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    You’ve Got Mail?

    May 19 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Innovation, Labor, Macroeconomic Measurement, Thinking Economically, Uncategorized • 933 Views

    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.

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    Sweden, Ikea and Taxes

    May 18 • Government, Innovation, Labor, Macroeconomic Measurement, Regulation, Uncategorized • 1225 Views

    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.

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    The New Economics of Marriage

    May 17 • Behavioral Economics, Demand, Supply, and Markets, Economic History, Gender Issues, Households, Labor, Thinking Economically, Uncategorized • 783 Views

    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.

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    Learning From the Low End

    May 16 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Innovation, Labor, Thinking Economically, Uncategorized • 660 Views

    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.

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    College Coupons

    May 15 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Thinking Economically • 647 Views

    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.”

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