• Is Law School A Good Investment?

    Feb 18 • Thinking Economically • 316 Views

    Looking at a paper by law school professor Herwig Schlunk reminded me that attending law school is similar to inventing a new machine. Both require an initial investment, both take several years to complete, and both will generate a private and social return. Also, they both result in capital creation.

    Dr. Schlunk’s paper focused on three hypothetical law students: Also Ran, Solid Performer, and Hot Prospect. Looking at ROI (return on investment) with opportunity cost, borrowing costs, and future income as important considerations for each prototype, the professor concluded that law school for most might not be a wise investment.

    Wearing economic lenses, Dr. Schlunk sees evidence of costs all students applying to all schools might consider.

    The Economic Life
    Rather like a recipe, land, labor and capital are the ingredients we use to make all of our goods and services. While all three are important, capital plays a special role. In his recent book, The Wealth and Poverty of Nations, Harvard professor David Landes explained why certain nations have experienced an increasingly better standard of living while others have stagnated. Looking at the variables he cites, physical capital which includes tools and machines, and human capital which involves education, entrepreneurship, and health, are most crucial for economic growth. Physical and human capital provide the highest ROIs.

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  • The Impact of the Vammas

    Feb 17 • Thinking Economically • 235 Views

    What is 68 feet long, has a giant blade in front for plowing, massive sweeper brushes in the middle, and a 452 MPH wind blowing capacity in the rear?

    A Vammas.

    Imported from Finland, the Vammas is used by Logan Airport for snow removal. A caravan of ten Vammas can clear a snow covered runway in as little as ten minutes (depending on the snow).

    Wearing your economic lenses, you could see that the Vammas generates a private and a social return. The positive social return of snow removal is considerable. However, is there also a negative side?

    The Economic Life
    The private rate of return–the net amount a business gets from an investment–tends to vary considerably and can ultimately be nonexistent because of competition. Moving beyond its origin, as the impact of the innovation ripples through society positively and negatively, it creates a social return. Both are tough to calculate. Edwin Mansfield, a University of Pennsylvania economist (1930-1997) who studied the impact of innovation concluded that smaller innovations such as new industrial thread had a much greater social rate of return than products and processes that sound more dramatic.

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  • The Ethical Economy

    Feb 16 • Thinking Economically • 237 Views

    During a recent discussion at Trinity Church (near the NYSE) Susan Lee, an economist, and The Archbishop of Canterbury spoke. Both sought a better society. Both wanted a wealthier society. Then though, they diverged.

    Summing up each one’s perspective, Dr. Lee said that, “Economists are interested in how to make the pie larger. Theologians are interested in how to divide the pie…”
    (In his grave nearby, Alexander Hamilton surely had an opinion.)

    The Economic Life
    Our dilemma as a society is locating the most ethical point on a continuum of wealth redistribution. On this continuum, imagine no redistribution on the right and total sharing of that a person earns on the left. At the beginning of the 20th century, we could say that we were at the right end. Then, with the passage of social security in 1935 and Medicare in 1965, we moved leftward. Now, should we move left or right?

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  • A Fourth Monetary Policy Tool

    Feb 15 • Thinking Economically • 375 Views

    The chasm between economics textbooks and real life has grown larger. It is just tough to keep up.

    Looking at monetary policy, the most typical tool used by the Federal Reserve takes students so very logically to the Federal Open Market Committee (FOMC). If the FOMC sells securities, they will sink the economy; buying securities buoys the economy. Easy to remember: sell/sink; buy/buoy.

    How? When securities are bought, the Fed injects money into the banking system. The Fed gets the securities and the bank gets the money. The result? More excess reserves, more to lend, lower interest rates. For selling securities, the opposite happens. The banks get the securities and the Fed gets the money. Then, banks have less to lend and theoretically, interest rates rise.

    Now though, concerned about avoiding inflation but continuing the recovery, Dr. Bernanke says that the Fed will take advantage of a new tool. During October, 2008, the Congress empowered the Fed to pay banks interest on reserves the banks are required to leave with the Fed. Consequently, banks could find it beneficial to hold on to reserves rather than lending them. The result? Fewer dollars chasing goods and restraining inflation.

    The Economic Life
    Created in 1913, the Federal Reserve is an independent government agency. In charge of monetary policy, traditionally, the Fed has overseen the supply of money and credit in the economy in three basic ways:
    1) Discount Rate: by raising or lowering the interest rate it charges banks when they borrow money from it.
    2) Open Market Operations: by buying and selling government securities the Fed targets the federal funds rate (the rate banks charge each other)
    3) Reserve Requirement: by changing the amount that banks are required to keep in reserve

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    Recycling Garbage

    Feb 14 • Thinking Economically • 302 Views

    A recent article in SF Gate focused on Berkeley’s garbage problems. Because of Berkeley’s commitment to recycling, the revenue it receives from garbage collection has dropped precitously. Less garbage means more job and service cuts.
    If people everywhere are recycling and composting, and if cities like Washington, D.C. are charging bag taxes, what is the cost? How are time, money, and jobs affected? Berkeley’s recylers take us to a much larger issue. They return us to opportunity cost and free lunches.

    The Economic Life
    Any decision we make has an opportunity cost. Any time we decide to do one thing, we sacrifice the next desirable alternative.

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