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    Aug 9 • Behavioral Economics, Financial Markets, Households, Money and Monetary Policy, Regulation • 375 Views

    Watching capuchin monkeys, we can learn about the financial crisis.

    In a July TED talk, Yale’s Laurie Santos describes the marketplace she created for the monkeys she was observing. Santos’s goal was to determine whether the mistakes we repeat are because of “us” or our environment. If the moneys with whom we share a common ancestor behave like “us”, then we both might be “hardwired” to behave in a certain way.

    In the Santos experiment, monkeys were given tokens that they could exchange for grapes. Seeing them quickly grasp the concept, the researchers introduced new variables to see, for example, whether the monkeys displayed a tendency to save. (They did not.) Faced with a risk taking situation that involved getting fewer grapes, the monkeys had to decide whether to accept a definite loss or to gamble on the size of the loss or gain. The monkeys gambled rather than selecting the safer alternative.

    Because of consistent behavioral results, Santos concluded that monkeys have a biological tendency to behave a certain way. And, because that behavior was reminiscent of human behavior, she asked if humans have a predisposed response when faced with financial risk related decisions.

    The Economic Lesson

    Through its Research Center for Behavioral Economics, the Federal Reserve Bank of Boston has sought insight about human behavior to improve policy decisions. At a 2007 conference, they considered papers on the following topics:1) the emotional response to changes in wages and prices 2) the impact of financial illiteracy or psychological biases on financial decisions 3) the impact of consumers being “largely unaware of how much things cost”” 4) the effect of financial literacy on saving behavior 5) the reasons wages are rarely cut.

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    Becoming Ben Bernanke

    Aug 8 • Economic Thinkers, Money and Monetary Policy • 359 Views

    This was fun! A 5 minute Federal Reserve simulation lets you target the fed funds rate for 16 hypothetical quarters and then watch the inflation and unemployment impact. It all appears manageable until a surprise news headline appears.

    The site also links to a decade by decade look at monetary policy through a video summary of key events and graphs of the CPI, real GDP, the fed funds rate, and unemployment. Very well done.

    Knowing that current unemployment is at 9.5% and inflation is close to 1% for a 12 month period, during the simulation you can experiment with your own policy ideas.

    The Economic Lesson

    Described by British economist A.W.H. Phillips, a Phillips Curve depicts an inverse relationship between unemployment and inflation. While the original Phillips curve referred to wage inflation, it soon came to represent the connection between unemployment and price inflation. Soon also, economists such as Milton Friedman and Edmund Phelps challenged the validity of the original curve as did 1970s stagflation.

    Typical monetary policy response to accelerating inflation is to target higher interest rates; diminishing unemployment would require lower interest rates. It all sounds rather logical until you look at what can really happen. 

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    Working Moms: The Good and the Bad News

    Aug 7 • Economic Thinkers, Gender Issues, Households, Labor, Macroeconomic Measurement • 259 Views

    Two recent studies about working moms give good news and bad.

    The good first. If you work during your child’s first year, and you contribute considerably to the family income, or if your child care is very good, or if you are sensitive to your children, then his or her cognitive development will equal those of stay-at-home moms.   

    Now the bad. As a working mother with an MBA, 15 years after graduation, “lesser job experience, greater career discontinuity and shorter work hours…,” will contribute to a gender pay gap of 25%. By contrast, perhaps as illustrated by Elena Kagan, Sonia Sotomayor, and Condaleezza Rice, women whose careers resembled those of men earned equal pay. 

    The Economic Lesson

    Labor force statistics include participation rates. Defined as a statistic that compares the size of the labor force to its potential total, female participation rates for June, 2010 were 58.5% while male participation rates were close to 71.3%.

    The labor force includes all people who are employed, who are looking for a job, and who are 16 or older. There are close to 155 million people in the U.S. labor force. 

    Average gender wage gap differentials for different occupations are noted in an earlier econlife post. For different countries, you can look here.

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    An Amazing Unemployment Visual

    Aug 6 • Businesses, Labor, Macroeconomic Measurement • 338 Views

    Wow! Changing the color of individual counties from light to dark, month by month, this graphic actively displays how the U.S. moved from a 4.6% unemployment rate during January 2007 to 9.7% during May, 2010. In 30 seconds it tells more than pages of analysis.

    The Economic Lesson

    According to the Bureau of Labor Statistics, with a civilian noninstitutional labor force of 154.4 million people, 9.7% represents 14.97 million individuals. More specifically, the unemployment rate for men over 16 years old is 10.5%. For women over 16 years old, it is 8.3%. 


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    Who Do You Trust?

    Aug 5 • Businesses, Economic Debates, Economic History, Economic Thinkers, Government, Macroeconomic Measurement, Thinking Economically • 271 Views

    Moderated by late show host Johnny Carson, there once was a TV show called “Who Do You Trust?” Initially aired during 1957, the quiz show had husbands (interesting–1950s version would have only husbands making the decision) deciding whether they or their wives would answer questions.

    With the current debate about the impact of stimulus spending, I thought of the show’s title. Based on “who” we trust, many of us select who we want to answer, “Is the stimulus working?”

    For those who trust the Keynesian outlook, Moody’s Mark Zandi and Princeton economist Alan Blinder provide the right answers. In a recent paper, Zandi and Blinder conclude that the financial bailout had the greatest impact. Saying that the Fed’s asset purchases and bank stress tests were critical for the current economic improvement, they point out that stimulus spending alone would not have sufficed. However, they say that the complementary character of both sets of policies tended “to reinforce each other.”

    By contrast, those who question the impact of government spending will gravitate toward Stanford economist John Taylor and Harvard’s H. Gregory Mankiw. Commenting on the Blinder/Zandi paper, Dr. Taylor says that they use an old Keynesian model for hypothetical data input. Never, he says, do they use current data on what actually happened–just what was supposed to have occurred.

    There is lots more to read on both sides. For the Keynesians’ view, you might want to look at what the Councll of Economic Advisors and Paul Krugman have said. To read more of the market dominated perspective, Arnold Kling, Tyler Cowen, and Russell Roberts have noted their opinions. 

    The Economic Lesson

    To simplify our market economy, economists like to draw a circular flow model with 2 concentric circles. As shown here, essentially, resources and goods and services move around the outer circle while dollars occupy the inner circle.

    The key, though, is that the Keynesians believe that during a recession we have to draw a huge government rectangle to help the other two. By contrast, those who believe the market should function with little outside help will depict the circular flow model with minimal governmental influence.

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