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    Spend More or Less?

    Aug 29 • Economic Debates, Macroeconomic Measurement, Regulation • 249 Views

    It was perfect. On the left side of the NY Times Op-Ed page, David Brooks defended the austerity approach. On the right was Paul Krugman saying spend more. Those are the alternatives. Maybe now it will be easier to choose one?

    Using Germany as his model, David Brooks presented the facts. He quoted economist Gary Becker saying that, “…the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempy to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus.” Now, the American economy remains sluggish while Germany has 9 percent growth and unemployment at “precrisis” levels. Brooks’s conclusion is that the U.S. needs to pay attention to the fundamentals. Fundamentally, we are very good at innovation. Our political institutions, however, are leading us in an unproductive direction.

    Krugman meanwhile says that we have to focus on unemployment. And focusing on unemployment takes us, inescapably, to the fact that we are in the midst of a recession. Why? Stimulus spending has been inadequate.  On the fiscal side, more spending is the answer; on the monetary side, the Fed has to inject more money into the economy.

    A summary? Brooks says less is more. Krugman says more is more.

    The Economic Lesson

    The two economic thinkers we can turn to are F.A. Hayek and John Maynard Keynes. A wonderful rap from econstories.com summarizes each man’s perspectve.

     

     

     

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    Double Dipping

    Aug 28 • Businesses, Economic Debates, Government, Households, Labor, Macroeconomic Measurement • 226 Views

    For a smile, you might want to watch Merle Hazard’s “Double Dippin'” song. As the Guardian points out, also look for the fun trivia such as a small background picture of mathematician Benoit Mandelbrot.

    No one was smiling, though in response to the 1.6% GDP revised growth rate for the second quarter. Thinking of future economic growth, economist Ed Yardeni, suggests three possibilities in a recent newsletter.

    1) The contrarian view says the economy will boom. To generate a 3% growth rate, we would need more housing refinancing that would put money in consumer’s pockets and elevate consumer spending. Also, lower mortgage rates coud lead to more housing sales. Add to this solid corporate profits and higher real pay per worker because of productivity gain and you have a robust recovery. Most say the chances of a robust recovery are slim.

    2) More and more people are concerned about a bust which takes us to the double dip scenario. The second dip would be caused by unimproved unemployment and plummeting consumer spending.

    3) Muddling with ups and downs in different sectors is the third and most likely alternative. Muddling would be characterized by some employment gains, some housng improvement, some consumer spending.

    A (trick) question: If the growth rate has moved from 3.7% down to 1.6% between  the first and second quarter of 2010, then has the economy contracted? The answer: No. The economy continues to grow but at a slower rate.

    The Economic Lesson

    Let’s think of a double dip as a “W”. The U.S. has experienced 2 double dips during the past 80 years. Looking between 1930 and 1940, economic activity contracted 1930-1933, expanded 1934-1937, dipped in 1938, and then steadily grew. A much faster double dip happened between 1980 and 1982. 1980/down; 1981/up; 1982/ down.

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    Pricing Airline Tickets

    Aug 27 • Businesses, Demand, Supply, and Markets, Economic History • 226 Views

    During the 1970s, a ticket to fly between New York and Washington, D.C. cost $50 whereas one between Los Angeles and San Francisco-almost twice the distance-cost only $40. 

    Why?

    Before deregulation in 1978, the interstate airline industry was subject to extensive regulatory control from the Civil Aeronautics Board (CAB).  For interstate travel, the CAB had to approve an airline’s decision to add or delete a route or to change a fare. Preserving profitability and service to large and small cities were government priorities. However, for intrastate travel, the market determined the price. As a result, intrastate flying tended to be cheaper.

    Fast forward to 2010. With government primarily regulating safety, the market shapes most other airline decisions.  According to the Wall Street Journal, four variables affect airline ticket pricing: 1) Competition from low-cost carriers for a specific route (When Southwest selects your route, fares drop.) 2) The number of carriers in the market for a specific route (More carriers…lower fares) 3) Whether passengers are discretionary or business travelers 4) Operating costs that would include landing fees and other airport expenses.

    The Economic Lesson

    A competitive market structure shapes a firm’s behavior. When government ran the industry, firms tended to behave like monopolies They had guaranteed profits, behaved inefficiently, and charged high prices.

    Now, with the market in charge, different routes have different market structures. When several airlines compete, and especially if one of those airlines is a discount carrier, fares tend to decrease. By contrast when the market is an oligopoly or one firm dominates, fares rise because the firm has more power. 

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    FDR and Obama: Similar or Different?

    Aug 26 • Economic History, Government, Macroeconomic Measurement, Money and Monetary Policy • 241 Views

    If this were 1930 or 1931, you would think you were experiencing a cyclical downturn–not a Great Depression. In an econtalk interview, Stanford’s David Kennedy begins this way, placing the listener in a contemporary context. Instead of looking backward at the Great Depression, we look forward to the 1930s.

    I recommend this podcast because Dr. Kennedy and George Mason economist Russ Roberts discuss facts from the 1930s that relate to today. Then we, as listeners can decide how contemporary economic policy and politics compare to that era. Kennedy alludes to “Black Swans“. If the Great Depression was perhaps the greatest Black Swan, how will this Great Recession compare? 

    Looking at presidential policy, he says we make President Hoover worse than he was and FDR better. While Hoover wound up not doing enough, he did initiate policies to fight the downturn and the Smoot-Hawley Tariff. By contrast, Dr. Kennedy reminds us that when FDR was president, unemployment remained high and production sluggish. Dr. Kennedy hypothesizes that perhaps FDR cared much more about creating a safety net for the bottom third of the economic population fighting the depression. After all, during the Roosevelt presidency the Social Security Act, Fannie Mae and the SEC were created.

    Do we have parallels? A cyclical downturn or a longer recession/depression? A minor black swan or a significant one? A president who cares more about the recession or a social agenda?

    The Economic Lesson

    As economic historians, our perspective changes when we look forward rather than backward. We see that when the stock market crashed and production declined in 1929, Herbert Hoover believed we were undergoing the beginning of a business cycle contraction, similar to many others. When FDR entered office during 1933, many worried about a balanced budget and federal spending. Meanwhile, the Federal Reserve was at best ineffectual.

    In December, 2007 our GDP started to decline and by the summer of 2008 financial markets were experiencing turmoil. After a 2009 stimulus package, we are debating whether more spending or austerity is the best policy.

    Looking at the past, we have implemented fiscal and monetary policies that do indeed reflect a grasp of the inadequacies of the past. But, I have to wonder what economic historians will say when they look back at us.

     

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    Overhead Problems

    Aug 25 • Businesses, Labor, Thinking Economically • 327 Views

    You’ve probably heard the story. Fed up, a flight attendant tells passengers what he really thinks of them, grabs a beer, presses the button for the emergency chute, and leaves the plane. The overhead storage bin might have been the reason.

    Overhead bins create frustration for everyone. They increase boarding delays. A cascading overflow can be dangerous when doors pop open. Attendants have to restrain impatient fliers from grabbing a bag before the plane has stopped. A cost saving fast turnaround for aircraft is delayed by passengers having to retrieve their paraphernalia. Deplaning is agonizingly slow.

    An economist would disagree with a NY Times solution: “Carry-Ons and Courtesy Need to Co-Exist“. Instead, incentives have to change. Because checked baggage generates huge revenue, airlines have the incentive to charge. Responding, passengers have the incentive to take more onboard. One solution? Spirit is charging for carry-ons. Your opinion?

    The Economic Lesson

    Two economic concepts explain the problem:

    1) The fallacy of composition states that what is good for one is bad when everyone does it. An example is fleeing from a fire in a crowded movie theater. One person, alone, can quickly leave but everyone together cannot. Similarly, one person can enjoy the plane’s overhead bin but everyone together cannot. When airlines decided to charge for checked luggage, they worsened the fallacy of composition.

    2) A negative externality is a cost to a third party because of the unrelated agreement between 2 other individuals. Here, the airline agrees with you or me that it is okay to bring baggage onboard. The result, though, is a cost to other passengers and the flight staff. On an aircraft, the negative externalities multiply geometrically because everyone is creating them.

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