• Uncertainty can slow economic growth.

    Watson Wins

    Feb 18 • Innovation, Macroeconomic Measurement • 409 Views

    Playing against Jeopardy champs Ken Jennings and Brad Rutter, Watson, the IBM computer won.

    Imagine three podiums. One is labeled Ken, the middle one Watson, and the third one, Brad. IBM assured everyone that Watson had no internet access and all three players had to use their mechanical buzzers. Host Alex Trebek ran the game as he always had. Categories? For this round the contestants could choose from: Literary Character APB, Beatles Names, Olympic Oddities, Name the Decade, Final Frontiers, Alternate Meanings.

    The game soon revealed Watson’s strengths:

    Memory: Having “gobbled” up information from books, movie scripts, encyclopedias, dictionaries, countless sources, Watson knew it all and won’t forget anything.

    Reaction time: Watson was fast. (And he was programmed to buzz only when he had the answer while the humans sometimes buzzed just before they thought of it.)

    Decision-making: With wagering a part of the game, Watson had to decide what to bet. He had sufficient information about the facts and past games to know how much would be appropriate.

    You might enjoy this TED talk about Watson.

    The Economic Lesson

    With countless business, medical, and consumer applications where Watson’s skills are valuable, “he” can affect all of us.  Physicians, for example, could consult Watson for speedy medical diagnoses that could include a “confidence” number indicating whether the statistics are convincing.

    As economists, Watson takes us to spillovers and positive externalities.  Originally involving 2 entities, Watson’s impact will ripple outward to benefit many.

    So really, everyone, not just Watson, has won.

     

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    Shrinking Packages

    Feb 17 • Businesses, Demand, Supply, and Markets, Households, Macroeconomic Measurement • 544 Views

    Have you noticed that the 64-ounce Tropicana Orange Juice container now holds 59 ounces of juice? Or, that Scott Toilet Tissue is 104.8 sq. ft. instead of 115.2 sq. ft.?

    Other shrinking packages include…

    The 24-slice package of Kraft American Cheese has 22 slices.

    The 16 oz. Haagen-Dazs ice cream container has 14 oz.

    At 24 oz., Ivory Dish Detergent is now 6 oz. smaller.

    The 12 oz. package of Hebrew National Franks has become 11 oz.

    According to Consumer Reports, many everyday goods are getting smaller. When cotton, wheat, oil, sugar, oilseeds (e.g. soybeans and sesame seeds) and other commodities become more expensive, then suppliers have decisions. Absorb higher production costs? Increase prices? Shrink product size? Many have chosen to preserve profit margins by downsizing.

    The Economic Lesson

    According to the Bureau of Economic Analysis (BEA), the Consumer Price Index (CPI) recalibrates when package size changes. They explain it here. However, I do wonder whether the CPI adequately reflects the inflationary implications of smaller packages.

    The December-to-December, 2009-2010 inflation rate is 1.5%.

     

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    U.S. Affluence

    Feb 16 • Developing Economies, Households, Macroeconomic Measurement • 398 Views

    How rich is the U.S.? Economist Branco Milanovic, in The Haves and the Have-Nots, gives us a really interesting answer.

    The poorest people in the U.S. are richer than most of the higher income individuals in other countries. Specifically, the poorest 5% of all Americans rank 68% in terms of world incomes. In other words, our poorest are richer than 2/3 of the world (p. 117).

    The Economic Lesson

    While Dr. Milanovic is looking at worldwide income distribution, we can also look at income distribution at home. In the U.S., our national income comes from wages and salaries, rent, interest, dividends and profits from businesses that are not incorporated.

    To picture our income distribution, please think of a pie as the total national income and then individual slices as the proportion that different groups receive. That would mean that if total national income were $1,000 and a society had only five households (people living together), then if every household earned $200, distribution was equal. By contrast, if one family earned $800, then, because $200 remained for everyone else, there would be considerable inequality. Recently, the top quintile of households in the U.S. earned close to 50% of all income. This quintile approach for representing income distribution was developed by statistician Max Lorenz. 

    You can see Dr. Milanovic’s graph for worldwide income distribution here.

     

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    Looking For A Reality Check

    Feb 15 • Economic Debates, Government • 425 Views

    Saying how the U.S. government spends our money, Washington Post columnist Ezra Klein said, “It’s an insurance conglomerate…”

    His explanation?

    Medicare, Medicaid and Social Security expenses add up to 2/5 of federal spending. With Medicare covering health insurance for people over 65, Medicaid relating to health insurance for  low income individuals and families, and Social Security primarily covering old age insurance, yes, we could say that the government is in the insurance business.

    His point?

    That the debate over the President’s 2012 budget proposal makes politicians sound fiscally responsible without focusing on the real issues.

    Meanwhile, one writer at The Atlantic says spending proposals are like a spork. “The same way a spork makes an incomplete fork and an ineffectual spoon, this compromise budget provides for both incomplete investment and ineffectual deficit reduction.”

    Paul Krugman, though, tells us to focus instead on House Republicans. Providing insight about why politicians are focusing on cuts in discretionary spending, he says it is all about the future. If, as a recent Pew Survey indicates, voters really want no cuts that affect them, then what to do? Cut “future-oriented” programs in order to slice immediate spending.

    The Economic Lesson

    For a reality check, we should return to the report from the President’s Deficit Reduction Commission. Their recommendations cover 6 categories. 1) Discretionary spending cuts 2) Comprehensive tax reform 3) Health care cost containment 4) Mandatory savings 5) Social Security reforms 6) Budget process changes. For a quick summary, you can look at pages 14-16 of their report.

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    Search Engine Competition

    Feb 14 • Businesses, Demand, Supply, and Markets • 545 Views

    Reading about Lillian Virginia Mountweasel in the 1975 edition of the New Columbia Encyclopedia, you would have discovered that she, a fountain designer and rural mailbox photographer, died in an explosion when working for Combustibles magazine. 

    But she really didn’t.

    Mountweasel was a fake entry.

    Encyclopedias, dictionaries and search engines use an occasional bogus entry to identify copycats. Columbia, for example, knew that any other encyclopedia with Mountweasel had lifted the info from them because it existed nowhere else. Similarly, Google has just accused Microsoft’s Bing of a copycat offense. Using the fake search term, “Hiybbprqag,” Google says that Bing was guilty of what we could call search engine plagiarism. In response, Microsoft pleads, “Not guilty.”

    On a different front, Google is facing competition from smaller search engines with niche specialties.

    The Economic Lesson

    As economists, we can look at how firms compete. With only a few large firms providing search answers to many millions of queries, the search engine market structure is oligopoly. One way in which oligopolies compete is product differentiation. Any copycat activity challenges their ability to differentiate.

    Along a continuum of market structures, we can list four benchmarks. At the far left is perfect competition with many firms, identical products such as potatoes and broccoli, many consumers, and a market that determines price. Next, to the right, is monopolistic competition where firms have a bit more power. Supermarkets and beauty salons are examples of firms in monopolistically competitive markets. Then comes oligopoly and firms with a lot of power to affect price. Kellogg’s Cereals, Coca-Cola, and pharmaceutical firms are oligopolies. Finally, at the far right is monopoly, where one firm controls the market.

    Are the newer, smaller search engines changing Google’s market structure?

     

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