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    Waiting In Line

    Aug 12 • Businesses, Developing Economies, Households, Thinking Economically • 267 Views

    During August evenings in Nantucket, the lines are long at the Juice Bar. Outside each of two doors is a line stretching along the sidewalk. Once you enter the doors into the shop, you can select among (sort of) 6 lines to get to the counter and order your ice cream.

    Analyzing the experience, journalist Anand Giridharas says that forming orderly lines had been equated with “middle class behavior”. In India, traditional lines looked like trees with branches as mini lines sprouted next to the trunk and others cut in. Then, though, with the emergence of a middle class, the acceptance of branches and those who cut in was replaced with orderly single file lines. Similarly, when McDonald’s arrived in Hong Kong, they “introduced queue monitors” to replace the traditional chaos around registers.

    Perhaps we can view lines as reflections of democracy and the market. Democracy dictates that we are all equal with the same opportunity cost for our time. The market, instead, implies that those who can pay deserve to go first. I guess whenever we fly, we are choosing between a democratic experience (coach) and the market (first class).  

    The Economic Lesson

    A line represents a transaction cost. Defined economically, cost means sacrifice. Standing in line, we are sacrificing what we otherwise might have been doing. During the business day, the transaction cost of a line can be high. During a summer vacation, the cost of standing in line at Nantucket’s Juice Bar is minimal.

    With lines reflecting the dysfunction of the former Soviet Union, the huge transaction costs helped to speed its demise.

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    How Are We Spending Our Money?

    Aug 11 • Businesses, Demand, Supply, and Markets, Economic Thinkers, Households, Macroeconomic Measurement • 260 Views

    Has the recession changed how we spend? Here are the numbers that give some answers according to a summary from Michael Mandel, former BusinessWeek chief economist.:

    Since the 4th quarter of 2007, we have spent more on: 1) telephone equipment/up by 16.6% 2) pets/up by 14.4% 3) education/up by 13.4% 4) childcare/up by 12.8% 4) healthcare (including drugs/up by 10.8% 5) housing (owner-occupoed and rental/up by 6.4% 6) food and drink for off-premises consumption/up by 5.3% (Please note that the percent change can indicate very different dollar amounts. For #1 16.6% refers to $1.5 billion while for #5, 6.4% represents $95.4 billion.)

    During the same 2 1/2 (or so) years we have spent less on: 1) Moving, storage and freight services/down by 19.6% 2) Motor vehicles and parts/down by 16.0% 3) gasoline and other energy sources/down by 15.3% 4) sports and recreational vehicles/down by 12.8% 5) video and audio equipment/down by 8.4%

    What does all of this mean? It appears actually that we are not spending very much more because the healthcare increase, by far the largest in billions of dollars, is from government. Also the housing total is what owners would have spent n rental if they had rented–an “imputed” number. So, accelerating this sluggish U.S. recovery will ultimately mean more private sector spending from you and me or from businesses. This returns us to the importance of stimulating innovation and entrepreneurs.

    The Economic Lesson

    Called National Income Accounting, a system for knowing the value of what we produce, how much we pay ourselves, and what we spend was developed by Simon Kuznets during the 1930s. Knowing the value of production, incomes, and spending enabled economists to recommend government economic policy more knowledgeably. 

     

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    Start-up stories

    Aug 10 • Businesses, Economic History, Innovation, Labor • 286 Views

    During 1939, in a garage, Bill Hewlett and Dave Packard started a new firm. Also in a garage, several decades later Steve Wozniak and Steve Jobs started Apple. Yes, Walt Disney worked in his uncle’s garage and Mattel, the toy company that makes Barbie dolls began in a garage. Google did not begin in a garage but they did use one.

    The Economic Lesson

    For most of these garage stories the key actually was funding. In some way, they needed to secure the money to proceed. And that takes us to today.

    With current unemployment high and growth sluggish, economists who disagree with a new Keynesian demand side stimulus are increasingly focusing on the entrepreneurs that have energized our economy. Nobel Prize winner Edmund Phelps suggests a First National Bank of Innovation that lends to entrepreneurs. Journalist Thomas Friedman quotes innovation experts when he recommends tax breaks for start-ups and a cabinet position that focussed on encouraging innovation. In a second column he says we need “More (Steve) Job, Jobs, Jobs, Jobs”.

    These ideas remind me of Alexander Hamilton’s development program. Through a “Report on Manufactures” and a First Bank of the United States, in 1791, he too suggested a plan that would fund business development in order to stimulate and diversify U.S. economic growth.

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    Monkeynomics

    Aug 9 • Behavioral Economics, Financial Markets, Households, Money and Monetary Policy, Regulation • 319 Views

    Watching capuchin monkeys, we can learn about the financial crisis.

    In a July TED talk, Yale’s Laurie Santos describes the marketplace she created for the monkeys she was observing. Santos’s goal was to determine whether the mistakes we repeat are because of “us” or our environment. If the moneys with whom we share a common ancestor behave like “us”, then we both might be “hardwired” to behave in a certain way.

    In the Santos experiment, monkeys were given tokens that they could exchange for grapes. Seeing them quickly grasp the concept, the researchers introduced new variables to see, for example, whether the monkeys displayed a tendency to save. (They did not.) Faced with a risk taking situation that involved getting fewer grapes, the monkeys had to decide whether to accept a definite loss or to gamble on the size of the loss or gain. The monkeys gambled rather than selecting the safer alternative.

    Because of consistent behavioral results, Santos concluded that monkeys have a biological tendency to behave a certain way. And, because that behavior was reminiscent of human behavior, she asked if humans have a predisposed response when faced with financial risk related decisions.

    The Economic Lesson

    Through its Research Center for Behavioral Economics, the Federal Reserve Bank of Boston has sought insight about human behavior to improve policy decisions. At a 2007 conference, they considered papers on the following topics:1) the emotional response to changes in wages and prices 2) the impact of financial illiteracy or psychological biases on financial decisions 3) the impact of consumers being “largely unaware of how much things cost”” 4) the effect of financial literacy on saving behavior 5) the reasons wages are rarely cut.

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    Becoming Ben Bernanke

    Aug 8 • Economic Thinkers, Money and Monetary Policy • 304 Views

    This was fun! A 5 minute Federal Reserve simulation lets you target the fed funds rate for 16 hypothetical quarters and then watch the inflation and unemployment impact. It all appears manageable until a surprise news headline appears.

    The site also links to a decade by decade look at monetary policy through a video summary of key events and graphs of the CPI, real GDP, the fed funds rate, and unemployment. Very well done.

    Knowing that current unemployment is at 9.5% and inflation is close to 1% for a 12 month period, during the simulation you can experiment with your own policy ideas.

    The Economic Lesson

    Described by British economist A.W.H. Phillips, a Phillips Curve depicts an inverse relationship between unemployment and inflation. While the original Phillips curve referred to wage inflation, it soon came to represent the connection between unemployment and price inflation. Soon also, economists such as Milton Friedman and Edmund Phelps challenged the validity of the original curve as did 1970s stagflation.

    Typical monetary policy response to accelerating inflation is to target higher interest rates; diminishing unemployment would require lower interest rates. It all sounds rather logical until you look at what can really happen. 

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