• The econlife.com Weekly Roundup

    Weekly Roundup: From Fed Humor to the Wisdom of Warren Buffett

    Mar 7 • Behavioral Economics, Developing Economies, Economic Humor, Economic Thinkers, Financial Markets, Innovation, Money and Monetary Policy, Tech, Thinking Economically • 112 Views

    Our Posts Roundup

    Everyday Economic and Warren Buffett's ideas Sunday 3.01.15

    Handy notes from Warren Buffett…more

    Everyday economics and Tax evasion in the shadow economy is a fiscal policy problem. Monday 3.02.15

    The basics of Greek tax evasion…more

    everyday economics and airline boarding Tuesday 3.03.15

    Insight about airline queues...more

    everyday economics and federal farm subsidies Wednesday 3.04.15

    Why we subsidize Brazilian farmers…more

    everyday economics and the significance of an ATM Thursday 3.05.15

    What an ATM can teach us…more

     

    everyday economics and Fed humor

    Friday 3.06.15

    Why a Fed joke is about more than humor…more

     

    Ideas Roundup

    • stock markets
    • probability neglect
    • developing nations
    • taxation, eurozone
    • negative externalities
    • shadow economy
    • productivity
    • marginal analysis
    • profits
    • competitive strategies
    • subsidies
    • crop insurance
    • financial intermediaries
    • creative destruction
    • automation
    • monetary policy
    • bubbles
    • recession

     

     

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  • everyday economics and Fed humor

    Some Federal Reserve (Gallows) Humor

    Mar 6 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Economic Growth, Economic History, Economic Humor, Economic Thinkers, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 141 Views

    We just found out what the Fed said.

    In 1800 pages of transcripts from 11 policy-making FOMC (Federal Open Market Committee) meetings and conference calls during 2009, the Fed debated how to manage the money and credit supply of a very troubled economy. Their deliberations included 303 moments of laughter (which we know because “laughter” was parenthetically noted after each one). Some of those lighter moments were reminders of the state of the economy only six years ago,

    Federal Reserve FOMC 2009

    The Economy

    Janet Yellen (current Fed Chair):

    • “Things are now so bad that I actually open the Greenbook with greater trepidation than my own 401K.” (The Greenbook is composed of Fed briefing documents.)
    • “Another disturbing sign of how tough things are is that people appear to be breaking into their piggy banks to make ends meet. The Cash Product Office reports huge increases in the amount of coins being brought into our inventory.”

    Job Losses in 2009

    Only during the Great Depression had the economy lost more jobs than during 2009.

    2009 job losses

    Ben Bernanke and a staff member:

    • “Let me turn now to the economic situation. Boy, I think it has been a while since we were three and a half hours into the meeting before we got to the staff forecast.”
    • “The GDP got a little smaller than it was at the start of the meeting.”

    The GDP in 2009:

    With the recession extending from December 2007 to June 2009, the FOMC had to cope with every U.S. region contracting.

    Federal Reserve Humor reflecting GDP contraction

    Housing Markets

    Elizabeth Duke (Fed Board member):

    “Before I move to asset purchases, I’d like to start with the story of an elderly wealthy gentleman who had taken a young bride and begun to spend money like crazy. His friends got very concerned that he was going to go through his entire fortune, and they elected one of their number to go and talk to him about it. He said, ‘Sam, We’re really concerned. We want to make sure that you know you can’t buy love.’ Sam said: ‘I know you can’t buy love, but if you spend enough money you can buy something that looks so close you can hardly tell the difference.'”

    “So I think if we spent enough money, got enough of a hit right now, it would look like a floor on house prices, and we might have something every bit as good as a floor on house prices…”

    Housing in 2009:

    Federal Reserve humor reflects housing market

    Financial Markets

    Ben Bernanke:

    Nominating Ben Bernanke as the Chair of the FOMC (which the Fed Chair always leads), Donald Kohn (Fed Vice-Chair 2006-2010) wonders if the appointment could be retribution:

    • “Mr. Chairman, it is a pleasure and an honor to recommend Ben Bernanke to be chairman of this committee. I am not sure what sins you committed in an earlier life, but I sure hope you had fun.”

    Wall Street in 2009:

    You can see the plunge in the Dow as the 2009 FOMC meetings unfolded:

    Federal Reserve humor reflected the Dow's plunge.

     

    More specifically, do look at price of Lehman Brothers stock (orange line) at the end of 2008.

    Federal Reserve Great Recession stock prices

     

    Our Bottom Line: Interest Rates

    When economic activity slows, the Fed digs into its tool box and uses a lower discount rate and securities purchases to increase bank loans.

    As in the above graphs, do look below at 2009.

    History of the Fed Funds Rate

    You can see why the press called the Fed’s lighter moments “gallows humor.”

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  • everyday economics and the significance of an ATM

    How an ATM is More Than a Money Machine

    Mar 5 • Businesses, Demand, Supply, and Markets, Economic Growth, Economic History, Financial Markets, Innovation, Labor, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 143 Views

    The year was 1969 and the place, a Chemical Bank in Rockville Center NY. As Wired explained, only six weeks after taking our first big leap for mankind on the moon, we took a second step with the first ATM. Called the Docuteller, the machine was the first to work with a reusable magnetically coded card.

    Fast forward to 2015. Walking into a new Chase branch near my home, I was greeted by a bank rep who took me straight to a freestanding circular express banking kiosk in the center of the room. No longer was the only ATM in the parking lot or near the front door. A kiosk of ATMs was supposed to offer the up-to-date banking experience.

    So, more ATMs and fewer tellers. Yes?

    Not necessarily.

    Where are we going? To how new technologies can affect jobs.

    ATMs and Bank Tellers

    I know that it sounds counterintuitive but the ATM increased the number of bank tellers. Between 1985 and 2002, the number of ATMs had grown from 60,000 to 352,000. Meanwhile, up from 500,000 to 527,000, we also had more bank tellers.

    Comparing ATM installations and bank teller numbers, you can see below that both increased.

    Creative destruction and ATMs

    From: “Toil and Technology”

     

    What happened? Because ATMs lowered the cost of operating bank branches, more opened up. So, though you needed fewer tellers per branch, there were lots more branches. Correspondingly, now that the number of bank branches has dipped to a ten year low, we have fewer tellers. However–and this may be the key–their job description is changing. Banks need people to sell new and traditional high margin financial products.

    Banks also need people to manufacture and maintain their ATMs. In 2013 the BLS says there were 110,850  “computer automated teller and office machine repairers.” (They have some great maps showing where you can find them.)

    Our Bottom Line: Creative Destruction

    As you can see below, new machines can create new jobs.

    Creative destruction and job creation

    From: “Toil and Technology”

     

    They can also remind us of Joseph Schumpeter (1883-1950).

    An academic superstar, an Austrian finance minister, and a Harvard professor, economist Joseph Schumpeter once proclaimed that he aspired to become the world’s greatest economist, horseman and lover. His biographer said he then said, “Things are not going well with the horses.”

    In 1883, Joseph Schumpeter was born in Austria. After working in government, business and academia, he went to Harvard in 1932–a perfectly timed departure from Europe. Explaining the evolution of capitalism, he attributed its growth to entrepreneurs and its eventual demise to the resentment that would build against its elite.

    Schumpeter tells us that entrepreneurs are the source of “creative destruction” because their businesses render others obsolete. With their new products and processes, entrepreneurs create jobs, progress and productivity. They change consumer habits, develop new means of production and new forms of economic organization.

    Beyond bank tellers, ATMs transformed the character of banking. We will save that story for another day.

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  • everyday economics and federal farm subsidies

    A Surprise in the Federal Budget

    Mar 4 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Economic Thinkers, Government, International Trade and Finance, Labor, Regulation, Thinking Economically • 100 Views

    As a movie and TV series, Naked City always ended with “There are eight million stories in the Naked City. This has been one of them.”

    So too for the federal budget.

    The Brazil Cotton Story

    This is a story we have already looked at and now have more to tell.

    We can start with the $147.3 million a year that the U.S. had been giving to Brazilian cotton growers. We were sending close to $12 million a month because Brazilian farmers protested that the subsidies US cotton farmers received were depressing the world price and givng U.S. growers an unfair advantage.

    In 2009, the World Trade Organization (WTO) agreed and told the U.S. to stop. Worried about retaliation that would compromise their business in Brazil, the US pharmaceuticals, movies and music industries entered the battle. To make everyone happy, instead of eliminating payments to U.S. farmers, Congress decided to pay the Brazilians subsidies also.

    Now, with a new Farm Bill that President Obama signed during February 2014, the domestic U.S. cotton subsidies that the WTO opposed were (sort of) eliminated. Instead of direct payments that farmers are paid whether they plant or not, they can get crop insurance. Like tradiitonal insurance, you hedge against risk. If cotton prices are too low, insurance kicks in.

    The big question was whether Brazil would say that the new crop insurance plans and other subsidy substitutes were simply subsidies with a different name. Rather than give a definitive answer, Brazil said to give them another $300 million. In return, they would drop the case. The WTO said okay.

    More technically, the WTO says on its web site…On 16 October 2014, Brazil and the United States notified the DSB that, in accordance with Article 3.6 of the DSU, they had concluded a Memorandum of Understanding, and agreed that this dispute was terminated.

    You can see below how the Brazil cotton story fits into the context of a massive Farm Bill.

    The 2014 Farm Bill

    Renewed approximately every five years, the Farm Bill is a gargantuan piece of legislation. Making the $300 million final payment an acceptable resolution, its insurance coverage for cotton farmers eliminated explicit direct payments.

    In this chart, the Congressional Research Service summarized the 2014 Farm Bill. The cotton insurance provisions are a part of the blue slice of the spending pie.

    An example of fiscal policy, the 2014 Farm Bill includes insurance replacing subsidies for cotton farmers.

    Our Bottom Line: Subsidies

    Decreasing the cost of production, subsidies shift the supply curve to the right. Because price decreases domestically, it pulls down the world price of the commodity. As a result, farmers around the world get less for that crop.

    Impact of cotton subsidies on price

     

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  • everyday economics and airline boarding

    Why It Takes So Long to Board an Airplane

    Mar 3 • Behavioral Economics, Businesses, Innovation, Labor, Lifestyle, Thinking Economically • 180 Views

    The airline seat you choose can make a difference.

    Productivity and airline seating

    But it all depends on how the airline boards everyone.

    Boarding Strategies

    Curious about which strategy was fastest, Mythbusters recreated the boarding experience. Using 173 volunteers, real flight attendants and a simulated airport waiting area and airplane interior, they timed different possibilities.

    As you can see in their video (below), the back to front method that American Airlines, JetBlue, Spirit, Air Canada, Frontier and Virgin America all use is the slowest. With back to front, the aisle clogs because people in the middle seats are always getting up for the person near the window. Meanwhile, waiting and looking for overhead bin space means we stay in the aisle longer.

    From slowest to fastest, the next best alternatives are random line-up with assigned seats, then outside-in with all window seats going first and then finally, entirely random order and no assigned seats. Used by Southwest, entirely random works because any slowdown creates the incentive for people to quickly take the most accessible seat. And yet, the Southwest method is one of the least liked.

    Although it is close to half the back-to-front time, outside-inside (aka WILMA–window/middle/aisle) is only used by United.

    Plane productivity boarding times

     

    And, according to Boeing, between 1968 and 1998, the “flow rate” slowed from 20 passengers a minute to 9.

    Our Bottom Line: Airline Productivity

    We might think that faster turnaround time means more for the airlines’ bottom line. Not necessarily. Yes, faster boarding saves money. But perhaps those priority boarding fees are one reason that it takes so long to board.

    Boeing had this turnaround task chart that was interesting:

    Airline turnaround productivity

    From: Boeing Aero Magazine

     

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