• The internet culture that included online based tax collection and computers as a part of the education system related to the market economy that Estonia developed.

    From Estonia: Cheap International Calls, Priceless Tweets

    Sep 5 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Education, Government, Innovation, International Trade and Finance, Macroeconomic Measurement • 218 Views

    The President of Estonia said that because of Mrs. Cummings’ 8th grade math class in Leonia, New Jersey, he rejected Finland’s offer to give his country a free analog phone system. Vintage 1970s, the system was far superior to the 1930s technology in Estonia but the President, Toomas Hendrik Ilves, and other officials, said no. Having started programming in his 8th grade math class and then continuing through his undergraduate years at Columbia, Ilves understood that Estonia had to leapfrog old technology and head straight for digital.

    Where are we going with this? To Estonia and their parallels with the U.S.

    Estonia’s Silicon Valley

    During the past 2 centuries, Estonia has had somewhat of a boomerang relationship with Russia. After 200 years of Tsarist Russian rule, as WW I ended they declared independence but reentered the Soviet orbit after WW II. When 1991’s dissolution of the Soviet Union again untethered them, they were mired in 1930s technology.

    I guess the good part, though, was they could piggyback a state-of-the-art infrastructure on top of the 50 years of progress they missed. Rejecting Finland’s outdated technology, they built free nationwide WIFI, established online based finances for the government including tax collection (of a flat tax–really easy compared to Ilves’s experience with the IRS) and instituted a computer-based curriculum in the schools. Such a human capital foundation has meant the emergence of a Silicon Valley culture and the development of Skype by a Swede, a Dane and Estonian engineers. Now owned by Microsoft, Skype still has a main office in Estonia.

    Estonia’s Market Economy

    Meanwhile, Estonia’s market statistics have been pristine to some and controversial to others. With eurozone membership central to their agenda, on January 1, 2011, they needed new wallets because the switch from the kroon to the Euro meant the size of their currency had changed. #11 in the Index of Economic Freedom–the U.S. is #12–and #22 out of 189 countries in the World Bank’s Ease of Doing Business Index, Estonia has embraced the market.

    She also has been a “poster child” for austerity advocates because of her response to a 2009 recession. Rather than borrow more, Estonia froze pensions, lowered government salaries and upped a value-added tax. Growing by 2.3% in 2010, she reversed a 14% GDP dive that soon climbed further.

    Estonia's commitment to a market economy has included disciplined debt policy.

    Commenting, Paul Krugman said austerity had not worked because GDP growth was insufficient. Ilves, whose undergraduate degree is from Columbia, fired off a series snarky retorts aimed at the Princeton professor, including this gem:

    Our Bottom Line

    Because of President Obama’s recent visit and guarantee of U.S. support, I wanted to share the economic philosophy that we share with Estonia.


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  • When one mall is located in 2 cities, each with a different minimum wage, the unique incentives affect employees and consumers through wages and prices.

    A Tale of Two Cities… and One Mall

    Sep 4 • Businesses, Demand, Supply, and Markets, Government, Labor, Thinking Economically • 124 Views

    Half of the Valley Fair Mall is in Santa Clara, CA while the other half is in San Jose. Because San Jose has a minimum wage of $10.15 while Santa Clara’s is $8.00, the stores at the mall have a problem.

    Minimum Wages Issues

    For some stores, the big challenge is competing for quality employees. Knowing the San Jose half paid more, the best workers went there. As a result, one Santa Clara store manager said he winds up with the “sketchy” help. Constrained from raising wages by the owner, he tried offering flexible hours to elevate quality.

    Meanwhile, the Gap had the challenge of spanning both municipalities. Theoretically, that meant they could pay the people who work in Santa Clara less than those in the San Jose part of the store. But how to tell? They were actually told they could figure out how much time a worker spends in each city. Instead, they decided to pay everyone the higher wage.

    Then, you have the owner of Wetsel’s Pretzels in the San Jose section who had to increase everyone’s pay. Expecting lower profits, she said she would have to take home less or lower employee bonuses but could not raise prices because of nearby Santa Clara competition. Further complicating her professional life was her Wetzel’s Pretzels store in the Santa Clara half where her employees earned less. Because she wanted to pay everyone the same hourly wage, she began rotating employees between Santa Clara and San Jose.

    The National Minimum Wage Debate

    On Labor Day, saying that “Obama Renews Call to Increase Pay Floor,” the WSJ  reminded us that the President’s attempt to increase the minimum wage from $7.25 to $10.10 an hour did not make it through the Senate. They also reminded us that the minimum wage is a pay floor because it prevents price from descending to equilibrium.

    Below, you can see the horizontal line is a floor that keeps price above equilibrium and creates a surplus of unemployed workers.

    The excess supply of worker hours reflects the jobs losses that opponents of the minimum wage hike predict.


    Further affecting the national debate, individual states (and cities like Santa Clara and San Jose) have different minimum wages.

    Our Bottom Line

    This tale of 2 cities in one mall provides a micro-version of the minimum wage debate in Congress. Expressed in a Boston Fed report, the competing arguments on both sides are persuasive. Proponents emphasize the additional spending that will be created, the minimal, if any, job losses, and their support for low wage workers. Meanwhile, opponents of a higher minimum wage cite jobs lost, higher business costs and price increases. But who is right? Some say that it all depends on which study you cite. We have some links below to both positions.

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  • Everyday Economics: When supply and demand in prediction markets create an unlikely price, they can indicate illegal activity like match fixing in tennis.

    Using Prediction Markets to Catch Match-Fixing at Wimbledon

    Sep 3 • Behavioral Economics, Demand, Supply, and Markets, Economic Thinkers, Sports, Thinking Economically • 104 Views

    Called collective intelligence, sometimes crowds can be smarter than individuals.

    Take jelly beans. When researchers have tried to compare the individual and the crowd, they have used the “guess-how-many-jelly-beans-in-the-jar approach.” For one experiment with 850 jelly beans in the jar, only one person out of 56 came close. The crowd though, when averaged, said 871. Similarly, guessing the weight of an ox that weighed 1,198 pounds after being slaughtered and dressed, the crowd average was 1,197.

    So where are we going? To collective intelligence in tennis prediction markets.

    Prediction Markets

    Beyond jelly beans and oxen, the collective wisdom has been used in prediction markets. Whether looking at elections, the timing of interest rate hikes from the Federal Reserve or sporting events, the price of the bet on a certain outcome can reflect its likelihood.

    During the primaries leading up to the 2012 presidential election, the University of Iowa prediction market for the Republican presidential nomination had a dollar payoff for a correct outcome and zero for all other bets. With the price of a contract representing the probability that market participants believed the event would happen, a 22-cent contract displayed a candidate’s 22% probability of winning.

    Before Rick Perry’s debate gaffe, the price of a Perry contract was 31 cents. After the debate, it nose-dived to 17 cents. For Romney, the average price of a contract remained in the vicinity of 80 cents. With these contracts, we have two variables at work. First we have supply and demand determining price. Also, researchers have concluded that voters’ expectations more accurately indicate an outcome than their intentions. Expecting Romney to win whether they intended to vote for him or not, traders placed their wager in his court.

    And that takes us to tennis.

    Forensic Economics at Wimbledon and The Bottom Line

    Like elections, tennis betting markets indicate who “gamblers” expect to win. But what happens when one market’s expectations contradict the collective wisdom elsewhere? That is where a sports law assistant professor got suspicious. Looking at 6,204 matches from 2011-2013 with a tennis gambler who had an algorithm to predict match outcomes, Florida State’s Ryan Rodenberg identified 23 matches whose betting patterns were 16% to 19% out of synch with expectations. Their conclusion? Tennis authorities should investigate to see if those 23 matches, including 3 first-round matches at Wimbledon in 2011 and 2012, were fixed.

    Our bottom line: For shoes or for a wager on a tennis player, price conveys information when supply and demand interact.

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  • Everyday Economics The quality of monetary and fiscal policy during a financial crisis does not depend on whether the President is on vacation.

    Economic Thoughts About Presidential Relaxation

    Sep 2 • Businesses, Economic Debates, Economic Thinkers, Financial Markets, Government, Money and Monetary Policy, Thinking Economically • 110 Views

    When the financial panic of 1907 struck, Theodore Roosevelt was off hunting bears. On October 5th, the President had joined his fellow Rough Rider, the Tabasco magnate, John Avery Mcllhenny, other businessmen and politicians in the Louisiana wilderness for a traditional bear hunt. During the second week of the hunt, he sent a note to his son saying,  “At last today I killed my big she bear—202 pounds. It was my thirteenth day; now everything is pure pleasure…”

    Where are we going with this? To whether the President has to be at his desk when the country needs emergency monetary and fiscal initiatives.

    The Panic Starts

    Meanwhile, (what became known as) the Panic of 1907 had begun. At first, the stock of United Copper Company plunged from $62 to $15 on October 14, then financial markets went  “haywire” and bank failures multiplied. Although NY Times headlines were shouting the gravity of the situation, the President was said to have known nothing while he was in Louisiana. Trying to control the financial damage, Treasury Secretary George B. Cortelyou went to New York on October 22 to meet with J.P. Morgan. A day later, the President returned to Washington D.C. from his bear hunt.

    Before the Federal Reserve was established in 1913, J.P. Morgan was the source of monetary policy. Suffering from a bad cold, Morgan sucked lozenges, had doctors spraying his throat and sneezed during the October 1907 meetings in his library with the banking elite. Fully grasping what had to be done, he generated the liquidity and publicized the confidence that the financial system needed to weather the storm.

    As the NY Times indicated in this October 27 poem…

    A millionaire is wicked, quite;
    His doom should quick be knelled;
    He should not be allowed to grow,
    If grown he should be felled,
    But when a city’s bonds fall flat,
    And no one cares for them,
    Who is the man who saves the day?
    It’s ].P.M.
    When banks and trusts go crashing down
    From credit’s sullied name,
    While Speechifying Greatness adds
    More fuel to the flame,
    When Titan Strength is needed sore
    Black ruin’s tide to stem,
    Who is the man who does the job?
    It’s J.P.M.

    Our Bottom Line and the Role of the President

    During the Great Recession, President Bush stepped back as his Treasury Secretary Henry Paulson and Federal Reserve Chair Benjamin Bernanke led negotiations with Congress. By contrast, President Franklin Roosevelt appeared fully engaged in the financial intricacies of the Great Depression. Then, though, we have President George Washington’s Treasury Secretary Alexander Hamilton galloping off to Pennsylvania to suppress a Whiskey Rebellion whose participants were not going to pay an excise tax.

    Our bottom line: So yes, we have had presidents who were at the center of the action for monetary and fiscal policy during a financial crisis and those who were not. As you can see, we seem to have no consistency on whether it matters.

    Here are some vacation days facts (some have been disputed):

    • Obama: 125 (so far)
    • George W. Bush: 407
    • Jimmy Carter: 79
    • Harry Truman: 175 days (during 11 visits) in Key West, Florida
    • John Adams left the Washington D.C. in 1798 for his Quincey, MA farm to be with Abigail for 7 months when she was ill.
    • In 1805, Thomas Jefferson spent 4 months–July-October–at Monticello.
    • James Madison left Washington for 4 months- June-September 1816.

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  • A NASA satellite image of the world's night lights conveys economic information about developed and developing countries.

    Bedtime Stories… About the Economy.

    Aug 31 • Developing Economies, Economic Growth, Government, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 122 Views

    Our Sunday Charts

    This week we have NASA Earth Observatory’s “Night Lights 2012″ as our chart. Isn’t it wonderful?

    NASA explains that, “This new image of the Earth at night is a composite assembled from data acquired by the Suomi National Polar-orbiting Partnership (Suomi NPP) satellite over nine days in April 2012 and thirteen days in October 2012. It took 312 orbits and 2.5 terabytes of data to get a clear shot of every parcel of Earth’s land surface and islands.”

    Looking at “Night Lights 2012,” you can see that African and South American developing countries and rural areas are primarily dark. By contrast, the U.S. and Europe are brightly lit as are many of the world’s top cities like New York, Chicago, Los Angeles, Buenos Aires, Shanghai, New Delhi, Tel Aviv, Paris, London, Copenhagen, Tokyo and Hong Kong. Also, perhaps the light is bright in the vicinity of the North Dakota Bakken oil shale formation because of natural gas flaring?

    These 2010 stats could confirm the absence of electrification in the darker areas of the satellite image.

    Developing countries and the absence of  electrification

    From: World Bank

    Our bottom line: In one of his farm journals from 1813, Thomas Jefferson points out that one-half more wool was spun during July than in January because extra daylight hours extended the length of the workday. Whether in 1813, or now where electrification is sparse, the productivity of land, labor and capital is still very much controlled by the sun.

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