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    Calorie Matters

    Jul 10 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Households, Regulation • 501 Views

    Learning that a Big Mac has 540 calories and a large fries, 500, will people select a salad? According to the Washington Post, “No.” We do not have the will power to avoid long term cost when faced with short term benefit.

    This takes us to the calorie-labeling mandate for national food chains in new health care legislation. One Carnegie Mellon study suggests people make healthier decisions when they are more convenient. During their study, they just changed the position of healthy food on a Subway menu and people actually selected it more frequently. By contrast, when they labeled calories, there was no impact.

    The Economic Lesson

    Behavioral economists believe that cost, defined as sacrifice, shapes our behavior. With calorie labeling, we are comparing short term benefit (the pleasure of a Big Mac) to long term cost (obesity and heart disease). When cost changes–even through convenience–we behave differently.

    An Economic Question: As a Congressional advisor who knew about academic research on calorie labeling and the impact of cost, how would you revise the FDA mandate?

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    Understanding the Jobs Report

    Jul 9 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Government, Households, Labor, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 547 Views

    Hearing yesterday’s jobs report, most people said, “No good news.” Lower wages, almost no hiring, less time on the job and 9.2% unemployment meant more worries about the economy.

    These facts might provide some insight.

    The output gap: Minimizing the difference between actual and potential production of goods and services will maximize job growth. A continuing 2% growth rate would leave us with 11.9% unemployment in 2020. By contrast, 6% growth would lead to a 5% unemployment rate in 2012.

    Structural or cyclical unemployment: Structural believers say that the high unemployment rate is the result of too many unemployed workers who cannot fit the jobs that are available. Cyclical advocates believe that high unemployment is the result of inadequate demand from consumers, businesses, and government.  For the most effective remedy, don’t we need a specific joblessness diagnosis?

    Which comes first, the jobs focus or economic growth? Should fiscal policy focus on encouraging businesses to expand which leads to more jobs? Or, should it concentrate on hiring incentives that, through consumer spending, will then fuel a recovery?

    The Economic Lesson

    The participation rate compares the size of the labor force to its potential total.

    You might want to see who was and is in the labor force through this WSJ interactive graph. For example, 59% of all women and 62% of all men who could be in the labor force are now employed or looking for a job. 50 years ago, the participation rate for women was 38% and for men, 83%.

    An Economic Question: How might participation rates relate to unemployment?

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    Green Signals

    Jul 8 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Environment, Households, Thinking Economically • 583 Views

    When “green” is valued, hybrid car sales will be high.

    But here is the interesting part. When green is valued, looking “green” sometimes can be more important than being “green.” As a result, people buy more Priuses than Honda Civic hybrids because the Prius has a unique design while the hybrid Civic looks like a gas guzzling Civic.

    To confirm their theories about “conspicuous conservation,” 2 economists looked at auto sales in Washington and Colorado. In addition, they noted California consumers who placed solar panels on the shady side of their property in order to have them face the road for all to see.

    This takes us to Portland, Oregon or Berkeley, California. Certain communities encourage environmental displays while others do not. By comparing Prius and Honda Civic hybrid sales, we can see where.

    In this Freakonomics podcast, you can hear more about the green signals conveyed by conspicuous conservation.

    The Economic Lesson

    In The Theory of the Leisure Class (1889), economist Thorstein Veblen (1857-1929) introduced us to “conspicuous consumption.” Referring to society’s more affluent, he said that buying behavior relates more to displaying power and prestige than need.

    With “conspicuous conservation,” rather than the costly jewelry or using the corporate jet, environmental concern elevates a person’s status.

    An Economic Question: How does this quote from Adam Smith (1723-1790) relate to conspicuous conservation? “The wish to become proper objects of this respect, to deserve and obtain this credit and rank among our equals, may be the strongest of all our desires.”

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    A Corn Price Surprise

    Jul 7 • Businesses, Demand, Supply, and Markets, Financial Markets, Government, International Trade and Finance, Thinking Economically • 567 Views

    Interesting how real life can imitate economics. You know how corn prices have been soaring? Well, farmers responded just like they read an econ textbook. They increased supply. One tradeoff?  A smaller soybean crop.

    Here are the headlines. You can see the perspective from Iowa in the Des Moines Register.

    Washington Post: “Farmers plant second-largest corn crop in nearly 7 decades, could ease food prices this year

    Des Moines Register: “Corn Plunges on Shocking USDA Report

    WSJ: “A Corn Crop Bonanza

    The Economic Lesson

    On a demand and supply graph, demand slopes downward and supply slopes upward while price is our y-axis and quantity, the x-axis. Because farmers expected higher prices for corn, they switched from soybeans and wheat. As a result, the corn crop is bigger while the soybean and wheat harvests will diminish. On our graph, price falls because the corn supply curve shifts to the right.

    An Economic Question: How would you draw the demand and supply graph for soybeans?

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    Greek Haircuts

    Jul 6 • Economic Debates, Economic History, Financial Markets, Government, International Trade and Finance • 578 Views

    When people talk about haircuts and Greece, they are no longer referring to the female beauticians that retired at 50 with a generous state pension because their work was “arduous.” Instead, they are discussing the losses, known on Wall Street as “haircuts,” that Greek bondholders might be force to take.

    A WSJ column presents 3 default alternatives and 4 key issues.

    Default Alternatives:

    1. Selective default: Some bond payments are postponed while others are paid on time.
    2. Organized default: All bondholders take a “haircut” within a predetermined plan.
    3. Disorganized failure: All bondholders take a “haircut” but there is no predetermined structure.

    Key Issues

    1. Greek financial obligations: Greece still is living beyond its means. If it defaults, how will it pay wages and provide public services?
    2. Greek banks: Greek’s banks own a lot of Greek bonds. A default would threaten Greece’s entire banking system. (This FT column is excellent.)
    3. European banks: Many euro zone banks that own Greek bonds have not yet recorded their true value on their balance sheets.
    4. Contagion: If Greece defaults, will investors, worried about risk, make borrowing much more expensive for Ireland, Portugal and other financially weaker euro zone countries?

    Saying that Greece has been rather forthright about its dire financial straits, NY Times financial journalist Floyd Norris characterizes the lenders who own Greek bonds as the group that is avoiding reality. Their policy? “Delay and pray” or “Extend and pretend.”

    Finally, an historical perspective from Harry Truman in 1947. “Should we fail to aid Greece and Turkey in this fateful hour, the effect will be far reaching to the West as well as the East. We must take immediate and resolute action.”

    And long before 1947: The first of many times that Greece defaulted on her debt was during the 4th century B.C.

    The Economic Lesson

    A bond is an IOU, a promise to repay a loan. The value of the bonds Greece has promised to repay is close to 155% of its GDP. Because GDP represents the value of goods and services that the Greek economy produces during 1 year, comparing the 2 provides an idea of whether they are living beyond their means.

    An Economic Question: The Greek government plays an active role in the economic life of its country through the salaries and entitlements it pays and the businesses it owns. Do you believe in considerable or minimal government economic intervention?

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