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    More Education Matters

    Mar 12 • Businesses, Economic Debates, Government, Households, Innovation, Labor, Macroeconomic Measurement, Thinking Economically • 348 Views

    15-year old U.S. students ranked #24 for math in an OECD assessment program (PISA). For reading, they placed #15.

    In a Teaching Company lecture called “Underperforming Schools” Wake Forest economist Robert Whaples suggests how we might raise our scores.

    Cost/benefit analysis: Dr. Whaples started with what we spend per pupil and then what we get. We spend, on average, $10,000 annually. What do we get? Ranked #24 in math and #15 in reading. New Jersey spends a lot more than Utah but their testing results are close. Even spending more on small classes does not seem to reap consistent benefits. So, is there a connection between educational achievement and spending? Are we sufficiently productive? He concluded, “Not necessarily.”

    Incentives: The next step then is to look specifically at teachers and students. Do teachers need different incentives such as merit pay? It is tough to design appropriate criteria. Would students do better if they had to take demanding “exit exams?” Some students excel with more pressure while weaker students drop out.

    Competition: Maybe vouchers and charter schools elevate student achievement by challenging enrollment at existing schools (that are monopolies). Here, Whaples said to look at the work of Stanford economist Caroline Hoxby whose research concludes that competition can make a big difference.

    Where does all of this take us? Most economists suggest that more “consumer sovereignty” would be desirable.

    The Economic Lesson

    In addition to productivity, incentives, and competition, economists use the idea of value-added to assess school quality. While value-added typically refers to a tax (VAT), for education, it takes us to student achievement. Stanford economist Eric Hanushek with 3 colleagues sought to measure teacher “value-added” through student achievement. 


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  • Displaying different strategies, McDonald's and Starbucks call a 16 ounce cup different names.

    More Conspicuous (Coffee) Consumption

    Mar 11 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 506 Views

    The same story.

    But now it is about coffee. Increasingly affluent, the Chinese have begun to drink more coffee (in addition to using more oil, eating more meat and buying more handbags). When talking about China, the International Coffee Organization says that coffee is an aspirational commodity. For a culture of tea drinkers, coffee represents “cosmopolitan sophistication.”

    Still though, the typical Chinese person drinks lots of tea and (a tiny!) 5 cups of coffee a year. By contrast, in Japan, annual per capita coffee drinking is 300 cups. Recognizing that the Japanese also had been tea drinkers, coffee retailers like Starbucks, with 200 Chinese stores, and Nestle see huge potential in China. And, the story is the same in India and Brazil.

    Meanwhile, on the supply side, coffee yield is down. Citing rains that damaged cherries in key growing areas, Indonesia predicts 2011 production will decrease 30%. Colombian growers are talking about the massive impact of temperatures that average just 1 or 2 degrees higher. Requiring new planting techniques and bug control, yield has plummeted, price has soared, and Yuban is charging 25% more.

    Also, espresso machine orders are up.

    The Economic Lesson

    Again, we have a classic demand and supply scenario. Demand shifts to the right as people in developing nations decide to conspicuously consume coffee. Supply, perhaps temporarily, shifts to the left as rain and heat diminish productivity. When demand is up and supply is down, price has to rise.

    As economists, we know that when price rises, 2 things happen. On the demand side, eventually, people want less. On the supply side, attracted by high prices, producers grow more, new firms enter the market and price drops.


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    Would You Use the Strategic Petroleum Reserve?

    Mar 10 • Demand, Supply, and Markets, Economic Debates, Economic History, Environment, International Trade and Finance, Regulation • 285 Views

    I am not sure what a giant salt cave is and cannot quite imagine 727 million barrels of oil. But, put them together and you have our Strategic Petroleum Reserve

    Concerned with supply disruptions after an OPEC embargo during the 1970s, Congress established the Reserve at 4 sites in Texas and Louisiana. In 2005, a new Energy Policy Act directed the Department of Energy to fill the reserve to one billion barrels. Since existing salt caves have no more room, the Department of Energy is currently getting authorization for new locations.

    So far, we have twice used the Reserve for emergencies: during Operation Desert Storm in 1991 (disruption worries from abroad) and after Hurricane Katrina in 2005 (oil production facility damage in the Gulf). Other reasons for its depletion include a Clinton administration decision to keep heating oil prices down by releasing some of the oil. Described as a “swap,” private industry later had to return the oil it received.

    This takes me to 2 questions:

    1. If we decide to turn on the SPR spigots now, will lower prices result in more driving, more demand, and higher prices?

    2. Contemplating the current oil market, how can we achieve the billion barrel directive?

    The Economic Lesson

    Sometimes good ideas have unintended consequences. Better unemployment insurance can lead to more unemployment. Seat belts can encourage unsafe driving. Diet snacks could make us fatter.

    During the 19th century, William Stanley Jevons (1835-1882) observed that greater fuel efficiency could lead to more resource consumption rather than less. As he expressed it, “It is wholly a confusion to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is truth.”

    Why? Lower prices could be one reason. The phenomenon has been called the Jevons Paradox.

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    Visiting the Labor Market

    Mar 9 • Households, Labor, Macroeconomic Measurement • 344 Views

    We might need to adjust how we think about the labor market. Yes, we know that the unemployment rate for February was 8.9% and that 13.7 million people are jobless.  However, to encourage thoughts about the future, an M.I.T. economist tells us more.

    First, let’s slice the labor force into thirds:

    1) High-skill, high wage workers which include “high education professional, technical, and managerial occupations.”

    2) Middle-skill, middle wage workers that are “white-collar clerical, administrative and sales jobs occupations and blue-collar production, craft, and operative occupations.”

    3) Low-skill, low wage workers which take us to “low-education food service, personal care, and protective service occupations.”

    According to M.I.T.’s David Autor, #2, the middle, has experienced diminishing opportunities during the past 2 decades while the top and the bottom of the labor market have had expanding job potential. Most important, though, are the two challenges cited in Dr. Autor’s paper. 1) Skilled workers are in greatest demand but educational levels have not kept up with our increased need for them. 2) Because we have expanding job opportunities at the top and the bottom of the labor market, we have greater polarization–a greater divide about which he is concerned.

    The basic question for us is trajectory. Do we approve of the direction in which the labor market is heading? What are the policy implications for wages, educational attainment, and employment opportunities?

    The Economic Lesson

    To be defined as a member of the labor force, an individual is:
    -16 years old or older
    -unemployed and looking for a paying job


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    Bikes-For-Hire and the British Coastline

    Mar 8 • Environment, Government, Households, Regulation, Thinking Economically • 381 Views

    London’s new bikes-for-hire program is about more than bikes.

    Launched this summer, the program had to solve a mismatch between supply and demand. In certain places there were too few bikes for the number of people who wanted them. In other spots, the number of racks for dropping them off was inadequate. Checking the stats, one blogger cited the impact of weather and holidays on bike usage.

    Also, the environmental impact was tough to assess. Seeing the trailers being used to transfer empty bikes to busier docks, concern developed that many were not attached to electricity-powered vehicles. Cutting emissions would be difficult because most people left mass transport to use bikes. The goal was to get them to stop using their cars.

    Meanwhile, London’s planners, recognizing a potential tragedy of the commons, sought to avoid thefts and vandalism by buying heavy, 23kg, bikes and using a “complex system of keys and passcodes.

    Finally, one transport economist said that the bikes were solving the wrong problem. People had enough bikes. Citing the lack of safe bike lanes, he said, “It’s just that people are afraid to use them.”

    A last thought–is London’s health insurance program involved if no helmets are provided?

    The Economic Lesson

    Mathematician Benoit Mandelbrot could tell us how bikes-for-hire take us to the British coastline.

    Dr. Mandelbrot was the father of fractal geometry and the idea that the closer you look, the more you see. From a distance, the British coastline will appear straight. However, looking closer and closer increasingly reveals indents and zigzags. Consequently, Dr. Mandelbrot believed that it was actually much longer and even infinite. The significance? Something we might think is simple is really complex.

    Perhaps many government programs, including bikes-for-hire, take us to the British coastline.


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