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    Understanding Unemployment

    Aug 5 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Labor, Macroeconomic Measurement • 449 Views

    A Washington Post article provided some insight about unemployment by suggesting that we place all US jobs into 2 buckets:

    One bucket contains firms participating in a global market. Some export goods and services. Others face competition from imports. Examples include:

    • most manufacturing
    • agricultural goods
    • minerals
    • energy
    • a “healthy chunk” of business and financial services

    The other is filled with purely domestic jobs such as:

    • construction
    • transportation
    • health care
    • government
    • retailing

    This takes us to income and jobs. Between 1990 and 2008, the global bucket generated more income for Americans at home because of worldwide competition and outsourcing. However, the second bucket had no income growth–only job growth.

    Now, with cutbacks in construction, government, and consumer spending, the problem of stagnant wage growth and benefits in the second bucket is compounded by lay-offs.

    The Washington Post article is based on a paper by Nobel Laureate Michael Spence. You also might look here for an analysis of the July jobs report.

    An Economic Lesson

    During May 2007, the unemployment rate was 4.4%. 2 1/2 years later (10/09), it peaked at 10.1%. Economists continue debating whether the cause is structural or cyclical. Perhaps our buckets provide another perspective.

    An Economic Question: Cyclical unemployment refers to jobs lost because of less demand when the GDP grows more slowly or declines. Structural unemployment is typically caused by technological change. Which examples might you note that relate to current unemployment?

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    Government Matters

    Aug 4 • Economic Debates, Economic Thinkers, Government, Households, Regulation, Thinking Economically • 462 Views

    Which do you prefer, “free” or “fair?”

    We have free speech, a free press, freedom of religion. The Declaration of Independence, the Constitution and the Bill of Rights refer to “free” but never “fair.” Explaining that our founding fathers perceived government as an umpire and a policeman, Nobel laureate Milton Friedman (1912-2006) concludes that they wanted us freely to pursue our individual lives.

    Being “fair” to one group, according to Friedman, means less fairness to others. If government is more equitable to consumers, then it is less fair to businesses. Require a fair and balanced press to all political candidates and you limit the freedom of the press.

    I wonder, though, what is “fair?” Does a fair society have health care for all? Is having a minimum wage a fair policy? If fair is the key criteria, then who should be taxed and how much? Does a fair society mandate maximum earnings?  Fair trade? Fair prices? Affirmative action?

    Your opinion?

    The Economic Lesson

    Adam Smith (1723-1790) has said that less government results in a more virtuous society because a small group of people cannot possibly know what is best or fair or good for a diverse populace.

    To see the logic of an economist who sought the “fairness” role for government, here, you will enjoy reading about Harvard’s John Kenneth Galbraith.

    An Economic Question: Although Dr. Friedman would disagree, there is no right or wrong answer to “Fair versus Free.” Which do you support? Why?

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    Supply, Demand and Internet Dating

    Aug 3 • Behavioral Economics, Demand, Supply, and Markets, Households, Thinking Economically • 822 Views

    What if, “you’re an 8 constantly chasing after 10s and constantly being chased by 6s?” Described in the Financial Times, the developers of Match.com’s algorithm, codenamed Synapse, have an answer.

    “It’s just supply and demand.”

    On the supply side, we can find individuals with certain characteristics–maybe age range, hair color, body type, religion–who are available for a relationship. Similarly, on the demand side of the market are men and women who, seeking a mate, will be more likely to respond when the supply side has the characteristics they seek.

    Equilibrium? Where the attributes from the supply side are equal to those on the demand side. And therein lies the problem for our person who is an “8.” He or she will be a part of clearing the market when satisfied with another “8.”

    The Economic Lesson

    Nobel prize winning economist Gary Becker tells us that marriage is about a lot more than love. Instead, we can best understand marriage by looking at utility functions and marriage markets.

    People marry because they expect to, “raise their utility level above what it would be were they to remain single.” (The Essence of Becker, p. 273) Looking for their best mate, they compete in marriage markets that have demand and supply curves. To see Dr. Becker’s descriptive and quantitative explanations, you might want to look at The Essence of Becker, pp. 273-328.

    An Economic Question: What marginal utility might marriage provide to newlyweds?

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    GDP Solutions

    Aug 2 • Businesses, Economic Debates, Economic History, Government, Households, Innovation, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy • 559 Views

    It is all about GDP.  In this article, the WSJ does a good job of explaining how each GDP component might solve our problems…or make them worse.

    • Consumer Spending: The largest part of GDP, consumer spending has propelled recovery in the past. With oil prices declining and the Japanese supply chain no longer depleting auto inventories, spending could rise. On the other hand, you know unemployment, the debt crisis, and consumer confidence are eroding any tendency to spend.
    • Investment: Business equipment purchases and profits have been robust. Looking ahead, though, housing remains weak and uncertainty seems to be building. As Keynes might have said, the requisite “animal spirits” might be diminishing.
    • Government: Compared to the spike from stimulus dollars, state, federal and local government spending are going down.
    • Trade: Yes, the weaker dollar should help exports. The question, though, is which healthy foreign economies will purchase our goods and services. We know the problems that the weaker euro zone nations and Japan have been experiencing.

    The Economic Lesson

    Where does this leave us? If you believe in Keynesian support for a troubled economy, you might suggest another stimulus that will sufficiently “prime the pump.” If your tendency is toward Adam Smith, then your policy is less government intervention because a steep trough in economic activity will ultimately lead to a healthy recovery.

    An Economic Question: Based on whether you are a more government or less government person, express your policy suggestions for high unemployment (9.2%) and sluggish GDP growth (1.3%).



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    Do We Need Area Codes?

    Aug 1 • Businesses, Economic Debates, Economic History, Households, Innovation • 688 Views

    What if the 3 digits that precede your phone number no longer related to a place?

    Known as “number depletion,” phone companies use area codes because we are running out of numbers. But need the numbers have geographical significance? Calls outside your own area code no longer cost more. Most phone plans do not distinguish between local and long distance.

    However, some businesses perceive value in an area code. Dial 415 and you know you are connecting to San Francisco, a technology center. Securing 212 for Manhattan is truly tough and maybe prestigious. Local businesses might want people to know they are nearby. Or, when you are no longer nearby, retaining your old area code might be helpful.

    Developed by the original AT&T, area codes were used initially by operators during 1947. Densely populated areas were assigned lower numbers because they saved time on a rotary phone. For that reason New York City was 212. If your state had only one area code like Connecticut (203) and New Jersey (201), then “0” was the middle digit.

    Looking even further back, you would find “exchange names.” From the 1930s until the 1970s, phone numbers started with the first 2 letters of words like Butterfield 8, Ivanhoe 3, Pennsylvania 6.

    The Economic Lesson

    From exchange names, to number depletion and geographically significant area codes, to perhaps a more up-to-date system. Sounds like Joseph Schumpeter’s creative destruction where innovation replaces the status quo as our communications infrastructure evolves.

    An Economic Question: How have cell phones related to innovation?

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