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    The Housing Dilemma

    Sep 9 • Demand, Supply, and Markets, Economic Debates, Financial Markets, Regulation • 333 Views

    Is it time for shock therapy? Since the housing bubble popped, from tax credits to mortgage modification programs, government has tried to support housing prices. The goal was to provide support and diminish foreclosures until the market stabilized. With housing sales still sinking, some suggest a different solution: the market.

    On the one hand…Enabling overextended homeowners to keep their homes has many benefits. Neighborhoods remain occupied and home values are sustained. Children remain in the same school, emotional dislocation is minimized, the court system is not overloaded, banks can keep securities that have a higher value.

    On the other hand…Shock therapy would involve the efficiency of the market. Buyers would offer bids for houses. With so many homes for sale from banks that foreclosed and homeowners with unaffordable properties, prices would probably plummet. Buyers would be pleased and sellers would be distraught. Confidence would initially suffer. Eventually, though, prices would stabilize at a market chosen level. The balance between demand and supply would be restored.

    Which solution do you prefer? Government assistance favors sellers/owners. The market would help buyers. Neither solution though, as discussed by Gretchen Morgenson is quite as simple as it sounds. And to further complicate the issue, here is another perspective.

    The Economic Lesson

    Please imagine a demand and supply graph with price the Y-axis, quantity the X-axis, a downward sloping demand curve, and an upward sloping supply curve. If government support were eliminated, then the supply curve would shift to the right because the number of sellers increases. As a result, supply crosses demand at a lower price. How low? No one knows.

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    Kidney Markets?

    Sep 8 • Demand, Supply, and Markets, Regulation, Thinking Economically • 653 Views

    What should we be able to buy and sell? Alcohol? Land? People? Body Parts?

    In a Teaching Company lecture on organ transplants, Wake Forest economist Robert Whaples says that the answers depend on the market’s boundaries. And, he soon adds, those boundaries change. Prohibition, for example, transformed the price, demand, and supply of alcohol between 1918 and 1933.

    Dr. Whaples asks whether a similar change should happen for organ transplants. Describing current shortages, he says that the demand side of the market, with insurance covering the expense, is considerable. By contrast, on the supply side, with altruism the key incentive since selling body parts is illegal, the hearts, lungs, kidneys, intestines that certain people need, are insufficiently available.

    That returns us to the market. Whether looking at human transplants or the viability of the housing market, we seem to keep on returning to how much we want to permit unfettered supply and demand.

    Should we be able to buy and sell kidneys if it will diminish massive shortages?

    The Economic Lesson

    When demand and supply interact, they allocate resources. If they are interacting successfully, then resources are allocated efficiently. Sometimes, though, markets fail. For example, when a factory pollutes, we can say we have market failure because the cost of pollution has been ignored by the price. We also have market failure when government partially affects the market’s boundaries through subsidized housing or a minimum wage. Finally, as with organ transplants, those boundaries can completely eliminate the market.

     

     

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    Vacation Daze

    Sep 7 • Behavioral Economics, Businesses, Economic History, Economic Thinkers, Innovation, Labor • 394 Views

    In a column about Netflix, author Daniel Pink described their vacation policy for salaried employees. They have none. All who are salaried can take off as many or as few days as they want. Their rationale? Because many people do a lot of work away from the workplace, time at the workplace is increasingly irrelevent.

    Netflix vacation policy is what Pink means what he says autonomy at work motivates us.  In an econtalk discussion, he said that once we are sufficiently paid, autonomy (directing our own lives), mastery (desire to get better and better at a task), and purpose (“yearning to do what we do in a service larger than ourselves”) propel our performance. Discussing the same ideas in a TED talk, he quotes a Federal Reserve paper that suggests high compensation can even detract from job performance.

    Should we care about Pink’s ideas? Do big changes have to happen at work? Can they?

    The Economic Lesson

    During the past several centuries, management styles have changed. We could start with Adam Smith’s description of small businesses and the division of labor in a market system and conclude with Alfred Chandler and Peter Drucker’s discussions of the structure and strategy of management and the worker in the modern corporation. 

    But then, as suggested by journalist Alan Murray in an excellent WSJ article about the demise of old management models, the 21st century might require that we begin all over again.

     

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    Bendy Buses and Health Care

    Sep 6 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, Government, Regulation, Thinking Economically • 318 Views

    Have you heard of a bendy bus? The bendy bus was supposed to solve Santiago, Chile’s public transit problems. But the story relates to each of us.

    It all began during 2007 when Santiago decided to replace its private bus system with public transit. Previously, with 3,000 different bus companies, the competition had been fierce and problematic. 1) Seeing a crowded bus stop, drivers would rev up their engines and race each other to get there first. Because of the accidents, injuries and conjestion, we could say competition was destructive. 2) Pollution was uncontrolled because buses were not licensed. 3) Although bus fares were quite low, the profitability ($60 million US dollars) made certain people question the ethics of making money by satisfying a basic municipal need.

    To solve the three problems, the city took over the system. Here is where bendy buses enter the picture. Big and attractive, they safely navigated city streets.

    Each of the problems was solved (but not really). 1) Drivers were told that on time service was crucial. Result? Buses were on time but empty as drivers skipped busy stops that might have delayed them. 2) Pollution was no longer a problem with the new buses. 3) Profits were no longer a concern because the system was losing lots of money ($600 million US dollars).

    The Economic Lesson

    In many ways, Santiago’s bus issues are our health issues.

    1) Incentive: Which incentives will optimize service?

    2) Pubic or private: How can we best provide the services we require?

    3) Affordability: How can the cost of necessities be minimized?

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    A Bow Tie Patent

    Sep 5 • Businesses, Innovation, Regulation • 339 Views

    Having said that jackets and dresses cannot be patented or copyrighted, I was fascinated to learn that a bow tie once had one.

    During the 1950s, the clothing retailer Brooks Brothers had patented their bow tie technology. A recent WSJ article referred to the patent because an attorney who saw a Brooks Brothers bow tie with an expired patent number is suing them. It is illegal to display an out-of-date patent on an item.

    You might want to look at patents which attorneys say have expired on Etch-a-sketch, turkey pop-up timers, the original Wooly Willy, and some covers from Solo Cup Co. on Starbucks coffee cups. According to the article, business firms that have forgotten to check when their patent protection has ended and still note it on the product, are breaking the law.

    The Economic Lesson

    This returns us to the general issue of intellectual property rights. A copyright refers to the expression of ideas and lasts for 70 years beyond its creator’s life. By contrast, a patent applies to an invention and can be enforced for 20 years.

    In this interesting econtalk interview, believing they should be longer, author Mark Helprin challenges the duration of literary copyrights.

     

     

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