• Because of less supply and more demand, lemon prices are soaring.

    Are We Getting Squeezed by Lemon Growers?

    Sep 25 • Businesses, Demand, Supply, and Markets, Economic History, Economic Thinkers, Households, Thinking Economically • 158 Views

    Recently, my lemons have been less juicy and more expensive. The reason is a classic supply and demand story.

    The Lemon Story

    On the supply side, we can focus on California. The source of 92% of the lemons grown in the U.S., California has had drought problems and a freeze that struck some lemon growers during December and January. As a result, production dipped 8.8%.

    Meanwhile, demand has soared. Think lemon soda, citrus salad dressing, lemony sauces and lemon dishwashing liquid. Always, lemons are more popular during the summer but now, consumers, beverage makers and restaurants all say people are clamoring for lemons. At the same time, tripling lime prices created a switch to lemons.

    We could say the result has been a zesty lemon rally. Currently averaging $34.20 a box, lemon prices are 80% higher than last year. Restaurants report paying $50 for a case of 165 lemons, up from $30 or $35 a year ago. Correspondingly, the retail price of lemons has reached its highest since 1980, up 36% to $2.33 a pound in August.

    Three years of lemon supply and demand history:

    Supply and demand boost lemon prices

    From: USDA

    With supply decreasing and demand up (below), you can see why lemon growers are smiling.

    Supply and demand increase lemon prices.

    Our Bottom Line: The Invisible Hand

    When Adam Smith explained how consumers and businesses interact in his Wealth of Nations (1776), he transformed a seemingly chaotic market into an orderly process. First, as with the lemon market, when supply decreases and demand goes up, prices rise. Then though, nudged by an invisible hand, businesses decide to produce more while consumers are willing and able to buy less. With only the invisible hand influencing how consumers and producers behave, the market adjusts.

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  • Everyday Economics of the iPhone 6 supply chain

    What Do iPhones & Pencils Have in Common?

    Sep 24 • Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, Innovation, International Trade and Finance, Labor, Tech • 268 Views

    In a 1958 essay, a pencil says to us, “Pick me up and look me over. What do you see? Not much meets the eye–there’s some wood, lacquer, the printed labeling, a graphite lead, a bit of metal, and an eraser…”

    Continuing, though, we learn a pencil is not as simple as it first appears. Made from trees in California and Oregon, it requires trucks, saws, rope, logging camps and coffee. Some millwork is next where the logs are cut into “pencil-length slats” and tinted. In a pencil factory, the slats receive graphite “lead” from Ceylon (now Sri Lanka) that was mixed with clay from Mississippi, some brass made of zinc and copper and rubber-like erasers from Malaysia.

    What are we really talking about? Global supply chain links.

    The iPhone 6 Supply Chain

    Composed of design and development, sourcing, manufacture, warehousing and a distribution infrastructure, the iPhone 6 supply chain links people around the world.

    By showing all of the countries that play a role in the creation of the iPhone 6, this section of an awesome infographic only begins to convey mind-boggling worldwide cooperation.

    Globalization and the iPhone 6 supply chain

     

    You can see below that China and the U.S, at 349 and 60, respectively, have the most suppliers.

    iPhone 6 Suppliers:

    The iPhone 6 supply chain

    But, naming countries separately obscures what really happens. A company based in South Korea or Japan or Taiwan, for example, outsources to lower cost facilities, perhaps in Malaysia or Thailand. And then, they send components that range from antenna switches to SDRAM memory mostly to China and some to Brazil.

    In China, two firms have contracted to complete 50 million iPhone 6s by the end of 2014:

    Apple iPhone 6 Chinese supply chain  links

    And, we have not even mentioned some of the minerals that are shown in the following section from another amazing infographic called “The Periodic Table of iPhones.”

    Globalization and the iPhone's minerals

    Our Bottom Line and the Price System

    As a final step, we should ask why so many people around the world cooperate to make a pencil and an iPhone. Answering our question, Nobel Laureate Milton Friedman (1912-2006) said, “the price system.” Prices are the incentives that encourage us to form the worldwide supply chains that compose globalization.

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  • Phasing out the penny from the money supply

    My Two Cents About Pennies

    Sep 23 • Behavioral Economics, Businesses, Economic Debates, Economic History, Financial Markets, Government • 136 Views

    Several years ago, Starbucks infuriated its NYC customers when a price hike plus tax meant a tall coffee would be $2.01. The new price was not the problem. It was the penny.

    Worth little, pennies are coins that we avoid carrying — and when we do carry them, we lose them. We even pay Coinstar 10.9 cents for every dollar of pennies we exchange in their machines and we do not think twice when we “Give a penny; take a penny” at store counters. I guess it makes sense that since 2000, close to one fifth of all pennies have disappeared.

    The Cost of the Penny

    For the country, though, pennies are expensive. Since they are 97.5% zinc, soaring zinc prices have pushed penny costs skyward. In 2013, totaling $114 million, penny production at the U.S. mint required 1.8 cents per penny. However, when the government sells the pennies they circulate, they can only charge — yes… a penny. So they are losing money. (However, we cannot make money by selling the zinc in pennies because meltdowns are illegal.)

    As a part of the U.S. money supply, the penny remains.

    Because of their low status and high expense, why not have a penny phase-out? After all, Canada, New Zealand and Australia have stopped producing them. And, like for gasoline, if we did not have pennies, we could round up. (Find out more about rounding gas prices here.)

    But, for some reason, the resistance is considerable. Perhaps the penny occupies a special place in our hearts. We say, “A penny for your thoughts,” and “Penny wise; pound foolish,” and “A penny saved is a penny earned.” Businesses that are set up to count coins would have logistical headaches and less demand. And, as you would expect, the resistance from the zinc lobby is huge.

    Our Bottom Line: The Money Supply

    In addition to different kinds of bank deposits, coin and currency compose a part of our money supply. To be considered money, a commodity has to be a unit of value (we know what it’s worth), a store of value (it retains spending power for a relatively long time) and a unit of exchange (people accept it as payment). Tobacco leaves, seashells and rectangles of paper have been called money.

    Because of our dismissive attitude toward the penny, I wonder if it will eventually no longer be defined as money.

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  • Everyday Economics and baby boomer productivity

    Why Baby Boomers Will Pull Productivity Down

    Sep 22 • Behavioral Economics, Businesses, Economic Growth, Government, Health Care, Households, Innovation, Labor, Lifestyle, Macroeconomic Measurement, Thinking Economically • 143 Views

    1999 might have been Derek Jeter’s best season. Twenty-five years old, he had 219 hits, 24 home runs and 102 RBIs. His batting average was .349.

    You can see below that .349 was Derek Jeter’s career high with the Yankees.

    Derek Jeter's batting productivity

    The most valuable baseball players (although Jeter was never an MVP) are typically younger than 30 and rarely over 35. Office workers and salespeople tend to be most productive in their early to mid-40s. Most Nobel prize winners in physics and chemistry did their innovative work before they were 50. Academic studies even imply that businesses with younger workers have a higher return on their assets.

    Where are we going? Wake Forest professor Robert Whaples tells us that we have more to worry about than soaring health care spending and Social Security programs. An aging population could diminish innovation.

    A Less Productive Population

    And that takes us to the 75 million baby boomers who buoyed home ownership, consumer spending and the size of the labor force. Now though, with the youngest baby boomers at 68 years old, approximately 10,000 Americans are retiring each day. As you might expect, retirees spend less than when they were younger and depend more on their children and government. While they boosted labor force participation rates to new highs during the 1990s, their departure from active employment is having a reverse impact.

    You can see baby boomers (born 1946-mid-1964) moving up the population pyramid:

    Moving up the population pyramid, typical baby boomers become less innovative and retard productivity growth.

    From: “The Baby Boom Cohort in the United States: 2012-2060″

    Baby boomers will balloon the number of people who depend on current workers. Called the dependency ratio, it just refers to the retirees who will depend on current workers’ tax dollars for their Medicare, Medicaid and Social Security checks. Returning to Dr. Whaples point, we will also have a smaller proportion of our population who are most creative.

    Aging baby boomer diminish U.S. productivity

    Our Bottom Line and Economic Growth

    Economic growth will be constrained if an older population means a less creative population. There is some good news, though — at least temporarily. Since the millennials (born 1981-1996) have surpassed the baby boomers as the largest population cohort, by 2030, they will have inflated the labor force enough to compensate for their boomer parents’ innovative decline. But then these “echo boomers” will start to retire and the whole cycle again becomes alarming.

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  • Everyday economics for government pension plan

    The Facts Behind the Gender Pay Gap

    Sep 21 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Gender Issues, Government, Health Care, Households, Labor, Macroeconomic Measurement, Thinking Economically • 182 Views

    The U.S. Census Bureau just published new gender pay gap data. But first, for some insight, let’s look at the Khasi.

    The Khasi

    Located in Northeast India, the Khasi is a matrilineal society numbering close to 1 million (2011). From birth, women experience a female world. Their households are led by females, businesses are run by women, property can be inherited only by women. When University of Chicago researchers quantified male and female tendencies to compete, the Khasi women got the top grades.

    In a Khasi maternity ward, you might hear cheering when a girl is born and, “‘oh okay, he’ll do” for a boy.

    Or, if you visit a Khasi home…

    “When we visited the Khasi household of a youngest daughter, if a man (obviously the husband) came first to greet us, he always said ‘please wait, my wife (or mother-in-law) is coming.’ And it was the wife who entertained us…while her husband remained in the corner of the room, or in the next room.”

    The U.S. Gender Pay Gap

    Still close to a 78% average, the U.S. gender pay gap is not quite as wide as it first appears. But 78% does mean that a woman with median earnings has to work three more months than a man to have the same yearly pay.

    Gender Pay Gap census report 2014

    However, a 78% ratio could be misleading because of the baby boomers. With a disproportionately high number of baby boomer ladies and the pay gap widening with age, the oldest female boomers skew the statistic.

    The picture also changes when we remember that women work fewer hours than men.

    The gender pay gap and number of hours worked

     

    Consequently, although aggregate wages differ, on an hourly basis of 16 cents for every dollar (from Pew, below), the gap shrinks. And, it gets even smaller when we look at hourly wages for women and men with similar characteristics. Then, the gap is close to five cents (2010 data) for every dollar.

    Gender Pay Gap narrows on hourly basis.

    Another consideration is the pay package. Because women tend to accept less pay in exchange for family friendly fringes like paid sick leave when caring for children, their wage may be less than a male counterpart’s but not their whole pay package. In one study, economists estimated the gap was close to 3.6 cents after including benefits.

    Also, we should consider the payoff from college majors. Among the top ten such as petroleum, aerospace and mechanical engineering, men dominate in nine. Perhaps predictably, those that yield the lower pay, including social work and early childhood education, are primarily populated by women.

    And, we could look at state-by state differences and have to be aware of the years and the age groups to which the data apply. So, you can see that we are having a Benoit Mandelbrot moment. As the fractal mathematician said when looking at the British coastline, the closer you look, the more detail you see.

    The Bottom Line and the Khasi

    But, ending where we began, the Khasi take me to a constant. Although we can attribute a gender pay gap to the law or the workplace or college, I suspect we are really talking about changing an attitude that starts with the family. Even for the millennials who seem to be closing the gap, Pew points out that fathers are one-third as likely as mothers to say that being a parent has harmed their chances for advancement.

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