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    Making Macroeconomic Decisions

    Jun 30 • Economic Debates, Economic History, Economic Thinkers, Government • 210 Views

    One problem with macroeconomic policy is the inability to confirm that it does or does not work. With variables constantly in motion, an entire economy as your lab, and no way to keep anything constant, how to know if you are doing the right thing? 

    This takes me to a Pew Research Center survey. A Pew questionnaire sent to 1001 adults confirmed that we all agree that state spending is a big problem. It also confirmed that we can solve the problem by cutting spending on highways, health services, public safety, and school funding. Or, we can raise taxes.

    Yes? Not quite. For every solution, more than 50% voted “no”. Furthermore, with the possibility of a double dip, some say now is the worst time to implement “austerity”. Others say “austerity” is the only solution.

    Decisions about state spending parallel federal dilemmas. Do we need more stimulus spending or has government spent too much already? We have no definitive empirical data to provide guidance.

    The Economic Lesson

    Since our nation began, we have disagreed about economic policy. George Washington had to cope with the ongoing feud between Secretary of the Treasury Hamilton and Secretary of State Jefferson. Hamilton was for a more interventionist government to spur economic development. Jefferson, by contrast, wanted less. And yet Hamilton’s goals are the same as today’s non government/market advocates.

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    Baseball Games and Airline Fares

    Jun 29 • Businesses, Demand, Supply, and Markets, Economic Debates • 215 Views

    How much will the San Francisco Giants charge for a baseball ticket? It all depends on, “past ticket sales, the day and time of the game, the teams’ records, the pitching match-up, the weather, the going rate on resale Web sites like StubHub and other data.” So, when 2 star pitchers were named for this year’s Memorial Day game between the Giants and the Colorado Rockies, tickets that had been selling for $17 rose as high as $25.

    Somewhat similarly, during the 1980s, American Airlines was the first to use a flexible pricing system that was called yield management. After airline deregulation, American Airlines had to figure out how to compete against young upstart airlines with lower costs and lower fares. Their response was a computerized booking system that constantly changed fares. Suddenly, their revenue depended on when the flight was booked, whether the flier stayed over a Saturday night (which identified business travelers who would pay more than the discretionary traveler), and other variables. Just like the San Francisco Giants, American was maximizing revenue by pricing customers individually.

    The Economic Lesson

    Whenever they have some monopoly power, business firms act more as price makers than price takers. Price makers have the power to shift their own supply curve to a new position. As a result, they help to decide where supply will cross demand to determine price. By charging different prices for the same product, they can cater to different consumers with different demand curves. Price takers have much less control. Their price is determined by the intersection of a supply curve that many similar firms create and a demand curve shaped by many consumers.

    When the San Francisco Giants realized they could maximize revenue because they had price making power, they implemented their “dynamic pricing” approach.

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    Idea Incubators and Economic Growth

    Jun 28 • Businesses, Economic History, Innovation, Macroeconomic Measurement • 213 Views

    It is so tempting to assume that we get the best results when we tell people what to do. If we want to use less oil, then pass laws that encourage us to invent better batteries. Yes?

    Using Selman Waksman as an example, retired Harvard professor David S. Landes, would probably answer, “No.” Waksman’s story starts in 1910, when, as a 22 year old Russian immigrant, he arrives in Philadelphia. The tale reaches its climax when he receives the 1952 Nobel Prize in Chemistry and Medicine for developing streptomycin. Waksman’s talents flourished in the United States because of the education he accessed, the mentors who supported him, and the businesses and federal government who gave him research money.  

    Summarized by Landes, Waksman was successful because of 1) “Contact and exchange” which resulted from “multiple points of intellectual entry” where ideas are nurtured, developed, and shared 2) Individual ambition, drive, and intelligence 3) Luck 4) An ongoing stream of new tools and technology. The result is technological progress, a key ingredient of economic growth.

    All of this takes me to a recent NY Times article about “idea incubators” and the convergence of academia, private business and (sometimes) government. With a program at M.I.T. as the article’s focus, an “entity” is described through which academic researchers can access business funding for their work at the idea stage. Fostering the potential of ideas, the concept is innovative because most seed money has been available at the development stage, after a good or service has materialized.

    The Economic Lesson

    Illustrating our economic growth, graphs with the bowed out lines called production possibilities frontiers will move to the right when we optimize opportunities for innovation. Economic growth is the best way to solve our current fiscal and financial problems.

    I recommend Dr. Landes’s book, The Wealth and Poverty of Nations: Why Are Some Nations Rich and Others So Poor?

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    The Marshmallow Test and Financial Reform

    Jun 27 • Behavioral Economics, Financial Markets, Labor, Regulation • 219 Views

    Is it possible that the marshmallow test relates to financial reform? As described in a 2009 New Yorker article by Jonah Lehrer and a WNYC Radio Lab podcast, a marshmallow test given to 4 year olds might predict adult behavior.

    40 years ago, psychologist Walter Mischel began studying gratification by giving young children a choice. A child and a single marshmallow were left in a room. The child could have one marshmallow now or two later. 500 children were tested. Mischel concluded that at 4 years old, certain children can resist temptation. Some could last 20 minutes while others capitulated immediately. The average resistance time was 7 or 8 minutes. (Researchers also used chocolate bars and Oreo cookies.)

    Years later, in a follow-up study, Mischel discovered that the SAT scores of children who held out for 15 or 20 minutes were 210 points higher than those who lasted only 30 seconds. Returning to the same people 40 years later, he found that the high delayers had better jobs and were skinnier.

    Looking at other studies, Lehrer again found a connection between our “hard wiring” and our behavior. In his book, How We Decide, discussing the connection between our “decision making apparatus” and our financial behavior, he suggests that an unaffordable McMansion bought through a subprime mortgage could be increasingly attractive if the potential loss is long term and the gratification is current.

    The Economic Lesson

    And this is where we can return to financial reform. If the intersection of neurological and psychological research does indeed point to certain people having certain innately unhealthy tendencies, how much should government protect them and everyone else?

     

     

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    Can the Post Office Deliver?

    Jun 26 • Businesses, Government • 218 Views

    Having just read a Washington Post article about the U.S. Postal Service (USPS), I started thinking about its future. But first, its past:

    While we have had postal services since the 1600s, Ben Franklin transformed the system. Appointed Deputy Postmaster for the Colonies by the British, he established our first home mail delivery system, diminished to a single day the letter delivery time between New York and Philadelphia, and to 6 days between Philadelphia and Boston. When Franklin was fired by the British for his rebellious political activity, the postal system was making a profit.

    Not today.

    Although it has a monopoly on letter delivery and mailboxes, still, the USPS lost a total of $12 billion during the past 3 years. As explained in a Teaching Company lecture, they face competition from UPS and FedEx, from email, faxes, and texts. Their salaries average 30% higher than the private sector, they have massive pension and retirement obligations, and their productivity lags behind national averages.

    While Congress has begun hearings on Postal Service problems, it appears unlikely that they will select any solutions that New Zealand and Germany have successfully implemented. Congress could divide the system into separate privately or publicly owned, profit seeking corporations or just eliminate all monopoly protection. To cut costs, they could stop Saturday delivery. As 80% of its expenses, labor could be cut. (Only Wal-Mart employs more people than the USPS.) 

    Having had nothing to do with the USPS, perhaps the title of the movie “You’ve Got Mail” sums it all up. 

    The Economic Lesson

    Hoping to preserve the status quo, some people have said that the Postal Service is a natural monopoly. Most economists disagree. Having a natural monopoly means that one firm is more efficient than a competitive market structure with many firms. Until new technology transformed the industry and government broke up AT&T, the U.S. phone system was called a natural monopoly. 

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