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    A Fair Shot?

    Jan 28 • Economic Debates, Gender Issues, Government, Households, Innovation, Labor, Macroeconomic Measurement • 527 Views

    In its breakdown of this week’s State of the Union, the Washington Post looked at time, topics and the Congress.

    Time: The President devoted almost half of his speech to the economy, and more than half if you include the deficit.

    The Congress: Republicans and Democrats together gave the President a standing ovation for saying that, “…women should earn equal pay for equal work.” For the other 9 standing ovations, Democrats stood and clapped alone during 8.

    Topics: Discussing the economy, the President referred to jobs the most (27 times), energy next (20 times).

    The breakdown does not mention, though, that “fair” appeared 8 times (my count) in the President’s speech:

    • has a fair shot (1)
    • does their fair share (1)
    • affluent Americans and multinationals pay their fair share of taxes (3)
    • foreign subsidies are not fair (1)
    • unfair trading practices from nations like China (1)
    • fair play (1)

    The Economic Lesson

    Nobel laureate Milton Friedman was concerned about”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, 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? 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?

    An Economic Question: What is your opinion of the balance between fair and free in a society with a market economy? You might want to look at Arthur Okun’s Equality and Efficiency: The Big Tradeoff.

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    Let Them Eat McDonald’s

    Jan 27 • Behavioral Economics, Businesses, Demand, Supply, and Markets, International Trade and Finance • 855 Views

    By Elizabeth Chrystal, guest blogger.

    France has long been known as a country of gourmets; it’s famous for its 2-hour lunches, picture-perfect pastries, and dizzying variety of cheeses. But the country that gave us succulent dishes like coq au vin and boeuf bourguignon has a new gastronomic passion, and one that might surprise you: McDonald’s. As a recent NPR story points out, France is McDonald’s second largest market, and the chain is poised to open even more restaurants in the country this year. France is already home to more than 1,200 of the franchises, many clustered around urban centers like Paris and Strasbourg.

    Why is there so much enthusiasm for eating “chez MacDo,” as it’s called in France? The most obvious reason is the food. McDonald’s has been very clever in adapting to French tastes and creating their own versions of traditional French dishes. This means that the menu of a McDonald’s in Paris, France will be strikingly different from one in Paris, Texas. In France, diners can buy such items as “Le Croque McDo,” a riff on the classic French ham-and-cheese sandwich. “Le Charolais,” which is made up of a celebrated kind of French beef, and even a “Mouseee aux Trois Chocolats,” McDonald’s version of a classic French chocolate mousse. During the time I was studying in Paris last fall, they introduced “Le McWrap Chevre” to great fanfare-think larger-than-life billboards and ads in every metro station. This sandwich features small rounds of fried goat cheese, one of France’s most popular cheeses, with vegetables and cheese sauce in a wrap. Last summer, the “McBaguette” was introduced, as reported by the French newspaper, LeFigaro. The item appeared on the chain’s breakfast menu in September, and has been such a success that a baguette sandwich is set to be added to the lunch and dinner menu this summer.

    McDonald’s has also taken steps to adapt to French eating habits. Since French consumers generally spend much more time lingering over meals than their Anglo-Saxon counterparts, McDonald’s has worked hard to make their stores inviting and tastefully decorated. Like the neighborhood cafes that surround them, many McDonald’s restaurants in France feature plush chairs, wood flooring, and subdued lighting. Some outlets even have fireplaces, flat-screen TVs and stone accents. These “luxe” restaurants stand in sharp contrast to the majority of McDonald’s U.S. restaurants, which seek to maximize customer turnover and minimize the amount of time customers are inside.

    McDonald’s has also taken steps to silence French critics who complain that the chain’s food is too unhealthy. Not only has McDonald’s France added new packets of fresh fruit and vegetables to its menu and begun offering whole-wheat buns for its Big Macs, it has also introduced a whole new restaurant concept: the McSalad. Located in the massive French office park, La Defense, on the outskirts of Paris, visitors to this restaurant won’t find any of McDonald’s traditional burgers or fries. Instead, as the name suggests, the McSalad is an all-salad restaurant targeting health-conscious business people and office workers who eat their lunch in the area. This allows them to reach a new consumer demographic without changing the traditional menu.

    The Economic Lesson

    We might expect a well-known chain like McDonald’s to offer nothing more than a “slice of America” abroad, serving up the same fare in India as it does in Indiana. This would significantly simplify production and distribution challenges, not to mention avoiding the difficulty of creating new menu items that please local palates. However, as we’ve just seen, McDonald’s has achieved success not by following the same business strategies that it uses in the U.S., but by significantly adapting to local tastes. In a recent paper about McDonald’s in France, written by graduates of the Wharton School of Business, the authors even raise the question, “Can McDonald’s still be considered an American company? The golden arches remain a worldwide symbol of the U.S., but the food–and even the restaurants themselves–have come a long way.

    An Economic Question: Which other American companies have achieved global success by rebranding themselves overseas?

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    Greek (Debt) Myths

    Jan 26 • Behavioral Economics, Demand, Supply, and Markets, International Trade and Finance, Money and Monetary Policy, Thinking Economically • 753 Views

    Maybe sell some islands and an ancient ruin or two?

    In Boomerang, Blind Side author Michael Lewis repeats what German politicians were suggesting in 2009 when they heard that the Greek debt was much larger than previous estimates. How much bigger? No one was really sure.

    In a wonderful podcast, NPR’s This American Life explains that once Greece joined the European Monetary Union, it enjoyed a new world of credit. With fellow euro zone member Germany perceived as “the rich uncle” to (theoretically) back all loans, Greece’s interest rates plunged. Borrowing more cheaply meant the Greek government could borrow much more. Consumers who never had car loans or home mortgages suddenly found bankers welcoming them with rates that declined from 18% to 4%.

    Lewis explains that Greek statisticians had to eliminate the high-priced tomatoes from their CPI to take their inflation rate within euro zone parameters. NPR’s reporters tell how Germany, hoping to expand the market for their goods, initially supported Greece’s euro zone entry. Getting what they wished for, more Greeks were buying Mercedes.

    Our bottom line? Incentives. Isn’t everyone responding predictably? You might want to read This Times It’s Different for an academic explanation.

    The Economic Lesson

    In his America and the New Global Economy Teaching Company course, Professor Timothy Taylor explains why the Europeans wanted a common market. Assume for a moment that you own a factory and start exporting goods to a nearby country. You have to wait at the border and have your trucks approved by customs. You have to be sure that you comply with their product safety laws. You need to use their currency. 

    Dr. Taylor says that with a common market you could enjoy the benefits of the 4 freedoms: 1) People, 2) Goods and services, 3) Labor, 4) Capital. The benefits of a European common market included one set of regulations instead of 15, labor that could move more freely, and capital that was more accessible.

    An Econmic Question: How does the United States enjoy the common market benefits  listed by Dr. Taylor?

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    Heed the Herd

    Jan 25 • Behavioral Economics, Demand, Supply, and Markets, Economic History, Economic Thinkers, Macroeconomic Measurement, Thinking Economically • 713 Views

    By Mira Korber, guest blogger.

    Just the other day, I walked outside to find all six of my horses facing the exact same direction, muscles tensed, ears pricked, nostrils flared…Clearly their horsey intuition was picking up on some obscure, equine-eating bogeyman undoubtedly lurking just on the other side of the pasture fence.

    I’ve seen it more times than not. One horse is startled, the others follow suit. Pretty soon, you have a stampeding herd of animals feeding off the fear of one.

    So what does this have to do with economics, anyway? It turns out that people aren’t so different from our four-legged friends.

    The very same behavior can describe the housing bubble at the heart of the most recent economic crisis. Prominent economist Robert Schiller discusses how the influence of the herd contributed to the real-estate bubble’s burst.

    Here’s the Scenario: Jack decided a truly low value house was a good investment because he individually misinterpreted its market value. So he decided to buy the house. Jill sees the transaction. She then assumes that buying a house is a good idea just because Jack did, not realizing that Jack overvalued his new home.

    And the cycle continues. The rational expectations hypothesis — that people make decisions considering all known economic conditions — has instead given way to irrational exuberance.

    Herd behavior could also factor in to the euro-zone crisis and Greece. According to The Economist, Europeans want to avoid making any decisions that might lead to a mass (herd-mentality) panic. Widespread concern abounds that if the recent debt swap deals fall through, the euro-zone would be at risk for collapse.

    In these two situations, you can see how an optimistic or pessimistic groupthink mentality affects mass behavior. In the housing situation, blind confidence in the upward surging (and likewise imaginary) home values ultimately lead to disaster. In Greece, private creditors and legislators alike are tiptoeing around negative expectations to avoid financial ruin.

    The Economic Lesson

    Herd behavior leads to what is known as information cascades. Such cascades are behavioral imitation of a certain activity, whether it be buying a home, selling stocks, or even choosing a restaurant for dinner. In other words, people base their decisions on the judgments of others, and mimicry ensues. This shows how we often turn to our social instincts in times of economic uncertainty.

    For a comical take on the behavior, check out this video of a herd of horses. Then, look at this satire of humans exhibiting herd mentality.

    An Economic Question: When and where have you experienced herd behavior? Have you ever decided to do something just because a friend or neighbor has? 

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    Clandestine Competition in China

    Jan 24 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Labor, Regulation, Thinking Economically • 620 Views

    By Mira Korber, guest blogger.

    If you asked an American government official if you owned the teeth in your mouth, you would probably get some very strange looks.

    But, imagine hearing “no” as the answer to your question. The year would be 1978, and you would be living in communist China, where, in fact, a farmer was told his teeth belonged not to him, but to the collective.

    On such collectives, farmers worked public land together, and at the end of the season, everyone received the same government-determined ration of the final harvest. No matter how much a farmer worked, he received the same as his neighbor.

    And there was never enough food.

    In this fascinating NPR podcast/article, you learn why. As all the farmers received the same amount, regardless of the effort they exerted to work, they had no incentive to produce more output. The community of Xiaogang suffered from hunger because people were not motivated to grow enough food to subsist.

    That is, until a group of farmers met in secret to draw up a contract. To ameliorate the hunger problem, the document assigned private plots of land to each farmer. If each farmer grew enough food, he got to keep some for his family. (This illegal contract was hidden away in the bamboo of someone’s roof.)

    At harvest time, the farmers gathered a bounty greater than the previous 5 years put together. And because the government happened to embrace their ideas, they formed the basis of a new Chinese economic model.

    The bottom line? By giving each farmer his own plot of land, he began to farm in his own self-interest, and was therefore incentivized to produce more food. By engaging in secret competition with one another, the farmers were able to produce more individually than they would working as a collective.

    The Economic Lesson

    The story of Xiaogang village reminds us of William Bradford, Plymouth colony governor, and the Pilgrims of early America. In “Of Plymouth Plantation,” written by Bradford, we see a similar shift from collective to individual farming:

    “the Govr…gave way that they should set corve every man for his owne perticuler, and in that regard trust to them selves; in all other things to goe on in the generall way as before. And so assigned to every family a parcell of land…This had very good success; for it made all hands very industrious…much more torne was planted then other waise would have bene by any means the Govr…The women now wente willingly into the feild…”

    An Economic Question: Keeping incentives in mind, how do you think the present-day American government might manipulate its citizens’ behavior in one way or another?



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