactive for President Obama’s 2013 budget shows perfectly where health care spending is going. Look at the 8.4% increase Medicare and Medicaid.

An Economic Question: Would you support Dr. Fuchs’s solution of a dedicated value added tax that funds universal coverage?

In colonial Massachusetts, the law required boys to attend school while girls were primarily educated at home. Because it was illegal for a married woman to own land, Abigail Adams had to use John’s name anytime she bought or sold land. And Abigail could not attend Harvard but John did.

Fast forward to 2012. In varying degrees around the world, still, women lack economic opportunity. In a recent report, The Economist tells us where and how.

First, a quick look at their criteria. Focusing on 5 broad categories, they looked at labor policy, finance, education, legal status and general business conditions. More specifically, variables included pay discrimination, ability to create a credit history, access to education, protection from violence, and property rights.

Next, the results.

Overall, ranking 128 countries, Sweden is first and Sudan last. The U.S. is #14.

Also dividing the world by affluence, researchers looked at 4 income groups. Among the 32 wealthiest nations, Sweden provides women with the most opportunity and Saudi Arabia with the least. For the next group, Lithuania tops the list and Algeria, #31 is last. The Lower Middle Income Group is led by Thailand while Sudan, #39, is at the bottom. And finally, among the poorest nations, Kenya gives women a lot more opportunity than Chad, #20.

The Economic Lesson

Why do women’s opportunities matter? One reason is economic growth. As one World Bank report concluded, “Societies that have a preference for not investing in girls pay a price for it in terms of slower growth and lower income.”

An Economic Question: Just referring to education, at home and at work, how might a women’s productive impact on economic growth change? Being able to drive a car? Owning property?

French fashion, food, wine and now a French giraffe.

Most French moms buy Sophie for their newborns. Seven inches tall, with brown spots, black eyes and pink cheeks, she is just a rubber toy giraffe that squeaks. In French supermarkets, her price is $12.

In the U.S., Sophie is a $25 giraffe with cachet. Exactly the same as her French sisters, her “Made in France” label, her natural rubber body, and her small-scale production differentiate Sophie from mass produced Chinese baby toy imports like Elmo and Big Bird. In the U.S., because Sophie is special, her sales are soaring.

Sophie reminds me of Levi’s in Communist Russia. Patented in 1873, Levi’s have always been utilitarian. However, in the former Soviet Union approximately 20 years ago, their “made in the U.S.A.” label made them a fashion icon .

The Economic Lesson

Looking at the total value of toy, doll and game imports from January to September, 2011 for 25 countries, France is #19 at $6 million. At the top of the list is China, then Japan and Mexico.

Because numbers from the St.Louis Fed indicate the U.S. imports more from France than we export to France, our trade balance is negative.

An Economic Question: Discussing trade, economists typically mention David Ricardo and the law of comparative advantage. Might French toy manufacturers have a comparative advantage over China?

By Mira Korber, guest blogger.

How often do we see “Privacy Policy” at the bottom of a web page? All the time. How often do we read beyond the alliterative title? At least for me, almost never.

And thankfully so, because those privacy policies would surely be gobbling up a lot of time. According to this entertaining article from The Atlantic, a pair of researchers from Carnegie Mellon University decided to determine all the time we would spend responsibly reading all the privacy policies we encounter in a year.

Here are the numbers:

• Median length of a privacy policy: 2,514 words
• Time required to read: approx. 10 mins
• Number of sites we visit with unique privacy policies: approx. 1,462
• Individual time required to read all these policies: 25 days straight or 76 business days
• Aggregate time required for reading: 53.8 billion hours

Next, those clever researchers decided to calculate the opportunity cost of spending all that time with your nose in a privacy policy. Their answer: $781 billion (which is larger than Florida’s GDP).  Check out their official study here.

So it’s evident to everyone by now that reading privacy policies keeps us from doing other big important things.

BUT…

Curiosity finally overcame my general laziness regarding reading Google’s new “This Stuff Matters” privacy policy. It’s controversial because it tracks your online activities, YouTube searches, and web queries more closely than ever before. Incidentally, users can’t avoid Google’s omnipresent eyeball.

Here are some creepy consequences of this new privacy policy’s power.

The Economic Lesson

Every decision comes with an opportunity cost. It’s what you sacrifice when you choose to do anything at all.

For example:

(1) Your opportunity cost of watching a horror movie may be getting a restful night’s sleep. (2) Your opportunity cost of reading a privacy policy may be searching for that suitably scary horror movie online.

(By the way, Google will probably know if you choose to search for either privacy policies or horror movies, due to the company’s new privacy policy itself.)

An Economic Question: Have you ever considered the opportunity cost of other mundane daily activities similar to reading privacy policies?

By Mira Korber, guest blogger.

Last Friday evening, two unexpected things happened at the highly attended Palm Beach International Equestrian Center (PBIEC) “Nations Cup” event.

1. I saw Donald Trump in the flesh — he’s very tall – from about two feet away.

2. I noticed an unusual parking situation. The “free” lot held 12 cars. The $20 parking fee lot housed (from my best guess) between 1,000 and 1,500 vehicles.

I would have expected the free lot to be full; a shiny complimentary shuttle bus carted me to the event and back while paying customers eked in and out of full “lots” (riding arenas at the showgrounds) at a painfully slow rate.  In fact, my sleek “free parking” shuttle bus followed Donald Trump’s top of the line Mercedes right out of the horseshow.

Why weren’t more people on that “free” shuttle efficiently following Mr. Trump off the premises?

“Free parking,” on principle, sounds “worse” than parking you have to pay for. The old maxim, “You get what you pay for” seems to have caused the sparsely-populated free lot. Demand was higher for a more expensive service because the consumer automatically expected it to be better.

This fascinating paper from Wharton School of Business (“When Do Higher Prices Increase Demand? The Dual Role of Price in Consumers’ Value Judgments”) explains the idea with case studies and experiments. Though the paper states that “an unequivocal positive relationship between price and perceived quality is yet to emerge,” it cites some situations that reflect the scenario where high price leads to high demand.

A parallel to my parking story emerges with the following case study (pg. 3): a $79 piece of technology called the Minivac 601 gained a strong customer base in schools and home users. Large corporations, however, dissed the product. But when Minivac 601 became Minivac 6010, and its price went up to $479, suddenly the product had purchasing appeal to large companies. The new, expensive Minivac was simply a different color and slightly modified design, but nothing more.

For some people, free parking costs too much.

The Economic Lesson

Demand reflects decision-making. In the case of parking at PBIEC, I witnessed a greater demand for paid parking than free parking. Attendees determined that paid parking had a greater utility because it validated their status as wealthy spectators.

While one might expect the demand curve for free parking to be horizontal and almost infinitely long, it turned out to be shorter than the paid parking curve because it offered lower utility (status) to consumers.

While this doesn’t really make a lot of sense, it turns out our human behavior doesn’t follow rational economic theories. Daniel Kahneman, 2002 winner of the Nobel Prize, explains our irrationality, quite rationally.

An Economic Question: Have you ever dismissed something as “too cheap” to be any good?