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    Will the US Postal Service Think Outside the Box?

    Jul 9 • Demand, Supply, and Markets, Government • 163 Views

    Do you care about Saturday mail delivery? Amazon does. Hallmark does. Catalog companies and and mail service pharmacies do. By contrast, Netflix has said it could accept the elimination of Saturday mail.

    Trying to decide what to do about the huge financial difficulties facing the postal service, Congress is holding hearings. Their stated alternatives are to raise rates, cut Saturday delivery, and diminish labor and facility costs. While opinions vary about Saturday delivery, all who testified expressed little price elasticity. Higher postal rates would decrease their usage, further exacerbating post office problems.

    Recently, the Washington Post expressed wisdom about the postal service. Comparing creative innovation from a privatized Swiss system to tired thinking from the USPS, they said we are dealing with a hybrid entity “hamstrung by a large and heavily unionized workforce, congressional management, and an antiquated business model.”

    The Economic Lesson

    A market economy can thrive when fundamental infrastructures function well. In the U.S., a transportation infrastructure emerged during the 19th century as roads, canals, and railroads increasingly connected disparate areas of the country. Similarly, a financial infrastructure developed that moved money from those who had it to those who would use it productively. The US Postal Service is a part of a communications infrastructure. When an infrastructure is crucial, is more government or less government the appropriate approach?

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    Unemployment Benefits and A One-Handed Economist

    Jul 8 • Economic Debates, Economic Thinkers, Government, Labor • 157 Views

    Called “a compromise of a compromise of a compromise,” the Senate failed to extend unemployment benefits to the 2 million individuals scheduled to lose them on July 12.  

    Thinking economically, it is tough to definitively assess the decision. On the one hand, as a $34 billion bill, the deficit will grow and some economists wonder whether more generous benefits actually encourage “jobless workers to be pickier in their searches.” But on the other hand, one economist estimates that every dollar of jobless benefits adds $1.61 of stimulus. (This sounds like Harry Truman’s search for a one-handed economist!)

    Extended U.S. benefits originated in the $787 billion stimulus bill that was passed during February, 2009 when the number of weeks and their dollar size were increased. Since then, the path in Congress to extending benefits further has been complicated.

    The Economic Lesson

    Looking at unemployment, economist Arthur Okun takes us to the GDP. Okun’s Law states that for every 3% rise in the GDP, after the GDP has sustained a trend level for a year, the unemployment rate will drop by 1%.

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    A Pencil, An Apple, and a Price System

    Jul 7 • Demand, Supply, and Markets, Economic Thinkers • 302 Views

    I suspect we take prices for granted. Please think for a moment about a $10 pair of shoes. As a consumer, that $10 price tag tells you that they are inexpensive and you won’t have to sacrifice very much to buy them. Correspondingly, seeing the same price, a shoe manufacturer might decide not to make them because profits would be minimal. 

    Saying prices are the reason, in Free To Choose, economist Milton Friedman (1912-2006) tells us that thousands of people, who might hate each other if they ever met, cooperate to make a pencil. Its wood, he says, probably comes from the state of Washington where they must have used a saw which required steel, which needed iron ore. The lead is actually graphite which probably came from mines in South America. With rubber from Malaya, they made an eraser and still, yellow paint and glue were necessary.

    Telling a similar story about the iPhone4, the NY Times described the worldwide cooperation that created it. While the phone is assembled in Shenzhen, China, according to a “teardown” analysis, its chips come from Germany, South Korea, and the U.S., a touch-screen module is from Taiwan, and the phone’s gyroscope is made by a Geneva based company. Also involved are Japanese, Italian, and French firms and every one of them probably has production facilities around the world.

    Why do they cooperate? Dr. Friedman would have said that the reason is the price system.

    The Economic Lesson

    In a market economy, prices that freely respond to demand and supply provide information and motivation to buyers and sellers. The up and down movement of prices is called the price system.

    By contrast, in the former Soviet Union, prices were set by government created committees. As a result, they did not convey information about efficiency on the supply side nor about quality on the demand side. Different suppliers were not encouraged by prices to interact nor to cater to consumers. Lacking a price system, the Soviet economy collapsed.

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    More About Money and Happiness

    Jul 6 • Behavioral Economics, Households, Thinking Economically • 214 Views

    If you want to know whether money relates to happiness, you might first decide what makes you happy. A Gallup World Poll of 136,000 people in 132 countries from 2005-2006 focused on 2 variables: “life satisfaction” and “enjoyment of life.” Those people who use how much money they have earned as a “scoreboard,” profess to greater life satisfaction because of higher earnings. By contrast, happiness on the “enjoyment of life” scale, which included laughter, friends, and meaningful family connections did not relate to money.

    This Gallup Poll is one of many happiness studies we have posted during the past several years. In one previous post, high income people experienced more happiness than low income individuals. We can, though, qualify the high income earners’ happiness with a study that concluded income increases had no impact on happiness. Qualifying it further, we also found a study that contradicts the first one. Then, yet another study asserts that lower quintile earners are happy when upward mobility is feasible. Also, however, a different study demonstrated that happiness comes from earning more than your “neighbor”. Consequently, people preferred lower earnings over higher earnings when the lower number exceeded an associate’s income. Finally, researchers concluded that overworked women, more recently, have become less happy than men.

    The Economic Lesson

    Thinking economically typically requires looking at the margin. The margin is that imaginary line where we find something extra. For example, marginal revenue is extra money that a business receives for each additional sale. When a business sells a computer, the price of the computer becomes its marginal revenue. For happiness studies, we are at the margin, asking if extra money (at the margin) means extra happiness (at the margin).



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    Independence and Printing Money

    Jul 5 • Government, Macroeconomic Measurement, Money and Monetary Policy • 253 Views

    Having just celebrated July 4th, I’ve been thinking about 1776, the American Revolution, and money. At the time, money frequently determined who won and lost wars. When countries ran out of money, they had to stop fighting. Great Britain had sufficient revenue to fight wars because they could collect taxes efficiently and fund a national debt. 

    By contrast, the credit of a new nation is anything but dependable. Just like you and me, a country establishes good credit by showing it can pay back loans. In 1776, trying to raise money to fight the war, the U.S. had no credit history. The Continental Congress was able to borrow close to $11 million from the French and the Dutch (British enemies) and through domestic bond sales but still it was not enough. As a result, Congress turned on the printing presses.

    As Benjamin Franklin said, “This currency as we manage it is a wonderful machine. It performs its Office when we issue it; it pays and clothes Troops, and provides Victuals and Ammunition.” As Franklin later pointed out, though, when too much money is printed it rapidly diminishes in value. From 1775 to 1779, the Continental Congress had issued and then spent close to $250 million. The people who received the $250 million now had lots of dollars to spend. As a result, prices skyrocketed.

    The Economic Lesson

    An economist would say that the Continental Congress had created demand pull inflation which means that too many dollars are chasing too few goods. Or, in colonial terms, “A wagon-load of money will scarcely purchase a wagon-load of provisions.”

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