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    Economic Insight

    Nov 26 • Environment, Thinking Economically • 289 Views

    Have you ever looked at “The 3 Little Pigs” through an economic lens? Referring to the third little pig, Harvard economist Edward Glaeser suggests the fairy tale is about investing wisely. In my econ class, a student used opportunity cost analysis to show that the first little pig actually made the wisest decision. His straw home gave him shelter and provided time for other worthwhile activities. The alternative, building a more resilient home, would not have provided as many benefits. Like all of us, when the first little pig made his decision, he did not know its consequences.

    Similarly, when we wear an economic lens, we might see that Jon Krakauer’s Into Thin Air is about more than a tragic attempt to climb Mount Everest. For example, using marginal cost/benefit analysis we might conclude that certain decisions were better than their consequences indicate. Perhaps unintentionally, Krakauer also gives us a tragedy of the commons lesson. in The Literary Book of Economics, economist Michael Watts quotes Krakauer saying “…Everest had been turned into a garbage dump by the ever increasing hordes…but in recent years it had been turned into a fairly tidy place…” Why? The incentives changed. Instead of the tragedy of the commons where climbers experienced no cost for littering, “…expeditions had to post a $4000 bond that would be refunded only if a predetermined amount of trash were carried back…”

    The Economic Lesson

    We should remember that opportunity cost analysis is about decision making at the time the decision is made. It is not about the consequences that only someone with a crystal ball could know. By identifying the benefits of a decision at the time it was chosen, we can better understand why it was made.

    You can look at the table of contents of The Literary Book of Economics here.

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    An Economic Story From Plymouth Plantation

    Nov 25 • Developing Economies, Economic Debates, Economic History, Labor, Macroeconomic Measurement, Thinking Economically • 458 Views

    In 1623, two years after the first Thanksgiving, Governor William Bradford was worried about Plymouth’s food supply. The problem, he concluded, was that people shared whatever they produced. Because “able and fit” young men were expected to work harder and then give their food to others, all worked less.

    As Bradford explained it in Of Plymouth Plantation,”So they began to think how they…could…obtain a better crop than they had done…At length…the Governor…so assigned to every family a parcel of land…This had very good results for it made all hands very industrious…”

    You can see what happened. When people could keep what they produced, they became more industrious.

    The Economic Lesson

    Equality or efficiency was a dilemma in 1623 and remains a dilemma today. The basic question involves how much of what we produce should we keep?

    Maybe, especially on Thanksgiving, we can say it all takes us back to the size of the pie.

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    Flying Snakes and Economic Growth

    Nov 24 • Government, Innovation • 367 Views

    Sometimes the federal government spends a tax payer’s money in unexpected ways. According to the Washington Post, scientists funded by the Department of Defense are studying snakes that can fly. Slightly venomous, sort of air-slithering, these Southeast Asian snakes can glide through the air for as far as 780 feet. Our DOD wants to know how.

    Thinking about the DOD and flying snakes took me to the space program. For industry and consumers, there are lots of practical examples of NASA sponsored research that have been used productively in the private sector. My favorite, though, is the golf ball with “500 dimples arranged in a pattern of 60 spherical triangles.” You can guess the benefit. Ball flight is faster and more stable.

    As NY Times columnist David Leonhardt emphasized, fiscal prudence involves retaining projects that will stimulate economic growth. And as Thomas Friedman said, this takes us to “More (Steve) Jobs, Jobs, Jobs, Jobs.” To grow and diminish unemployment, we need to stimulate innovation.

    The Economic Lesson

    New technology and ideas propel economic growth. Economists can use production possibilities graphs to illustrate economic growth. On production possibilities graphs, a bowed out curve is drawn which illustrates a country’s maximum production capability. For example, when the ability to schedule thousands of overlapping activities is developed by NASA, licensed to a private company for commercial use, and manufacturing becomes more efficient, the production possibilities curve shifts to the right. 

    Maybe flying snakes research will eventually shift a production possibilities curve?

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    More of a Contagious Disease

    Nov 23 • Financial Markets, International Trade and Finance, Money and Monetary Policy • 238 Views

    From FT.com: “The Irish say they are not Greece. The Portuguese say they are not Irish. The Spanish finance minister said last week that Spain is not Portugal. There are no prizes for guessing what Italy is not.”

    Also, This BBC article does a good job of showing how the fiscal woes of the Irish, Greeks, Portuguese and Spanish differ. Finally, you might want to refer back to “A Contagious Disease” for a diagnosis of eurozone fiscal illnesses.

    The Economic Lesson

    I discovered an easy to understand academic paper on the connection between fiscal and monetary policy in the “euro area.” Called “The Euro and Fiscal Policy,” it explained the fundamental tension between the “euro area’s” centralized monetary policy and decentralized fiscal policy. Its basic point was that when fiscal policy becomes powerless, monetary policy becomes even more important for steering a nation toward economic health. However, if the economic needs of euro area nations are so different, then how can one monetary policy function appropriately for everyone?

    Most simply defined, fiscal policy refers to government spending, taxing, and borrowing while monetary policy applies to the supply of money and credit.

     

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    Inequality and Movie Stars

    Nov 22 • Behavioral Economics, Government, Regulation • 216 Views

    Did you know that Academy Award winners live longer than losers? Much more than a trivia fact, Academy Award winner longevity provided researchers with data about inequality.

    As reported in the May 15, 2001 issue of The Annals of Internal Medicine, researchers gathered mortality statistics for 1649 people. They looked at all “actors and actresses ever nominated for a leading or supporting role…For each, another cast member of the same sex who was in the same film and was born in the same era was identified…” Their goal was to determine whether relative success correlated with a person’s lifespan. Their answer was, “Yes.” They concluded that winners had approximately 4 extra years of life and that “…movie stars who have won multiple Academy Awards have a survival advantage of 6.0 years over performers with multiple films but no victories.”

    I know that you might have many questions. The researchers did also. But our key here is to think about whether inequality among all of us in the U.S. warrants remedial action from our government.

    This takes me to a recent NY Times column from economist Robert Frank. Comparing 1976 and 2007, he tells us that the top 1% of earners moved from an 8.9% share of total income to 23.5%. Then, he also points out that counties with rising income inequality experience higher divorce rates, more bankruptcies, and longer commute time. His point? Because “…greater inequality causes real harm…” more income equality through higher taxes is a valid goal for our leaders.

    During an Econtalk podcast, George Mason University economist Russ Roberts disagreed with Dr. Frank’s conclusions. Dr. Roberts said that economic growth was constrained by income redistribution and a “bigger pie” will help everyone.

    The Economic Lesson

    Taxes are all about income redistribution. If we promote equality, we will have more income redistribution through taxes, more fairness, and a common living standard. However, economic efficiency will suffer and our economic pie will grow more slowly. By contrast, economic competition leads to more efficiency, more entrepreneurial energy, more economic growth and a bigger pie. And, is it fairer to be able to keep more of what you earn?

    You might want to look at economist Arthur Okun’s Equality and Efficiency: The Big Tradeoff.

     

     

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