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    A Reason for 23 Courses

    Mar 6 • Thinking Economically • 455 Views

    At one Chicago restaurant, Alinea, a serving of steak would weigh 2 ounces or so. 5 or 6 bites and you are finished. But then, you would still have 22 other courses to consume.

    Asked why he serves so small an amount, Chef Grant Achatz said, “Diminishing returns.” Given a 12-ounce steak, diners start enthusiastically downing the first bite and the second. Then though, enjoyment wanes until they are eating robotically. By preventing the onset of diminishing returns, Achatz enables his patrons consistently to savor every morsel.

    You might enjoy hearing Grant Achatz interviewed here by NPR’s Terry Gross.

    The Economic Lesson 

    Typically describing the limitations of mass production, diminishing returns refers to less extra output. For example, on one acre of land, if, one by one, you add farmers and shovels, at first your productivity will increase. Eventually though, because of crowding, extra output drops and then disappears.

    More broadly applied, diminishing returns can also refer to the extra pleasure we get from repeatedly performing an activity. For pizza or steak, we love those first few bites. The 37th bite, though, provides much less extra, if any, joy. Our total pleasure goes up by less and less as we eat more and more.

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    From China to Iowa

    Mar 5 • Demand, Supply, and Markets, Developing Economies, Environment, Money and Monetary Policy, Thinking Economically • 446 Views

    We can travel very quickly from China to Iowa.

    In an excellent report from The Economist on feeding the world, you can see how an increasingly affluent Chinese urban consumer affects many of us. One example connects more Chinese meat consumption to soaring prices for corn, wheat, and soybeans because of a growing demand for animal feed.  

    This takes us to Iowa where the price of farmland is skyrocketing. With escalating worldwide crop prices, low interest rates, diminishing lending standards, and investors who say the only direction is up, the price of Iowa farmland is nearing a 1979 high.

    Covering issues that range from population, technology and water to land and climate, the February 24th issue of The Economist ideally discusses “How Much is Enough?” It also returns us to the Reverend Malthus who might be saying, “I share your concern.”

    The Economic Lesson

    Perhaps one of the first environmentalists, Reverend Thomas Malthus (1766-1834) told us in 1798 that population grows geometrically while resource production expands arithmetically. Consequently, resource prices will rise and supply will become increasingly inadequate.


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    Oil Dilemmas

    Mar 4 • Demand, Supply, and Markets, Environment, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 487 Views

    The good news? We are driving more again–more miles than any year since 2007.

    The bad news? We are driving more again–more miles than any year since 2007..

    Here are the facts from a WSJ article.

    With the recession and higher gas prices, mileage dropped by 3.6%.

    But then, the recovery began, unemployment slightly decreased, and confidence built. The result? We drove more. More driving means more demand for gasoline that will contribute to escalating gas prices.

    The solution? 3 possibilities.

    1. Increase the federal gasoline tax. It has been 18.4 cents since 1993. A higher tax means less driving and less dependence on Middle East oil.

    2. Release extra oil from U.S. emergency fuel reserves. Extra oil means cheaper gas, more driving and sustained recovery.

    3. Do nothing.

    The Economic Lesson

    This is classic demand and supply. During 2007-2008, skyrocketing gas prices decreased quantity demanded, the recession (that began during December, 2007) shifted the demand curve to the left and equilibrium price dropped. Now, with demand reversing and Middle East concerns affecting (perceptions of) supply, the equilibrium gas price is rising.

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    What is Best For Growth?

    Mar 3 • Businesses, Economic Debates, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 391 Views

    What if the Congress decides to slash spending by $60 billion right now? Prominent economists are again disagreeing.

    According to Stanford economist John Taylor, we would have a resurgence of business confidence, renewed investment spending and new jobs. Assured that taxes and regulation will not increase, businesses will expand.

    On the other hand, economist Mark Zandi (Moody’s Analytics) says that we will lose 700,000 jobs because of spending cuts. He is against “too much too soon.” Referring to “fiscal drag,” economist Alec Phillips (Goldman Sachs) cites the rippling impact of less federal spending that will retard GDP growth.

    Who is right?

    The Economic Lesson

    Looking back and looking forward, the economic debate about fiscal policy is a traditional one. Looking back at stimulus spending since 2008, opponents point out that the stimulus will not only ignite inflation but also was not really necessary. Meanwhile, advocates say we are much better off because of it. Looking forward they differ on how businesses and unemployment will respond.

    Also, we should not forget about monetary policy. A similar debate surrounds Dr. Bernanke’s QE2.

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    Mar 2 • Economic Debates, Environment, Government, Regulation, Thinking Economically • 667 Views

    What if someone had invented “smog-eating” concrete roof tiles? And, what if these tiles consumed enough smog to offset one car’s nitrous oxide emissions during one year (10,800 miles of driving)?

    Telling us that a firm in California has them for sale, Harvard professor Greg Mankiw asks, “What should government policy be regarding these roof tiles?” Similarly, do you believe that government should mandate posting calorie counts in restaurants? Or subsidizing ethanol? Hybrid cars? Broccoli consumption? (so that medical care is cheaper) Mowing the lawn? (because, with house sales plunging, a nicer neighborhood could attract buyers)

    The Economic Lesson

    In his 1759 book, The Theory of Moral Sentiments, Adam Smith (1723-1790) tried to identify the origins of a just and virtuous society. Concluding that no one is wise enough to know what is best for most, he recommended less government for all.

    And yet, through tax and regulatory policy, should government encourage positive externalities–transactions between two parties that affect a third individual or group in some beneficial way?

    Your opinion?

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