• everyday economics

    Our Weekly Roundup: From Prop 8 to Alexander Hamilton

    Jul 5 • Demand, Supply, and Markets, Thinking Economically • 189 Views

    An Econlife roundup for the week

    This week same-sex marriage and human capital, natural gas and opportunity cost were some of the ways we connected everyday life with economics.

     

    everyday economics and human capital06.30.14 The battle against Prop 8 was about more than validating same-sex marriage…more

     

    everyday economics and African development07.01.14 Looking at programs targeting extreme African poverty, we asked how to give people the boost they need to reach the first step of development…more

     

    everyday economics and the opportunity Cost of Natural Gas07.02.14 The fracking debate takes us to opportunity cost and the environment, the economy, and home-rule…more

     

    everyday economics and cranberries07.03.14 Not just sauce, juice, or sugary and dried, cranberries are a supply and demand story…more

     

    everyday economics and Alexander Hamilton's development plan7.04.14 Let’s celebrate economic independence and say thanks to Alexander Hamilton on Independence Day…more

    Our bottom line: Slicing away all of the complexities of economics, we wind up with ideas about production, distribution and tradeoffs that help us better understand our everyday lives.

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  • everyday economics and Alexander Hamilton's development program gave the US economic independence

    Celebrating Economic Independence

    Jul 4 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Financial Markets, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation • 154 Views

    Yes, the United States declared independence from Great Britain on July 4, 1776 and won the American Revolutionary War. But still, we were not truly independent.

    George Washington’s Secretary of the Treasury Alexander Hamilton knew that true independence required a vibrant economy. He had to diminish our huge debt, create a banking system, and diversify what we produced. To deal with so troubled an economy, Hamilton submitted a development plan to the Congress. In 3 separate reports, he explained how to establish public credit, create a national bank, and encourage manufactures.

    Public Credit

    • Countries need good public credit in order to borrow money at reasonable interest rates. Sort of like you and me, the only way to get good credit is having lenders know you will pay them back. With the US sovereign debt owed partially to Europeans who had funded the Revolutionary War, Hamilton had to reassure them that they would get all of the money that was due them. Domestic creditors also needed to hear that Hamilton had a viable plan. Only then could Hamilton establish the good credit that was necessary for sound finance. Since then, the U.S. has never defaulted on its sovereign debt.

    Banking

    • Composed of financial intermediaries that connect savers to borrowers, a banking system facilitates economic expansion. Banks loan money to business start-ups and help them finance inventory, banks purchase the bonds that nations sell to raise money, and banks expand the money supply. By establishing the First Bank of the United States, Hamilton generated the beginning of a banking system that continued to grow and support US economic independence.

    Diversified Production

    • Economic diversity was the third leg of Alexander Hamilton’s plan for economic independence. Recognizing that the US in 1790 was a farming economy, he sought to create a complementary manufacturing sector. Correct again, Hamilton knew that the combination of agriculture and manufacturing meant we would not have to rely on others for our necessities. Through tariffs that would protect infant industries in the US and incentives that would encourage their creation, he stimulated business people to diversify.

    Our bottom line? Isn’t it interesting that Hamilton’s goals–managing sovereign debt wisely, producing a vibrant banking system and encouraging productive diversity–remain leading economic issues?

     

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  • Supply and demand are lowering cranberry prices

    A Cranberry Blog

    Jul 3 • Businesses, Government, Innovation, Labor, Lifestyle, Regulation • 184 Views

    Yesterday morning, during my “rantum scoot” around a Nantucket cranberry bog, our group leader unknowingly presented a supply and demand story.

    This is the bog:

    Starting with some history, he said the island of Nantucket was ideally suited to growing cranberries because it had sand and water and the right climate. The problem was the price. Cranberry prices had sunk so low that the growers were making no money. With an increasing number of Canadian producers entering the market, last year’s inventory and this year’s bumper crop, supply was excessive. Whereas 5 years ago, producers had gotten almost $50 for a 100-pound barrel, now, some were receiving as little as $7.00. And, making the situation worse, as one cranberry processor explained, “”We’ve gone from sauce to juice to sweet-dried, but there’s no new use.”

    Whenever price cascades in commodity markets, there is a good chance that the market has the solution. With prices low and profits gone, some producers exit, the supply curve shifts upward and prices rise.

    Prices went down like this.

    Supply and demand price problems for cranberries

    Instead of waiting for the market to shift the supply curve back up, the growers in the US and cranberry producers like Canada agreed to production caps that would artificially lower supply and raise prices. Meanwhile, on the demand side, someone figured out how to achieve some product differentiation through new labeling that said “Nantucket Organic” for the cranberries they had always grown. The result? Health conscious consumers looking for a premium brand will increase their demand. And, instead of $7 a 100-pound barrel, for the “premium cranberries,” growers have begun to get $25.

    Our bottom line? We are really talking about how firms compete. In perfectly competitive markets, having little power, firms need to wait for supply to drop and/or demand to increase. Here though, government is adjusting supply and growers are stimulating more demand by giving their cranberries an individual identity. The move to a premium label (with no product change) nudged those cranberries into a monopolistically competitive market where the seller has a bit more pricing power.

    Another story for a future blog is how Ocean Spray, a cranberry cooperative has also elevated prices through more market control.

     

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  • The opportunity Cost of Natural Gas

    What is the Real Natural Gas Trade off?

    Jul 2 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Growth, Entertainment, Environment, Government, Regulation, Thinking Economically • 177 Views

    Our occasional Wednesday environment focus

    When you discuss natural gas, do you refer to the environment, the economy or the law?

    Just mention natural gas to some of my friends and they focus on the environment. Concerned about the impact of the process used to extract natural gas from shale, they say it should be banned. Otherwise, they expect local water supplies will be contaminated and greenhouse gas emissions will increase. More dependence on fossil fuels is what they want to avoid.

    I also know people who perceive the natural gas boom as an economic boost to an economy that is still emerging from a massive recession. Their focus is the natural gas that we use to heat and cool our homes and the steel, plastics and chemical plants that need natural gas. They see supply soaring, prices sliding, and natural gas tugging the price of all energy sources down. Furthermore, as a growing industry, they point out that natural gas is creating jobs and pockets of prosperity.

    You can see below that almost one-half of all US households use natural gas to heat a home.

    The opportunity cost using natural gas

    A third possible perspective was in the papers last night. Since 2008, New York State has imposed a temporary moratorium on natural gas drilling. Worried that the moratorium will be lifted, 177 municipalities in the state have expressed a NIMBY position while 77 of them enacted a permanent ban.  As a result, 2 of those municipalities landed in court when a driller and a local dairy farmer said the ban was illegal. Proclaiming that home-rule was fine, yesterday, the court disagreed. That means every community in NYS can decide if it will permit natural gas development.

    Our bottom line? Most of the discussion about natural gas extraction has focused on fracking and the  environment. To take the next step, we could use opportunity cost analysis. Using opportunity cost analysis, we would first identify the next best alternative that we sacrificed. Then, to see what would be gained and lost, we list the benefits of the decision and of the alternative.

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  • African Development is complex

    Seeing Why African Development Is So Tough To Get Started

    Jul 1 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic Thinkers, Education, Government, Health Care, Households, Labor, Lifestyle, Macroeconomic Measurement • 116 Views

    I just finished and do recommend The Idealist: Jeffrey Sachs and the Quest to End Poverty. Written by a Vanity Fair journalist, the book is a good read.

    On one level, The Idealist is about a dynamic economist who raised $120 million (and then more) for his Millennium Villages Project (MVP). His basic premise was that people in extreme poverty just needed a boost to reach the first step of an African development ladder. After reaching that first step they could take over the climb themselves. His $120 million could provide that boost in 12 African villages.

    More than a story, though, the book’s unresolvable dilemmas resounded. Seeing firsthand why it is so tough to eliminate extreme African poverty, you start pondering moral responsibility and methods. I particularly have been thinking about the bottom-up people and the top-downers.

    The bottom-uppers were not in the Sachs story. Instead, I discovered Ernesto Sirolli in a TED Radio Hour podcast during one of my walks. He starts his talk with a Zambian village. As a 21-year old aid worker, he introduced Italian seeds to a community in a fertile Zambian valley that had little agriculture. Teaching the locals how to grow tomatoes and zucchini, he was proud of the initial results. The tomatoes were as big as cantaloupes. But then, one night, 200 hippos came out of the river and ate everything. Hippos, the villagers explained, are why we have no agriculture. He inquired why they did not tell him. “You never asked,” they replied.

    Because of his Zambian experience, Sirolli says he became a listener who helps people find the resources they need. His development projects start in cafes and around kitchen tables. He avoids community meetings because entrepreneurs do not attend. Asking for the help they need, people use him as a “servant to their passions.”

    Sirolli describes his approach in a TED talk:

    The Jeffrey Sachs approach is somewhat different. He says he was aware of what people wanted and needed when he designed his Millennium Villages Project. Citing health care, education, water, power, roads, and market-oriented businesses, he identified an intervention network in which the components feed off each other. With enough money to create a development infrastructure, he believes he can not only jumpstart local wealth but also generate scalable achievements that will ripple across Africa.

    The Jeffrey Sachs approach is controversial.

    In The Idealist, Nina Munk uses 2 African communities to illustrate the foibles and glory of Sachs’s MVP. She documents its auspicious beginnings, the early successes and the subsequent difficulties. She conveys Sachs’s dynamic response to a moral obligation. She implies that everyone meant well but an approach that resembles charity cannot serve as a springboard to self-sufficient growth.

    In one hour-long Econtalk segment, Munk describes her visits to the MVP villages. She tells of villagers who are given high-yield seeds to plant but not the necessary storage facilities nor the roads that would facilitate mass marketing their bumper corn crop. She speaks of donated incubators that sit unused. She tells of pipes that are the wrong size.

    She also tells of the success of malaria fighting mosquito nets. But then she explains that other African communities without the MVP support have an equal or better record of using the nets. Yes, the malaria death rate is down but is the Sachs project the reason?

    And here is where Jeffrey Sachs enters the picture. In an Econtalk response to the Munk interview, he says the data still has to be gathered and reviewed. And, when asked about anti-malaria mosquito nets achieving even more success in non-MVP communities, he attributes the progress to scaling. His intervention spread. He planted seeds that will blossom far from their original roots. Asked if he is top down, he emphatically says no.

    Listening to Sachs, I would say he is bringing to Africa an infrastructure that people seem not to have specifically requested. He seems instead to believe rather convincingly that people need a foundation to lift them from devastating poverty. Never quite saying it, he also implies very persuasively that the world needs passionate people to lead us down the moral path. And he reminds us, accurately, that people’s lives in his MVP villages are better.

    The Munk book is excellent. The Sachs’ response is fascinating. Add to that the Sirolli video and you have a micro debate about solving extreme poverty.

    Our bottom line? Thinking of Sachs and Sirolli, perhaps we have a continuum between the top-downers and the bottom-uppers. But then, at each step along the scale, adding in the relevant cultural, political, social and financial issues, the complexities and dilemmas of sub-Saharan African development become ever more impenetrable.

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