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    Frozen Jeans

    Nov 4 • Businesses, Demand, Supply, and Markets, Developing Economies, Environment, Households, Innovation, International Trade and Finance, Thinking Economically • 670 Views

    Being a responsible citizen of the earth might mean freezing your jeans.

    According to Levi’s, one pair of jeans, from its inception in the cotton field to its demise in the recycling bin, uses over 900 gallons of water. To reduce the climate change impact of your jeans by 48% (yes, Levi’s is precise), you could wash them one quarter as much–maybe once a month instead of weekly.

    Here, one man chronicles a year in the life of his jeans without washing them. Or, as the NY Times tells us, putting your jeans in the freezer kills the germs that make them smell.

    The Levi’s story does take us to questions about using water wisely. Discussed in this podcast, depending on where and when, wise water use relates to its quality and quantity. For Nature, water use is a “cropping efficiency” issue that will help us feed everyone in 2050. And for one Indian cotton farmer, this NY Times article describes the beneficial impact of targeted irrigation

    From 2007, here is a NY Times interactive on where in the world water is scarce.

    The Economic Lesson

    As economists, we can predict that an increase in the cost of water will become the most potent conservation incentive.

    An Economic Question: Using demand and supply graphs, explain how price stimulates conservation and encourages production.

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    Are You A Good Investor?

    Nov 3 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Financial Markets, Thinking Economically • 548 Views

    Good investing takes us to our emotions. But not quite how you might expect.

    Our brains don’t like random events. Instead, we prefer patterns, especially pleasing patterns. For basketball, that means streaks. According to one statistical study of the 76ers and the Boston Celtics, players do not really have “hot hands.” But our brains experience more pleasure when we attribute a streak to a player.

    Similarly, for investing, because we perceive rising stock prices as a pattern, we feel pleasure. Then, for tech stocks, or gold, or houses, the higher the market goes, the more satisfaction participants get from being a part of its ascent. In fact, many of us get so much delight from our “dopamine rich” brain centers that we forget we could be in a bubble.

    Consequently, as science writer Jonah Lehrer tells us in a Wired column, and in How We Decide, the quest for “lucrative patterns” when events are actually random can lead us astray. Maybe that is why “the best shooters always think they’re cold” and the best investors question a skyrocketing market.

    The Economic Lesson

    For his behavioral research, psychologist Daniel Kahneman won the Nobel Prize in Economics in 2002. Demonstrating that our decisions are more irrational than traditional economists tend to believe, Dr. Kahneman described the “systemic patterns” that we create when we respond illogically.

    For example, his work displayed that we care more about losses than gains and the “frame” for a question shapes its answer. As a result, told that an investment of $1,000 could lose 50% people typically reject the idea. On the other hand, we tend to say, “Yes,” when told an investment could gain 50%.  Here, the NY Times ideally describes his work.

    An Economic Question: Similar to basketball shooting streaks, where else have you seen people try to create patterns where none exist?

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    Default Deja Vu

    Nov 2 • Behavioral Economics, Economic History, Financial Markets, Government, International Trade and Finance, Money and Monetary Policy, Thinking Economically • 565 Views

    Between its independence in 1829 and 2006, Greece has had 5 defaults or debt reschedulings that occupied a total of 50.6 years.  Described by Rogoff and Reinhart in their 2008 paper and book, This Time It’s Different, few nations break out of a serial default pattern.

    Here are the total number of defaults and/or reschedulings for selected euro zone countries, 1800-2006:

    • Spain: 13
    • Germany: 8
    • France: 8
    • Austria: 7
    • Portugal: 6
    • Greece: 5
    • Italy: 1
    • the Netherlands: 1
    • Belgium:0
    • Finland:0

    And here is a thought-provoking discussion of the politics and economics behind the beginning and potential end of the euro.

    The Economic Lesson

    Alexander Hamilton surely knew about sovereign debt defaults and wanted to avoid them. Reading about his plan to fund and refinance the United States’ revolutionary war debt reveals his commitment to establishing our good credit.  His approach was varied, including issuing new bonds to pay for those outstanding and servicing the interest promptly on the foreign debt.  It worked. 

    Even those in Holland, then the financial capital of the world, displayed confidence in our public credit. Adhering to the Hamiltonian philosophy, the United States has never defaulted on its debt.

    An Economic Question: How do countries borrow money?

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    Deficit Deal Primer

    Nov 1 • Economic Debates, Government, Macroeconomic Measurement, Thinking Economically • 528 Views

    In 1934, after meeting with John Maynard Keynes, FDR said that he “liked him immensely” but groaned that he talked like a “mathematician.”

    Keynes’s advice to FDR? Described by Sylvia Nasar in Grand Pursuit, increase deficit spending from $300 to $400 million a month in order to spike the national income. Not entirely convinced, FDR partially, and just for awhile, implemented a Keynesian approach.

    The Economic Lesson

    Now, three-quarters of a century later, we remain divided about whether to embrace or abandon Keynesian spending.  And this takes us to the Super Committee appointed by President Obama as a part of the August debt ceiling deal. Unrestrained by political realities, the 6 Democratic committee members probably would implement large Keynesian deficits to fight unemployment. On the other side, the 6 Republicans would diminish government spending to fuel growth.

    Our purpose right now is not to see how they might compromise but instead to understand what will happen if they do not. We just have to remember 2 things: November 23 and DDMM.

    • November 23? The deadline. They have to have a deal by then. If they do not, then…
    • DDMM. Automatic cuts will slice spending for Defense, Discretionary budget items (such as education), Mandatory spending (like agricultural subsidies) and Medicare.

    Here is a NY Times graphic that details DDMM.

    An Economic Question: How might John Maynard Keynes have responded to the automatic cuts for “DDMM?”

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    Does Luck Matter?

    Oct 31 • Behavioral Economics, Businesses, Economic Debates, Innovation, Labor, Regulation, Thinking Economically • 514 Views

    In Las Vegas, the 2010 World Series of Poker was composed of 32,000 players and 57 separate tournaments. For the final event, $9 million was at stake. Freakonomics economist Steve Levitt and U. of Chicago law professor Thomas Miles studied the poker world series to determine whether luck or skill created winners.

    Their conclusion? Poker is a game of skill.

    The best players have more than a 30% return on their investment (ROI). Average players? The ROI is -15%. Translated into dollars and cents, that means the return to skill, per player, per event averaged over $1,200. For the less skilled, the loss was more than $400. (The ROI compared the tournament fees to amounts won or lost.)

    Our bottom line?  Similar to poker, in business, skill matters most. Using Bill Gates and Southwest Airlines as examples, this NY Times essay illustrates that skill, discipline, and knowledge turn good and bad luck into success.

    The Economic Lesson

    The NY Times piece says yes, Bill Gates was lucky. However, Mr. Gates was successful because his skills, decisions and willingness to persevere optimally converged. As a lesson for all aspiring entrepreneurs, Bill Gates depended on a lot more than luck.

    An Economic Question: Which characteristics might be necessary for a successful entrepreneur?

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