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    Overhead Problems

    Aug 25 • Businesses, Labor, Thinking Economically • 392 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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    The Locavore Challenge

    Aug 24 • Environment, Households, Thinking Economically • 241 Views

    Being a locavore is not always easy but it can feel very good. Those of us who are locavores believe that we are helping the planet by saving on transport costs and emissions, patronizing small businesses rather than distant impersonal corporate giants, and eating healthy fresh food. In many ways, locavores can have their cake and eat it too (although it usually is broccoli and local produce). While buying good, healthy food, locavores are helping the planet…

    But are they?

    In a recent post, I suggested cost/benefit analysis of environmentally friendly preferences such as wind farms, ethanol production, and buying local. Instead, though, we can let price do it for us. As economist Steve Landsurg points out, for local food purchases, cost/benefit analysis involves an undoable amount of research about “land, fertilizers, equipment, workers, transportation and energy costs” and still we would not have considered everything.

    Using a tomato as an example, Landsburg explains that the price conveys all we need to know. Assume, for example, that the local tomato laborers would have been more efficient growing grapes. As a result, the tomato supply curve would shift up and to the left because of lower production, and the price of the tomato would increase. You don’t have to ask specifically about cost and benefit because a high or low price provides the answer.

    The Economic Lesson

    Cost is more than money. Economically defined, it is sacrifice. The cost of a decision is the next best alternative that you sacrificed.

    Because the vast assortment of “costs” that relate to producing a good or a service affect the price, consumers who care about the environment can optimize decision making by considering the dollars they are spending. Indeed, all of us can look at a price as a source of information about the good or service we are purchasing. We can use price to become a better locavore.

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    The Two Sides of ZIRP

    Aug 23 • Economic Debates, Money and Monetary Policy • 260 Views

    Hearing economists discuss the Fed’s zero-interest-rate policy, Harry Truman would again search for a one-handed economist.

    On the one hand…if you can borrow money cheaply, you are more likely to expand your business and buy a house or a car. Especially during a recession, low interest rates can encourage business expansion and consumer loans. As a source of economic stimulus, many believe that zirp is desirable.

    On the other hand…households and businesses that have income based on interest rates are suffering. Historically, savers have been able to earn an average of 3 percent. Now, they receive close to 0% when they invest in such financial instruments as short term treasury securities, The problem? If we look at what they could have earned, savers have lost a total of $350 billion annually–350 billion that would have been saved or spent.

    For countries also, there are two sides. According to the Bank for International Settlements (BIS), countries with zirp, such as the U.S., can borrow money very cheaply. Also though, other nations such as Australia that pay higher interest rates, can lure investors away from lower yielding securities elsewhere.

    The Economic Lesson

    The interest rate is the price of money. When an economy experiences rapidly rising prices, central banks usually increase the price of money to constrain spending. Recession, by contrast, requires a lower price of money (interest rate) in order to stimulate business and consumerr spending. 

    The Federal Reserve has three traditional tools to affect interest rates in the U.S. 1) It can change the amount of money that banks have to keep in reserve. 2) It can change the interest rate that it charges banks when they borrow the Fed’s money. 3) It can enable banks to have less to lend by selling them securities or more money to lend by buying securities from banks.

    During the recent recession, the Federal Reserve expanded the contents of its monetary policy “toolbox”.

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    Apples, Oranges, and Government Pay

    Aug 22 • Government, Labor, Thinking Economically • 257 Views

    Hearing that federal employees earn more than people working in the private sector, how should we respond? Let’s look at the facts.

    Assessing someone’s earnings involves salaries and benefits.  According to the BEA (Bureau of Economic Analysis) at $81,258, the average federal worker earns 60% more than someone in the private sector. Looking at benefits, the gap grows larger with federal workers getting $41,791 and private workers at $10,589. Combining salaries and benefits, we have federal workers with total average compensation of $123,049 compared to privately employed workers at $61,051.

    We can also look at raises and inflation. Between 2000 and 2009, the average federal worker’s salary increased by 33% more than inflation. Including benefits which primarily refer to pensions for federal employees, average compensation, adjusted for inflation, is up 36.9%. By contrast, privately employed workers are receiving 8.8% more.

    Looking at salary data, Democrats and Republicans disagree about whether we are comparing “apples to oranges” or “apples to apples”. Saying “apples to oranges”, people who believe that the federal pay scale is appropriate emphasize that many federal jobs require a more highly skilled worker. Those who disagree say we are comparing similar issues, especially when focusing on yearly salary increases where percent increases can be compared.

    The Economic Lesson

    Having looked at the public/private sector pay gap and the debate that surrounds it,  as economists, we should return to cost and benefit. To consider why there is a public/private sector pay gap, we can identify the opportunity cost experienced by private businesses and the federal government.

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    Preventing a ‘Flash Crash’

    Aug 21 • Businesses, International Trade and Finance, Regulation • 279 Views

    Do you remember the ‘flash crash‘? On Thursday, May 6, for close to 20 minutes, markets everywhere wildly fluctuated.  It began at 2:23 when certain stock prices started moving oddly. With Apple trading at approximately $250 a share, at 2:44, the stock plunged $23 while at another moment one share was selling for $100,000. At 2:47, Accenture PLC shares dove to 1 cent from $40 a share. During that day, the Dow Jones Industrial Average opened at 10,862, dropped to 9869.62, and then closed at 10,520. Some say it felt like a roller coaster.

    Financial markets are not supposed to feel like roller coasters. Instead, at the NY Stock Exchange, for example, different “specialists” oversee the buying and selling of different firms’ stocks. Historically, the specialists’ job was to maintain an “orderly market” by buying or selling the stocks themselves when price was not gradually moving up or down. So, if everyone wanted to sell a stock and there was no one to buy it, the specialist (in theory) stepped in to buy it temporarily so that price could change smoothly. 

    Now though, with computerized trading, worldwide markets selling the same companies’ stocks and bonds, and a group of firms called “quants‘ that speed trade based on complex computer models, it appears to be impossible for one group to maintain an orderly market. Yes, much of the time, markets tend toward rational ups and downs. However, during the ‘flash crash’, they did not.

    The Economic Lesson

    Why should we care?

    Accenture says it all. If one stock, for no apparent reason, can drop from $40 to 1 cent in seconds, then investors will be less willing to allocate their savings to stocks. However, our market economy needs dependable financial markets for savers and businesses. We need to invest in order to save for college, for retirement, for emergencies. Correspondingly, businesses need investors’ money as start-ups, when they expand, and for everyday operations.

    Knowing that the continued possibility of a ‘flash crash’ diminishes investor confidence, a final report from the SEC and Commodities Futures Trading Commission should be completed during the next several months.

    Please note that for Accenture PLC and other firms that experienced an erratic stock fluctation on May 6, those trades were canceled.


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