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    Statistical Fun

    Mar 13 • Developing Economies, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy • 209 Views

    Reading that China might be concerned with an annual 3.5 percent inflation rate, I wondered how that compared to other countries and the world.  At a Google site with World Bank data, not only did I get some answers, but I had some fun.  Graphically, this site lets you compare data between countries, among countries, and with the overall world rate.  For example, with inflation, I first discovered a world rate of 8.06 percent (2008) and then added China and saw that in 2008, it was not far from the world statistic.  Then, I started to have some fun by adding Zimbabwe.  The graph looked amazing.  With the world zigzagging rather consistently, Zimbabwe, by contrast, goes vertical in 2003!

    I suggest taking a look.

    The Economic Lesson
    Inflation matters. A typical goal of monetary authorities is price stability which means close to zero inflation.  When prices are not stable, businesses have difficulty planning ahead, wages rapidly lose purchasing power, and interest rates soar because lenders would otherwise lose money.  As a self-fulfilling prophecy, inflationary expectations build unless a central bank such as the Federal Reserve controls the upward spiral.


     

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    Icemen and Pinsetters

    Mar 12 • Innovation, Labor, Macroeconomic Measurement, Tech • 261 Views

    In a wonderful story, NPR looked at “The Jobs of Yesteryear.”  Among those they discussed were pinsetters, elevator operators, icemen, and lamplighters. For each one, while technology made the occupation obsolete, the economy benefited with a higher GDP and a better standard of living.

    More specifically…

    In bowling alleys, during the beginning of the 20th century, a pingirl or a pinboy would have been stationed near the gutters waiting to pick up and reset the the pins after they were knocked down.    As late as the 1940s, you could still find pinsetters.

    Manually driven, the first elevators were operated by men and women who controlled the levers and “drove” the lift.  Even when push buttons were first used, because people could not stop at multiple floors, they still needed operator driven elevators.  (Unable to stop in between, each trip went from one floor to a selected destination.) Around 1950, the need for elevator operators began to dwindle.

    How to keep ice boxes cold before the electric refrigerator became commonplace?  Hauling 25-100 pound chunks of ice, the iceman came to neighborhoods several times a week.  During the 1940s, icemen became obsolete.

    And finally, in 1900 or so, in NYC, lamplighters were supposed to light 200-300 gas streetlights an hour.

    The Economic Lesson

    Hearing about obsolescence, economists would cite structural change.  Used economically, structural refers to the building blocks of an economy.  When the basic building blocks change, economic life is transformed.  Indeed, with the arrival of such new technology as electricity, the auto, and the transistor, we had progress as a plus and structural unemployment as a minus until those workers were retrained with skills that were more suited to the new economy.

     

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    A Real Seat

    Mar 11 • Economic History, Financial Markets • 257 Views

    In 2005 you could have paid $4 million (an all time high) for a seat on the New York Stock Exchange (NYSE) but you would have had almost nothing on which to sit.  Looking down from the balconies overlooking the huge trading floor of the NYSE, until now, you would have seen most people standing at the multiple trading posts that dominate the floor and at the broker stations to the side.  Now though, as part of a $10 million renovation, certain floor traders will have new stations, brighter lighting, curved glass walls, and, for the first time in recent history, chairs.

    Owning an NYSE seat meant that you or your firm had the right to trade securities on the exchange.  Today, with Euronext owning the NYSE, traditional seats are no longer for sale.

    The Economic Lesson

    The history of the NYSE dates back to 1792 when 24 of the new nation’s financiers signed the Buttonwood Agreement.  Named for the tree under which they gathered to trade securities at 68-70 Wall Street, these gentlemen agreed to a specified commission and mutually preferential treatment. When continuous trading began in 1871, members no longer sat in their chairs for scheduled stock auctions.

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    The Top 19

    Mar 10 • Economic History, Money and Monetary Policy, Regulation • 246 Views

    Are 19 banks “too big to fail?” Listening to Bloomberg radio, I heard that four banking firms control close to 50 percent of their industry’s assets, that the top 19 control 85 percent, and that the bottom 8000 control 15 per cent.  An FDIC report from 2006 described a similar trend.

    In a recent econtalk podcast, Gary Stern, past head of the Minneapolis Fed said that “too big to fail” distorts markets.  Explaining why, he said that once creditors expect that an institution will be rescued, no matter how risky its behavior, its demand curve shifts lower than it should be for that institution’s securities.  The result is “mispricing”.  With borrowing less expensive, risky behavior is fueled with funds.  Place that fund supply on steroids as before the 2007 panic and you have the potential for a “systemic” calamity.  And, going full circle, if systemic calamity is possible, than those big enough to cause it, cannot fail.  The challenge is to stop that cycle. 

    Is the solution smaller financial institutions?  As happened during the late 1970s, when banks were prohibited from competing and growing freely, other financial firms took away the banks’ business with a better deal–a higher return and new financial products– for their customers.  As a result, the attempt to preserve healthy institutions wound up threatening their survival.  Today, we have an international financial community ready to offer “better deals” if we limit our banks.  And, we also have an industry where new products, that regulators never imagined, surface daily. Is the solution new regulations?  Enforce existing regulations better? Permit failure and let the market take care of itself? Your comments?

    The Economic Lesson

    Whenever banking is discussed, someone always refers to Glass-Steagall as a benchmark.  Passed in 1933, Glass-Steagall is primarily associated with creating the FDIC and requiring banks to spin off their investment banking activities as separate firms. Repealed in 1999, actually, Glass-Steagall had gradually been unraveling since 1980.  

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    Euro Matters

    Mar 9 • Thinking Economically • 225 Views

    Said to have been one of the least-prepared countries to transition to euro cash, Greece was an original participant in the euro launch on January 1, 2002.  In the first major euro robbery, in Athens, a gunman ran off with 76,000 euros ($68,400).  During the early days of the launch, in Greece, only 50,000 of 300,000 businesses had been supplied with the new currency.  By contrast, in Denmark,  where “there were big queues at cash machines but it was very jolly with champagne,” the transition was virtually flawless and universal. 12 countries in all, amazingly, accomplished the massive task of circulating 6 billion euro notes and 40 billion coins.

    But why?  We could say that it all came down to transaction costs.  Moving from country to country meant switching from escudos (Portugal), to francs, to guilders, to 12 currencies in all if we just look at the countries that initially pooled their monetary lives.  While tourists found it daunting, businesses had even more trouble.  Uniformity would not only stimulate travel and commerce, it also presented the potential for a world currency to rival the dollar. 

    In a recent NPR Planet Money podcast, we hear how the creation of a single currency made sense but also created problems.  When acting alone, a country with fiscal problems might see its own currency decline in value internationally.  The decline served as a self-correcting mechanism that could ultimately solve the original fiscal difficulty.  Now, with 16 different fiscal policies and 16 different economies BUT ONE currency, the self-correcting mechanism is gone.

    Perhaps all of this just returns us once again to opportunity cost.  Whether looking at the creation of the eurozone or its preservation, the benefits far exceed the costs for its members.

    The Economic Life

    Governments can influence economic activity through monetary policy.  Focusing on the supply of money and credit, the goal of monetary policy in the United States is stable prices, steady growth, and low unemployment. 

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