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    Jobs and Crocodiles

    Jun 5 • Labor, Macroeconomic Measurement • 336 Views

    Hearing yesterday’s employment numbers, I recalled the Malaysian proverb, “Don’t think there are no crocodiles because the water is calm.” Everyone is worried about crocodiles.

    Looking beneath the surface, the employment numbers could be troublesome. The water may look smooth because we added jobs; however, they primarily resulted from temporary census workers. During the beginning of May, census hiring peaked at nearly 600,000. Similarly, the good news is that the unemployment rate dropped to 9.7% from 9.9%. Still, though, the broader U-6 rate which included workers marginally connected to the labor force, worsened.

    A jobs bill, also could have crocodiles lurking nearby. In a Teaching Company lecture from Professor Robert Whaples, he explained high European unemployment rates through supply and demand. Providing skills, labor is on the supply side. Meanwhile, we have businesses who hire labor as the source of demand. Whaples says that on the supply side, workers tended to be more comfortable remaining jobless because of generous and sometimes unending unemployment benefits. On the demand side, businesses were looking for fewer employees because of higher minimum wage laws and union control over the workplace. Consequently, workers in France, for example, remain unemployed longer than U.S. workers. In the United States, is the crocodile the cost of a European approach?

    Maybe we need a new proverb:

    “The reverse side always has a reverse side.” (Japanese proverb)

    The Economic Lesson

    The unemployment rate is calculated by dividing the number of people in the labor force who are actively looking for a job by the the size of the entire labor force. People are defined as being in the labor force if they are 16 or older, employed and receiving a wage or salary or unemployed but looking for a job.

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    Michael Lewis and the U.S. Congress

    Jun 4 • Economic History, Financial Markets, Regulation • 284 Views

    The Big Short by Michael Lewis (who also wrote The Blind Side) is a “hot read” on Capital Hill. Senate Majority Whip Dick Durbin (D-Ill) recommended it. Chris Dodd (D-CT) referred to it during a speech on Fannie and Freddie. And, Senators Harry Reid (D-Nev), John Ensign (R-Nev.), and Ted Kaufman (D-Del.) were among several other lawmakers who said, “Read it.”

    Meanwhile, in a fictitious NY Times letter called “Shorting Reform,” Lewis expressed withering skepticism about Congress.  


    The Economic Lesson
    The 34 page Glass-Steagall Act functioned productively between 1933 and the mid-1970s. Lessons from it?


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    Trivial Pursuits

    Jun 3 • Businesses, Economic History, Economic Thinkers, Innovation • 334 Views

    Playing Scrabble in a bar, Canadian journalist Chris Haney and a sports reporter friend thought they could do better. Within an hour, during December, 1979, the two created the idea for Trivial Pursuit and drew an initial version of the game board on bar room napkins. Haney focused on writing the first 6,000 questions for the game, they secured financing by gathering a group of small investors, and the game was launched in 1981. In 2008, Hasbro bought Trivial Pursuit for $80 million. 59 years old, Chris Haney died on May 31.

    The Economic Lesson

    The Chris Haney story started me thinking about the market system. Seemingly chaotic, only Adam Smith’s “invisible hand” gives instructions. The “invisible hand” tells businesses to make profits through the goods and services they produce. At the same time, it instructs consumers to purchase what they want and need at the lowest prices. Winding up as supply and demand, the two intersect and answer the three basic economic questions: What should be produced? How should goods and services be produced? Who should receive the income generated by production? Indeed, the “invisible hand” propelled Chrs Haney.

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    BP and the Financial Crisis

    Jun 2 • Economic History, Environment, Financial Markets, Innovation • 320 Views

    I suspect that there is an inverse relationship between government’s ability to get regulation right and the length of the legislation. Glass-Steagall was 34 pages long. Recently proposed financial legislation is 3000 pages long.

    The need for appropriate regulation is where Harvard professor Richard Rogoff is heading when he compares the BP oil spill and the financial crisis. Both, he says were characterized by “the promise of innovation, unfathomable complexity, and lack of transparency.” Both also are connected to economic growth, economic catastrophe and the need for a global regulatory consensus. Quesioning whether a global financial consensus is feasible, IMF officials have said that individual nations are acting but the pieces don’t fit together. For offshore drilling, we can say the same when we consider the disparate incentives facing Brazil, the United States, and Nigeria.

    Professor Rogoff concludes his paper with, “This time we can ill afford to keep getting it wrong.” I wonder though, whether, faced with the allure of innovation and the challenge of such complexity, government can ever get it right.

    The Economic Lesson

    I recommend looking at: This Time Is Different by Richard Rogoff and Manics, Panics, and Crashes, A History of Financial Crises by Charles Kindleberger. Both present the facts. By looking at the past, you can best decide what is wisest for future regulatory policy.


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    A Sweet Free Trade Zone

    Jun 1 • Government, International Trade and Finance • 297 Views

    Economically speaking, Tootsie Rolls are special.

    In 2009, U.S. sugar beet prices (at 27.2 cents/lb.) were more than double the world price of cane sugar (13.8 cents/lb.)  Consequently, almost anything with sugar in it is more expensive. According to the Dallas Fed, because of the import barriers that protected the domestic sugar industry in 2002, a typical household paid $21 extra (close to $26 today because of inflation) for products that contain sugar.

    But not Tootsie Roll. With Free Trade Zone status bestowed upon them by the U.S. Congress, the sugar they use in their Chicago manufacturing plant is tariff free.

    The Economic Lesson

    It is tough to find an economist who does not like free trade. In his Teaching Company lecture on the global economy, Dr. Timothy Taylor introduces his discussion about the benefits of trade by telling us that we probably learned about the noodle from Marco Polo and have been sharing ideas ever since. Several hundred years later, in a California assembly plant, NPR’s This American Life described how Toyota taught General Motors about manufacturing cars more efficiently. Indeed, from noodles to cars, now and for hundreds of years, trade has enabled us to share ideas. Also, the specialization that trade facilitates creates more efficiency when we do what we do best. As a result, there seems to be a correlation between higher G.D.P.s and more trade.

    Those who are harmed by free trade are easy to identify. By contrast, it is tougher to support a “faceless” consumer who would save $26.00 a year. Perhaps, the invisible consumer is the reason that nations still try to erect trade barriers. A list of trade barriers would include tariffs, import quotas, licensing restrictions, antidumping laws, government subsidies, embargoes and quality control standards.

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