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    Consumer Choices

    Jul 2 • Households • 325 Views

    If you were asked today to plan next week’s snacks, would you select fruit or chocolate? In a 1998 study, 74% of those surveyed said fruit. However, when the same people had to decide between fruit and chocolate for today’s snack, 70% chose chocolate.

    As explained by behavioral economists, those who chose chocolate for today’s snack were “overvaluing” current gratification and “undervaluing” the future benefits from fruit. Behavioral economists also believe that people tend to choose the status quo instead of other choices that require active decision-making. 

    This takes me to a question. If we tend to overvalue current gratification and stick with the status quo, then how can we make wise decisions about health care insurance, retirement planning, and mortgages? In a recent column, New Yorker columnist James Surowiecki suggests “choice architecture” through which optimal choices are the default option. For example, a fixed rate, self amortizing 30 year mortgage would be the default rather than a more risky loan. Another possibility is just having a brief explicit disclosure that buyers have to sign. For example, when getting a risky mortgage, they would have to indicate that they knew that, ” You could lose your home.” (Researchers have found that this works.) Surowiecki also recommends that government protect us and that schools mandate financial literacy courses.

    The Economic Lesson

    Behavioral economics offers some insight that legislators should recognize. Still though, we have the convergence of the profit seeking sell side and the buy side with a plethora of exploitable tendencies. Add to that congressmen with reelection concerns and you start to wonder how 2300 pages of financial reform can reflect our collective wisdom.  

     

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    Common Markets

    Jul 1 • Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, International Trade and Finance • 308 Views

    Kenyan coffee exporters have a problem at the Tanzanian border. “On the Kenyan side they operate 24 hours a day, but on the Tanzanian side it’s 12 …We have had drivers standing at the border for 4 days. These things make the final price of our coffee up to 3 times that of the local product.” The solution? 5 East African nations are creating a common market. 

    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 initially included one set of regulations instead of 15, labor that could move more freely, and capital that was more accessible.

    It is amazing that our founding fathers created our “common market” when they replaced the Articles of Confederation with the Constitution. The European process was accelerated with the Single Market Act in 1986. And now, Burundi, Kenya, Rwanda, Tanzania and Uganda are trying to move in a similar economic direction.

    The Economic Lesson

    In an Econtalk lecture, Professor Russ Roberts talks about the connection between Adam Smith, David Ricardo, and trade. Starting with Smith and then moving to Ricardo, he points out that the optimal potential of markets is realized when they grow larger. “The more people we trade with, the greater the opportunity to specialize and innovate…” and grow.

    This returns us to the benefits of the East African Common Market, the EU and the United States. 

    At another time we will look at NAFTA.

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    Making Macroeconomic Decisions

    Jun 30 • Economic Debates, Economic History, Economic Thinkers, Government • 259 Views

    One problem with macroeconomic policy is the inability to confirm that it does or does not work. With variables constantly in motion, an entire economy as your lab, and no way to keep anything constant, how to know if you are doing the right thing? 

    This takes me to a Pew Research Center survey. A Pew questionnaire sent to 1001 adults confirmed that we all agree that state spending is a big problem. It also confirmed that we can solve the problem by cutting spending on highways, health services, public safety, and school funding. Or, we can raise taxes.

    Yes? Not quite. For every solution, more than 50% voted “no”. Furthermore, with the possibility of a double dip, some say now is the worst time to implement “austerity”. Others say “austerity” is the only solution.

    Decisions about state spending parallel federal dilemmas. Do we need more stimulus spending or has government spent too much already? We have no definitive empirical data to provide guidance.

    The Economic Lesson

    Since our nation began, we have disagreed about economic policy. George Washington had to cope with the ongoing feud between Secretary of the Treasury Hamilton and Secretary of State Jefferson. Hamilton was for a more interventionist government to spur economic development. Jefferson, by contrast, wanted less. And yet Hamilton’s goals are the same as today’s non government/market advocates.

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    Baseball Games and Airline Fares

    Jun 29 • Businesses, Demand, Supply, and Markets, Economic Debates • 282 Views

    How much will the San Francisco Giants charge for a baseball ticket? It all depends on, “past ticket sales, the day and time of the game, the teams’ records, the pitching match-up, the weather, the going rate on resale Web sites like StubHub and other data.” So, when 2 star pitchers were named for this year’s Memorial Day game between the Giants and the Colorado Rockies, tickets that had been selling for $17 rose as high as $25.

    Somewhat similarly, during the 1980s, American Airlines was the first to use a flexible pricing system that was called yield management. After airline deregulation, American Airlines had to figure out how to compete against young upstart airlines with lower costs and lower fares. Their response was a computerized booking system that constantly changed fares. Suddenly, their revenue depended on when the flight was booked, whether the flier stayed over a Saturday night (which identified business travelers who would pay more than the discretionary traveler), and other variables. Just like the San Francisco Giants, American was maximizing revenue by pricing customers individually.

    The Economic Lesson

    Whenever they have some monopoly power, business firms act more as price makers than price takers. Price makers have the power to shift their own supply curve to a new position. As a result, they help to decide where supply will cross demand to determine price. By charging different prices for the same product, they can cater to different consumers with different demand curves. Price takers have much less control. Their price is determined by the intersection of a supply curve that many similar firms create and a demand curve shaped by many consumers.

    When the San Francisco Giants realized they could maximize revenue because they had price making power, they implemented their “dynamic pricing” approach.

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    Idea Incubators and Economic Growth

    Jun 28 • Businesses, Economic History, Innovation, Macroeconomic Measurement • 272 Views

    It is so tempting to assume that we get the best results when we tell people what to do. If we want to use less oil, then pass laws that encourage us to invent better batteries. Yes?

    Using Selman Waksman as an example, retired Harvard professor David S. Landes, would probably answer, “No.” Waksman’s story starts in 1910, when, as a 22 year old Russian immigrant, he arrives in Philadelphia. The tale reaches its climax when he receives the 1952 Nobel Prize in Chemistry and Medicine for developing streptomycin. Waksman’s talents flourished in the United States because of the education he accessed, the mentors who supported him, and the businesses and federal government who gave him research money.  

    Summarized by Landes, Waksman was successful because of 1) “Contact and exchange” which resulted from “multiple points of intellectual entry” where ideas are nurtured, developed, and shared 2) Individual ambition, drive, and intelligence 3) Luck 4) An ongoing stream of new tools and technology. The result is technological progress, a key ingredient of economic growth.

    All of this takes me to a recent NY Times article about “idea incubators” and the convergence of academia, private business and (sometimes) government. With a program at M.I.T. as the article’s focus, an “entity” is described through which academic researchers can access business funding for their work at the idea stage. Fostering the potential of ideas, the concept is innovative because most seed money has been available at the development stage, after a good or service has materialized.

    The Economic Lesson

    Illustrating our economic growth, graphs with the bowed out lines called production possibilities frontiers will move to the right when we optimize opportunities for innovation. Economic growth is the best way to solve our current fiscal and financial problems.

    I recommend Dr. Landes’s book, The Wealth and Poverty of Nations: Why Are Some Nations Rich and Others So Poor?

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