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    Jumping (or Not) and Unemployment

    Apr 10 • Businesses, Demand, Supply, and Markets, Labor • 615 Views

    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.

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    Should We Keep the Penny?

    Apr 9 • Economic Debates, Government, Households, Money and Monetary Policy, Uncategorized • 858 Views

    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.

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    African Developments

    Apr 8 • Behavioral Economics, Developing Economies, Economic Debates, Economic History, Economic Thinkers, International Trade and Finance, Macroeconomic Measurement, Regulation, Uncategorized • 652 Views

    In Malawi, when local newspapers referred to the president as “the big kahuna,” his office threatened a jail sentence if they did not stop. This threat and subsequent events take us straight to Why Nations Fail.

    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.

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    The Augusta National Golf Club and Women

    Apr 7 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Gender Issues, Uncategorized • 516 Views

    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.

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  • Decisions Have An Opportunity Cost That Require Tradeoffs

    Street Smarts

    Apr 6 • Behavioral Economics, Government, Households, Macroeconomic Measurement, Uncategorized • 634 Views

    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.

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