• Cost Measured by Work Minutes

    Aug 31 • Households, Macroeconomic Measurement • 293 Views

    Having referred to a $40 1970s airline ticket, I was curious about other prices 35 years ago. Not everything was cheaper.

    (According to the Dallas Fed, in 1974, a 1 ounce bag of chips was approximately 25 cents, and in 1980, a large pepperoni pizza averaged $7.99.)

    But, having pondered prices, the Fed said, instead of comparing prices, look at work minutes.

    Deflation discussio

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    Spend More or Less?

    Aug 29 • Economic Debates, Macroeconomic Measurement, Regulation • 264 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 • 247 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 • 247 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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