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    A Race Between Supply and Demand

    Feb 7 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment • 461 Views

    In a wonderful Chip Bok cartoon, a child starts by asking, “Why are gas prices so high?” and is told, “Turmoil in the Mid East.” Then, asking about the turmoil, he is told the source is “High Food Prices.” The reason for high food prices? The cartoon concludes with, “Because we use our corn for gas.”

    The cartoon summarized what economist Timothy Taylor says is a race between supply and demand. If supply lags (Mid East oil), then price rises. Also though, when demand pulls ahead (corn and biofuels), prices go up. You can see then, for lower prices, we need demand to pull back and supply to surge ahead. 

    The Economic Lesson

    On the supply side, we could consider the impact of Egyptian turmoil on Suez Canal oil tanker traffic and of drought in Russia on wheat prices. Meanwhile though, new technology could increase yield.

    As for demand, in the U.S., a biofuel initiative has led to rising demand for corn. In addition, more affluence in China, India and other developing nations has meant more consumers who eat more meat which means animals who eat more grain. Factor in world population growth and demand could surge.

    Whenever supply accelerates and increases productivity, then the upward sloping supply curve moves to the right and crosses the demand curve at a lower price. However, if demand takes the lead in the race, the downward sloping demand curve shifts to the right and price rises.

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    Unemployment Questions

    Feb 6 • Households, Labor, Macroeconomic Measurement • 388 Views

    Friday’s employment report had good news and bad news. There was considerably less unemployment and considerably less job creation. Moving from 9.4% to 9%, the unemployment rate decreased more than most people expected. However, the job creation number, 36,000, was a disappointment.

    Do we have a contradiction? We just do not know. The fuzziness has many reasons. Here are a few:

    1) The unemployment rate is based on the Household Survey, a canvas of 60,000 households. The job creation numbers come from the Payroll Survey, collected from approximately 440,000 business and government establishments. You can look here to see how the 2 surveys differ.

    2) Furthermore, the Household Survey data might have been skewed because it is collected during one week. What if that week was snowy? What if no one was home?

    3) Previous job creation numbers from the Payroll Survey are revised each month as more data is collected. As a result, the Payroll Survey data becomes more accurate over time.

    4) However, the unemployment rate is never revised.

    Where are we? At the NY Times, Floyd Norris and David Leonhardt tried to work their way through the confusion. Their conclusions? The job market is definitely better than it was during October 2009 and the happier news comes from the Household Survey. 

    The Economic Lesson

    To complicate matters further, the unemployment rate looks only at those who are in the labor force (16 or older, have a job, looking for a job). For that reason, some suggest considering the U-6 rate, which includes the traditional numbers plus “marginally attached” workers and those who are not in the labor force. These workers have either stopped looking for a job or cannot find full time employment. The U-6 rate is a whopping 17.3%.

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    Military Business

    Feb 5 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Labor, Macroeconomic Measurement, Thinking Economically • 449 Views

    Choosing between “guns and butter” (or missiles and margarine), national leaders think of the military for guns and the private sector for “butter.” Not Egypt, though.

    As far back as the 1970s, when peace with Israel meant less to do for the Egyptian army, they redefined their role. According to an NPR report, the military decided to manufacture pots, process food, and make bottles for natural gas. A wikileaks 2008 diplomatic cable explained further that retired Egyptian generals ran “water, olive oil, cement, construction, hotel and gasoline” firms. The document said that the military built the road to Red Sea resorts while officers owned “large amounts of land…in the Nile Delta and on the Red Sea Coast.” (#j5)

    Will the military’s economic stake affect their political decisions? Thinking of their opportunity cost, will they favor stability over turmoil? The wikileaks document says yes.

    The Economic Lesson

    Every economics text reminds us that scarcity necessitates choices. One traditional choice is between producing for the consumer and producing for the military. Whenever land, labor, and capital are allocated toward one, there is less for the other one. Choosing guns instead of butter was one reason that the former Soviet Union collapsed.

    Economic growth, though, can enable us to produce more guns and more butter. One mid 1990s report suggests that fueling economic growth was the reason for the expanded role of the Egyptian military.

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    What’s Cooking?

    Feb 4 • Economic History, Households, Innovation • 362 Views

    The kitchen that my mother used 50 years ago is really not that different from the one we use today. Electricity, a mechanical refrigerator, and hot and cold running water have been here for a long time. But 60 years before that, the kitchen was a very different place.

    According to Princeton’s Stanley Lebergott (1918-2009), in Pursuing Happiness, in 1890, 24% (the majority in cities) of all homes had running water. In 1900, no one had a mechanical refrigerator and only 3% of all U.S. kitchens had iceboxes and horse drawn wagon deliveries of ice blocks. A freezer? No.

    Looking at those two kitchens, economist Tyler Cowen expresses concern. He relates the lack of meaningful technological change in the home to a stagnant standard of living and ineffectually rising health care and education spending.

    The bottom line? Nationally, we have to live within our means until the next technological revolution.

    The Economic Lesson

    What kind of technological revolution is meaningful? Sometimes less is more. Research from Edwin Mansfield (1930-1997) indicates something as simple as a new kind of industrial thread can make a big difference.

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    Getting the Most From Our Money

    Feb 3 • Developing Economies, Economic Debates, Economic Thinkers, Environment, Regulation, Thinking Economically • 372 Views

    In 2020, according to the World Health Organization, traffic fatalities will be the second leading cause of deaths in the world. Moreover, in the U.S. alone, approximately 57 million birds are killed by cars annually. (from Cool It, p. 154)

    So, asks Bjorn Lomborg, would you be willing to use existing technology to solve the problem? Probably not since the solution is a 5 MPH speed limit.

    Lomborg’s example relates to his support of a micronutrient program for the developing world. Getting swept up by emotions, we tend to ignore the cost of a solution. As a result, we “feel good” rather than “doing good.” Here, he tells us that adding crucial nutrients, Vitamin A and zinc, to a child’s diet in Kolkata, India would cost $2.20 a year. He estimates that $10 spent on Vitamin A would reap a $170 benefit in “health and long-term prosperity.” By contrast, he believes that $10 spent on carbon offsets would result in a $3.00 benefit.

    The Economic Lesson

    We might not agree with Dr. Lomborg’s numbers. But, as economists, we should agree with his approach. Thinking at the margin, he compares the extra benefit ($170) to the extra cost ($10.00) in order to make a decision.

    His approach also reminds us of scarcity. Because resources are limited, we have to make choices. Doing more of one thing means less of something else.

    Correction: More recent WHO data indicates that by 2030, traffic fatalities will rank five among the causes of death in the world.

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