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    Greener Money

    Jan 22 • Economic History, Environment, Innovation, Money and Monetary Policy • 435 Views

    Hearing that Canada was switching to plastic money this year, I imagined…plastic. It turns out that plastic money looks and feels pretty much like the cotton-based paper currency we now use. 

    Why make the change? Money was one reason. Although it is costs close to half as much to make cotton-based currency, plastic lasts 4 times as long. Also, it is tougher to counterfeit, it carries fewer germs, and it is more ATM friendly because it clogs less easily. Some call plastic currency “greener” because, as money that lasts longer, there is less to discard or recycle.

    Still though, Thailand tried it out and then, dissatisfied with how it “handled” and discolored, went back to its original currency. Mexico still has plastic currency but its banks have had to get used to not being able to staple bills together. One journalist said that plastic money is “springier.”

    Australia, the country that developed the polymer technology for creating plastic bank notes started using them in 1988.

    The Economic Lesson

    What money is made of matters. It is most crucial that the coin or currency that circulates is composed of material that has less value than the face value of the money.

    Seignorage refers to the money a central bank can make when it issues money because it costs so little to print it. The central bank gets the currency for the amount it costs to print it and then receives a market value return when it circulates it. We could say that it costs 16 cents to print a $1 bill. Then the Fed gets paid interest on the $1 if it buys a treasury bill from a bank with millions of dollars of that newly minted money. The seignorage is the different between the printing cost and the interest it gets.

    In 2006, when metal prices soared, there was concern that people would melt their coins. At the time, the metal in a nickel was worth 6.99 cents and in a penny, 1.12 cents. So, the US government said, “No,” it is against the law to melt money. Violators could face jail and large fines.

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    A Broccoli Mandate?

    Jan 21 • Economic Debates, Economic History, Government, Regulation • 372 Views

    For one federal district judge, deciding whether parts of the new health care reform law are constitutional relates to, “What is economic?”

    Our story begins with a court hearing in Florida on December 16. States opposing the health care reform law have said that that Congress does not have the authority to make us buy health insurance or, instead, pay a $695.00 annual fine. Defending the law, (federal) government attorneys said that the insurance market was economic activity under Congress’s authority to regulate interstate commerce. 

    Here is where economics appears to enter the picture for the judge. Pondering the authority of Congress, he said,  “In the broadest sense every decision we make is economic. The decision to marry. The decision to keep a job or not has an economic effect…If they [the federal government] decided everybody needs to eat broccoli because broccoli makes us healthy, they could mandate that everybody has to eat broccoli each week?”

    You might want to go here for a Washington Post interactive description of lawsuits challenging health care legislation.

    The Economic Lesson

    Discussed here, the balance between the power of the states and the power of the federal government relates to the Commerce Clause and the Tenth Amendment.

    The Commerce Clause of the US Constitution, Article 1, Section 8, Clause 3,  states that “The Congress shall have Power…To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”

    The Tenth Amendment to the Constitution says that those powers not given to the federal government in the Constitution are reserved to the states.

    And perhaps all of this takes us back to “What is economic?”

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    Apple’s Patents

    Jan 20 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Innovation, Regulation • 487 Views

    An ibike? A solar-powered iPhone? Or maybe an iKey? 

    During 2010, Apple received 563 patents. In addition to the iBike, a solar-powered iPhone, and an iKey, Apple’s patents included a wand remote and a touchscreen iMac. When asked about Apple’s products, one person who follows their patent history said it was not about superior technical ability. Instead, it was all about vision. 

    That takes us to Apple’s founder and CEO, Steve Jobs, who just announced he was taking a medical leave of absence. Asked about how much market research he did to develop the iPad, he answered, “None. It isn’t the consumers’ job to know what they want.”

    It also takes me to Steve Jobs’ commencement speech at Stanford, 2005. Wonderfully inspiring, it provides insight about this gentleman who describes what he “stumbled into by following his curiosity…”

    The Economic Lesson

    We call Apple an oligopoly because it competes against few firms, it has some control over price, it enjoys the benefits of mass production, and market entry and exit are relatively difficult. Also, as demonstrated by Apple, product differentiation is the key to successful competition.

    As one Bloomberg commentator said, with Apple, “…after buying something you never thought you needed, you decide you can’t live without it.”


     

     

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    Pay-As-You-Throw

    Jan 19 • Economic Debates, Environment, Government, Households, Regulation, Thinking Economically • 379 Views

    Hearing Beethoven’s Fur Elise, a Taiwan resident knows the garbage truck is near. As described by a Washington Post writer, entire neighborhoods assemble with their garbage as the truck approaches. Called pay-as-you-throw (PAYT), through unit-pricing, people are charged for their garbage removal.

    A Freakonomics podcast explained that certain U.S. municipalities were less successful. Perceiving the payment as just another tax or costing too much time, residents of Sanford, Maine eliminated PAYT after 4 months. Elsewhere, to lower their garbage expense, people threw garbage in the woods or flushed it down the toilet (which created plumbing problems).

    How then, whether looking at PAYT, buying local, or recycling, can green initiatives ensure their goals?

    The Economic Lesson

    When people support PAYT, the amount of garbage decreases by 17%. (A sociologist quoted this statistic in the Freakonomics podcast.) Facing a heretofore non-existing cost, people recycled, they mulched, they gave items away.

    Others, opposing the approach, tried to circumvent it. They threw trash in the woods or tried to get the policy repealed.

    This takes us to the heart of economics. Incentives shape our behavior. The obvious response to a greater cost for garbage removal is to throw out less. We can see though, that new incentives might instead create unintended consequences. We then need to ask whether the benefit still outweighs the cost.

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    More Than Just a House

    Jan 18 • Demand, Supply, and Markets, Financial Markets, Government, Households, Macroeconomic Measurement, Money and Monetary Policy • 373 Views

    The story of a small home in Los Angeles is about much more than one house. Told by Marketplace.org and KCET TV, the story of the house on Lot 354 explains the entire housing bubble and bust.

    Built in 1927, an 1800 square foot bungalow is bought by Shawna and James for $445,000 in 2002. Reflecting sky rocketing home prices in the neighborhood, the house is resold for $1.2 million to Jin and Chong in 2006. Having borrowed $900,000 to buy the house, and hoping that their $1 million home becomes a $2 million home which they can sell, the new owners default when the economy collapses. Foreclosed, the owners leave and the house is auctioned to its current owners, Eric and Alison, for $765,000.

    You can see the buyers’ side of the story. Easy to borrow money, soaring home prices, excited people who see their net worth multiply.

    Meanwhile, behind the scenes, we have Washington Mutual providing easy loans (and then imploding), real estate agents facilitating sale after sale, Fannie and Freddie packaging mortgages into mortgage-backed securities, investors buying the securities, servicing firms collecting all of this money and passing it from party to party.

    But still, when we get right down to it, it really is all about one house. And then another, and another, and another.

    You might want to listen to Planet Money’s story of the mortgage-backed security they purchased, Toxie.

    The Economic Lesson

    Mortgage-backed securities enabled a financial bubble to inflate because they funded house sales with more money than otherwise would have been available. More dollars chasing the same number of goods inflates prices. As with all bubbles, eventually prices cannot move any higher. At that moment, the bubble pops and prices descend.

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