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    Khakis and Lettuce

    Apr 30 • Businesses, Demand, Supply, and Markets • 275 Views

    Do you remember when we only had Levi’s? Until the late 1970s when Jordache arrived in department stores, buying jeans was not about style. After that, designer jeans became a fashion statement as did their higher prices.  

    I wonder whether yesterday’s WSJ article on $520 khaki pants for men described a similar phenomenon. The pricier pants represent a trend toward more detail, softer fabrics, and enzyme washes. According to the WSJ, most khakis had looked too much alike, even when sold by different retailers. How to stimulate sales? Create some “designer cachet”. 

    As an economist, we would say that khakis makers are creating product differentiation…sort of like lettuce.

    In a supermarket, lettuces can look alike. But, if you put them in packages, and prewash them, call them organic or provide a gourmet image, you might be able to generate some buyer recognition. And maybe, if the consumer really likes the lettuce (or wants designer cachet), he or she will buy that brand every time.

    The Economic Life

    Imagine a line representing different competitive market structures. The far left side of the line is labeled perfect competition while the far right side is monopoly. Very similar products such as unpackaged lettuce tend to be sold in markets that are on the left side of the scale. Their producers have little power over price because their goods look just like someone else’s. When individual lettuce growers gave their produce more individuality, they moved to the right on the market structure line. They also got more price making capability–just like Khakis. 

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    From Mill to Obama

    Apr 29 • Economic Thinkers, Government, Thinking Economically • 285 Views

    Yesterday, President Obama briefly said that some salaries on Wall Street were more than anyone should earn. 

    Approximately 160 years ago, John Stuart Mill responded by saying that he wanted to encourage work. Consequently, instead of limiting salaries through a progressive income tax, he supported a moderate proportional tax and high inheritance taxes. “To tax the larger incomes at a higher percentage than the smaller, is to lay a tax on industry and economy; to impose a penalty on people for having worked harder and saved more than their neighbors.” (1848, Principles of Political Economy)

    Believing that all too often government distorts incentives, Adam Smith points out that people personally have less to give and spend when taxed. Government, Smith believed, was more likely to poison virtue than spawn it.

    Not waiting for government, Ben & Jerry’s capped the salary of its highest paid executives at seven times the lowest pay. In 1994, though, they eliminated the cap when they could not find a new CEO who would accept it.

    The Economic Life

    Through a Teaching Company series on the history of economic thought, Professor Timothy Taylor discusses the life and ideas of Adam Smith and John Stuart Mill. They provide an ideal foundation to build from or tear down when contemplating salary caps and income distribution.    

     

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    Nobel Humor

    Apr 28 • Behavioral Economics, Demand, Supply, and Markets • 284 Views

    Presented at Harvard with Nobel laureate participation (and based on authentic scholarly research), the Ig Nobel awards are funny but they also make you think. 

    As they express it…

    The 2009 economics prize went to executives at four Icelandic banks “for demonstrating that tiny banks can be rapidly transformed into huge banks, and vice versa-and for demonstrating that similar things can be done to an entire national economy.”

    The 2009 mathematics prize went to the governor of Zimbabwe’s central bank “for giving people a simple, everyday way to cope with a wide range of numbers-from very small to very big-by having his bank print bank notes with denominations ranging from one cent ($.01) to one hundred trillion dollars ($100,000,000,000,000).”

    In 2008, behavioral economist Dan Ariely won the Medicine prize “for demonstrating that high-priced fake medicine is more effective then low-priced fake medicine.” 

    In 2006, the economics price (to an MIT researcher) was “for inventing an alarm clock that runs away and hides, repeatedly, thus ensuring that people DO get out of bed, and thus theoretically adding many productive hours to the workday.”

    The 2006 Ornithology Prize was “for exploring and explaining why woodpeckers don’t get headaches.”

    The Economic Life

    Economics need not be the dismal science.

     

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    Max Bialystock and CDOs

    Apr 27 • Businesses, Demand, Supply, and Markets, Financial Markets, Regulation • 270 Views

    Comparing the deal to Bialystock, Bloom, and Springtime For Hitler in The Producers, NPR’s This American Life looked at how a Chicago hedge fund made money on seemingly unprofitable CDO transactions. Available as a podcast, the story made the CDO derivatives world entirely understandable. 

    The protagonist of the story is Magnetar, a Chicago hedge fund. The plot focuses on why Magnetar would buy a “layer” of a package of mortgage securities that was so speculative that its default was probable. The “climax” relates to the “insurance” that the firm purchased on the package. The podcast uses broadway music, a derivatives song that they commissioned, and clear explanations that provide insight. Listening to it is worth the opportunity cost.

    The Economic Life

    Imagine a big box filled with mortgages. Fundamentally, you are looking at a CDO, a collateralized debt obligation. Through financial reform legislation, Congress wants to limit who can buy and sell these packages and the securities that relate to them.

     

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    Wheelbarrows of Money

    Apr 26 • International Trade and Finance, Money and Monetary Policy • 300 Views

    If your country’s currency is hyperinflating, then how do you buy bread? You can find a wheelbarrow or use another currency. During February, 2007, with an inflation rate exceeding 50% per month, the Zimbabwean economy experienced hyperinflation. Looking for purchasing power, people avoided Zimbabwean currency and turned to the U.S. dollar, the South African rand, Botswana’s pula, and the Zambian kwacha. One researcher estimated that in Zimbabwe, by November, 2008, prices were doubling every 24.7 hours. 

    With Zimbabweans just one of many people using U.S. currency throughout the world, and computers making counterfeiting increasingly simple, the U.S. government just issued a new, forgery resistant $100 bill. Yes, Ben Franklin is still there.  But, his shoulders were added, as you tilt the bill certain areas change color, and there is a blue 3-D “security ribbon”. On a government video, you can see the new bill. In a recent column, Floyd Norris pointed out that abroad, the $100 bill is preferred.

    The Economic Life

    Money has three basic characteristics. 1) It is a medium of exchange. 2) It is a unit of value. 3) It provides a store of value. Hyperinflation, the plunge in value of money, immediately affects whether money is acceptable as a medium of exchange, it diminishes the value of money, and it reduces its ability to store value. 

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