• Saving for Retirement

    College Coupons

    May 15 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Thinking Economically • 650 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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  • Swimming pool

    Pool Rules

    May 14 • Economic Debates, Regulation, Thinking Economically, Uncategorized • 559 Views

    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?  


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  • airlines industry...airplanes.16825_3.15a_000002547262XSmall

    Low Costs and Big Benefits for Spirit Airlines

    May 13 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Innovation, Labor, Regulation, Thinking Economically • 1117 Views

    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.

    Marginal Cost and Airline Fees

    (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 about marginal cost, 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

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  • The Midnight Ride of Paul Revere

    How Government Helped and Helps Paul Revere

    May 12 • Businesses, Economic History, Government, Innovation, International Trade and Finance, Labor, Macroeconomic Measurement, Uncategorized • 615 Views

    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.

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  • lightbulb

    JPMorgan Chase and Financial Innovation

    May 11 • Economic History, Financial Markets, Innovation, Money and Monetary Policy, Regulation, Uncategorized • 923 Views

    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.

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