Should we like a higher minimum wage? With the release of 9.6% as the August, 2010 unemployment number, I thought about the minimum wage debate. The teenage unemployment rate is 26.3%.

In 2007, Congress increased a $5.15 minimum wage in three stages. On July 24, 2009, the final 11% raise, from $6.55 to $7.25 was implemented in the 31 states with a lower minimum wage.

If you owned a fast food restaurant and were told that you had to pay workers a higher minimum wage of $7.25 an hour, what would you do? Give everyone raises and pay the increased hourly rate to new hires?  Only give raises to current employees but decide not to do the hiring it had planned? Terminate certain positions? Other alternatives? You might want to look at a good discussion here.

The Economic Lesson

Originating in Australia and New Zealand during the 1890s, minimum wage legislation was first passed federally (it had existed in individual states) in the U.S. through the 1938 Fair Labor Standards Act. Believing that employers were paying "substandard wages" and perpetuating sweatshops, Congress sought to ensure a "fair wage". Their rationale was the need to tilt the balance of power toward workers.

Graphically, economists illustrate the minimum wage through a "floor". Please imagine for a moment a supply and demand graph. Price is the y-axis and quantity is the x-axis. Thinking of wages, the supply curve represents labor and the demand curve is the business side of the market. The point at which demand and supply meet, called equilibrium, is the wage (the price of labor) determined by the market.

Government, however, can say that it believes the market determined wage is too low. It then mandates a higher wage that can be depicted as a horizontal line placed above equilibrium. Economists call this horizontal line a "floor" because it stops wages from moving lower to their natural market price. 

And therein lies the dilemma. A higher wage or more jobs? Floors create surpluses. At the new, higher wage, the number of jobs laborers want is more than the number of jobs businesses are willing and able to offer. So, we have a higher wage but fewer jobs. Perhaps 26.3% fewer jobs for teenagers and other unskilled workers?

Which women earn more than men?

If you are female, in your 20s, childless, unmarrried, live in a city, and a college graduate, there is a good chance that you earn more than a man in your peer group. You also represent a major change in what women earn. For decades (and before), the average working woman in the U.S. has earned less than the average working man--recently, close to 20% less.

Now, according the the Census Bureau, young women are pulling ahead because of the structural shift in the economy. A knowledge based economy with less manufacturing fuels female earnings. Also, because female minorities are more likely to attend college than their male counterparts, they earn more.

20 years from now, what will we see because of this earnings shift? Your comments?

The Economic Lesson

According to Harvard economist Claudia Goldin, the gender gap refers to labor market differences between men and women that relate to types of occupations, pay, and participation rates.

Are fashion copycats good or bad for the industry? N.Y. Senator Charles Schumer says, "Bad" and is proposing legislation that would provide a 3 year period during which, with certain exceptions, knock-offs would represent copyright infringement. Others, though, say that fashion copies are beneficial as a source of trends and innovation.

The issue of copyright protection for fashion is a part of a much bigger debate. Do you believe, for example, that Amazon should have an exclusive, government protected right to "one-click shopping"?

The Economic Lesson

When Alexander Hamilton was concerned with protecting infant industries in a very young United States, he and James Madison supported a patent system that served a specific economic purpose. By contrast, Thomas Jefferson, himself a inventor, said that Congress should not "meddle" with "matters of invention".

Recently, Denmark decided that 4 years of unemployment benefits were too long. Shrinking their duration to 2 years, they said that 1) the longer people are out of a job, the harder it is to find one and 2) too many people wait for benefits to expire before they decide to work again.

Does Denmark's decision relate to the U.S.? According to Harvard economist, Robert Barro "Yes." Responding to Congress's recent extension of unemployment benefits to 99 weeks, he says that the U.S. would have lower unemployment if benefits are not extended. By contrast, presenting "a chart that screams 'Extend Unemployment Benefits,'" Berkeley economist Brad DeLong disagrees.

The Economic Lesson

A slate journalist says that the unemployment benefits debate is actually between those who believe unemployment is primarily cyclical and those who say it is structural.

The cyclical advocates say that the current econmic contraction is the source of the high unemployment numbers. Consequently, more government spending would be appropriate.

By contrast, structural unemployment refers to a permanent shift in economic production. For example, when we moved from typewriters to computers, we had a structural shift which temporarily created a mismatch between skills and new jobs. Structural believers do not believe that government necessarily has the answer through its current recession response.

Let's assume you would like to sell your house. According to Wired journalist Jonah Lehrer, the price you select might not be optimal. Why? Because we like to avoid losing money. (Of course, you might say, that is obvious. But an economist would suggest that a rational person would grasp the reality of the current housing market.)

People who purchased homes during the housing bubble probably paid much more for them than their current market value. According to Lehrer, these people have a tendency to price their homes much higher than others who made housing purchases after the height of the housing bubble. The reason is "loss aversion". Only when houses are more realistically priced will the housing market recover.

The Economic Lesson

Loss aversion was first identified by economics Nobel Laureate Daniel Kahneman (a psychologist) and Amos Tversky during the 1970s. In one experiment they gave subjects two sets of alternatives. Worded differently, both actually were identical. However, for the first pair, option "A" said out of 600 people, 200 will be saved. With the second pair, the first option said that out of 600 people, 400 will die. Presented the first pair, people chose "A". However, for the second pair they rejected that first option. According to Kahneman and Tversky, "losses loom larger than gains" and people are not always the rational decision makers that classical economists cite.

Loss aversion can also explain most investors' behavior when faced with a losing investment. It also can explain capuchin monkey behavior.

How old are you? Between 35 and 69? Then you are more likely to be a saver. As a saver, you might place your money in a bank, or buy a government security, or invest directy or indirectly in a stock or bond.  From there your savings could move to a business nearby or somewhere around the world.

Focusing on age, we can observe how money might move among nations. Those with more savers will have a surplus and send it to other countries. Researchers at Goldman Sachs predict that, because of demographics, emerging economies will be the source of more of a future surplus than the developed world. 

The Economic Lesson

Economists predict that countries with more savers are more likely to have more money to send to other countries. The result is called a current account surplus. In a 2005 speech, Fed Chair Ben Bernanke provides a clear explanation of what a current account means. He says it can be defined from two perspectives. you can look at imports, exports, and investing and see whether more money is leaving or entering a country. Alternatively, but closely related, you can compare saving and investing see whether the result is negative, which means foreign money was necessary to fund domestic projects.

It was perfect. On the left side of the NY Times Op-Ed page, David Brooks defended the austerity approach. On the right was Paul Krugman saying spend more. Those are the alternatives. Maybe now it will be easier to choose one?

Using Germany as his model, David Brooks presented the facts. He quoted economist Gary Becker saying that, "...the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempy to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus." Now, the American economy remains sluggish while Germany has 9 percent growth and unemployment at "precrisis" levels. Brooks's conclusion is that the U.S. needs to pay attention to the fundamentals. Fundamentally, we are very good at innovation. Our political institutions, however, are leading us in an unproductive direction.

Krugman meanwhile says that we have to focus on unemployent. And focusing on unemployment takes us, inescapably, to the fact that we are in the midst of a recession. Why? Stimulus spending has been inadequate.  On the fiscal side, more spending is the answer; on the monetary side, the Fed has to inject more money into the economy.

A summary? Brooks says less is more. Krugman says more is more.

The Economic Lesson

The two economic thinkers we can turn to are F.A. Hayek and John Maynard Keynes. A wonderful rap from econstories.com summarizes each man's perspectve.

For a smile, you might want to watch Merle Hazard's "Double Dippin'" song. As the Guardian points out, also look for the fun trivia such as a small background picture of mathematician Benoit Mandelbrot.

No one was smiling, though in response to the 1.6% GDP revised growth rate for the second quarter. Thinking of future economic growth, economist Ed Yardeni, suggests three possibilities in a recent newsletter.

1) The contrarian view says the economy will boom. To generate a 3% growth rate, we would need more housing refinancing that would put money in consumer's pockets and elevate consumer spending. Also, lower mortgage rates coud lead to more housing sales. Add to this solid corporate profits and higher real pay per worker because of productivity gain and you have a robust recovery. Most say the chances of a robust recovery are slim.

2) More and more people are concerned about a bust which takes us to the double dip scenario. The second dip would be caused by unimproved unemployment and plummeting consumer spending.

3) Muddling with ups and downs in different sectors is the third and most likely alternative. Muddling would be characterized by some employment gains, some housng improvement, some consumer spending.

A (trick) question: If the growth rate has moved from 3.7% down to 1.6% between  the first and second quarter of 2010, then has the economy contracted? The answer: No. The economy continues to grow but at a slower rate.

The Economic Lesson

Let's think of a double dip as a "W". The U.S. has experienced 2 double dips during the past 80 years. Looking between 1930 and 1940, economic activity contracted 1930-1933, expanded 1934-1937, dipped in 1938, and then steadily grew. A much faster double dip happened between 1980 and 1982. 1980/down; 1981/up; 1982/ down.

During the 1970s, a ticket to fly between New York and Washington, D.C. cost $50 whereas one between Los Angeles and San Francisco-almost twice the distance-cost only $40. 

Why?

Before deregulation in 1978, the interstate airline industry was subject to extensive regulatory control from the Civil Aeronautics Board (CAB).  For interstate travel, the CAB had to approve an airline's decision to add or delete a route or to change a fare. Preserving profitability and service to large and small cities were government priorities. However, for intrastate travel, the market determined the price. As a result, intrastate flying tended to be cheaper.

Fast forward to 2010. With government primarily regulating safety, the market shapes most other airline decisions.  According to the Wall Street Journal, four variables affect airline ticket pricing: 1) Competition from low-cost carriers for a specific route (When Southwest selects your route, fares drop.) 2) The number of carriers in the market for a specific route (More carriers...lower fares) 3) Whether passengers are discretionary or business travelers 4) Operating costs that would include landing fees and other airport expenses.

The Economic Lesson

A competitive market structure shapes a firm's behavior. When government ran the industry, firms tended to behave like monopolies They had guaranteed profits, behaved inefficiently, and charged high prices.

Now, with the market in charge, different routes have different market structures. When several airlines compete, and especially if one of those airlines is a discount carrier, fares tend to decrease. By contrast when the market is an oligopoly or one firm dominates, fares rise because the firm has more power. 

If this were 1930 or 1931, you would think you were experiencing a cyclical downturn--not a Great Depression. In an econtalk interview, Stanford's David Kennedy begins this way, placing the listener in a contemporary context. Instead of looking backward at the Great Depression, we look forward to the 1930s.

I recommend this podcast because Dr. Kennedy and George Mason economist Russ Roberts discuss facts from the 1930s that relate to today. Then we, as listeners can decide how contemporary economic policy and politics compare to that era. Kennedy alludes to "Black Swans". If the Great Depression was perhaps the greatest Black Swan, how will this Great Recession compare? 

Looking at presidential policy, he says we make President Hoover worse than he was and FDR better. While Hoover wound up not doing enough, he did initiate policies to fight the downturn and the Smoot-Hawley Tariff. By contrast, Dr. Kennedy reminds us that when FDR was president, unemployment remained high and production sluggish. Dr. Kennedy hypothesizes that perhaps FDR cared much more about creating a safety net for the bottom third of the economic population fighting the depression. After all, during the Roosevelt presidency the Social Security Act, Fannie Mae and the SEC were created.

Do we have parallels? A cyclical downturn or a longer recession/depression? A minor black swan or a significant one? A president who cares more about the recession or a social agenda?

The Economic Lesson

As economic historians, our perspective changes when we look forward rather than backward. We see that when the stock market crashed and production declined in 1929, Herbert Hoover believed we were undergoing the beginning of a business cycle contraction, similar to many others. When FDR entered office during 1933, many worried about a balanced budget and federal spending. Meanwhile, the Federal Reserve was at best ineffectual.

In December, 2007 our GDP started to decline and by the summer of 2008 financial markets were experiencing turmoil. After a 2009 stimulus package, we are debating whether more spending or austerity is the best policy.

Looking at the past, we have implemented fiscal and monetary policies that do indeed reflect a grasp of the inadequacies of the past. But, I have to wonder what economic historians will say when they look back at us.

You've probably heard the story. Fed up, a flight attendant tells passengers what he really thinks of them, grabs a beer, presses the button for the emergency chute, and leaves the plane. The overhead storage bin might have been the reason.

Overhead bins create frustration for everyone. They increase boarding delays. A cascading overflow can be dangerous when doors pop open. Attendants have to restrain impatient fliers from grabbing a bag before the plane has stopped. A cost saving fast turnaround for aircraft is delayed by passengers having to retrieve their paraphernalia. Deplaning is agonizingly slow.

An economist would disagree with a NY Times solution: "Carry-Ons and Courtesy Need to Co-Exist". Instead, incentives have to change. Because checked baggage generates huge revenue, airlines have the incentive to charge. Responding, passengers have the incentive to take more onboard. One solution? Spirit is charging for carry-ons. Your opinion?

The Economic Lesson

Two economic concepts explain the problem:

1) The fallacy of composition states that what is good for one is bad when everyone does it. An example is fleeing from a fire in a crowded movie theater. One person, alone, can quickly leave but everyone together cannot. Similarly, one person can enjoy the plane's overhead bin but everyone together cannot. When airlines decided to charge for checked luggage, they worsened the fallacy of composition.

2) A negative externality is a cost to a third party because of the unrelated agreement between 2 other individuals. Here, the airline agrees with you or me that it is okay to bring baggage onboard. The result, though, is a cost to other passengers and the flight staff. On an aircraft, the negative externalities multiply geometrically because everyone is creating them.

Being a locavore is not always easy but it can feel very good. Those of us who are locavores believe that we are helping the planet by saving on transport costs and emissions, patronizing small businesses rather than distant impersonal corporate giants, and eating healthy fresh food. In many ways, locavores can have their cake and eat it too (although it usually is broccoli and local produce). While buying good, healthy food, locavores are helping the planet...

But are they?

In a recent post, I suggested cost/benefit analysis of environmentally friendly preferences such as wind farms, ethanol production, and buying local. Instead, though, we can let price do it for us. As economist Steve Landsurg points out, for local food purchases, cost/benefit analysis involves an undoable amount of research about "land, fertilizers, equipment, workers, transportation and energy costs" and still we would not have considered everything.

Using a tomato as an example, Landsburg explains that the price conveys all we need to know. Assume, for example, that the local tomato laborers would have been more efficient growing grapes. As a result, the tomato supply curve would shift up and to the left because of lower production, and the price of the tomato would increase. You don't have to ask specifically about cost and benefit because a high or low price provides the answer.

The Economic Lesson

Cost is more than money. Economically defined, it is sacrifice. The cost of a decision is the next best alternative that you sacrificed.

Because the vast assortment of "costs" that relate to producing a good or a service affect the price, consumers who care about the environment can optimize decision making by considering the dollars they are spending. Indeed, all of us can look at a price as a source of information about the good or service we are purchasing. We can use price to become a better locavore.

Hearing economists discuss the Fed's zero-interest-rate policy, Harry Truman would again search for a one-handed economist.

On the one hand...if you can borrow money cheaply, you are more likely to expand your business and buy a house or a car. Especially during a recession, low interest rates can encourage business expansion and consumer loans. As a source of economic stimulus, many believe that zirp is desirable.

On the other hand...households and businesses that have income based on interest rates are suffering. Historically, savers have been able to earn an average of 3 percent. Now, they receive close to 0% when they invest in such financial instruments as short term treasury securities, The problem? If we look at what they could have earned, savers have lost a total of $350 billion annually--350 billion that would have been saved or spent.

For countries also, there are two sides. According to the Bank for International Settlements (BIS), countries with zirp, such as the U.S., can borrow money very cheaply. Also though, other nations such as Australia that pay higher interest rates, can lure investors away from lower yielding securities elsewhere.

The Economic Lesson

The interest rate is the price of money. When an economy experiences rapidly rising prices, central banks usually increase the price of money to constrain spending. Recession, by contrast, requires a lower price of money (interest rate) in order to stimulate business and consumerr spending. 

The Federal Reserve has three traditional tools to affect interest rates in the U.S. 1) It can change the amount of money that banks have to keep in reserve. 2) It can change the interest rate that it charges banks when they borrow the Fed's money. 3) It can enable banks to have less to lend by selling them securities or more money to lend by buying securities from banks.

During the recent recession, the Federal Reserve expanded the contents of its monetary policy "toolbox".

Hearing that federal employees earn more than people working in the private sector, how should we respond? Let's look at the facts.

Assessing someone's earnings involves salaries and benefits.  According to the BEA (Bureau of Economic Analysis) at $81,258, the average federal worker earns 60% more than someone in the private sector. Looking at benefits, the gap grows larger with federal workers getting $41,791 and private workers at $10,589. Combining salaries and benefits, we have federal workers with total average compensation of $123,049 compared to privately employed workers at $61,051.

We can also look at raises and inflation. Between 2000 and 2009, the average federal worker's salary increased by 33% more than inflation. Including benefits which primarily refer to pensions for federal employees, average compensation, adjusted for inflation, is up 36.9%. By contrast, privately employed workers are receiving 8.8% more.

Looking at salary data, Democrats and Republicans disagree about whether we are comparing "apples to oranges" or "apples to apples". Saying "apples to oranges", people who believe that the federal pay scale is appropriate emphasize that many federal jobs require a more highly skilled worker. Those who disagree say we are comparing similar issues, especially when focusing on yearly salary increases where percent increases can be compared.

The Economic Lesson

Having looked at the public/private sector pay gap and the debate that surrounds it,  as economists, we should return to cost and benefit. To consider why there is a public/private sector pay gap, we can identify the opportunity cost experienced by private businesses and the federal government.

Do you remember the 'flash crash'? On Thursday, May 6, for close to 20 minutes, markets everywhere wildly fluctuated.  It began at 2:23 when certain stock prices started moving oddly. With Apple trading at approximately $250 a share, at 2:44, the stock plunged $23 while at another moment one share was selling for $100,000. At 2:47, Accenture PLC shares dove to 1 cent from $40 a share. During that day, the Dow Jones Industrial Average opened at 10,862, dropped to 9869.62, and then closed at 10,520. Some say it felt like a roller coaster.

Financial markets are not supposed to feel like roller coasters. Instead, at the NY Stock Exchange, for example, different "specialists" oversee the buying and selling of different firms' stocks. Historically, the specialists' job was to maintain an "orderly market" by buying or selling the stocks themselves when price was not gradually moving up or down. So, if everyone wanted to sell a stock and there was no one to buy it, the specialist (in theory) stepped in to buy it temporarily so that price could change smoothly. 

Now though, with computerized trading, worldwide markets selling the same companies' stocks and bonds, and a group of firms called "quants' that speed trade based on complex computer models, it appears to be impossible for one group to maintain an orderly market. Yes, much of the time, markets tend toward rational ups and downs. However, during the 'flash crash', they did not.

The Economic Lesson

Why should we care?

Accenture says it all. If one stock, for no apparent reason, can drop from $40 to 1 cent in seconds, then investors will be less willing to allocate their savings to stocks. However, our market economy needs dependable financial markets for savers and businesses. We need to invest in order to save for college, for retirement, for emergencies. Correspondingly, businesses need investors' money as start-ups, when they expand, and for everyday operations.

Knowing that the continued possibility of a 'flash crash' diminishes investor confidence, a final report from the SEC and Commodities Futures Trading Commission should be completed during the next several months.

Please note that for Accenture PLC and other firms that experienced an erratic stock fluctation on May 6, those trades were canceled.

The Chinese leader Deng Xiaoping said, "It doesn't matter what color a cat is as long as it catches mice." Explained in the Teaching Company's "Why Economies Rise or Fall," Deng cared about results more than economic ideology as he propelled the Chinese economy toward capitalism.

Through Deng's leadership, China allowed farmers to keep and sell excess crops, productivity swiftly rose, and agricultural markets evolved. Then, as infrastructure emerged to connect these markets with factories, and education and technology developed, "Made in China" became a household term in the U.S. Throw in currency control, low wages, and you get a country whose economy is now #2 in the world.

Ranked by GDP, the U.S is #1 (close to $15 trillion), China is #2 (close to $5 trillion), and Japan is #3 (close to $5 trillion but less than China). Completing a list of the top 10, then we have Germany, France, the U.K., Italy, Brazil, Canada, and Russia.

If China continues to grow at a 10% rate while the U.S. growth rate remains close to 3%, then China will be #1 in 2 to 3 decades. However, the Chinese per capita GDP and average standard of living will still be far behind most of the world's largest economies.

The Economic Lesson

It can be tough to compare economies. Even if GDP comparisons use the same components (consumer spending, business investment, government spending, and exports minus imports), still we have to remember that purchasing power differs. Also, we can use per capita (per person) comparisons and other indiviudal standard of living yardsticks.

Economists recently have been debating whether the $787 billion 2009 stimulus package has helped the economy. Perhaps first they should ask what has been spent.

For a variety of reasons, recipients of stimulus money are not spending it. Dollars destined for energy efficiency in Detroit have barely been used.  Worried that next year they might not be able to afford teachers hired with stimulus money, school districts in NJ, Texas, NYC, and CA have said that they are not spending it. Other places have just not figured out what to do with their money.

Responding to criticism about slow spending, the Obama Admnistration points out that the stimulus package had 3 sections. They say that: 1) $360 billion in tax breaks and other help for businesses and individuals has been paid out. 2) The $296 billion that targeted unemployment assistance, food stamps, and other aid programs has mostly been spent. 3) $170 billion meant for infrastructure projects has not been spent while $66 billion has.

You might want to look at the Obama administration's stimulus website to identify local projects. Have you seen any spending near your home?

The Economic Lesson

Fiscal policy includes government spending, taxing, and borrowing. During the 1930s Great Depression, President Roosevelt and the Congress used fiscal policy to try to stimulate economic growth and to create jobs through the TVA and other government funded projects.

A question: How are a little Sunshine and the U.S. taxpayer similar?

The answer: Both are helping General Motors grow.

The Wuling Sunshine is the most popular car in China. Manufactured by General Motors with 2 Chinese partners, it is a no frills minivan that sells for as low as $4,500. With AC a $366 extra, thinner bumpers, no airbags, a top speed of 80 mph, and lots of hard plastic and plastic liner, the Wuling Sunshine is what the rural Chinese small business person is willing and able to pay for. As the most popular car in China, it is a profitable low cost prototype that General Motors plans to replicate in India and beyond.

The Economic Lesson

While the global reach of U.S. multinational corporations extends around the world, so, too, do the activities of foreign multinationals. Called foreign direct investment (FDI), in China, General Motors has 10 joint ventures, 10 assembly plants (11 in U.S.), and 32,000 employees (77,000 in U.S.).

In 2005, the latest year for which we have detailed data, 5.5. million Americans were employed by foreign firms doing business in the U.S. Led by the UK (think BP), other firms with a major U.S. presence are Japan (autos, for example), Canada (banking and finance), the Dutch (oil), Germans (media), and the French.

In NYC, there are 250,000 housing units that use more electricity than most others. The reason? Buildings without meters for each apartment have leases that say "utilities included". So, whether tenants use more or less power, the rent is the same.  Consequently, they perceive that their electrical consumption is "free".

What happens when we think something has little or no cost? We tend to use more of it.

Elinor Ostrom, winner of the Nobel Prize in economics wrote about how people abuse a good that appears free because it is owned by all of us. Called the tragedy of the commons, for a pasture, we overgraze our cows. For a workplace refrigerator, we create a mess. Factories tend to pollute more when there is no cost. Parking is tough to find when no one has to pay for a space. Dr. Ostrom believed though, that when people care about their common pasture or refrigerator or air, they can willingly formulate a solution together.

The Economic Lesson

With price as the y-axis and quantity as the x-axis, a demand curve is downward sloping. Lower prices make us willing and able to purchase more of an item. With a lower price, the item requires less sacrifice and we have more to spend elsewhere.

According to British economist Arthur Pigou (1877-1959), the tragedy of the commons can be solved with a fee or tax that makes an overused commodity more expensive. For those NYC overusers of electricity, individual meters that connect cost to usage would eliminate the extra expense to landlords and diminish the ease with which additional greenhouse gases can be created.

Parking expert Professor Donald Shoup has identified a traffic problem with implicatons far beyond city streets. Essentially he says that cheap city parking is really rather expensive.  Throughout parts of NYC, for example, drivers can select meters that might require $1.50 an hour or a free side street. With so low a price, demand is considerable and there are few empty spaces. Consequently, drivers create pollution, exacerbate congestion, and generate pedestrian challenges while searching for spots. Also, land used for parking might have a better alternative function. Explained economically, while "parkers" pay little, the cost (sacrifice) for everyone else is high.

One way to solve the problem of underpriced public commodities is to charge more. San Francisco has begun to experiment with variably priced meters and parking lots. Spaces with higher demand will become more expensive. The result? Fewer people will demand them and negatively impact the neighborhood. Correspondingly, as suggested by George Mason economics professor Tyler Cowen, "...if we are ging to wean ourselves away from excess use of fossil fuels, we need to remove current subsidies to energy-unfriendly ways of life."

One concern: Should we care that more expensive parking is regressive? Other costs?

The Economic Lesson

An externality is the impact of a behavior or contract that is experienced by a third uninvolved party. When the impact on third parties is undesirable, as with cheap parking, we call the result a negative externality. A benevolent impact on an uninvolved third party is called a positive externality. A community experiences the positive externality of flu vaccinations.

How to diminish a negative externality? Increase its source's cost. How to encourage a positive externality? Make it cheaper to create.

Do you prefer adjusting COLAs or the full retirement age (FRA) to ensure the survival of the U.S. Social Security program? To decide, you might want to know how different solutions will affect high and low income earners.  

One way to solve Social Security insolvency is to decrease COLAs. COLAs (Cost of Living Adjustments) typically increase the amount that Social Security recipients receive each year. For example, if a person got a $100 check during year 1 and the inflation rate was 3%, then a COLA would mean a $103 check during year 2. If COLAs are diminished then lower income and older beneficiaries will be hit hardest.

Another solution is to increase the retirement age when people start to collect Social Security. A decade ago, the full retirement age was 65. While now it will be 66 for people who are currently 62, starting with individuals born during 1960, the retirement age will be 67. If the retirement age is the solution, then higher earners will feel it more than others.

COLAs and FRA solutions take us to the benefits received side of the problem. Revenue increasing solutions such as higher taxes are also possibilities.

The Economic Lesson

Social Security is a progressive program with low earners collecting more than they paid in taxes and high earners getting much less. According to the August 2010 report from the Trustees of the Social Security Trust Fund, during 2014 deficits will begin because of the baby boomers. During 2037, when the trust fund will be depleted, benefits will decrease.

After reading this NY Times article about Netflix, you might begin to think about buggy whips. I know it sounds distant but here is the connection.

Entrepreneurs make an existing product or process obsolete. Netflix and Blockbuster. Amazon and Barnes & Noble. The Model-T Ford and buggy whips.

Aware that someone else's innovation could lead to their own demise, Netflix is creating its own DVD obsolescence by encouraging us to stream movies from them. Also though, through innovation, they have guaranteed their survival.

Any other examples of this type of "creative destruction"?

The Economic Lesson

According to Joseph Schumpeter, economists should focus more on entrepreneurs and less on demand and supply.To Schumpeter, the entrepreneur, as an innovator, is the source of progress, change, and creative destruction. But also, by upsetting the status quo, entrepreneurs create conflict between the new and the old.

Next time you are in Starbucks, check how long you stood in line. They care. To save 14 seconds, for example, Starbucks designed a larger ice scoop which baristas could use for one dip instead of 2. Still though, in a "mystery shopper" survey of "limited service restaurant brands," Starbucks was #6 in wait time, behind Dunkin' Donuts (4 minutes 3 seconds) during 2008. Also concerned about line time, the NYC Columbus Circle Whole Foods uses a line manager, a single line system, and an unusually high number of check-out registers.

The science of line movement is called queue management. One researcher says that we respond favorably to a wait time of up to 3 minutes. Then, though it starts to feel longer than the actual time. Also, our response can depend on what we are waiting for. People might not want to wait at a gas station but will accept long lines for new iPhones and concert tickets.

The Economic Lesson

Firms that compete in a market with many consumers and many firms are in a monopolistically competitive market. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. With Starbucks and Dunkin Donuts in a monopolistically competitive market, they can use their coffee, their product assortment, their image, and their wait time to compete.

During August evenings in Nantucket, the lines are long at the Juice Bar. Outside each of two doors is a line stretching along the sidewalk. Once you enter the doors into the shop, you can select among (sort of) 6 lines to get to the counter and order your ice cream.

Analyzing the experience, journalist Anand Giridharas says that forming orderly lines had been equated with "middle class behavior". In India, traditional lines looked like trees with branches as mini lines sprouted next to the trunk and others cut in. Then, though, with the emergence of a middle class, the acceptance of branches and those who cut in was replaced with orderly single file lines. Similarly, when McDonald's arrived in Hong Kong, they "introduced queue monitors" to replace the traditional chaos around registers.

Perhaps we can view lines as reflections of democracy and the market. Democracy dictates that we are all equal with the same opportunity cost for our time. The market, instead, implies that those who can pay deserve to go first. I guess whenever we fly, we are choosing between a democratic experience (coach) and the market (first class).  

The Economic Lesson

A line represents a transaction cost. Defined economically, cost means sacrifice. Standing in line, we are sacrificing what we otherwise might have been doing. During the business day, the transaction cost of a line can be high. During a summer vacation, the cost of standing in line at Nantucket's Juice Bar is minimal.

With lines reflecting the dysfunction of the former Soviet Union, the huge transaction costs helped to speed its demise.

Has the recession changed how we spend? Here are the numbers that give some answers according to a summary from Michael Mandel, former BusinessWeek chief economist.:

Since the 4th quarter of 2007, we have spent more on: 1) telephone equipment/up by 16.6% 2) pets/up by 14.4% 3) education/up by 13.4% 4) childcare/up by 12.8% 4) healthcare (including drugs/up by 10.8% 5) housing (owner-occupoed and rental/up by 6.4% 6) food and drink for off-premises consumption/up by 5.3% (Please note that the percent change can indicate very different dollar amounts. For #1 16.6% refers to $1.5 billion while for #5, 6.4% represents $95.4 billion.)

During the same 2 1/2 (or so) years we have spent less on: 1) Moving, storage and freight services/down by 19.6% 2) Motor vehicles and parts/down by 16.0% 3) gasoline and other energy sources/down by 15.3% 4) sports and recreational vehicles/down by 12.8% 5) video and audio equipment/down by 8.4%

What does all of this mean? It appears actually that we are not spending very much more because the healthcare increase, by far the largest in billions of dollars, is from government. Also the housing total is what owners would have spent n rental if they had rented--an "imputed" number. So, accelerating this sluggish U.S. recovery will ultimately mean more private sector spending from you and me or from businesses. This returns us to the importance of stimulating innovation and entrepreneurs.

The Economic Lesson

Called National Income Accounting, a system for knowing the value of what we produce, how much we pay ourselves, and what we spend was developed by Simon Kuznets during the 1930s. Knowing the value of production, incomes, and spending enabled economists to recommend government economic policy more knowledgeably. 

During 1939, in a garage, Bill Hewlett and Dave Packard started a new firm. Also in a garage, several decades later Steve Wozniak and Steve Jobs started Apple. Yes, Walt Disney worked in his uncle's garage and Mattel, the toy company that makes Barbie dolls began in a garage. Google did not begin in a garage but they did use one.

The Economic Lesson

For most of these garage stories the key actually was funding. In some way, they needed to secure the money to proceed. And that takes us to today.

With current unemployment high and growth sluggish, economists who disagree with a new Keynesian demand side stimulus are increasingly focusing on the entrepreneurs that have energized our economy. Nobel Prize winner Edmund Phelps suggests a First National Bank of Innovation that lends to entrepreneurs. Journalist Thomas Friedman quotes innovation experts when he recommends tax breaks for start-ups and a cabinet position that focussed on encouraging innovation. In a second column he says we need "More (Steve) Job, Jobs, Jobs, Jobs".

These ideas remind me of Alexander Hamilton's development program. Through a "Report on Manufactures" and a First Bank of the United States, in 1791, he too suggested a plan that would fund business development in order to stimulate and diversify U.S. economic growth.

Watching capuchin monkeys, we can learn about the financial crisis.

In a July TED talk, Yale's Laurie Santos describes the marketplace she created for the monkeys she was observing. Santos's goal was to determine whether the mistakes we repeat are because of "us" or our environment. If the moneys with whom we share a common ancestor behave like "us", then we both might be "hardwired" to behave in a certain way. 

In the Santos experiment, monkeys were given tokens that they could exchange for grapes. Seeing them quickly grasp the concept, the researchers introduced new variables to see, for example, whether the monkeys displayed a tendency to save. (They did not.) Faced with a risk taking situation that involved getting fewer grapes, the monkeys had to decide whether to accept a definite loss or to gamble on the size of the loss or gain. The monkeys gambled rather than selecting the safer alternative. 

Because of consistent behavioral results, Santos concluded that monkeys have a biological tendency to behave a certain way. And, because that behavior was reminiscent of human behavior, she asked if humans have a predisposed response when faced with financial risk related decisions.

The Economic Lesson

Through its Research Center for Behavioral Economics, the Federal Reserve Bank of Boston has sought insight about human behavior to improve policy decisions. At a 2007 conference, they considered papers on the following topics:1) the emotional response to changes in wages and prices 2) the impact of financial illiteracy or psychological biases on financial decisions 3) the impact of consumers being "largely unaware of how much things cost"" 4) the effect of financial literacy on saving behavior 5) the reasons wages are rarely cut.

This was fun! A 5 minute Federal Reserve simulation lets you target the fed funds rate for 16 hypothetical quarters and then watch the inflation and unemployment impact. It all appears manageable until a surprise news headline appears.

The site also links to a decade by decade look at monetary policy through a video summary of key events and graphs of the CPI, real GDP, the fed funds rate, and unemployment. Very well done.

Knowing that current unemployment is at 9.5% and inflation is close to 1% for a 12 month period, during the simulation you can experiment with your own policy ideas.

The Economic Lesson

Described by British economist A.W.H. Phillips, a Phillips Curve depicts an inverse relationship between unemployment and inflation. While the original Phillips curve referred to wage inflation, it soon came to represent the connection between unemployment and price inflation. Soon also, economists such as Milton Friedman and Edmund Phelps challenged the validity of the original curve as did 1970s stagflation.

Typical monetary policy response to accelerating inflation is to target higher interest rates; diminishing unemployment would require lower interest rates. It all sounds rather logical until you look at what can really happen. 

Two recent studies about working moms give good news and bad.

The good first. If you work during your child's first year, and you contribute considerably to the family income, or if your child care is very good, or if you are sensitive to your children, then his or her cognitive development will equal those of stay-at-home moms.   

Now the bad. As a working mother with an MBA, 15 years after graduation, "lesser job experience, greater career discontinuity and shorter work hours...," will contribute to a gender pay gap of 25%. By contrast, perhaps as illustrated by Elena Kagan, Sonia Sotomayor, and Condaleezza Rice, women whose careers resembled those of men earned equal pay. 

The Economic Lesson

Labor force statistics include participation rates. Defined as a statistic that compares the size of the labor force to its potential total, female participation rates for June, 2010 were 58.5% while male participation rates were close to 71.3%.

The labor force includes all people who are employed, who are looking for a job, and who are 16 or older. There are close to 155 million people in the U.S. labor force. 

Average gender wage gap differentials for different occupations are noted in an earlier econlife post. For different countries, you can look here.

Wow! Changing the color of individual counties from light to dark, month by month, this graphic actively displays how the U.S. moved from a 4.6% unemployment rate during January 2007 to 9.7% during May, 2010. In 30 seconds it tells more than pages of analysis.

The Economic Lesson

According to the Bureau of Labor Statistics, with a civilian noninstitutional labor force of 154.4 million people, 9.7% represents 14.97 million individuals. More specifically, the unemployment rate for men over 16 years old is 10.5%. For women over 16 years old, it is 8.3%. 

Moderated by late show host Johnny Carson, there once was a TV show called "Who Do You Trust?" Initially aired during 1957, the quiz show had husbands (interesting--1950s version would have only husbands making the decision) deciding whether they or their wives would answer questions.

With the current debate about the impact of stimulus spending, I thought of the show's title. Based on "who" we trust, many of us select who we want to answer, "Is the stimulus working?"

For those who trust the Keynesian outlook, Moody's Mark Zandi and Princeton economist Alan Blinder provide the right answers. In a recent paper, Zandi and Blinder conclude that the financial bailout had the greatest impact. Saying that the Fed's asset purchases and bank stress tests were critical for the current economic improvement, they point out that stimulus spending alone would not have sufficed. However, they say that the complementary character of both sets of policies tended "to reinforce each other."

By contrast, those who question the impact of government spending will gravitate toward Stanford economist John Taylor and Harvard's H. Gregory Mankiw. Commenting on the Blinder/Zandi paper, Dr. Taylor says that they use an old Keynesian model for hypothetical data input. Never, he says, do they use current data on what actually happened--just what was supposed to have occurred.

There is lots more to read on both sides. For the Keynesians' view, you might want to look at what the Councll of Economic Advisors and Paul Krugman have said. To read more of the market dominated perspective, Arnold Kling, Tyler Cowen, and Russell Roberts have noted their opinions. 

The Economic Lesson

To simplify our market economy, economists like to draw a circular flow model with 2 concentric circles. As shown here, essentially, resources and goods and services move around the outer circle while dollars occupy the inner circle.

The key, though, is that the Keynesians believe that during a recession we have to draw a huge government rectangle to help the other two. By contrast, those who believe the market should function with little outside help will depict the circular flow model with minimal governmental influence.

The average social security check received by a retired grandma is $1169. Multiply that by 35 million recipients, add to it other social security obligations, and this year, you have more money leaving than entering the social security "bank account".

Next year everything should be okay but not for long. The crisis starts in 2016 when the system will be swamped by baby boomers. What should be done? The Congressional Budget Office has suggested 5 categories of solutions: 1) Change taxes. 2) Change benefits. 3) Pay more to low income earners. 4) Raise the retirement age further. 5) Reduce cost-of-living adjustments.

The Economic Lesson

Hoping to give "ownership" to all of us, the creators of Social Security designed a universal pay-as-you-go program in 1935. When we "pay-as-you-go", we are giving today's workers payroll tax dollars to today's social security recipients.

Looking at the potential problems, should social security remain a universal program with common "ownership?"

In a  wonderful NYC Radio Lab podcast about success, Malcolm Gladwell also explains why genius is closely related to love.

Recorded at the  92nd Street Y in NYC, writer Malcolm Gladwell and Radio Lab host Robert Shulwich preceded their conclusions about genius with reasons that people are successful. Gladwell began with a list of birth dates for Canadian hockey players. Pointing out that 17 of a group of 25 were born between January and April, he said the reason was the cut off date for children's hockey leagues. With a January 1st cut off date, the boys who just missed the deadline were the biggest and oldest in the next class. The result? They were the best, got reinforced as the best, and excelled at hockey.

Similarly fortuitous, Microsoft co-founder Bill Gates attended a private school whose students were given the opportunity to use a computer long before before PCs and Apples existed. As a result, he knew when mainframe computer time was available in the middle of the night at a university and, as a teenager, regularly snuck out of his home to use it.

And this takes us to love. Not only did Bill Gates have an opportunity but he loved what he was doing. According to Malcolm Gladwell, most of us are successful and even rise to the genius level because of more than brains. It often is a combination of luck, talent, and love.

Malcolm Gladwell also looked at success in a 2008 New Yorker Magazine article. Commenting on football players, teachers, and financial advisors, he discusses how tough it is to predict success. People can earn the right degrees, function well during interviews, and perform optimally in similar situations. Still, selecting the person who will be truly successful in a job happens less frequently than we might expect.

The Economic Lesson

In our mixed economy, with the market and government both affecting production and distribution, success is nurtured through a variety of incentives. Starting with demand and supply, many of the the market's incentives focus on self-interest. Through taxes, spending, and regulatory policy, government can target incentives more specifically to shape our behavior. Consequently, aren't the market and government providing a definition of success?

And then, we can return to Malcolm Gladwell with his recipe for achieving success and his observation that success is tough to predict.

What if peak wind for your wind farm equals peak demand? Good? Not necessarily. The key is timing.

According to a NY Times article, certain wind installations have to "dump energy late at night..." because there is no demand for power at that hour. How to avoid wasting energy? Batteries are one solution. 

Hearing about batteries for wind installations reminded me of ethanol and locovores.  Ethanol fuel can sound ideal. However a closer look at the entire ethanol production process in an MIT study reveals a close call for diminishing GHG (greenhouse gases). Similarly, buying local produce will lower transport emissions. However, what if the type of food we eat has a significantly greater impact on GHG?

You see where this is going. It takes us to cost and benefit. Are wind farm batteries a cost or a benefit? 

The Economic Lesson

As economists, we can assess the success of wind farms (or ethanol or buying local produce) by thinking at the margin. For each extra kilowatt hour of electricity generated by wind turbines, we should look at cost and benefit. Then, when cost equals and moves onward to exceed benefit, we should stop production.

The problem, though, is how to define cost and benefit. In Eastern Oregon, residents are complaining about wind farm noise. Does cost include that noise? Turbine transport? Battery production? Are new jobs a benefit? Do we want to learn more about wind energy by using it? A cost/benefit list could be endless. The bottom line, though, remains cost/benefit analysis. Let's evaluate green projects at the margin so that we know they are truly effective. 

What is a "systemically important" financial institution? 2300 pages of financial regulation do not specifically tell us. Instead,regulatory agencies will have to decide. One study indicated that implementing new Dodd-Frank financial legislation will require details for more than 243 new financial rules.

Already, firms have begun responding. Legions of lobbyists are trying to influence agency decisions. Concerned about liability for an inaccurate credit rating, Moody's and other ratings agencies have asked financial firms not to use their data when filing with the SEC even if a mortgage related security, for example, is required by law to have a rating. Jamie Dimon, Chairman and CEO of JPMorgan Chase responded to regulatory changes with, "If you're a restaurant and you can't charge for the soda, you're going to charge more for the burger." Email has also been affected with Goldman Sachs prohibiting all profanities.

The Economic Lesson

In a wonderful Teaching Company course of 36 half hour lectures, "Thinking About Capitalism", from Professor Jerry Z. Muller, the never ending debate about the validity of profit seeking self-interested behavior consistently resurfaces. As I heard a chronological sequence of economic thought, starting with early Christianity and continuing with such thinkers as Edmund Burke, Voltaire, Henri Rousseau, Alexander Hamilton, and Karl Marx, back and forth the argument went between the costs and benefits of the market. With new financial regulation, isn't the pendulum swinging toward constraining the market's self-interest?

$1 million in $100 bills weighs 22 pounds. In $500 bills, $1 million would weigh 4.4 pounds. But the U.S. does not circulate $500 bills.

The EU does.

According to the WSJ and NPR's Planet Money, people engaging in illegal activities prefer large denomination bills that can travel. If you are a smuggler, a money launderer, a drug dealer, or someone living in a country with a hyperinflated currency, you might select the €500 bill. Weighing close to 4 pounds per million euros, it would be your chosen currency. Today, the €500 is equal to $652.55.

This takes us to the value of the euro. It has been suggested that the international value of a currency is a "leading indicator" of that region's financial health. Traditionally, financial health relates to a rising GDP, fiscal moderation, and monetary stability. Also, we can look at the balance sheet of the central bank.

The European Central Bank (ECB) has been called "super-solvent" because of the money it "earns" from its €500 and €100 notes. The money that a central bank earns on the currency it issues is also called seignorage.

The Economic Lesson

Most simply defined, seignorage refers to the money a central bank can make when it issues money because it costs so little to print it. The central bank gets the currency for the amount it costs to print it and then receives a market value return when it circulates it. Very hypothetically, we could say that it costs $1 to print a $100 bill. Then the Fed gets 5% interest on the $100 if it buys a treasury bill from a bank with that money. The seignorage is $4.

The WSJ estimates that 35% of the euros in circulation are in high denomination notes. The seignorage on these notes can be considerable. For that reason, the title of the WSJ article is "How Gangsters Are Saving Euro Zone." 

If there are 122 men for every 100 women, how do you find a wife? According to a Columbia University professor, in China, you save.

Economists have been asking why Chinese households save so much--30% as compared to a current 6% rate in the U.S. One answer starts with the hypothesis that too many Chinese men have too few women they can marry. How to compete? Become richer by saving. To prove their theory, researchers gathered data and found that savings rates appeared to vary with an area's male/female ratios. Or, as expressed by one social scientist, it was all about "keeping up with the Zhangs". 

Why does all of this matter? 

1. Domestic saving relates to an undervalued yuan. More saving in China has helped their current account surplus grow. This surplus helps the yuan remain undervalued. An undervalued yuan perpetuates a U.S. trade deficit as the U.S. continues to buy Chinese exports.
2. Domestic saving also relates to women's rights. With China's one child policy and son preference leading to male births, the result was "missing women" and a social issue becoming an economic concern. Defined, "missing women" is a gender inequality phenomenon in which a country's demographics become artificially skewed toward male births and male survival. (You might want to look at nobel laureate Amartya Sen's comments.)

The Economic Lesson

An undervalued Chinese currency has become an economic and a political concern. Just like we might purchase a sweater when it is cheap, we tend to be attracted to less expensive currencies. Owning the currency enables us to buy that nation's exports more cheaply. Hence, we buy Chinese goods, look to Chinese factories, and inflate our trade deficit.

But what is the cause of the problem? Some say we should focus less on the Chinese government's control over the yuan and more on their social policy toward women. 

Several months ago, we asked if law school was a good investment. Now we can ask the same question about kindergarten.

Saying that adult outcomes count while test scores do not, Harvard economist Raj Chetty and 5 colleagues researched the impact of kindergarten teachers on their students' college attendance, tendency to become single parents and to save, and on income. With a 1980s Tennessee study providing a wealth of data about 11,571 young students, recent tax related information told the research group about many of the same individuals now.

As their slide show indicates, classmate results clustered. Students whose test scores jumped from average to the 60th percentile during kindergarten could expect to earn $1,000 more a year than a child who started and concluded kindergarten with average scores. Children whose scores jumped during kindergarten also wound up having a greater chance of attending college, of not being a single parent, and of saving for retirement. Summarizing the kindergarten impact on earnings, one teacher created, per class, $320,000 of extra income during a lifetime.

The Economic Lesson

An economist would say that good kindergarten teachers have added substantially to society's human capital. In this context, capital refers to one of three factors of production: land, labor, and capital. Rather like a recipe, we can say that all goods and services are made from different combinations of land, labor, and capital.

Capital can be divided into two categories: Physical capital and human capital. Physical capital includes machinery, tools, buildings and inventory--the technology made by people that we use to become more productive. Human capital relates to the job training and education that make people more productive. To produce physical and human capital, society has to be patient. As each is developing, the resources needed to create them have little impact. Afterwards, though, they become growth engines.

Talented kindergarten teachers appear to be skillful human capital developers. Remembering that our resources are limited, we need to decide where to do less so that we can do more at the kindergarten level.

NPR's Planet Money has been looking for the people behind a mortgage backed security. The story, almost like a page turner mystery, began with a $1,000 purchase. With $1,000, Planet Money reporters purchased a tiny piece of a mortgage backed security composed of loans on 2,000 mortgages. Like most investors, they hoped to make some money. In this example, they would profit if the owners of the properties continued to pay the interest and principle due on their mortgages.

A mortgage backed security begins its life when a mortgage broker or a bank or some group says, "We can lend you the money to buy your house." From there, probably, the lender sells the loan to a second group who combines it with other loans and then sells it to someone else as a mortgage backed security.

You can see the cash flow here. When loans are sold, the seller gets more money to make more loans and then sells them and gets more money to do it all over again. The money made is from the transactions. The incentive? More transactions.

Their podcast was especially good because the mortgage backed security--essentially a computer printout--became human when Planet Money went to Florida to find the people with the mortgages. One couple, 82 years old with a dog named Muffin, had purchased their dream retirement home. However, when its value plunged and they had to choose between maintaining their lifestyle and paying their mortgage, they defaulted. A real estate speculator had purchased multiple properties for resale and then defaulted. A third group was being investigated by the FBI for fraud. And this was only the beginning. If the Planet Money reporters had continued, they would have found a different story behind each mortgage.

The Planet Money story reminded me that so many people relate to a mortgage backed security. In addition to the individuals who initially borrowed the money, we have the mortgage sellers, the mortgage packagers, and the investors. We can look at government and Fannie Mae and Freddie Mac. We can investigate private businesses, families, investment banks, and hedge funds. And still there is more. The group is huge, it is diverse, and its spans the world. 

The Economic Lesson

Mortgage backed securities enabled a financial bubble to inflate because they funded house sales with more money than otherwise would have been available. More dollars chasing the same number of goods inflates prices. As with all bubbles, eventually prices cannot move any higher. At that moment, the bubble pops and prices descend. 

I have been curious about why the new Bureau of Consumer Financial Protection (BCFP), established by the Dodd-Frank financial reform bill, is an independent bureau within the Federal Reserve. While I have not discovered a satisfactory answer, I have learned several interesting facts.

There already is a Consumer Advisory Council (CAC) housed within the Fed. According to its website, the council advises the Federal Reserve Board "on the exercise of its responsibilities under the Consumer Protection Act..." Noting that the CAC had not been effectual, several past and present members suggested that any new consumer protection agency reside elsewhere. Barney Frank, during March, said that a consumer protection council would be a second or third rate group if it were inside the Fed. 

In addition, there already is another Bureau of Consumer Protection in the Federal Trade Commission. Its website says that, "The Bureau of Consumer Protection works to protect consumers against unfair, deceptive, or fraudulent practices in the marketplace." Through its Financial Practices authority, the FTC "protects consumers from deceptive and unfair practices in the financial services industry."

Interesting.

The Economic Lesson

A WSJ article noted general facts about the BCFP. Funded by the Federal Reserve, it will create and enforce rules about how financial products ranging from mortgages to credit card fees affect consumers. Its enforcement authority, though, extends only to such large financial institutions as banks with more than $10 billion of assets. Other federal regulators will keep an eye on smaller institutions. Nothing, however, was said about the hierarchy. Does the Fed Chairman have any power over the agency if they provide the funding? 

The FDIC (1933) and the SEC (1934) emerged through the turmoil of the Great Depression. With 19th century panics in mind, the Federal Reserve (1913) was created specifically in response to the Panic of 1907.

One person might have purchased enough cocoa to make 5 billion chocolate bars. And, he is not even in the candy making business. Instead, he is doing what financial speculators have tried to do for centuries. He is trying to corner a market.

The man is Anthony Ward. His firm, Armajaro, does financial investing that includes commodities trading. One of those commodities is cocoa. Recently, he has purchased a lot of cocoa. 

Cornering any market requires massive buying, so much buying that little remains for anyone else. The result is control of supply and price. Typically, when a commodities trader makes a purchase of corn, for example, the seller locks in that price. Meanwhile, because with corn the buyer is purchasing a crop that will be harvested in the future, he has the opportunity to take advantage of a price rise. The seller gets security and the buyer is the speculator. Trying to corner a market just involves buying more.

In 1869, another financial speculator, Jay Gould, tried to corner the gold market. In the Gold Room, located near the Stock Exchange in NYC, traders bought and sold gold. When Gould's agents (secretly working for him) started to buy and buy, the price of gold moved up. During subsequent months his men continued buying. Ultimately the U.S. government entered the market as a seller and foiled Gould's plans.

In the wonderful 1983 film Trading Places, Eddie Murphy and Dan Aykroyd foil a plot to corner the orange juice market.

The Economic Lesson

There are many buyers and many sellers in perfectly competitive markets. As a result, no one controls price or quantity. Because all producers are price takers, they have to abide by the price established through the intersection of demand and supply.

Cornering a market involves taking control away from demand and supply. The demand curve is "hijacked" by an individual. As price goes up, other potential buyers are "squeezed" out of the market. The ultimate result, though, is control of the supply curve.   

The Big Mac Index is out again. Not much has changed. Norway's Big Macs are most expensive and Chinese Big Macs are cheap.

What do Big Mac prices tell us? Starting with an average U.S. price of $3.73 (based on 4 cities), we can determine whether other currencies are over valued or undervalued in comparison to the dollar. So, when we see that a euro based Big Mac will cost $4.33, we know the euro is overvalued. Rather interestingly, a Brazilian Big Mac, at $4.91 is also more while Argentina's Big Mac is very inexpensive at $1.78.

I wondered, though, whether a low price would be inexpensive domestically and discovered that we can also look at the Big Mac Index from an average net wage perspective. In March, 2009, someone buying a Big Mac in Chicago, Tokyo, or Toronto would have needed 12 minutes of work time. By contrast, workers in Nairobi, Mexico City, and Jakarta worked longer than 2 hours. The global average, based on 73 cities, was just below 40 minutes.   

The Economic Lesson

As economists, the Big Mac Index takes us to purchasing power parity. A 2 page St. Louis Fed paper clearly and briefly connects the Big Mac Index to economics. Starting with a "one price" theory, they explain that price deviations can vary because of local productivity. If workers producing exports have higher wages, other workers benefit, and prices move up. Looking at supply and demand, Big Mac prices relate to the cost of local labor and the amount consumers are willing and able to spend. Does export activity relate to Brazil's position on the list?

The production path of a pair of Levi's stonewashed 501 jeans could have started in a Mississippi Delta cotton farm, continued with a North Carolina fabric weaver, and included the Dominican Republic and Haiti for cutting, sewing, and finishing. Then, the jeans would have returned to the U.S. to one of countless retail outlets, to a consumer, and maybe even to a recycled life afterwards in some other country.

Commenting on these "production paths" economist Tim Harford  says they ultimately lead to economic growth but only if the path is preserved by trust. The trust he refers to is primarily an institutionalized trust. We "trust" that money will have a certain value. We "trust" that a contract will be enforced. We "trust" transactions that involve Visa and American Express. We "trust" that we will receive a package that we order from Amazon.

Correspondingly, in economies where corruption and bribery abound, economic development is constrained. Explaining why Haiti has made little progress rebuilding its main harbor, the Miami Herald points out that the project is "mired in cronyism, waste, scandal, and inertia. They could also have said that there was no institutional trust.   

The Economic Lesson

Secretary of the Treasury Alexander Hamilton realized that the sanctity of contracts was essential for U.S. economic development. As a result, when he had to decide who owned Revolutionary War bonds, the benevolent patriots who had sold the bonds at a discount or the ruthless speculators who bought them, he chose the speculators. Why? Government has to enforce a legal contract. A nation has to have "institutional trust."

Contemporary economists have researched the role of trust in the market system. You might want to look at "Adam Smith's Essentials: On Trust, Faith, and Free Markets," and "Trust and Growth". 

Reading about a new Eco Index started me thinking about competition. The Eco Index is somewhat comparable to the Energy Star rating created by the EPA in 1992. For appliances, Energy Star ratings convey energy efficiency information. For apparel, the Eco Index provides a green score.

As described in a WSJ article, the Eco Index is composed of questions that relate to environmental and labor practices. Using information about the entire, "... life of a product, from raw-material production to manufacturing, shipping, and even disposal," a score is assigned. Levi's, for example, elevated its Eco Index score for stonewashed 501 jeans by rerouting trucks to save carbon emissions and suggesting cold water washing. 

Having started during the 1850s with a basic, utilitarian pair of Levi Strauss jeans, now the jeans market involves many firms, many designs, many price points. So, when I saw the Eco Index, I perceived it as a way for firms to differentiate themselves. 

The Economic Lesson

Levi's and other jeans makers compete in a monopolistically competitive market. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual unique identity, and sellers having some control over price. The Eco Index will enable certain sellers to convey this unique identity.

From most competitive to least competitive, the four basic competitive market structures are perfect competition, monopolistic competition, oligopoly, and monopoly. 

A writer for The Baltimore Sun recently said that, "A 'new living wage' will make Baltimore City no more livable than stilettos will make Sen. Barbara Mikulski a forward for the WNBA." Meanwhile, in New York City, Mayor Bloomberg was said to have "scoffed" at a similar idea. These opponents of "living wage" legislation believe businesses will flee and unemployment will climb because of a mandated higher wage.  

On the other side, proponents say that workers deserve a fair wage. Laborers should be able to afford to live in the city in which they work. In New York, supporters of a $10.00 living wage say that the current $7.25 state minimum is inadequate.

The "living wage" is a municipally mandated minimum for all subsidized jobs. For example, any business receiving a tax break, which could include most retailers, would have to observe the pay minimum. Living wage mandates tend to cluster between $10 and $11 an hour. Close to 140 municipalities, including Los Angeles, CA and Santa Fe, NM have living wage laws. Each time one is proposed, the same dilemmas resurface. The graph described below conveys the basic dilemma.

The Economic Lesson

Please imagine for a moment a supply and demand graph. Price is the y-axis and quantity is the x-axis.

Thinking of wages, the supply curve represents labor and the demand curve is the business side of the market. The point at which demand and supply meet, called equilibrium, is the wage (the price of labor) determined by the market.

Government, however, can say that it believes the market determined wage is too low. It then mandates a higher wage that can be depicted as a horizontal line placed above equilibrium. Economists call this horizontal line a "floor" because it stops wages from moving lower to their natural market price. 

And therein lies the dilemma. A higher wage or more jobs? Floors create surpluses. At the new, higher wage, the number of jobs laborers want is more than the number of jobs businesses are willing and able to offer. So, we have a higher wage but fewer jobs.

Because I am still reading Peter Hessler's Country Driving A Journey Through China, I related a recent NY Times article to his wonderful descriptions of an expanding transportation infrastructure, villagers migrating to cities, and more affluence. Saying that textile jobs were shifting to Bangladesh, Vietnam, and Cambodia, the NY Times article focussed on higher Chinese wages for unskilled labor. Then, combining all of this with other articles on striking workers at auto plants, I assumed that Chinese wages were rising. 

But it is never that easy.

I checked further and discovered that not everyone agrees on the status of Chinese wages. In a rather interesting debate at The Economist, several experts present different perspectives. One Peking University professor said that although wages have been rising, demographic data indicate that the era of "cheap" unskilled labour has not ended. Similarly, Morgan Stanley's Stephen Roach says that "Chinese wage convergence" has a long way to go. A third commentator looks at a shift that has begun and economist Tyler Cowen says that instead, we can focus on Chinese productivity.

The Economic Lesson

I guess all of this returns me to, "It's complicated." Involving a huge work force, many businesses, and a powerful government, a changing Chinese economy requires a closer look when someone states a clear and logical conclusion.

Also I will let you know more when I finish the "factory half" of the Hessler book. I am looking forward to it. 

Peter Hessler's Country Driving A Journey Through China From Farm To Factory takes the reader to China's roads, villages, and factories. Having just completed the first half of the book, I wanted to share random fascinating facts that relate to their transportation infrastructure. 

1. Many provincial roads in China do not have a name. When Hessler asked how you know where you are, he was told that sometimes there are signs naming a nearby town. Otherwise, you just ask.
2. "Chaff crops" such as millet, wheat, and sorghum are placed in the middle of roads for drivers to "thresh" them. He called it a "drive-through harvest".
3. With considerable road building and a growing number of drivers, national law mandates every Chinese driver to takes 58 hours of driving practice through a state approved course.
4. Until 1945 when they switched (because of a US Army suggestion) the Chinese drove on the left side of the road.
5. Although the legal driving age is 18, most people do not drive until their 30s because they cannot afford it.
6. Price controls keep gas cheap. In 2002, across China, the price was the equivalent of $1.20 a gallon.
7. "Gas station girls," in their teens, who left small villages, were the attendants who pumped gas in western China.
8. In Beijing, people can sell their cars in huge lots where they paid 25 cents an hour in exchange for being able to solicit buyers. A typical sign might have read "2003 model, one owner. All registration legal." One women was observed saying, "December, 1998" when asked about her car's age.
9. Xiali is a popular Chinese carmaker.

The Economic Lesson

Within China and between China and its neighbors, China's transportation infrastructure is expanding geometrically. Comparable in some ways to the U.S. during the 19th century, China's new roads will facilitate specialization, urbanization, and efficiency.

Margaret Thatcher once said, "You and I travel by rail and road. Economists travel by infrastructure.

Did someone once say, where you look determines what you see? For evaluating the impact of federal spending, perhaps that is the problem.

Some economists emphasize the connection between federal spending and the change in GDP (national production). Mathematically, they say, "Look, we spend one dollar and then national production increases by $2. The reason is the new spending that was created." Government could build a road, then workers are paid, they buy computers and cars, still more workers receive additional wages, which they spend, and so on. The result would be the multiplied impact of the first dollar spent by government--the goal of the 2009 stimulus package. One economist, during Senate testimony, said that the type of spending or tax cut determines the change in GDP. Citing his "Bang For the Buck Chart," he said that the ripple of spending during one year is especially magnified when government extends unemployment benefits.

A trio of Harvard researchers looked at spending through a totally different lens. They focussed on the connection between congressional spending and business investment. Looking at congressional districts to which powerful members of congress directed federal dollars, they found that businesses responded by doing less. Why? They hypothesized that government took over what business would have done, government created uncertainty, and government attracted employees.

As you might have predicted, the first economist recommended more government spending while the second group had the opposite conclusion.

The Economic Lesson

Explained by economist John Maynard Keynes during the 1930s, the government spending multiplier is a controversial concept. Believed by some and condemned by others, it contends that government spending can "prime the pump" and stimulate the private sector when a nation is experiencing an economic contraction.

Words cannot describe the 2300 pages of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In a way, because it says so much, it tells us very little. Still though, after looking at the bill and several news summaries, I wanted to share some main ideas.

At first, "risk" and "protection" were the two words that came to mind. Risk: Lawmakers want to manage the impact of the risks taken by financial institutions. Protection: Lawmakers hope to protect consumers from making unwise financial decisions.  

Then, I discovered a second approach that made sense to me at WSJ.com where they described the basics of the bill through four categories: 

1) Government: Its powers will grow in order to preserve financial stability. Starting with the Federal Reserve, countless government regulatory agencies will be transformed.

2) Banks: Financial firms will experience new restrictions on trading different types of complex securities.

3) Consumers: A new bureau to protect consumers will be established. Its responsibilities will impact a plethora of financial activities. 

4) Investors: Different investing groups such as hedge funds, people who give investment advice, insurance companies, and those who create securities packages will have new constraints.

Essentially then we have four groups responding to a Congress that hopes to control financial risk and expand financial protection. With 2300 pages of text, mathematically, the ways in which the four groups can respond and then interact create countless permutations. 

The Economic Lesson

Passed in 1932 and 1933, the Glass-Steagall Act separated investment and commercial banking, changed the structure of the Federal Reserve, and created the FDIC. Although it was formally repealed in 1999, regulators permitted financial institutions to violate its spirit beforehand. When I read the act, I was surprised to see language that was as tough to follow as the current financial reform bill. However, as 34 pages of legislation, it had fewer variables and appeared to cover many of the necessary regulatory details.  

In The Big Short, Michael Lewis explains the subprime bubble mentality through a quote about CNBC media coverage. "...they weren't in touch with reality anymore. If something negative happened, they'd spin it positive. If something positive happened, they'd blow it out of proportion.." A page turner that clearly and capitvatingly describes the subprime believers and doubters on Wall Street, The Big Short is a perfect story of a bubble.

In addition to the subprime bubble and the tech bubble, there once was a bowling bubble. In 1936, Gottfried Schmidt invented the first automatic pinsetter. With machines replacing pin boys, after World War II, bowling boomed and Wall Street responded. As a young Charles Schwab said, "Compute it out--180 million people times two hours per week, for 52 weeks. That's a lot of bowling." The result was soaring stock prices in firms such as AMF and Brunswick and the bowling bubble. By 1963, though, following the path of all bubbles, the market reversed and prices plunged to 20% of their all time highs.

In The Wisdom of Crowds, New Yorker columnist James Surowiecki says that crowds can usually make decisions that are more accurate than individuals. In markets, crowds accurately price sodas and broccoli and tennis lessons. Studies demonstrate that crowds' guesses cluster around the true number of jelly beans in those huge glass jugs. Similarly, bubbles are an example of crowd behavior. Here though, we have "collective decision-making gone wrong".

The Economic Lesson

Usually investors have "long" positions. They buy a stock (ownership in a company), wait for its price to rise (hopefully), and then sell it.

Selling before they buy, short sellers want prices to decline. How can you sell something you do not own?  Short sellers borrow a stock or some other type of security and then they sell it. Weeks, months, or years later, they buy the security and return it to the owner from whom they borrowed it. For example, assume you borrow something and sell it for $10; then, weeks later you buy something identical for $5 and return it to the lender. You have made $5.

In The Big Short, a very small number of people, rather like the boy in "The Emperor's New Clothes", realized the folly of buying subprime related securities and instead shorted them.

Ed Koch, former mayor of NYC used to ask, "How am I doing?" We can ask the same question about economic stimulus spending. By going to recovery.gov, you will see that there were 682,370 new recipient reported jobs between January 1 and March 31, 2010. Correspondingly, the July 14 Council of Economic Advisors' Report (CEA) estimates that stimulus spending created, to date, somewhere between 2.5 and 3.6 million additional jobs. 

Yes? Maybe. I wonder whether we can be sure that stimulus money created jobs. Perhaps they would have been there anyhow.

In a recent blog post, economist N. Gregory Mankiw questions the CEA's conclusions. Sympathizing with their assigned task, he says it is very difficult to ascertain the impact of the stimulus program through their model:

1) He describes their Keynesian model as assuming that "no matter how bad the economy got, the inference is that it would have been even worse without the stimulus." Consequently, whether the numbers go up or down, stimulus spending has to have had a positive impact.

2) He points out that the CEA presents data confirming that the economy improved after the stimulus passed. How he asks, though, can we know if the stimulus was the reason the economy improved with so many other variables also having an impact. His basic point? "Post hoc ergo propter hoc."

All of this started me thinking about Paul the psychic octopus. As you probably recall, Paul accurately predicted 2010 World Cup Soccer results by the food receptacles he selected. Not quite "post hoc ergo propter hoc, " but close.

The Economic Lesson

Most of us know whether we support more government or less as the thrust of macroeconomic policy. None of us though can statistically prove that we are right.

As most of us know, cow burps add to global warming. According to the NY Times, animal methane emissions account for 10% of Australia's contribution to greenhouse gasses. The solution? The kangaroo. Like cows, kangaroos are "foregut fermenters". However, because their digestive system uses a different microbe, they produce harmless acetic acids instead of methane. If researchers could discover how to give cows the kangaroo microbe, then bovine emissions would be less harmful.

IPCC researchers predict that global warming will result in temperature increases that might average 4 degrees Celsius during the next century. As a result, warmer temperatures would diminish economic growth by 1% to 5%. In other words, the world economy will continue growing but just not as much. (You might want to look at a good debate on the topic at The New Republic.)

Enter Congress. Pending legislation includes proposals for electricity producers using qualifying fuels, creating cap and trade programs and carbon taxes, studying carbon capture, subsidizing auto makers' efforts to create more fuel efficient cars, providing loans for clean energy projects, and nuclear power incentives. They have also suggested a big battery contest.

The Economic Lesson

Using CBA (cost/benefit analysis), economists would compare marginal (extra) cost and marginal (extra) benefit. Next, they would conclude that as long as the extra cost does not exceed the extra benefit that results, the policy should be implemented. Here though, I wonder whether it is possible to assess the marginal cost and marginal benefit of congressional initiatives. Even for animal emissions, because the entire Australian beef industry would be affected by diminishing cattle methane, can we accurately assess the impact?

And therein lies our dilemma. Will the current cost of diminishing greenhouse emissions which may be incalculable be worth a potentially indefinite future benefit?

Called "LeBronomics" by NPR's Planet Money, LeBron James' decision to go to Miami was about much more than $99 million. Instead, the key issue was "utils".

Whenever economists want to quantify satisfaction, they use the "util". If LeBron had selected Chicago, local residents might have felt 10 extra utils every time they watched their team play. (I just chose 10. The number does not matter.) Choosing New York, though, would have resulted in many more utils. 2009-2010 was a 50-loss, disappointing season for Knicks fans. Consequently, just seeing LeBron at every game would have generated lots of extra happiness for many New Yorkers.

By contrast, according to the Planet Money people, selecting Miami created the least extra happiness in the United States. Because Miami already has other superstars, adding a third would not create very many more utils. We could compare this to the utils we get from the first bite of a chocolate chip cookie and the 15th bite. We get much more pleasure at the beginning before adding lots more.

The Economic Lesson

Getting less extra satisfaction from each additional unit is called diminishing marginal utility.

We might add that LeBron James did not experience diminishing marginal utility when he added to his income because Florida tax rates are among the lowest in the country.

Imagine a world filled with electric cars. In private homes, people could install their own charging devices. Others could be built in apartment building garages and on city streets. Some envision restaurants, department stores, and movie theaters offering a charge as you eat or shop. One firm hopes to build battery switching stations "manned' by robots that would replace depleted car batteries during long trips. Demand for oil would drop. Energy independence could become a reality. Yes? Not so fast.

Let's first look at home. For a 20 hour charge, it would be easy. Just use your wall outlet. More speed, though, means lots more voltage and upgrading home capacity.

We should also ask about the role of government. Raleigh, N.C. officials told Nissan that it would require permits, inspections, and electricians for homeowners to install faster charging docks. Electric utilities point out that 15 minute fast charges requiring 440 volts could overload grid capacity. In response, California regulatory authorities expressed concern while Houston says it can turn to wind farms and natural gas fired facilities to satisfy higher demand. In addition, California says it will end its HOV perk for hybrid owners but not for electric and natural gas powered vehicles.

The U.S. auto-related infrastructure began to develop 100 years ago. In 1909, there were 3 "filling stations" in the United States. By 1925, millions owned Model-T Fords and General Motors advertised a car for every pocketbook by producing Chevrolets, Pontiacs, Oldsmobiles, Buicks, and Cadillacs. Government built an interstate highway network and private industry took care of gasoline stations, motels, and roadside restaurants. Is the next step electric?

The Economic Lesson

Two economic questions come to mind that always apply to innovation: 1) What are the tradeoffs? Yes, there are benefits but what are the costs? 2) What role should government play? 

Furthermore, we should remember Joseph Schumpeter's explanation of how creative destruction accompanies innovation.

I am concerned that the word "ration" has a bad reputation. In a recent CBS story about a new Medicare/Medicaid head, and throughout the healthcare reform debate, stories about reputed "rationing" kept popping up. There was no need, though, to search for examples because rationing is everywhere. Healthcare has always been rationed because its supply is limited. 

Actually, the supply of everything is limited. As a result, societies have to have a way to decide who gets what. They have to ration. In the U.S., most goods and services are rationed through a market system. In the market system, prices act as a rationing mechanism. For example, when price rises, consumers typically buy less. 

During World War II, rationing was more extreme. With very limited domestic quantities of such goods as butter, sugar, and gasoline, consumers were allocated specific amounts through books of coupons. Others, hoping to buy more than their coupon totals, located black markets in which an illegal demand and supply price system also rationed goods.

It is true that we usually use the word ration to describe a more extreme drop in distribution. Still though, I hope we will remember that whether we have a lot or a little, still a limited amount has to be allocated. As a result, everyday, our economy rations pizza and eggs and doctor's appointments.

The Economic Lesson

In order to produce and distribute goods and services, all societies have to answer three basic economic questions: 1)What goods and services should we produce? 2) How will land, labor, and capital be used to produce goods and services? 3) To whom will incomes go?

Societies have answered "what, how, and to whom" using three basic systems: 1) the market: demand and supply, 2) command: someone decides and others obey, 3) tradition: the same tasks are passed down through generations

The market, command, and tradition are all rationing systems.

A government decision to stop subsidizing gasoline prices in India fueled protests last week. The subsidy cost the indian government 2.5% of its budget ($5.5 billion). Now, with prices responding to the market, the record high deficit can drop. However, a liter at the pump will increase by 3.5 rupees or 8 cents (6.7%)--the equivalent of almost 30 cents a gallon. Protesters also claim that expensive gas will send the Indian inflation rate beyond a 10% rate.

Events in India took me to gasbuddy to see where the price of gasoline has been in the United States. A five year chart reveals that a gallon of unleaded regular averaged between $2.11 and $3.11 in 2005, touched $4.12 in July, 2008, and dropped to $1.61 soon after. Now, we are at about $2.70.

The Economic Lesson

When economists discuss gas prices, sooner or later the topic turns to elasticity. If price changes a lot and the quantity we buy remains relatively stable, then our price elasticity of demand is inelastic. By contrast, if price swings have an impact on buying, then our response is elastic. Economists believe that our demand for gas tends toward inelastic. Consequently, to encourage less fuel consumption, we could not depend on moderate price hikes at the pump. Instead we would need big price jumps, income drops, and more hybrids. 

Last year's winning idea for the second annual federal worker's cost cutting contest (SAVE) was from A Department of Veterans Affairs employee. Scheduled for the fiscal 2012 budget, the suggestion will save a projected $14.5 million by 2014 by enabling patients to take medication and bandages home with them after being discharged.

Total spending for 2011 is projected to be close to $4,000 billion. $124,000 million ($124,000,000,000) is for the Department of Veterans Affairs. And, the most we could save was $14.5 million during a two year period--$7 million a year? 

The Economic Lesson

The federal budget is composed of mandatory and discretionary spending. Mandatory spending (required by law) for Medicare, Medicaid, and Social Security totals close to half of the budget. Then, if we add defense and interest that is due for money borrowed by the government, that takes us to more than 75% of all spending. Discretionary items cover a multitude of categories including agriculture, foreign affairs, justice, transportation, education, NASA and the EPA. You can see where this going. If we want to control the budget, suggestions for freezing discretionary items will have a minimal impact.

Do you care about Saturday mail delivery? Amazon does. Hallmark does. Catalog companies and and mail service pharmacies do. By contrast, Netflix has said it could accept the elimination of Saturday mail.

Trying to decide what to do about the huge financial difficulties facing the postal service, Congress is holding hearings. Their stated alternatives are to raise rates, cut Saturday delivery, and diminish labor and facility costs. While opinions vary about Saturday delivery, all who testified expressed little price elasticity. Higher postal rates would decrease their usage, further exacerbating post office problems.

Recently, the Washington Post expressed wisdom about the postal service. Comparing creative innovation from a privatized Swiss system to tired thinking from the USPS, they said we are dealing with a hybrid entity "hamstrung by a large and heavily unionized workforce, congressional management, and an antiquated business model."

The Economic Lesson

A market economy can thrive when fundamental infrastructures function well. In the U.S., a transportation infrastructure emerged during the 19th century as roads, canals, and railroads increasingly connected disparate areas of the country. Similarly, a financial infrastructure developed that moved money from those who had it to those who would use it productively. The US Postal Service is a part of a communications infrastructure. When an infrastructure is crucial, is more government or less government the appropriate approach?

Called "a compromise of a compromise of a compromise," the Senate failed to extend unemployment benefits to the 2 million individuals scheduled to lose them on July 12.  

Thinking economically, it is tough to definitively assess the decision. On the one hand, as a $34 billion bill, the deficit will grow and some economists wonder whether more generous benefits actually encourage "jobless workers to be pickier in their searches." But on the other hand, one economist estimates that every dollar of jobless benefits adds $1.61 of stimulus. (This sounds like Harry Truman's search for a one-handed economist!)

Extended U.S. benefits originated in the $787 billion stimulus bill that was passed during February, 2009 when the number of weeks and their dollar size were increased. Since then, the path in Congress to extending benefits further has been complicated.

The Economic Lesson

Looking at unemployment, economist Arthur Okun takes us to the GDP. Okun's Law states that for every 3% rise in the GDP, after the GDP has sustained a trend level for a year, the unemployment rate will drop by 1%.

I suspect we take prices for granted. Please think for a moment about a $10 pair of shoes. As a consumer, that $10 price tag tells you that they are inexpensive and you won't have to sacrifice very much to buy them. Correspondingly, seeing the same price, a shoe manufacturer might decide not to make them because profits would be minimal. 

Saying prices are the reason, in Free To Choose, economist Milton Friedman (1912-2006) tells us that thousands of people, who might hate each other if they ever met, cooperate to make a pencil. Its wood, he says, probably comes from the state of Washington where they must have used a saw which required steel, which needed iron ore. The lead is actually graphite which probably came from mines in South America. With rubber from Malaya, they made an eraser and still, yellow paint and glue were necessary.

Telling a similar story about the iPhone4, the NY Times described the worldwide cooperation that created it. While the phone is assembled in Shenzhen, China, according to a "teardown" analysis, its chips come from Germany, South Korea, and the U.S., a touch-screen module is from Taiwan, and the phone's gyroscope is made by a Geneva based company. Also involved are Japanese, Italian, and French firms and every one of them probably has production facilities around the world.

Why do they cooperate? Dr. Friedman would have said that the reason is the price system.

The Economic Lesson

In a market economy, prices that freely respond to demand and supply provide information and motivation to buyers and sellers. The up and down movement of prices is called the price system.

By contrast, in the former Soviet Union, prices were set by government created committees. As a result, they did not convey information about efficiency on the supply side nor about quality on the demand side. Different suppliers were not encouraged by prices to interact nor to cater to consumers. Lacking a price system, the Soviet economy collapsed.

If you want to know whether money relates to happiness, you might first decide what makes you happy. A Gallup World Poll of 136,000 people in 132 countries from 2005-2006 focused on 2 variables: "life satisfaction" and "enjoyment of life." Those people who use how much money they have earned as a "scoreboard," profess to greater life satisfaction because of higher earnings. By contrast, happiness on the "enjoyment of life" scale, which included laughter, friends, and meaningful family connections did not relate to money.

This Gallup Poll is one of many happiness studies we have posted during the past several years. In one previous post, high income people experienced more happiness than low income individuals. We can, though, qualify the high income earners' happiness with a study that concluded income increases had no impact on happiness. Qualifying it further, we also found a study that contradicts the first one. Then, yet another study asserts that lower quintile earners are happy when upward mobility is feasible. Also, however, a different study demonstrated that happiness comes from earning more than your "neighbor". Consequently, people preferred lower earnings over higher earnings when the lower number exceeded an associate's income. Finally, researchers concluded that overworked women, more recently, have become less happy than men.

The Economic Lesson

Thinking economically typically requires looking at the margin. The margin is that imaginary line where we find something extra. For example, marginal revenue is extra money that a business receives for each additional sale. When a business sells a computer, the price of the computer becomes its marginal revenue. For happiness studies, we are at the margin, asking if extra money (at the margin) means extra happiness (at the margin).

Having just celebrated July 4th, I've been thinking about 1776, the American Revolution, and money. At the time, money frequently determined who won and lost wars. When countries ran out of money, they had to stop fighting. Great Britain had sufficient revenue to fight wars because they could collect taxes efficiently and fund a national debt. 

By contrast, the credit of a new nation is anything but dependable. Just like you and me, a country establishes good credit by showing it can pay back loans. In 1776, trying to raise money to fight the war, the U.S. had no credit history. The Continental Congress was able to borrow close to $11 million from the French and the Dutch (British enemies) and through domestic bond sales but still it was not enough. As a result, Congress turned on the printing presses.

As Benjamin Franklin said, "This currency as we manage it is a wonderful machine. It performs its Office when we issue it; it pays and clothes Troops, and provides Victuals and Ammunition." As Franklin later pointed out, though, when too much money is printed it rapidly diminishes in value. From 1775 to 1779, the Continental Congress had issued and then spent close to $250 million. The people who received the $250 million now had lots of dollars to spend. As a result, prices skyrocketed.

The Economic Lesson

An economist would say that the Continental Congress had created demand pull inflation which means that too many dollars are chasing too few goods. Or, in colonial terms, "A wagon-load of money will scarcely purchase a wagon-load of provisions."

Located 30 miles from Cape Cod, Massachusetts, the island of Nantucket has no traffic lights. Instead, drivers respond to stop signs, rotaries, and courtesy. More often than not, if a pedestrian, a walker, or a biker needs to cross the street, cars stop. When someone is making a left turn or leaving a parking lot on a busy street, cars stop. And, drivers usually smile and street crossers wave thank you.

Nantucket's lack of lights started me thinking about Adam Smith. Economic thinker (there were no economists in 1776) Adam Smith suggested that less government was better than more government. Smith believed that human nature was so diverse and policy consequences so unpredictable, that, although imperfect, less government could ultimately lead to more virtuous human behavior. For example, told their taxes will be increased to help the less fortunate, certain people express resentment. And yet voluntarily giving the same amount to charity can evoke pride and generosity.

What are the implications for our society if what we do voluntarily makes us feel better and can make us more virtuous than when we are forced to do something?

The Economic Lesson

In his first major book, The Theory of Moral Sentiments (1759), Adam Smith sought to describe a just society. Displaying a thorough grasp of human nature, he said that the path to a just society started with profit seeking businesses. Building from his first book, he then wrote The Wealth of Nations (1776), through which his analysis brought order and insight to the seemingly chaotic market system that was spreading through Europe.

Told you are about to meet the CEO of a major corporation, do you imagine someone in a skirt? According to a recent Washington Post article, the answer from most people is "No". To individuals saying we have entered "the age of women," because of Elena Kagan and more females in the U.S. work force, this journalist instead looked at "the areas where the real money and power reside." For example, at Google and Amazon, the top paying hedge funds, and the major banks, males dominate top management. Her conclusion? She suggests that for women to claim economic power, they have to focus on amassing their own capital.

Looking further at gender equality in OECD Nations, 2006 median income statistics indicate that women earn 18% less than men. In Japan and Korea, the gap is close to 30%, in Poland, New Zealand, and Belgium, at 10%, the gap is much less, and for the U.S. the difference is 19%. Correspondingly, women hold only 1/3 of all management positions.

The Economic Lesson

In the U.S., to be defined as a part of the labor force, a person has to be 16 or older and employed or unemployed but looking for a job. With 154 million people in the U.S. labor force, women total approximately 72 million.

If you were asked today to plan next week's snacks, would you select fruit or chocolate? In a 1998 study, 74% of those surveyed said fruit. However, when the same people had to decide between fruit and chocolate for today's snack, 70% chose chocolate.

As explained by behavioral economists, those who chose chocolate for today's snack were "overvaluing" current gratification and "undervaluing" the future benefits from fruit. Behavioral economists also believe that people tend to choose the status quo instead of other choices that require active decision-making. 

This takes me to a question. If we tend to overvalue current gratification and stick with the status quo, then how can we make wise decisions about health care insurance, retirement planning, and mortgages? In a recent column, New Yorker columnist James Surowiecki suggests "choice architecture" through which optimal choices are the default option. For example, a fixed rate, self amortizing 30 year mortgage would be the default rather than a more risky loan. Another possibility is just having a brief explicit disclosure that buyers have to sign. For example, when getting a risky mortgage, they would have to indicate that they knew that, " You could lose your home." (Researchers have found that this works.) Surowiecki also recommends that government protect us and that schools mandate financial literacy courses.

The Economic Lesson

Behavioral economics offers some insight that legislators should recognize. Still though, we have the convergence of the profit seeking sell side and the buy side with a plethora of exploitable tendencies. Add to that congressmen with reelection concerns and you start to wonder how 2300 pages of financial reform can reflect our collective wisdom.  

Kenyan coffee exporters have a problem at the Tanzanian border. "On the Kenyan side they operate 24 hours a day, but on the Tanzanian side it's 12 ...We have had drivers standing at the border for 4 days. These things make the final price of our coffee up to 3 times that of the local product." The solution? 5 East African nations are creating a common market. 

In his America and the New Global Economy Teaching Company course, Professor Timothy Taylor explains why the Europeans wanted a common market. Assume for a moment that you own a factory and start exporting goods to a nearby country. You have to wait at the border and have your trucks approved by customs. You have to be sure that you comply with their product safety laws. You need to use their currency. 

Dr. Taylor says that with a common market you could enjoy the benefits of the 4 freedoms: 1) People, 2) Goods and services, 3) Labor, 4) Capital. The benefits of a European common market initially included one set of regulations instead of 15, labor that could move more freely, and capital that was more accessible.

It is amazing that our founding fathers created our "common market" when they replaced the Articles of Confederation with the Constitution. The European process was accelerated with the Single Market Act in 1986. And now, Burundi, Kenya, Rwanda, Tanzania and Uganda are trying to move in a similar economic direction.

The Economic Lesson

In an Econtalk lecture, Professor Russ Roberts talks about the connection between Adam Smith, David Ricardo, and trade. Starting with Smith and then moving to Ricardo, he points out that the optimal potential of markets is realized when they grow larger. "The more people we trade with, the greater the opportunity to specialize and innovate..." and grow.

This returns us to the benefits of the East African Common Market, the EU and the United States. 

At another time we will look at NAFTA.

One problem with macroeconomic policy is the inability to confirm that it does or does not work. With variables constantly in motion, an entire economy as your lab, and no way to keep anything constant, how to know if you are doing the right thing? 

This takes me to a Pew Research Center survey. A Pew questionnaire sent to 1001 adults confirmed that we all agree that state spending is a big problem. It also confirmed that we can solve the problem by cutting spending on highways, health services, public safety, and school funding. Or, we can raise taxes.

Yes? Not quite. For every solution, more than 50% voted "no". Furthermore, with the possibility of a double dip, some say now is the worst time to implement "austerity". Others say "austerity" is the only solution.

Decisions about state spending parallel federal dilemmas. Do we need more stimulus spending or has government spent too much already? We have no definitive empirical data to provide guidance.

The Economic Lesson

Since our nation began, we have disagreed about economic policy. George Washington had to cope with the ongoing feud between Secretary of the Treasury Hamilton and Secretary of State Jefferson. Hamilton was for a more interventionist government to spur economic development. Jefferson, by contrast, wanted less. And yet Hamilton's goals are the same as today's non government/market advocates.

How much will the San Francisco Giants charge for a baseball ticket? It all depends on, "past ticket sales, the day and time of the game, the teams' records, the pitching match-up, the weather, the going rate on resale Web sites like StubHub and other data." So, when 2 star pitchers were named for this year's Memorial Day game between the Giants and the Colorado Rockies, tickets that had been selling for $17 rose as high as $25.

Somewhat similarly, during the 1980s, American Airlines was the first to use a flexible pricing system that was called yield management. After airline deregulation, American Airlines had to figure out how to compete against young upstart airlines with lower costs and lower fares. Their response was a computerized booking system that constantly changed fares. Suddenly, their revenue depended on when the flight was booked, whether the flier stayed over a Saturday night (which identified business travelers who would pay more than the discretionary traveler), and other variables. Just like the San Francisco Giants, American was maximizing revenue by pricing customers individually.

The Economic Lesson

Whenever they have some monopoly power, business firms act more as price makers than price takers. Price makers have the power to shift their own supply curve to a new position. As a result, they help to decide where supply will cross demand to determine price. By charging different prices for the same product, they can cater to different consumers with different demand curves. Price takers have much less control. Their price is determined by the intersection of a supply curve that many similar firms create and a demand curve shaped by many consumers.

When the San Francisco Giants realized they could maximize revenue because they had price making power, they implemented their "dynamic pricing" approach.

It is so tempting to assume that we get the best results when we tell people what to do. If we want to use less oil, then pass laws that encourage us to invent better batteries. Yes?

Using Selman Waksman as an example, retired Harvard professor David S. Landes, would probably answer, "No." Waksman's story starts in 1910, when, as a 22 year old Russian immigrant, he arrives in Philadelphia. The tale reaches its climax when he receives the 1952 Nobel Prize in Chemistry and Medicine for developing streptomycin. Waksman's talents flourished in the United States because of the education he accessed, the mentors who supported him, and the businesses and federal government who gave him research money.  

Summarized by Landes, Waksman was successful because of 1) "Contact and exchange" which resulted from "multiple points of intellectual entry" where ideas are nurtured, developed, and shared 2) Individual ambition, drive, and intelligence 3) Luck 4) An ongoing stream of new tools and technology. The result is technological progress, a key ingredient of economic growth.

All of this takes me to a recent NY Times article about "idea incubators" and the convergence of academia, private business and (sometimes) government. With a program at M.I.T. as the article's focus, an "entity" is described through which academic researchers can access business funding for their work at the idea stage. Fostering the potential of ideas, the concept is innovative because most seed money has been available at the development stage, after a good or service has materialized.

The Economic Lesson

Illustrating our economic growth, graphs with the bowed out lines called production possibilities frontiers will move to the right when we optimize opportunities for innovation. Economic growth is the best way to solve our current fiscal and financial problems.

I recommend Dr. Landes's book, The Wealth and Poverty of Nations: Why Are Some Nations Rich and Others So Poor?

Is it possible that the marshmallow test relates to financial reform? As described in a 2009 New Yorker article by Jonah Lehrer and a WNYC Radio Lab podcast, a marshmallow test given to 4 year olds might predict adult behavior.

40 years ago, psychologist Walter Mischel began studying gratification by giving young children a choice. A child and a single marshmallow were left in a room. The child could have one marshmallow now or two later. 500 children were tested. Mischel concluded that at 4 years old, certain children can resist temptation. Some could last 20 minutes while others capitulated immediately. The average resistance time was 7 or 8 minutes. (Researchers also used chocolate bars and Oreo cookies.)

Years later, in a follow-up study, Mischel discovered that the SAT scores of children who held out for 15 or 20 minutes were 210 points higher than those who lasted only 30 seconds. Returning to the same people 40 years later, he found that the high delayers had better jobs and were skinnier.

Looking at other studies, Lehrer again found a connection between our "hard wiring" and our behavior. In his book, How We Decide, discussing the connection between our "decision making apparatus" and our financial behavior, he suggests that an unaffordable McMansion bought through a subprime mortgage could be increasingly attractive if the potential loss is long term and the gratification is current.

The Economic Lesson

And this is where we can return to financial reform. If the intersection of neurological and psychological research does indeed point to certain people having certain innately unhealthy tendencies, how much should government protect them and everyone else?

Having just read a Washington Post article about the U.S. Postal Service (USPS), I started thinking about its future. But first, its past:

While we have had postal services since the 1600s, Ben Franklin transformed the system. Appointed Deputy Postmaster for the Colonies by the British, he established our first home mail delivery system, diminished to a single day the letter delivery time between New York and Philadelphia, and to 6 days between Philadelphia and Boston. When Franklin was fired by the British for his rebellious political activity, the postal system was making a profit.

Not today.

Although it has a monopoly on letter delivery and mailboxes, still, the USPS lost a total of $12 billion during the past 3 years. As explained in a Teaching Company lecture, they face competition from UPS and FedEx, from email, faxes, and texts. Their salaries average 30% higher than the private sector, they have massive pension and retirement obligations, and their productivity lags behind national averages.

While Congress has begun hearings on Postal Service problems, it appears unlikely that they will select any solutions that New Zealand and Germany have successfully implemented. Congress could divide the system into separate privately or publicly owned, profit seeking corporations or just eliminate all monopoly protection. To cut costs, they could stop Saturday delivery. As 80% of its expenses, labor could be cut. (Only Wal-Mart employs more people than the USPS.) 

Having had nothing to do with the USPS, perhaps the title of the movie "You've Got Mail" sums it all up. 

The Economic Lesson

Hoping to preserve the status quo, some people have said that the Postal Service is a natural monopoly. Most economists disagree. Having a natural monopoly means that one firm is more efficient than a competitive market structure with many firms. Until new technology transformed the industry and government broke up AT&T, the U.S. phone system was called a natural monopoly. 

A letter in "The Mail" section of a recent New Yorker tells us about a funny error on the cover of the May 17, 2010 issue. Mainly portrayng emissions from vehicles, factories, and cows, the cover focuses on our environmental problems. According to the letter writer, though, the illustrator, "..has the 'ends' mixed up." The cow "releases only trace amounts of gas through its rectum [as drawn]...; the hundreds of quarts of methane it contributes to the atmosphere each day are belched."

Thinking about the cover, I recalled pending Congressional legislation that concerns emissions. Through the "Electric Vehicle Deployment Act of 2010," the Congress proposes that we minimize auto emissions and oil consumption. The 77 page (pending) law includes a $10 million prize for creating a 500 mile battery and a process for establishing between 5 and 15 "deployment communities". 

I wonder whether government R & D support should be so specific. Should federal dollars go to institutions rather than a precisely described result? Aren't the best ideas generated when we encourage a more open ended approach? 

The Economic Lesson

Through an opportunity cost chart, we could determine the benefits of targeting one technology and the benefits of an attractive alternative approach. Knowing that choosing is refusing, hopefully our legislators use cost/benefit analysis.

As a prospective buyer, Daily Show reporter Jason Jones went to check out the Arizona State Capitol Building when he heard it was for sale for $735 million. Once sold, the capitol would then be leased back to the state for $60 million a year. Why sell it? Because Arizona has a $3.4 billion budget gap.The problem, though, is that the solution is short term. It is a temporary fix that leaves all fundamental spending and revenue issues untouched. 

Other states facing similar crises have devised equally short term solutions. Several are trying to sell prisons. Hawaii has shortened its school week. States have postponed paying workers until the fiscal year ends to avoid recording current spending.

New York's Lieutenant Governor Ravitch, appointed by Governor Paterson to deal with his state's budget crisis, explained that while cities can declare bankruptcy, states cannot. Consequently, states lack a "triggering event" that would force businesses, labor, and political groups to compromise.

The result is a graph that Ravitch calls a "jaws chart". On a "jaws chart," a line representing state revenue is rising very gradually while the line showing state spending is much steeper. The two together look like the shark in Jaws with his mouth open. 

The Economic Lesson

There is a difference between a debt and a deficit. The debt refers to the total amount owed by the municipality or the federal government. The deficit is the amount by which spending exceeds revenues during one fiscal year.

Referring to a basic investing strategy, Vanguard founder, Jack Bogle said, "Buy and hold forever". If you disagree, though, you might want to hear about the impact of World Cup soccer on stock markets.

In a recent academic study, researchers found that team losses cause stock market declines. With more important games precipitating steeper plunges, a team loss during a World Cup elimination stage resulted in its home stock market dropping close to .5%. The reason, the study's authors say, is investor mood. By contrast, winning has no impact.

Academics also have identified a correlation between rising stock markets and Ramadan, St. Patrick's Day, and Rosh Hashanah (but not Yom Kippur). A fourth study found that morning sunshine brings a higher stock market close.

Might I suggest a new investing strategy?

The Economic Lesson

While the complexities of investing lead me to question these studies, they do take me to behavioral economics. In 2002, Daniel Kahneman won the Nobel Prize in economics for his work in behavioral economics. Concluding that we were not always as rational as some economists believed, he examined a cognitive side to our behavior that created unexpected economic results.

Each of us is helping to pay a $10 million monthly grass mowing bill. Why? Because of homes that are owned by Fannie Mae and Freddie Mac. As GSE's (government sponsored enterprises), Fannie and Freddie had purchased mortgages from financial institutions, sold the mortgages, and said they would guarantee them. When Fannie and Freddie ran out of money, tax payers became responsible for their obligations.

This is the way it works: John decides to buy a house. John gets a mortgage from a local mortgage broker. The broker sells John's mortgage to Fannie Mae. Combining John's mortgage with JoAnne's and Jesse's mortgages, Fannie Mae sells them as a package that pays interest to investors. When an investor asks Fannie about the mortgages, Fannie says, "Don't worry. I will guarantee each one." So, when John loses his job, defaults on his loan, and moves out of his house, Fannie rescues the investor by guaranteeing the payments that John had been making.

Meanwhile, Fannie got the house. As of the end of March, actually, Fannie and Freddie got 163,828 houses. Keeping insides clean and outsides neat cost them $1 billion last year. That means that it cost us $1 billion.

The Economic Lesson

Mowing a lawn brings to mind the "multiplier". Assume that the contractor hired by Fannie had to purchase lawn mowers, and the lawn mower manufacturer hired extra workers, and those workers spent their paychecks on washing machines. Then the washing machine workers spent their paychecks on computers and the computer workers bought cars. Called the multiplier, this whole spending sequence happened because of the lawn mower maker. If a lawn mower cost $300 and $600 is added to the GDP because of the subsequent goods and service purchases the lawn mowers led to, then the multiplier is 2.

In Pursuing Happiness: American Consumers in the Twentieth Century, economist Stanley Lebergott asked us to imagine that automobiles, penicillin, electric washing machines, refrigerators, disposable diapers, electricity, television, and "every economically significant good added since 1900" all disappear.  Next, he tells us that the remaining items would include "salt pork, lard, and houses without running water." You get the picture. Our purchases have changed a lot during the past century.

Next, I checked a Bureau of Labor Statistics report (2008 data) too see how we spend our money today. In descending order, the average household uses close to 34% of its total spending on housing; 17%: transportation; 13%: food; 11%: personal insurance and pensions; 5.9%: healthcare; 5.6%: entertainment; and 3.6%: apparel and services.

As you might expect, the amounts are quite different when we look specifically at income levels. For example, a family spending $34,687 annually will use $4,818 on food. At the other end of the income scale, a family spending $124,678 will allocate $13,011 to food.

The Economic Lesson

Just an interesting spending fact today. On July 4, 1776, Thomas Jefferson noted that he spent 27 shillings on 7 pair of women's gloves.

I once read that Thorstein Veblen let his dirty dishes accumulate until his cupboard was bare, then sprayed them with a hose and started all over again. Maybe a good idea, but unusual. This early 20th century scholar (1857-1929) was somewhat eccentric.

We remember Veblen for his The Theory of the Leisure Class (1899) and his theory of conspicuous consumption. According to Veblen, affluent consumers try to convey their power and wealth through wasteful and unproductive behavior. The affluent can do less because their servants and employees do more. And then, to display their prestige and power, everyone else also wants to do less. As expressed by Veblen, "The members of each stratum accept as their ideal of decency the scheme of life in vogue in the next higher stratum, and bend their energies to live up to that ideal."

In a 2009 essay, columnist Daniel Gross asks whether Veblen is still right. Does wasteful spending convey prestige? Yes, he concludes. But, when Veblen says the affluent become unproductive, times may have changed. "Type-A" behavior has become prestigious. Maybe now, "there's a sort of reverse prestige associated with leisure."

More tomorrow with specifics on what the rich buy.

The Economic Lesson

Using Lorenz curves developed by statistician Max Lorenz, we can look at income distribution in the U.S. Lorenz divided the total number of families into 5 equal groups as the X-axis of his graph. For the Y-axis, he looked at the total amount of income that all families received. Then, he used coordinates to show how society's total income was distributed. For example, a dot at (20.20) would mean that 20% of all families received 20% of all income. If the line moved from (20.20) to (40.40) to (60.60) and finally to (100,100), income distribution would be equal. Displaying unequal income distribution, in the U.S., the most affluent quintile receives close to 50% of all income. 

States debating a tax on soda have to decide whether they want to raise revenue or diminish obesity. If a sales tax on soda is not very high, people will continue buying sugary drinks. The result? The state gets more money. On the other hand, if the tax is high enough and people buy fewer sugary drinks, then a major cause of the "obesity epidemic" in the United States will be addressed. 

When will a tax impact sales? A recent study described in the American Journal of Public Health concluded that soda prices need to increase by 35% (45 cents up from the baseline price) for people to diminish soda purchases by 26%. With health care costs soaring and obesity spreading, all a state needs to do is levy a 35% soda tax. Are they? According to a 2009 Kaiser Family Foundation study, the highest soda tax rates, at 7%, are in California, Indiana, and New Jersey.

With state budget crises erupting everywhere, do you expect state lawmakers to opt for health over a revenue stream?

The Economic Lesson

An economist would say the sales tax debate is about the price elasticity of demand. If price changes a lot and the quantity we buy remains the same, as with medication and gasoline, then our demand is inelastic. By contrast, if price swings have an impact on buying, then our response is elastic. With soda, within a certain price range our demand is inelastic. Once we reach the 35% level, though, we switch to an elastic response. 

If Miuccia Prada sees a vintage designer jacket that she likes, she can copy it. She can even replicate it exactly and call it a Prada. Illegal? No. And yet, if Michael Lewis included a page from another writer's book, he would be accused of violating intellectual property rights.

In a TED talk, Johanna Blakley explains that a jacket and most other clothing cannot be copyrighted because they are "utilitarian". A logo on the jacket can receive copyright protection but not the jacket or blouse or coat or shoe. Contrary to what I would have expected, she believes that the industry is helped by the absence of protection. Copying begets trends; copying stimulates innovation. The threat of copying makes people repeatedly move onward to newer, better, and more unique designs.

Writers of jokes, designers of furniture, and inventors of autos also find it tough to secure patent protection.

Your opinion for protecting music? 

The Economic Lesson

I wonder whether Alexander Hamilton would have disagreed with Ms. Blakley. Convinced it would foster invention, protect infant industries, and thereby stimulate economic growth, as Secretary of the Treasury, during the 1790s, Hamilton promoted a patent system. 

Reading about India's inadequate railway system, I thought about the Erie Canal. Currently, massive freight containers that took four or five days to travel from Singapore to Mumbai will then take 28 days to reach New Delhi because trains and tracks are too congested. To continue growing, India will need a better transportation network.   

By contrast, during the nineteenth century, a transportation system of roads, canals, and railroads increasingly crisscrossed the United States. Dug between 1817 and 1825 from Albany to Buffalo, N.Y., the Erie Canal was the last link of an all-water route between the port of New York and the Great Lakes. Because of the Erie Canal, eastern manufacturers could easily trade with western suppliers of raw materials. Instead of traveling via slow and expensive overland routes, goods could move across the Erie Canal more cheaply and quickly.

Specifically, to ship freight 100 miles by land during the early 1820s would have cost $32 a ton. By canal, the expense dropped to $1 per ton. Several decades later, in 1852, moving over rivers and canals between Cincinnati and New York City, freight arrived in 18 days. By rail, it took 6 to 8 days.

The Economic Lesson

Canals and railroads could also be called capital. Defined as tools, buildings, and inventory, capital is crucial for economic development because it saves time and increases knowledge. Because capital investment involves postponing current consumption, India has politically difficult choices.

Picture this political cartoon: In some unknown ocean, a Chinese submarine confronts a U.S. navy vessel with the Chinese submarine captain saying, "Turn around or we sell all your T-bills." The caption says, "Chinese sub threatens U.S. Navy."

As expressed by Harvard Professor Niall Ferguson in a recent talk, the People's Republic of China holds "a substantial chunk" of the U.S. federal debt. Professor Ferguson referred to China because he was discussing the connection between massive debt and global power. First though, through three questions, he presented a primer on debt:

1. How can we identify a debt crisis? We can look at the ratio between the GDP and the debt; we can compare interest payments to tax revenue; we can look at dependency on foreign funding.

2. Why have debt crises been tough to eliminate? They are difficult problems because they are political phenomena, cutting spending and raising taxes are unpopular, and irrational exuberance can be uncontrollable.

3. How can countries exit a debt crisis? They can grow their economy, lower interest rates, get a bailout, create fiscal pain, print money, or default.

Because the world's advanced economies share a debt crisis (except for Norway and Canada), Professor Ferguson concluded his talk with, "It's not a thousand years that separates imperial zenith from imperial oblivion. It's really a very, very short ride from the top to the bottom."

And that returns us to U.S. global power, the U.S. debt, and to our political cartoon (which you can see in Dr. Ferguson's slide show, slide #32.)

The Economic Lesson

Perhaps our fiscal challenges remind us that there is no free lunch. Beyond the money that was spent, the stimulus program can be very costly.

I was surprised to hear that when Fannie Mae was created in 1938 as a federal agency, a part of her mission was to move money. At the time, because of the 1927 McFadden Act, interstate banking was prohibited. As a result, there could be (and was) insufficient money for mortgages in California and too much unused mortgage money on the East Coast. By buying mortgages from banks and brokers, Fannie Mae was able to move money to areas that needed it. Meanwhile, by selling the mortgages she purchased, she could attract funding from the areas that had it to lend.

Fundamentally, Fannie Mae was supposed to help people buy homes. During the 1930s, she made 30 year mortgages more common when 5 year mortgages were the norm. Yes, she typically required a 20% deposit and strict credit guidelines but she guaranteed the mortgages that she purchased. She let people live the American Dream.

30 years later, everything changed. In 1968, under President Johnson, Fannie Mae became a private corporation but retained a connection with government as a GSE (government sponsored enterprise). No longer a federal agency, she was a profit seeking business with stockholders. Still though, the federal government implicitly guaranteed the mortgages she purchased.

As a result, especially since 2003, when Congress asked her to assist the effort to extend home ownership, Fannie Mae reduced her credit requirements. Initially, profits and home ownership soared but both depended on home prices rising. When prices started to fall, recipients of NINJA mortgages (No Income, No Job or Assets) and 3% down payment mortgages defaulted. The result? The government's implicit guarantee has become an $84 billion dollar bailout reality.

The Economic Lesson

Arthur Okun's Equality and Efficiency:The Big Tradeoff (Brookings, 1975) discusses the tension between our democratic heritage and our economic aspirations. Equality implies a smaller economic pie while with efficiency we get a bigger pie and more individual wealth and power. 

Do you support the smaller pie that would accompany a government that facilitates widespread home ownership?

We will never know for sure whether the $787 billion stimulus package really made a difference. According to NY Times columnist David Brooks, President Obama's economists predicted 3 million jobs would be created or saved while others suggest the impact will be much smaller.

How are we doing so far? Is the U.S. economy faring much better than it would have without massive spending? 

Looking at research by Harvard professor Edward Glaeser, we see the data from individual states provides no definitive answers. We cannot say for sure that unemployment numbers and the change in government spending are related. Also, even with the Recovery Act, we still have a 9.7% unemployment rate and I wonder how you can prove that government "saved" a private sector job. As Dr. Glaeser points out, because "there are too many moving parts," we cannot identify definitive empirical evidence supporting or refuting a Keynesian approach. 

Even for the Great Depression, economists disagree. Some say FDR's spending was crucial. Others believe that World War II was the answer. Meanwhile a third group asks us to focus on monetary policy problems. 

The Economic Lesson

British economist John Maynard Keynes (1883-1946) said that government economic intervention could be beneficial during a recession. "Prime the pump" through government deficit spending. Then, when the private sector regains its strength, government can reduce its spending.

This story is about a canal and a plastic milk crate. It takes place on a mango farm in Haiti. The farmer has 2 mango trees. The trees produce her entire crop and her income of approximately $2 a day. As described by NPR's This American Life, to double production, this farmer just needs water from a nearby river that a short canal would deliver. For Americans to buy more of her crop, she just needs a crate to minimize bruising. To get the crate, she needs aid from an NGO. For the NGO to provide the crate, she has to participate in a farmers' cooperative. For the cooperative to get the crate, they need property on which to store crates. To get the property, the farmers have to be willing to give it to the coop.

I think you see where this is going. It is complicated. And, to make matters worse, Haiti is listed by the World Bank as one of the toughest places in Latin America to do business. Ranking close to last (#32) in such categories as "ease of starting a business" and "construction permits," Haiti's bureaucracy presents formidable business obstacles.

The Economic Lesson

Countless economic issues relate to Haiti's canal and crates story. Technology (a canal), tools (crates), and transport (roads) are only several challenges facing a mango farmer who wants to double her production. Add huge transaction costs ("red tape") to the tale and you wind up, so far, with a sad ending. You also have a production possibilities curve that will not increase.

To hear a surprising solution, you might want to listen to the econtalk podcast on charter cities from Stanford's Paul Romer.

Death usually means some money for Uncle Sam and the rest for the real relatives (and unrelated heirs). As a result, when John D. Rockefeller died in 1937, his heirs received 30% of his fortune and the U.S. government got the rest. During March, 2010, however, Dan Duncan, the 74th richest man in the world died and his family inherited everything because the estate tax had lapsed for just one year.

Rewind to 1889.

Supporting an inheritance tax, Andrew Carnegie said, "I would as soon leave to my son a curse as the almighty dollar..." Bequeath great wealth to charity? "No," because a disappointed family will probably contest the decision. Instead, according to Carnegie, a man of wealth should, ..."set an example of modest...living..., provide moderately [for] those dependent upon him..." and then use the money for the good of the people. How? Invest in universities, free libraries, hospitals, parks, meeting halls, and church buildings. Saying that it created liars, Carnegie opposed an income tax.

Do you agree with Andrew Carnegie?

The Economic Lesson

In descending order, the individual income tax, the payroll tax (social security/Medicare), and the corporate income generate most of the U.S. government's revenue. Typically, even though rates fluctuate with new legislation, still, revenue tends not to exceed 19% of GDP.

Just like teachers, the writers of the Index of Economic Freedom give grades. Instead of students, though, countries receive their grades after being "tested" on such economic issues as starting a business, tax policy, and private property. The highest grades are earned by the countries that give citizens the most freedom to produce and distribute goods and services without government interference.

For the 2010 Index of Economic Freedom, Hong Kong, with a grade of 89.7 was first. Ranked last at #179, North Korea's score was "1". The United States was #8 with an average of 78.

A recent NY Times article illustrated why North Korea fared so poorly. Demonstrating a citizen's lack of monetary freedom, the North Korean government devalued its currency last November. Suddenly, a family's life savings of $1560 became $30 (4,050 North Korean Won). In the business sector, with all factories run by the state, production is stagnant and workers, sometimes, are not paid. In agriculture, (as with the former Soviet Union) individual plots of land are far more productive than large state-owned collectives. The results? The North Korean economic system has produced massive poverty and inadequate food.  

The Economic Lesson

Countries produce and distribute goods and services through three basic economic systems: tradition, command, the market system. North Korea's centrally commanded economic system is government controlled. While the United States primarily has a market system in which people are free to function economically, still there is some command whenever government policies affect market activity.  

A recent Pew Research Center survey asked 2260 adults whether they would, "prefer to live in a place with more McDonald's or more Starbucks." 43% said McDonald's; 35% said Starbucks; 22% had no preference. According to the study, a key variable is your political inclination. Liberals tend to favor Starbucks over McDonald's.

More specifically, if you are female, politically liberal, 18-29 years old, earn more than $75,000 a year, a college graduate, or religiously unaffiliated, you probably prefer Starbucks. On the other hand, a McDonald's loyalist tends to be male, to earn less than $30,000, to have a high school degree but not college, and/or to be Protestant or Catholic.

The Pew survey reminded me of research about economics majors that was in the news. Discussing the connection between education and civic behavior, a New York Fed Staff Report concluded that students who majored in economics tended to be Republicans. Taking a huge analytic leap, does that means that economists prefer McDonald's?

The Economic Lesson

McDonald's and Starbucks compete in monopolistically competitive markets. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. The competitive behavior of beauty salons, supermarkets, and clothing manufacturers is also shaped by a monopolistically competitive market structure.

From most competitive to least competitive, the four basic competitive market structures are: perfect competition, monopolistic competition, oligopoly, monopoly.

Yesterday's post about the impact of individual wealth on happiness started me wondering about flush toilets, washing machines, and cars. As our nation became wealthier and produced more goods and services, how did that affect our happiness? To get some answers, I looked at Stanley Lebergott's Pursuing Happiness: American Consumers in the Twentieth Century.

Talking about a typical housewife in 1900, Lebergott says that she needed approximately 7 hours each week to do the laundry. During one year, for one child, she washed more than 4,000 diapers. Lacking modern plumbing (15% of all families had flush toilets), she hauled 9,000 gallons of water into the house annually. To do a wash, this woman had to boil the water, use her scrub board, wring out the water, hang up the clothes, and carry out the dirty water. The Model T? Not yet.

Statistically, today's economy can be described through trillions, billions, and millions: trillions of dollars of production, billions of dollars of government spending, millions of business firms. Compared with 1900, we are talking about longer lives, better health, and many more labor-saving devices. Is this more happiness? Lebergott says, "Yes!"

The Economic Lesson

The GDP is the money value of goods and services produced in one country during a specific time period. The four components of the GDP are consumption expenditures (consumer spending), gross investment (primarily business spending and residential housing), government purchases, and exports minus imports (usually a negative number). The consumer component is the largest segment of the U.S. GDP.

Does money buy happiness? A 2006 report from the Pew Research Center said yes and no.

If we compare income groups, the answer is yes. Almost 50% of people earning more than $100,000 annually said they were happy. However, as income levels dropped, so too did happiness. Only 24% of those who earned $30,000 a year said they were happy.

Pew researchers, though, have been asking the same question for three decades during which per capita income has risen. As a nation, we are richer and yet happiness levels have remained constant. They did discover, though, that when we discover we are earning more than others, we do experience a pop in happiness.

In another study Richard Easterlin investigated whether we experienced increasingly more or less happiness each time our income grew. If, he hypotheisized, our behavior paralleled typical economic behavior (diminishing marginal utility), we would display less extra happiness with increases in income. Instead, he found no marginal utility. There was no increase in happiness.

I do suspect though that the recession has affected happiness for many of us.

Your interpretation?

The Economic Lesson

When eating chocolate chip cookies, our total utility (satisfaction) usually increases. However, economists like to point out that the increase-the marginal utility- for each additional cookie is less and less. Numerically, we could say the first cookie gives us 10 units of utillity as does the second one. Then though, a third cookie might provide 3 units of pleasure and the fourth one only one unit of pleasure. Adding them all together, our pleasure is ascending. However, as we eat more and more, pleasure rises more slowly. Economists call this phenomenom diminishing marginal utility.

Now that we have a health care reform bill, I wondered about the next step. After a law is passed, how are the provisions implemented? A recent Washington Post article provided the answers.

The next step unfolds in government offices where staffers decide what each provision means and how it will be applied. With more than 2,000 pages of provisions, for health care reform, the decisions are countless and the logistics unfathomable. According to the Washington Post, government staffers are arriving earlier, staying later, and seeing White House officials oversee key timing and content decisions.

Immediately, $250 checks have to be sent to seniors because of Medicare's drug benefit coverage gap, small businesses will receive a tax break in exchange for their employees' insurance coverage, and insurers will have to let families keep adult children on their policies. The law prohibits an "unreasonable" premium increase but what is "unreasonable"? Because the law says that insurers have to spend premiums on improving members' health, insurers have begun to reclassify activities as improving members' health. Who determines their validity? Even agency names are being debated. Creators of OCIIO (The Office of Consumer Information and Insurance Oversight), for example, have to decide what to call themselves, "oh-sig-oh" or "C-C-I-I-O". And this is only the beginning.

Reading the legislation (H.R.4872 and H.R. 3590), I recalled that Otto von Bismarck said, "Laws are like sausages. It is better not to see them being made." And we should add, "and implemented".

The Economic Lesson

Fiscal polcy can be defined as the activities of the President and the Congress that relate to spending, taxing, and borrowing. It sounds so concise and clear until we look at health care reform and see how complicated fiscal policy can be.

If unemployment creates unhappiness, then will people be less unhappy if their friends are also unemployed? According to a recent IMF paper, not only are people less unhappy when they and their friends are unemployed, but also, they then tend to be jobless for a longer time period.

Somewhat similarly, a Harvard medical sociology professor discovered that people gain weight when their friends gain weight. Saying that weight gain was similar to the spread of a virus, he observed that obesity spread through social networks.    

The Economic Lesson

Economically speaking, we are looking at "utility differences". An individual who is very unhappy being unemployed gets satisfaction (utility) from job hunting although it requires considerable effort. By contrast, a less unhappy person will discover that the job hunting effort does not elevate his or her happiness level enough to be worth the effort.

Hearing yesterday's employment numbers, I recalled the Malaysian proverb, "Don't think there are no crocodiles because the water is calm." Everyone is worried about crocodiles.

Looking beneath the surface, the employment numbers could be troublesome. The water may look smooth because we added jobs; however, they primarily resulted from temporary census workers. During the beginning of May, census hiring peaked at nearly 600,000. Similarly, the good news is that the unemployment rate dropped to 9.7% from 9.9%. Still, though, the broader U-6 rate which included workers marginally connected to the labor force, worsened.

A jobs bill, also could have crocodiles lurking nearby. In a Teaching Company lecture from Professor Robert Whaples, he explained high European unemployment rates through supply and demand. Providing skills, labor is on the supply side. Meanwhile, we have businesses who hire labor as the source of demand. Whaples says that on the supply side, workers tended to be more comfortable remaining jobless because of generous and sometimes unending unemployment benefits. On the demand side, businesses were looking for fewer employees because of higher minimum wage laws and union control over the workplace. Consequently, workers in France, for example, remain unemployed longer than U.S. workers. In the United States, is the crocodile the cost of a European approach?

Maybe we need a new proverb:

"The reverse side always has a reverse side." (Japanese proverb)

The Economic Lesson

The unemployment rate is calculated by dividing the number of people in the labor force who are actively looking for a job by the the size of the entire labor force. People are defined as being in the labor force if they are 16 or older, employed and receiving a wage or salary or unemployed but looking for a job.

The Big Short by Michael Lewis (who also wrote The Blind Side) is a "hot read" on Capital Hill. Senate Majority Whip Dick Durbin (D-Ill) recommended it. Chris Dodd (D-CT) referred to it during a speech on Fannie and Freddie. And, Senators Harry Reid (D-Nev), John Ensign (R-Nev.), and Ted Kaufman (D-Del.) were among several other lawmakers who said, "Read it."

Meanwhile, in a fictitious NY Times letter called "Shorting Reform," Lewis expressed withering skepticism about Congress.  

Interesting.

Playing Scrabble in a bar, Canadian journalist Chris Haney and a sports reporter friend thought they could do better. Within an hour, during December, 1979, the two created the idea for Trivial Pursuit and drew an initial version of the game board on bar room napkins. Haney focused on writing the first 6,000 questions for the game, they secured financing by gathering a group of small investors, and the game was launched in 1981. In 2008, Hasbro bought Trivial Pursuit for $80 million. 59 years old, Chris Haney died on May 31.

The Economic Lesson

The Chris Haney story started me thinking about the market system. Seemingly chaotic, only Adam Smith's "invisible hand" gives instructions. The "invisible hand" tells businesses to make profits through the goods and services they produce. At the same time, it instructs consumers to purchase what they want and need at the lowest prices. Winding up as supply and demand, the two intersect and answer the three basic economic questions: What should be produced? How should goods and services be produced? Who should receive the income generated by production? Indeed, the "invisible hand" propelled Chrs Haney.

I suspect that there is an inverse relationship between government's ability to get regulation right and the length of the legislation. Glass-Steagall was 34 pages long. Recently proposed financial legislation is 3000 pages long.

The need for appropriate regulation is where Harvard professor Richard Rogoff is heading when he compares the BP oil spill and the financial crisis. Both, he says were characterized by "the promise of innovation, unfathomable complexity, and lack of transparency." Both also are connected to economic growth, economic catastrophe and the need for a global regulatory consensus. Quesioning whether a global financial consensus is feasible, IMF officials have said that individual nations are acting but the pieces don't fit together. For offshore drilling, we can say the same when we consider the disparate incentives facing Brazil, the United States, and Nigeria.

Professor Rogoff concludes his paper with, "This time we can ill afford to keep getting it wrong." I wonder though, whether, faced with the allure of innovation and the challenge of such complexity, government can ever get it right.

The Economic Lesson

I recommend looking at: This Time Is Different by Richard Rogoff and Manics, Panics, and Crashes, A History of Financial Crises by Charles Kindleberger. Both present the facts. By looking at the past, you can best decide what is wisest for future regulatory policy.

Economically speaking, Tootsie Rolls are special.

In 2009, U.S. sugar beet prices (at 27.2 cents/lb.) were more than double the world price of cane sugar (13.8 cents/lb.)  Consequently, almost anything with sugar in it is more expensive. According to the Dallas Fed, because of the import barriers that protected the domestic sugar industry in 2002, a typical household paid $21 extra (close to $26 today because of inflation) for products that contain sugar.

But not Tootsie Roll. With Free Trade Zone status bestowed upon them by the U.S. Congress, the sugar they use in their Chicago manufacturing plant is tariff free.

The Economic Lesson

It is tough to find an economist who does not like free trade. In his Teaching Company lecture on the global economy, Dr. Timothy Taylor introduces his discussion about the benefits of trade by telling us that we probably learned about the noodle from Marco Polo and have been sharing ideas ever since. Several hundred years later, in a California assembly plant, NPR's This American Life described how Toyota taught General Motors about manufacturing cars more efficiently. Indeed, from noodles to cars, now and for hundreds of years, trade has enabled us to share ideas. Also, the specialization that trade facilitates creates more efficiency when we do what we do best. As a result, there seems to be a correlation between higher G.D.P.s and more trade.

Those who are harmed by free trade are easy to identify. By contrast, it is tougher to support a "faceless" consumer who would save $26.00 a year. Perhaps, the invisible consumer is the reason that nations still try to erect trade barriers. A list of trade barriers would include tariffs, import quotas, licensing restrictions, antidumping laws, government subsidies, embargoes and quality control standards.

A typical t-shirt starts as cotton in Texas. Traveling by truck or train to California, it continues moving westward until it reaches China. In China, the cotton becomes yarn which is made into cloth which is made into  a t-shirt. With a "made in China" label, the t-shirt leaves China, headed for a screen printing plant in Florida. Perhaps months later, after the t-shirt has been sold and worn, it winds up in a used clothing bin, destined once again to travel thousands of miles to a clothing bazaar in Tanzania where it is sold.

This abbreviated tale of a t-shirt's life is told in detail in The Travels of a T-Shirt in the Global Economy by Pietra Rivoli. Seemingly simple, its journey meets opposition everywhere. When the opposition is successful, trade is burdened by tariffs, quotas, licensing restrictions and other laws that limit entry and thereby preserve domestic textile jobs.. For Rivoli's t-shirt, tariffs increase production costs by $.24.

At the end of a 2002 report from the Dallas Federal Reserve Bank called "The Fruits of Free Trade," is a chart that conveys the cost of policies that save domestic jobs. For apparel and textiles, 168,786 jobs are saved. The cost though, is $33,629,000,000 or $199,241 per job. Why is the cost so high? Because consumers are paying more when there is no competition. 

More tomorrow on the Dallas Fed's report and a Teaching Company lecture from Timothy Taylor on globalization.

The Economic Lesson

David Ricardo's principle of comparative advantage says that worldwide productivity increases when nations specialize and export the good or service for which they sacrifice the least to make.

Instead of the G.D.P., CPI, and assorted leading and lagging indicators, economists also look at an entirely different set of data. Sometimes hemlines, movie star preferences, and everyday purchases provide business cycle evidence.

During a plunge in economic activity, people's tastes have reflected a sober outlook. Since the hemline index was created in 1926, a parallel between recessions and longer lengths has been apparent. Other research has shown that during hard times, people prefer "songs that are longer, slower, with more meaningful themes" and actresses with more mature features. Also, laxative, deodorant, rice, and beans sales tend to rise as do lipstick and make-up foundation purchases. By contrast, people buy less tobacco and carbonated drinks.

The Economic Lesson

Buying behavior takes us to the economic topic of elasticity. If we are looking at how much our quantity demanded changes (stretches) in response to a change in price or income, then elasticity is involved. For example, if we buy lots more (or lots less) rice when our income minimally changes, then our buying behavior is elastic. If buying remains relatively constant, as with chocolate during good times and bad, then our behavior is inelastic.

Composed of 179 countries, the Index of Economic Freedom ranks France 64 and the United States 8. At the top of the list, with the more free economies and the lowest numbers, are Hong Kong, Singapore, and Australia while North Korea, Zimbabwe, and Cuba are listed at the other end. On the United States pages, the authors indicate that the index number is destined to increase because of the response to the financial crisis. Citing massive government spending, they say that economic freedom has diminished.

A Washington Post column by Michael Gerson actually started me thinking about government economic intervention. He pointed out that support for health care reform has recently diminished to 14% of the U.S. population expressing '"very favorable" views'. Taking us to an historical perspective, he says that the social safety net initially targeted the elderly through Social Security and Medicare, and the poor and disabled with Medicaid and Aid to Families With Dependent Children. Looking at waning enthusiasm for health care reform, he suggests that the U.S. population prefers a safety net reserved for those who need it rather than everyone. He is also saying that U.S. public opinion prefers a lower Index of Economic Freedom number.

The Economic Lesson

To determine the extent of government economic intervention, researchers look at such variables as the ease of starting a business, the degree to which trade is free, and the level of government spending and taxation. The list also includes the amount of corruption that permeates the business world, such labor regulations as how easy it is to dismiss an employee, and the dependability of property rights.

Looking at a recent NY Times article, whose title was, "Cost of Jobs Bill Leaves Some Democrats Leery," I wondered whether the author realized just how many costs his discussion involved. If passed, the bill would extend jobless pay, provide health insurance subsidies for the unemployed, a summer jobs program, and a tax hike for affluent investors. As economists, we can see its costs as sacrifice.

The immediate cost of the bill is its expense; money spent on it could be used elsewhere or saved. Other costs (sacrifices) include a lower federal deficit, more economic growth, and the economic efficiency that freedom can spawn. Thinking of the unemployed, generous benefits could lead to more joblessness as they have in Europe. And yet, will the jobless experience too high a cost if government does not offer more of a lifeline?

Yes, it is complicated. Which cost are we willing to pay?

The Economic Lesson

Economist Milton Friedman will always be remembered for emphasizing that there is never a free lunch. Even if someone else pays the bill, still, in some way, at some time, the recipient will have experienced a cost. Considering the trade offs surrounding a social safety net, we are sacrificing efficiency for equality.

"What a silly little ant you are," said the grasshopper in The Ant and the Grasshopper. "Forget about work...Enjoy the summer!" But all day, everyday, grain by grain, the ant continued to gather and store her wheat. When the harsh winter arrived and the ant's larder was full, a starving grasshopper begs for some food but Aesop has the ant refusing. By contrast, in a Walt Disney version the ants feed the grasshopper while when the Muppets retold the story  the grasshopper squishes the ant and the grasshopper drives to warm, balmy Florida in his sports car. 

In a recent column, Financial Times columnist Martin Wolf provides a more modern slant. Equating the ant with the Japanese, the Chinese, other Asian nations, and Germany, and the grasshopper with the United States, Greece, the U.K., the Irish, and Spain, he has the ants lending money to the grasshoppers. His moral is: "If you want to create enduring wealth, don't lend to grasshoppers."

Is there a chance that we will see an ending that echoes what Walt Disney or the Muppets presented?

The Economic Lesson

Production possibilities curves illustrate the maximum production capability of a country when land, labor, and capital are fully utilized. Because the hardworking ant fully used her land, labor, and capital, the grain she harvested would be represented by dots on the curve. By contrast, the grasshopper was underutilizing resources. His productive capability would be shown by a dot to the left of the curve, closer to the Y and X axes. We can use production possibilities graphs to represent the impact of sovereign debt and the financial crisis on each nation's production of goods and services.

Bottled water has been around for a long time. Bottled Perrier was introduced in 1863 while people first drank a bottled Poland Spring product 13 years later. With bottled water consumption having increased until the recent economic contraction, environmentalists are hoping to perpetuate diminished sales.  As economists, deciding whether or not to drink bottled water is a classic opportunity cost dilemma.

Opponents of bottled water cite alternative potential for the energy and materials used to manufacture and transport plastic bottles. As for the water, preserving natural springs is a priority as is the goal of diminishing corporate influence over our water supply.  

Claiming that they are taking "water in a sustainable way," Nestle, and other bottled water supporters are the source of jobs and a product. For the aspirational drinker, they claim that sipping a San Pellegrino is a "trendy statement."

A current battle is being fought over the water that Cascade Locks, Oregon can provide to Nestle. Ideally located for the Northwestern U.S. market, Cascade Locks, a town with 18% unemployment, would enjoy new jobs and tax revenue from Nestle. The local Fish and Wildlife Department supports Nestle's plan to bring more water to their hatchery and to preserve its aquatic residents. The environmentalist community, though, is concerned about Nestle's control of a spring, their impact on wildlife, and their takeover of municipal responsibilities.

The Economic Lesson

The choice is between buying and not buying bottled water. Perhaps we can best make a decision when we consider the benefits associated with each alternative and then determine what we are willing to sacrifice. If we do not buy bottled water then the opportunity cost is making the purchase. Correspondingly, we sacrifice such benefits as more jobs for Cascade Locks and tax revenue. All that we sacrifice is the cost of the decision.

In many ways, the recent financial crisis was (and is) really about seesaws. A seesaw is a lever that lets you do a lot with a little. Using a seesaw, a person weighing 100 pounds can lift someone at the other end who is much larger.  

As purchasers of mortgages from financial institutions, Fannie Mae and Freddie Mac had rules about the size of down payments for home loans. Lowered to 3% in 1998, new down payment rules meant that consumers needed a lot less money to get a mortgage. In 2001, the rules again shifted when buyers could use other people's money and loans for a down payment. Leverage? Yes. It became possible to spend a lot on a home with very little money. According to 2002 Congressional testimony from the CEO of Fannie Mae, financing for low down payment loans (5% or less) grew from $109 million in 1993 to $17 billion in 2002. The number of Fannie and Freddie loans requiring less than a 5% down payment soared to 608,581 in 2007 from 75,694 in 1998. In a paper on the financial crisis, George Mason economist Russell Roberts details the leverage that people enjoyed.

Investment bankers also had their own seesaw. When businesses can borrow at a low interest rate and then earn a higher return on that money, their profits multiply. Between 2003 and 2007, investment banking firms started to increase their leverage ratio from 21x to 30x.  The leverage ratio compares money borrowed to a firm's total assets. The change was the result of more lenient borrowing parameters from the SEC during 2004. Interest rates trending downward since 2000 then incentivized further borrowing. Leverage? Yes! Investment banking firms could use a little to borrow and then invest a lot. A paper from University of Maryland associate law professor Robert J. Rhee describes the leverage employed by the major investment banking firms.

Pondering Greece, I realized that they too had their own seesaw. With debt totaling 113% of G.D.P., they too were spending a lot when they had a little.

The Economic Lesson

Hoping to use other people's money to grow their own assets, in a market economy, individuals, business firms, and governments borrow money. Then, when you have a sufficient return on the investment, you can pay it back. Problems only develop when leverage works in reverse. If the returns do not materialize, then you owe more than you can pay back.

In NYC, new pedestrian plazas are easing harried city life. Sitting in the middle of a once busy street where traffic congregated, now, you can relax at a table, drink some coffee and enjoy a sandwich.

The only problem is the opportunity cost. Pedestrian plazas upset former traffic patterns. For certain bus travelers, the new routes add 25% more time for them to get to their destination. Multiply that by hundreds of riders and you get a cost that could be considerable. On the other hand, though, other bus routes actually benefited from their detours and saved riders' time.

The conclusion? Whether contemplating health care reform, financial regulation, or pedestrian plazas, I hope that legislators will take economics and remain aware of opportunity cost, thinking at the margin, and cost and benefit.

The Economic Lesson

Choosing is refusing. Any decision has an alternative choice being rejected. Optimal decision making involves identifying the best two alternatives, comparing their benefits, and then making a decsiion. In this way, we are minimizing the opportunity cost of all that we decide to do. Whether deciding what to export to other nations or which college to attend, an opportunity cost analysis will maximize efficiency. 

The place is the SAME Cafe in Denver, a "pay-what-you-want" restaurant. Recently, one person paid $5 for a large soup and coffee and a second individual left $7.50 for 2 slices of pizza, a large soup, and a salad. Then, a third person decided $7.00 was a fair price for a slice of pizza, a salad, and an iced tea while someone left $1.50 for a large soup, a salad, and a slice of pizza. I checked out the reviews for the Cafe and they are overwhelmingly positive. Good healthy food, great atmosphere.

I don't quite get it.

Yes, as a concept, "pay-what-you-want" has benefits. Those who cannot afford the price of a meal pay less but can volunteer time instead to compensate for their purchase. Those who can afford it pay more, enjoy a meal, and also know they are helping others. Based on SAME Cafe's reviews, most experiece a communal pleasure. In addition, because the business is a non-profit, it pays no income tax and enjoys all nonprofit perks. With a semi-volunteers workforce, their labor costs must be diminished.

But I still have many economic questions. Demand/supply graphs tell us that price is determined by the intersection of what buyers are willing and able to spend and the amounts, at different prices, that suppliers can provide. Here, the costs of the supply side seem distant from price determination. If their variable costs such as the food, are not covered, then how can they stay in business? How can they plan for the future? Does it matter that government gets no revenue?

In a recent NY Times article, a similar venture from Panera Bread was described. Through a non-profit subsidiary, Panera Bread is trying out the "pay-what-you-want" concept. Here though, they provide patrons with a suggested price. I wonder whether a chain can generate the same spirit as a local establishment like SAME.

Another question: Does anyone leave a tip or is there no wait staff?

The Economic Lesson

I suspect we are not talking about a new business model. Instead, these are non-profit charitable ventures, just like Ben & Jerry's had a charitable foundation that functioned with their for-profit ice cream business. Also, we are looking at the fallacy of composition which states that what is good for one becomes dysfunctional when everyone does it.

Having just followed the probable travels of a dollar bill at "wheresgeorge," I've been thinking about money. Money is more than coin or paper currency. Because we can easily spend our demand deposits (checking accounts) and savings accounts, they too are money. Anything that people accept as payment, know the value of, and stores value can function as money. 

At wheresgeorge.com, you can register a dollar bill and then trace its life if its holders record their transactions. Between Marc 5, 2002 and March 5, 2005, a certain dollar bill traveled from Dayton, Ohio to Rudyard, Michigan with stops in Kentucky, Tennessee, Florida, Texas, Louisiana, and Utah. Along the way, the dollar saw a food mart, a race track, and a McDonald's. Its last recorded user said the bill "was getting pretty old looking." At that point, we can guess that the bill was retired at a Federal Reserve Bank by someone's local banker.

According to the Federal Reserve, in 2007, located primarily abroad, there was approximately $829 billion of coin and paper currency in circulation. In the United States, if banks need more cash (maybe Mondays when ATMs are most popular), they withdraw it from the Federal Reserve bank in their area. On the other hand, when they have too much cash, banks take it to the Fed. At that time, the Fed destroys close to one third of the bills they receive.

With the life span of a typical dollar 1.8 years, the bill traced by "wheresgeorge" lived to a ripe old age but not as long as most hundred dollar bills which live 7.4 years.  It cost the Bureau of Engraving and Printing four cents to make each bill. 

The Economic Lesson

All of this matters because the money supply has an impact on business activity. If there is too much money circulating, then its value can plummet. It fell so much in Zimbabwe recently that people needed wheelbarrows or U.S. money to buy milk. On the other hand, when there is too little money, producers have less incentive to create goods and services because people do not have enough money to spend. During the recent recession when credit froze, less money passed from hand to hand and businesses produced less.

The Equation of Exchange, MV=PQ, illustrates the connection between the money supply and production (the G.D.P.). Here "M" equals the money supply; "V" is velocity, the number of times the same dollar is used; "P" is the average price of goods and services and "Q" is their quantity. 

Would you support a penny an ounce tax on sugar sweetened beverages? According to the NY Times and The New England Journal of Medicine, the idea is becoming increasingly attractive to many municipalities. By putting on our economic glasses, we can better decide whether to support it.

First, we can ask whether society should be compensated for the cost it experiences from unhealthy behavior. Any cost absorbed by an "innocent" third party because of someone else's behavior is called an externality. The tax would then be a payback. 

To make up our minds, we can also assess the cost and benefit of the decision to tax sugary beverages. Diminishing obesity, increased intake of healthier foods, and decreased risk for diabetes, are several of the benefits associated with the impact of a soda tax. As suggested by one study, a 10% tax would decrease consumption by 7.8%. Meanwhile, on the cost side, we have the impact on manufacturers, on jobs, and the expense of implementing the tax. Some people believe the biggest cost, though, is the freedom we lose.

Finally, we can focus on the tax itself. Opponents point out that the tax is regressive because when everyone pays the same amount, the less affluent feel a larger burden. By contrast, supporters ask us to focus on the revenue's destination. If the soda tax becomes a "benefits received" levy, then the money would be destined for treatment of sugary drink related maladies.

The Economic Lesson

Named after economist Arthur Pigou (1877-1959), Pigovian taxes are levied on undesirable activities called negative externalities. At best, they eliminate the activity. But even when less successful, the revenue that is generated can be used productively.

Last Tuesday was a bad day for most umbrellas. In New York City, it poured, it was windy, and most umbrellas were flipping out, blowing sidewards, and doing everything except what they were supposed to do.  It makes sense that someone should have invented a better umbrella. As economists, we have some answers about why no one has.

On the demand side of umbrella markets, consumers are behaving rationally. Most of us easily lose umbrellas, they are not very durable, and they rarely provide a fashion statement. In fact, according to a recent WSJ article, 794 umbrellas were reported lost in New York's Grand Central terminal and its Metro North line. The result? We want cheap umbrellas. With an average umbrella selling for $6, most consumers care more about price than progress.

Knowing that umbrellas have to be inexpensive, sellers keep production costs low. Consequently, most umbrellas are made in countries such as China with lower labor costs. Innovate? There is little financial incentive to innovate if price and profit margins are low.

Still though, several manufacturers are considering the high end. For the aspirational shopper and tech savvy individuals, umbrellas have countless possibilities. With additional wind tunnel research and experimentation with steel, fiber glass, aluminum, and other metals, a "souped-up" umbrella could develop a following. The 11% jump in umbrella sales during 2009 was on the high end of the market. Sellers of pricey umbrellas are even thinking of loss insurance to generate more interest.

The Economic Lesson

In order to understand the umbrella market, we need to look beyond demand and supply basics. Also, resource costs, the aspirational shopper, international trade and tariffs, research and development, and risk relate to buy and sell decisions. The umbrella is even reminiscent of the Model-T and its low price, high volume profile. Indeed, an umbrella is not just an umbrella.

When an airplane crashes, investigators rush to the scene, gather evidence, and ultimately hope to emerge with updated safety suggestions. It would be wonderful if we, when assessing the "flash crash" or slower stock market dives, could also diagnose the problems, identify the faulty mechanisms, and repair or redesign them. 

George Mason economist Russell Roberts tells us, though, that financial crashes are very different from the world of aviation. He suggests that the financial world reflects the interaction of "investors, regulators, and politicians" in which the behavior of one group sets the other two in motion. Consequently, the permutations are infinite.

His advice? He provides a short list from which I especially liked his reminder that "Capitalism is a profit and loss system." He also says that "Policymakers who make creditors and lenders whole should be excoriated, condemned and called to account rather than praised and honored."

Your opinion?

The Economic Lesson

Perhaps economist Friedrich Hayek (1899-1992, the Austrian school) summed up our problem when he said "The curious task of economics is to demonstrate to men how iittle they really know about what they imagine they can design." 

For centuries, the US Postal Service delivered most of the mail. The job it did was satisfactory but not optimal. Yes, through sleet and snow, etc., we received our letters and packages but employees rarely focused on cutting costs and innovating. Two results? The USPS loses money each year and entrepreneurs create FedEx and UPS.

Concerned about government's inefficiencies, economic historian, John Steel Gordon, provided some history. The problem, we soon see, is the wrong incentives. Save money? Your budget decreases. Innovate? People might lose jobs. However, the 19th century British Navy had a solution. Seamen who captured enemy vessels shared the loot. A 21st century version could let bureaucrats share contemporary plunder. According to Gordon, any public employee who devised a cost saving initiative would receive some of the money saved or a financial regulator who uncovered massive fraud could receive a reward.

My concern takes me back to incentives. In the former Soviet Union, no one ever figured out how to stimulate efficiency and productivity through government selected incentives. When people knew they would be rewarded for increasing production in a lamp factory, they produced lighter lamps. When the quota was weight, each lamp became heavier. All too frequently, bureaucratic incentives become perverse incentives that have unexpected consequences.

The Economic lesson

Adam Smith, in 1776, suggested that we are such a diverse population that no government individual could possibly know what is best for each of us. For that reason, he preferred the market and individual initiative as the source of a just and fair society. With 21st century government burgeoning, is it possible to create the incentives that would optimize its performance?

A recent NPR report on the changing status of marijuana in California is also a supply and demand story.

The story begins in 1983 when the Reagan administration sought to decimate pot production in California. As a result, supply would have decreased because growers were willing and able to produce less. With diminished supply, price soared to as much as $5,000 per pound. Recently, with legalized medical marijuana, a more tolerant law enforcement environment, and the competition between indoor and outdoor marijuana cultivation, supply and demand changes have resulted in a $2000 per pound price. Next November, if the vote is yes to legalize pot in California, how would you predict that supply and demand will shift?

Some analysts believe that if pot is legalized and its market expands, then marijuana will be controlled by large growers just like strawberries and lettuce. With strawberries and lettuce, growers sought to differentiate their produce through packaging. Does that mean that marijuana could be next? 

The Economic Lesson

A demand and supply graph can be drawn as an "X" in which the Y-axis represents all of the prices buyers and sellers are willing to select and the X-axis shows the different quantities. With demand sloping downward and supply sloping upward, the point at which they meet, the market price, is called equilibrium. By moving along each line and also by shifting them when conditions change, we can illustrate the sources of price changes.  

With "Law & Order" being canceled by NBC, the New York City economy will feel it. Of course actors are affected but also the caterers who feed them, the stores that sell them the lawyers' clothing (Barney's and Saks), and the hotels, the bars and the restaurants where TV crews hang out. People rented their homes, apartment houses provided their lobbies, and neighborhood stores supplied such law enforcement necessities as duct tape. With the credibility that "Law & Order" embodied, businesses and careers were launched by the program. 

Similarly, "Law & Order" was a launching pad for the GDP. Every time a business invests in land, labor, and capital, it is initiating a ripple of spending. Called the multiplier, the ripple results in a magnified impact upon the total spending on new goods and services throughout the economy.

The Economic Lesson

Specifically defined, the investment multiplier is the number that compares the amount of an initial investment to the total that ultimately is added to the GDP because of the ripple of spending that is created. A multiplier of 3 would mean that a purchase of a $1000 camera for "Law & Order" could result in $3000 being added to the GDP once all of the transactions that relate to the camera are completed.

Having read that Greek fiscal austerity involves raising their average retirement age from 53 to 67 and that their life expectancy is 79.5 years, I thought of the Social Security Act of 1935 and then 2035.

When Social Security was enacted in 1935, 5.4% of the U.S. population was over 65. With social security old age benefits starting at 65, life expectancy was close to 62. By contrast, in 2035, 20% of the U.S. population is projected to be 65 or older. The last of the baby boomers (born 1946-1964) will have turned 65 in 2030, when the over 65 population will have reached 20% and then stabilized. Even now, close to 13% of the population is 65 and over with life expectancy close to 78 years. "Full retirement age" for receiving social security benefits is 67. 

Should old age benefits start closer to life expectancy projections as they did when the social security system made its first payments?

The Economic Lesson

Social security is a pay-as-you-go system; today's workers pay the benefits for today's recipients. When social security began, there were 42 workers for each beneficiary (life expectancy was close to 62 and benefits began at 65). Today there are close to 3.3 workers for each beneficiary while for 2030 the projection is 2.2.

Intentionally created as a universal system rather than a poverty program, social security was designed to support elderly people who could not work. Today, the Census Bureau calls the 65-74 group the "young old."

No one has figured out the cause of the "flash crash". Some background information might help, though, when we try to understand what happened.

1. On May 6th, the Dow Jones Industrial Average plunged close to 1000 points, then made up some of its loss, and closed down 348. Most of the drop happened from 2:40 to 3:00.
2. Historically, the New York Stock Exchange (NYSE) was the epicenter of buying and selling stock. Yes, there were other stock markets but the NYSE was king.
3. Now, the NYSE is only one of many stock markets in which NYSE listed companies' stock trade each day. For example, before 2003, Procter & Gamble shares were traded almost exclusively through the NYSE. Now, as shown on an Economist chart titled "Flash Crash Mish Mash," Nasdaq, ArcaEx, Direct Edge, and BATS, and others also trade NYSE listed equities.
4. Simplifying considerably, we can say that not only are stocks individually traded, but also "packages" of stocks are traded, and beyond that, people trade stocks that are based on stocks. And beyond all of this, not only are people buying and selling, but also, trying to make pennies on each transaction, we have computers doing very speedy trades with other computers.  In fact, these high frequency trades now represent more than 60% of daily stock trading.
5. Fundamentally, stock prices fall when the number of shares people (and computers) want to sell exceeds the amount people want to buy. If there is an avalanche of sell orders, the NYSE has slow down rules that are designed to let it maintain an orderly market. The other markets have (or don't have) their own rules and no one necessarily has the same rules.

Can you see why no one knows why the Dow dove suddenly? And yet, to maintain investor confidence, regulators need to prevent it from happening again. 

The Economic Lesson

The first rule of "Investing 101" is, "Maintain an orderly market." Orderly means that upward or downward price changes should unfold in steady increments; it means that trading will be halted whenever the buy or sell side becomes unmanageable. For several centuries "specialists" in trading posts on the floor of the NYSE were charged with maintaining orderly markets in the securities when they matched buyers and sellers. On May 6th, with no new news about the company, consulting firm Accenture's stock tumbled 99% to one penny from above $40 a share and then returned to prior levels. Most of the drop occurred between 2:40 at 3:00. For Accenture, the market was not orderly.

In a Washington Post article with the heading, "'Potty Parity' hearing set for today," I discovered that the U.S. Congress was working on a bill to increase the number of female restrooms in federal buildings. Testimony began yesterday.

Watching the PBS NewsHour, I also learned that with two women on the Supreme Court, attorneys occasionally referred to each by the other's name because they were the "female" justices. Now, they wondered whether a third woman on the court would become the "tipping point," normalize the female presence, and all would blend as justices.  

These new facts started me thinking about how the number of working women had changed. I found some answers in a BLS paper on women's changing participation rates. Some stats follow. Called participation rates, the percents represent the women who are in the labor force compared to those who could be in the labor force.     

1960: 37.7%;  1970: 43.3%;  1980: 51.6%;  1990: 57.5%;   2000: 59.9%;  2005: 59.3%;  2008: 59.5%

A very interesting participation rate stat: For women 65 and older, the rate was 8.1% in 1980, 13.3% in 2008 and projected to be 17.5% in 2016.

The Economic Lesson

Formally defined, the participation rate is a statistic that compares the size of the labor force to its potential total.  When we refer to women's participation rates, we are looking at the women who are in the labor force compared to all who could be in the labor force. For example, if 100 women could be in the labor force and 40 of those 100 are in the labor force, the participation rate is 40%. 

How do you feel about the penny and the nickel? If you care about the federal budget, you might want to mint them more inexpensively. But, if you own a laundromat, you disagree.   

Pennies are actually copper coated pieces of zinc while nickels are nickel (but mostly copper). It costs close to two cents to mint a penny and sometmes as much as nine cents for a nickel. Making them more cheaply could mean replacing the copper in a penny with an aluminum alloy. The nickel and the penny could both be made of plastic.

However, just switching from copper to zinc in the penny was controversial when President Reagan proposed it in 1981. A recent WSJ article described the uproar.  Some said we should not become dependent on foreign zinc suppliers (Canadian). Others said tradition was crucial. Vendors wanted to avoid retooling their coin machines. Plastic coins stir up even more emotion.

Do care if your penny is plastic?

The Economic Lesson

Anything can be money, a piece of paper, a circle of zinc, or a seashell, if it has three basic attributes:

1. It is accepted as a medium of exchange. For example, you and I are willing to use the commodity in a supermarket. A peso or a tie is not a medium of exchange in the United States. The nickel is a medium of exchange.
2. It is a unit of value. We all know how much purchasing power a nickel represents but not necessarily the yen.
3. It is a store of value. We all like our money to retain its purchasing power if we do not spend it immediately.

In yesterday's Washington Post, Robert Samuelson reminded us that most developed nations will have a growing proportion of senior citizens. Comparing 2005 and 2030, for Greece, the 65 and older group will increase from 18% to 25%, for Spain, from 17% to 25%. According to 2000 US census projections, between 2010 and 2030, the 65 and older population will pop from 12.97% to 19.3%.  

Calling it a "welfare state death spiral," Samuelson believes that this simultaneous aging across borders eliminates the chance that one nation can extricate itself from a "bind" through help from a healthier country. Because, he says, of everyone's unemployment insurance, health insurance, and old age assistance, governments will have excessive expenses that will be difficult to fund.

The Economic Lesson

Also, the causes relate to opportunity cost. Let's assume that a politician can vote for or against an old age benefit. Therefore, the opportunity cost would be the best alternative that was not selected: choosing means refusing. One benefit of voting "yes" is reelection. Another benefit is giving money to a very needy person. By contrast, the benefits of voting "no" could include creating less debt for grandchildren and slowing economic growth. Each alternative has a high opportunity cost.

Your choice?

We could say that the graders of sovereign debt use a "rubric" to decide whether a country has a high or a low score. In the classroom, students are given rubrics which specifically describe how a test is graded. A rubric is a list of facts and ideas that compose a high grade or a low one.

When NPR's Planet Money visited Standard & Poor's to find out their "rubric", they described a two step process. First S & P checks a variety of topics that include the country's debt, monetary policy, exports, imports, budget, and election results. They look at objective and subjective data, even including what the media is saying. Next, all information is given to a 5 person committee that decides what the rating should be. 

Recently, The Guardian described what the three major ratings agencies, Standard & Poor's, Fitch, and Moody's, do and listed the grades of nations ranging from Albania (B+) to Vietnam (BB). The grades are based on how likely a nation is to pay back its debt fully and on time. Because the United States and Canada, for example, are considered very likely to pay back all that they borrow, they received the highest rating: AAA. The lowest grade is a CCC and maybe even an R.

Controversial during the subprime crisis, the ratings agencies generate criticism for their sovereign debt ratings also. Bill Gross, a prominent bond investor and the co-founder of PIMCO, questions how Spain, "a country with 20% unemployment... that has defaulted 13 times during the past two centuries" can have AA and AAA ratings.

The Economic Lesson

When countries borrow, they most typically issue bonds. Bonds are IOUs that pay interest in exchange for money from the lender for a specific period of time. A lender can be a person, a business, or another country. A country's loans can be called sovereign debt.

There is oil under Murchison Falls National Park. Home to rare birds, lions, elephants, and giraffes, this Ugandan nature park is a tourist mecca. The Ugandan government, though, prefers oil to tourists as a revenue stream. 

Thinking as economists, we can identify negative and positive externalities of the decision to let Tullow Oil, PLC explore and drill. On the negative side, wildlife in the park is being adversely affected and villagers' revenue from tourism is diminished. However, because oil will bring in more money than tourism, Uganda's economic growth should accelerate and generate a ripple of benefits. 

Economics is always about cost and benefit. Environmentalists say the choice is money or wildlife. I wonder, though, whether the "money" side involves a better life for many people if the Ugandan government appropriately manages foreign investment. Still, we have an "on the one hand but then on the other" situation--the reason President Harry Truman (1945-1953) said he was searching for a one-handed economist.

The Economic Lesson

Whenever a transaction between two parties affects a third, uninvolved individual or group, economists see an externality.

Comments? Other externalities?

Last week, the Boston area had undrinkable water for several days. Predictably, bottled water sales soared as did bottled water prices in certain stores.  Equally predictably, politicians condemned the increases. Most economists, though, disagreed.

As explained by a Boston Globe journalist, price boosters best served the public interest because they had the incentive to supply more water. Yes, price could even double but, as he describes, "...sales of water are slower [than at the cheaper vendor] and there is a lot of grumbling about the high price. But even late arriving customers are able to buy the water they need..." By contrast, the lower priced vendor had "his entire stock cleaned out."

The riddle: How can high prices make people happy? 

The answer: When they preserve the supply of a necessity.

The Economic Lesson

Picture a supply curve sloping upward crossed by a demand curve sloping downward. Price is the y-axis and quantity is the x-axis. As price rises, producers are willing and able to create and sell more. Why? Because higher prices mean higher profits. Whenever government steps in and prevents price from naturally rising as the market dictates, shortages result. Do you prefer high or low water prices for Boston?

Comments? 

Pondering Greece, I wondered about the individual and the state.  Sometimes what is good for one person is bad for all. 

That took me to a graphic of the federal budget in 2020 in which entitlements, which are good for individuals, are dominant. The Congressional Budget Office projects that Medicare will be 17% of the federal budget, Social Security: 22%, and Medicaid: 8%. The probable result? Burgeoning deficits.

The Trustees Report for 2009 on Social Security and Medicare corresponds to the surge in entitlement spending. As a pay-as-you-go system, current workers pay current social security benefits. In 2016, because of the baby boomers, the revenue will be insufficient but there is a trust fund. By 2037, the trust fund will have been depleted. For Medicare, 2017 represents the year that the money starts to run out unless current health care reform legislation has an impact.

Your opinion of this potential tension between individual well being and budgetary crisis?

The Economic Lesson

Called the tragedy of the commons, meadows are overgrazed, lounges are messy, and the air is polluted when commonly held resources are bespoiled by individuals pursuing their own self-interest. Perhaps burgeoning deficits are a version of the tragedy of the commons. 

Seeing the Bloomberg Businessweek headline, "Greek Contagion Spurs Surge in Portugal, Spanish Debt Swaps," I started thinking about diagnosing fiscal illness, treating it, and contagion.

How can we diagnose the illness? The illness seems to be the Greek spending disease. Just like you can identify a risky mortgage by looking at someone's income, you can identify too much national (sovereign) debt by comparing it to the GDP of that country. As we noted on February 9th, for 2009, Portugal (75%), Italy (116%), Ireland (61%), Greece (108%), and Spain (57%) have debt that is too high a proportion of their national income.  

How do you treat a fiscal disease? Greece has moved to cut the wages and pensions of public employees and to increase sales taxes. In addition, articles abound about a tax system that needs to diminish fraud. Also, afraid of catching related illnesses, investors are inoculating themselves with credit default swaps. A credit default swap is insurance that relates to risky sovereign debt. In addition, could we say that healthier European nations and the IMF might give Greece a money IV? 

What is contagious? The contagion sounds rather similar to bank runs during the 1930s before the FDIC was created. Once one person became worried about a bank's health, the concern spread with many rushing to withdraw their money. In today's fiscal world, nations need to borrow. The contagion here is refusing to buy a nation's debt.

Do you agree? Would you suggest another way to define the contagion? Other medical analogies?

The Economic Lesson

In his General Theory on Employment, Interest, and Money, British economist John Maynard Keynes said that nation should borrow during a recession. Then, by using the money to "prime the pump", fiscal activism stimulates business expansion, the recession ends, government revenue surges, and the debt is repaid.

We always hear reporters saying that, "Consumer spending makes up more than 70% of the economy..." Mike Mandel, former chief economist at Newsweek, believes the reporters are misleading us. Yes, the consumer component of GDP is 70% of all spending. But, the consumer is not necessarily doing the spending and the impact might not be jobs and growth.

According to Mandel...

1. Because a lot of what we buy is made elsewhere, more consumer spending will not necessarily result in more jobs at home. 
2. Government's Medicare spending is counted in the consumer component of GDP.
3. "Imputed services" which include, for example, the rent we never pay on a house we own, are a part of the consumer component of GDP.
4. Spending by religious groups is included in the consumer GDP category.
5. As a result, Mandel concludes that consumer spending on domestically produced goods and services is actually close to 40% of GDP.

The Economic Lesson

GDP includes consumption expenditures, gross investment (primarily business spending but also residential housing), government purchases, and exports minus imports (usually a negative number). Alternatively, we can define GDP as the value of goods and services produced domestically during one year. If we assume that actual consumer spending on domestically produced goods and services is a lower number than reported, maybe the consumer is not quite as important as reporters say.  

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/08/get_it_straight.html

Which words do you associate with "entrepreneur"? Risk taker? Ambitious?Creative? Smart? Energized? Henry Ford? Steve Jobs? Clarence Birdseye? The words and names convey a recipe for success. And yet, according to a recent FT article from Tim Harford, the ingredients are not quite what you would have expected.

1. Is there an entrepreneurial spirit? The researchers did not discover it. However, they did say that intelligence and patience were more prevalent among those who started businesses. 

2. Is there a common key to success? The most important resource is the ability to fund the project. An inheritance, for example, facilitates business creation as would available venture capital money.

3. Family counts. Children of the self-employed tend to start their own businesses.

4.  Where you live counts. Countries with lower taxes and less red tape tend to have more entrepreneurs.

You might enjoy this article from yesterday's NY Times about a "tech incubator" for entrepreneurs.

The Economic Lesson

New businesses propel economic growth if they create new technology and ideas or employ underutilized resources. Economists can use production possibilities graphs to illustrate economic growth. On production possibilities graphs, a bowed out curve is drawn which illustrates that country's maximum production capability. Then, when an entrepreneur like Henry Ford invents the Model T, the production possibilities curve shifts to the right. 

Hey Everyone

My name is Ilya Sabnani. I am currently a sophomore at Princeton majoring in Economics with certificates in Environmental Studies and South Asia Studies. I'm guest blogging about social and economic change in India. This past fall, I had the opportunity to spend 3 months in Hyderabad working for a microfinance institution, BASIX. I ended up doing research on improving the livelihoods of handloom weavers living in a rural area not far from the city. During my time abroad, I was exposed to both the cosmopolitan and developing aspects of Indian culture. From this, I'm going to provide an outsider's view on change happening in India. I hope my experiences abroad can help you understand the problems facing many people around the world. Hope you like what I have to say and will post a comment or question.

Is India's Change Really Happening?

Apparently, it is. As soon as I stepped out of Rajeev Gandhi Airport in Hyderabad, I thought I was at a country club. The lawns were perfectly manicured, the cars were neatly lined up in a large parking lot, and more importantly, there was NO SMOG. I could breathe! The last time I was in India in 2003, I was grasping for whatever oxygen was left in the air because there was so much pollution. With plenty of autorickshaws and cars that still run on diesel, urbanized areas of India are prone to heavy pollution. As i soon discovered, driving around Hyderabad ended up becoming one pf the most time consuming activities during my stay. The more I saw the city, the more I realized how much change had seemingly occurred. Practically everyone had a cell phone and there were wireless internet cafes that made technology accessible to those who could afford it.

However, the deeper I thought about it, the more I realized how difficult life is for people who are at the bottom of the social and economic pyramid. In India, urban life can be especially taxing for the poor. For some, their main livelihood is begging at traffic intersections. For others, it's working at hotels as dishwashers and sending money back to their families in villages nearby. At the end of the day, these people are struggling to make ends meet and are trapped in a cycle of the rich getting richer and the poor getting poorer.

Delhi is hosting the Commonwealth Games in November. Even though this is a huge honor, the city is faced with what to do about the slums in the city. Instead of creating temporary housing, they are covering up the slums with bamboo walls. This temporary solution proves how governments simply don't know what to do with the massive influx of people living in slums. How do you think this problem should be best addressed in the long run? Are more social services for Indian citizens necessary for substantial change to occur?

This is a part of a series on Change in India. More to come.

Hearing that U.S. real GDP growth for the first quarter was 3.2%, I wondered how well we were doing.

We can look at past recessions to assess 3.2%. Looking back to the early 1980s, some economists say they were hoping for better. Like a "V", when a recession is pretty steep, usually, so too is the recovery. For 2nd quarter 1983, after the 1980 and 1982 "double dip", we jumped to 9.7% real GDP growth. By contrast 2010 projections are for 3.1%.

We can also look at other countries. According to a recent IMF report, compared to developing nations and the emerging economies, our 3.1% projected recovery is "tepid". China's projected growth rate for 2010 is 10%; India's is 8.8%; Brazil's is 5.5%. However, when we look at the EU, we are doing okay. Their projected real growth rate is 1.0%.

Finally, we can consider unemployment rates. Projections for 2010 are: U.S.: 9.4%; Germany: 8.6%; Greece: 12%; Spain: 19.4%; Japan: 5.1%.

The Economic Life

GDP is a measure of the money value of new goods and services produced in a country during one year. The unemployment rate is the number of unemployed in a labor force divided by the size of the entire labor force.

How can you show your friends that you have ascended to your country's middle class? Starbucks.

A recent BusinessWeek article on the world's most caffeinated countries cited a connection between an emerging middle class and coffee consumption. With the demand for instant coffee increasing in Turkey, Belarus, and Ukraine, analysts see Starbucks growing there also. Correspondingly, Brazil, Russia, India, and China (BRIC countries), have accelerated their espresso machine orders.

The list of the most caffeinated countries is topped by Finland (608.2 liters per capita), Norway, and Denmark. The U.S. is #16 with per capita consumption of 105.9 liters annually. Coffee researchers say that the U.S. is relatively low on the list because we put so much milk in our coffee. 

The Economic Life

In The Theory of the Leisure Class (1889), economist Thorstein Veblen introduced us to "conspicuous consumption". Referring to society's more affluent, he said that buying behavior relates more to displaying power and prestige than need. Perhaps having read Veblen, Starbucks founder and CEO, Howard Schultz, perceives the potential for expansion in China as a "major opportunity" for new growth.

Do you remember when we only had Levi's? Until the late 1970s when Jordache arrived in department stores, buying jeans was not about style. After that, designer jeans became a fashion statement as did their higher prices.  

I wonder whether yesterday's WSJ article on $520 khaki pants for men described a similar phenomenon. The pricier pants represent a trend toward more detail, softer fabrics, and enzyme washes. According to the WSJ, most khakis had looked too much alike, even when sold by different retailers. How to stimulate sales? Create some "designer cachet". 

As an economist, we would say that khakis makers are creating product differentiation...sort of like lettuce.

In a supermarket, lettuces can look alike. But, if you put them in packages, and prewash them, call them organic or provide a gourmet image, you might be able to generate some buyer recognition. And maybe, if the consumer really likes the lettuce (or wants designer cachet), he or she will buy that brand every time.

The Economic Life

Imagine a line representing different competitive market structures. The far left side of the line is labeled perfect competition while the far right side is monopoly. Very similar products such as unpackaged lettuce tend to be sold in markets that are on the left side of the scale. Their producers have little power over price because their goods look just like someone else's. When individual lettuce growers gave their produce more individuality, they moved to the right on the market structure line. They also got more price making capability--just like Khakis. 

Yesterday, President Obama briefly said that some salaries on Wall Street were more than anyone should earn. 

Approximately 160 years ago, John Stuart Mill responded by saying that he wanted to encourage work. Consequently, instead of limiting salaries through a progressive income tax, he supported a moderate proportional tax and high inheritance taxes. "To tax the larger incomes at a higher percentage than the smaller, is to lay a tax on industry and economy; to impose a penalty on people for having worked harder and saved more than their neighbors." (1848, Principles of Political Economy)

Believing that all too often government distorts incentives, Adam Smith points out that people personally have less to give and spend when taxed. Government, Smith believed, was more likely to poison virtue than spawn it.

Not waiting for government, Ben & Jerry's capped the salary of its highest paid executives at seven times the lowest pay. In 1994, though, they eliminated the cap when they could not find a new CEO who would accept it.

The Economic Life

Through a Teaching Company series on the history of economic thought, Professor Timothy Taylor discusses the life and ideas of Adam Smith and John Stuart Mill. They provide an ideal foundation to build from or tear down when contemplating salary caps and income distribution.    

Presented at Harvard with Nobel laureate participation (and based on authentic scholarly research), the Ig Nobel awards are funny but they also make you think. 

As they express it...

The 2009 economics prize went to executives at four Icelandic banks "for demonstrating that tiny banks can be rapidly transformed into huge banks, and vice versa-and for demonstrating that similar things can be done to an entire national economy."

The 2009 mathematics prize went to the governor of Zimbabwe's central bank "for giving people a simple, everyday way to cope with a wide range of numbers-from very small to very big-by having his bank print bank notes with denominations ranging from one cent ($.01) to one hundred trillion dollars ($100,000,000,000,000)."

In 2008, behavioral economist Dan Ariely won the Medicine prize "for demonstrating that high-priced fake medicine is more effective then low-priced fake medicine." 

In 2006, the economics price (to an MIT researcher) was "for inventing an alarm clock that runs away and hides, repeatedly, thus ensuring that people DO get out of bed, and thus theoretically adding many productive hours to the workday."

The 2006 Ornithology Prize was "for exploring and explaining why woodpeckers don't get headaches."

The Economic Life

Economics need not be the dismal science.

Comparing the deal to Bialystock, Bloom, and Springtime For Hitler in The Producers, NPR's This American Life looked at how a Chicago hedge fund made money on seemingly unprofitable CDO transactions. Available as a podcast, the story made the CDO derivatives world entirely understandable. 

The protagonist of the story is Magnetar, a Chicago hedge fund. The plot focuses on why Magnetar would buy a "layer" of a package of mortgage securities that was so speculative that its default was probable. The "climax" relates to the "insurance" that the firm purchased on the package. The podcast uses broadway music, a derivatives song that they commissioned, and clear explanations that provide insight. Listening to it is worth the opportunity cost.

The Economic Life

Imagine a big box filled with mortgages. Fundamentally, you are looking at a CDO, a collateralized debt obligation. Through financial reform legislation, Congress wants to limit who can buy and sell these packages and the securities that relate to them.

If your country's currency is hyperinflating, then how do you buy bread? You can find a wheelbarrow or use another currency. During February, 2007, with an inflation rate exceeding 50% per month, the Zimbabwean economy experienced hyperinflation. Looking for purchasing power, people avoided Zimbabwean currency and turned to the U.S. dollar, the South African rand, Botswana's pula, and the Zambian kwacha. One researcher estimated that in Zimbabwe, by November, 2008, prices were doubling every 24.7 hours. 

With Zimbabweans just one of many people using U.S. currency throughout the world, and computers making counterfeiting increasingly simple, the U.S. government just issued a new, forgery resistant $100 bill. Yes, Ben Franklin is still there.  But, his shoulders were added, as you tilt the bill certain areas change color, and there is a blue 3-D "security ribbon". On a government video, you can see the new bill. In a recent column, Floyd Norris pointed out that abroad, the $100 bill is preferred.

The Economic Life

Money has three basic characteristics. 1) It is a medium of exchange. 2) It is a unit of value. 3) It provides a store of value. Hyperinflation, the plunge in value of money, immediately affects whether money is acceptable as a medium of exchange, it diminishes the value of money, and it reduces its ability to store value. 

At Starbucks, no one orders just a regular coffee, at the Gap, we look at easy fit or relaxed or straight leg, and when selecting health insurance, we think about deductibles and prescription drug coverage. Everywhere we have many choices.

One experiment in a California supermarket focused on the impact of choice. Faced with six kinds of jam, 30% of the tasters bought a jar and walked out satisfied. By contrast, with 24 to sample, 3% made a purchase while 97% left with nothing. Why? The researcher concluded that there was too much choice.

In a TED talk, psychologist Barry Schwartz suggests that too much choice leads to paralysis, dissatisfaction, and self-blame. His solution is income redistribution through which unhappy affluent consumers with too many choices transfer income to poorer groups with fewer alternatives. Disagreeing, libertarian writer Virginia Postrel says that satisfaction requires the choices that a market economy creates. 

Your choice?

The Economic Life

Why should we care about choice research? Starting with health care reform, legislation can present the potential for many alternatives or few.

Reading Ken Auletta's recent New Yorker article on the iPad and the Kindle, I first thought of "the razor or the blade." While Amazon loses money on books in order to sell Kindles, razors were precisely the opposite. Get a cheap razor, buy blades for a lifetime, and Gillette has an unending stream of revenue. Doing the opposite, Amazon has dominated e-book sales. 

Amazon also broke other rules:

Price taker or price maker? Six publishers control 60% of the business. These classic oligopoly stats mean that they should have control over price and yet Amazon was able to charge $9.99.

A New Pie? According to Auletta, for a $26 hardcover book, the publisher gets 50% of each sale, pays the author 15% of its revenue, covers publishing expenses, and also accepts returned unsold copies. Now, with e-books selling for $9.99, the revenue pie has changed. 

Which market? Instead of competing against other publishers, maybe now all media based activities have a toe in the same market with everyone vying for a piece of the consumer's time.

Perhaps the one rule that has not been broken relates to innovation. As entrepreneurs implement new ideas, existing firms will be forced to change or disappear.

The Economic Life

Joseph Schumpeter best explained the march of new ideas as creative destruction.  

Although Nairobi and London are 4228 miles apart, they actually are closely connected. The NY Times described the tie that was cut by volcanic ash.

Kenyans supply gourmet vegetables and cut flowers to European supermarkets. When planes were grounded, so too were sugar snap peas, onions, and corn. Roses began to wilt and corn started to spoil. Daily shipments of two million pounds of produce were affected as were unneeded Kenyan packers and washers.

Other trade connections we might not know? Please comment.

The Economic Life

Perhaps here we have a connection between Adam Smith, David Ricardo, the U.K. and Kenya. In his Wealth of Nations, Adam Smith explains the virtues of mass production and the need for "distant sale" which can only be achieved through a transport infrastructure and many buyers. Kenya developed so large a horticultural export sector because cargo planes could connect it with large affluent markets. And here is where Ricardo enters the picture. Markets that interconnect nations facilitate even more efficiencies through economies of scale and comparative advantage. 

Carbon offset markets are about thinking at the margin. Hoping to become the first carbon neutral state in the world, the Vatican bought carbon offsets. The U.S. House of Representatives funded an $89,000 purchase of carbon offsets. Before boarding, you can buy a carbon offset to compensate for emissions during a plane flight. In each example, someone was paying to create an "extra" environmental benefit (a forest that "inhales carbon dioxide") in order to compensate for the marginal cost of environmental harm (airplane emissions). 

Yes?

Maybe.

The market in which carbon offsets are sold is unregulated. Consequently, government is not directly checking whether sellers are actually creating the offsets that are purchased nor whether cost and benefit are connected. For example, in a recent Christian Science Monitor article, investigative reporter Phillip Martin found major deficiencies in the carbon offset market. Essentially he discovered that certain offsets never were created. 

The Economic Life

A market is a process through which demand and supply determine price and quantity of a good or a service. A recent paper from the Pew Center on Global Climate Change suggests that oversight of carbon markets should accompany current financial reform.

I guess we can all agree that citizens have basic rights. But vacations? "Traveling for tourism today is a right. The way we spend our holidays is a formidable indicator of our quality of life," according to Antonio Tajani, the European Union commissioner for enterprise and industry. 

During a recent meeting in Brussels, the EU proclaimed that government should subsidize tourism and travel for those who cannot afford it. Available "to pensioners and anyone over 65, young people between 18 and 25, families facing 'difficult social, financial or personal' circumstances and disabled people," the program will be piloted until 2013.

You might want to look at this WSJ.com article for a reality check about the tough fiscal choices facing EU members.

Your opinion? Please comment.

The Economic Life

An entitlement is a government program that citizens believe government should provide.  In the U.S. Medicare and Social Security are our largest entitlement programs. If we return to our government involvement scale, with more government to the left and less to the right, where do you believe the U.S. should be? With a travel subsidy mandate, where have the EU nations moved? 

Did you ever wonder how rich Jed Clampett (the Beverly Billbillies) would be? According to Forbes Fictional 15, because of oil, gas, and banking investments, Clampett, worth $7.2 billion, is #5 on the list.

C. Montgomery Burns, hometown Springfield, U.S.A., and graduate of Yale, is #12 because of the money he made as owner of the Springfield Power Plant and Jay Gatsby is #14 with $1 billion. #1 was Carlisle Cullen from Twilight's Billionaire Vampire.

The Economic Life

A very real issue that concerns economists is income distribution.  In the U.S., our national income comes from wages and salaries, rent, interest, dividends and profits from businesses that are not incorporated. To picture our income distribution, please think of a pie as the total national income and then individual slices as the proportion that different groups receive. That would mean that if total national income were $1,000 and a society had only five households (people living together), then if every household earned $200, distribution was equal. By contrast, if one family earned $800, then, because $200 remained for everyone else, there would be considerable inequality. Recently, the top quintile of households in the U.S. earned close to 50% of all income. This quintile approach for representing income distribution was developed by statistician Max Lorenz. 

Hearing that actor John Cleese took a Mercedes taxi from Oslo to Brussels for about $5,000 because the Icelandic volcano eruption prevented him from flying, an economist would say, "That is a positive externality."

Economists see positive externalities wherever a transaction between two parties affects a third individual or group in some beneficial way. For Mr. Cleese, the transaction was between him and his airline while the taxi service experienced the positive externality.

Primarily, though, news articles are emphasizing the negative externalities where unrelated third parties are harmed by airline cancellations. Because cyclists destined for the Amstel Gold race in the Netherlands, runners in the Boston Marathon, and wrestlers who were supposed to be in Rutherford , N.J., are stranded, those events will lose some of their stars. Similarly, audiences are disappointed by musicians who missed a concert and businesses are compensating for absent workers. 

Other positive externalities are being felt by: ferries, NYC hotels, German trains.

Other negative externalities include: the money lost by merchants awaiting food and pharmaceutical shipments, vacation cancellations, missed FedEx shipments, delayed military supplies to Afghanistan.

Your additions?

The Economic Life

Traditionally, pollution is cited as a negative externality because the "cost" is experienced by anyone breathing nearby air. Some say that the recent recession was the negative externality created by the banking sector's transactions (and again, Iceland?).

For a positive externality, a vaccine is a good example. Here, the transaction is between the physician and the patient. Then, though we all benefit when fewer people become ill. 

The Senate just said "No" to a VAT. Disagreeing, Paul Volcker sort of said "Yes" when he observed that a VAT is "not as toxic an idea" as we once believed. Suddenly everyone seems to be talking about a VAT.

Here are some basic VAT facts:

1. What is it?

Most fundamentally, the VAT is a consumption tax, sort of a distant relative of the sales tax. Please think about a pretzel. A sales tax on a pretzel would be paid at the cash register. (Federal sales taxes now provide only 3% of federal tax revenue.) 

The VAT, a value added tax, is also a consumption tax. If we levied a VAT, as with the sales tax, our pretzel would have a higher price.  However, the consumer does not pay the entire tax at the cash register. Instead, at each production stage, the value that is added to the product is taxed.

With a 10% VAT, when $100 of wheat for pretzels leaves the farm, the flour maker who buys the wheat pays $100 for the wheat and a $10 tax. Then, when the pretzel factory buys the flour, it pays (very hypothetically) $1000 for the flour plus $100 VAT minus a credit for the taxes that were already paid. At each stage, the VAT is levied on buyers of the unfinished product; the consumer covers the final VAT payment. Piecemeal, through a sequence of tax forms, the federal government identifies and charges for "value added". 

2. Who uses the VAT?

Close to 100 countries generate revenue through a VAT. In France, for example, more revenue is raised through their VAT than through income taxes. I checked the OECD website and saw that VAT rates vary. Denmark: 25%; Spain: 16%; Thailand 7%.

But then I discovered that reality can be a lot more complex. In the U.K., for example, where food is tax free, they decided to exclude frozen yogurt that needs to be thawed. They faced similar dilemmas about children's clothing, having to decide the whether small adult sizes are for children and even if flotation devices are clothing.

3. Why is a VAT desirable?

Many economists believe that a VAT can generate "a ton of revenue". Also, as a consumption tax that elevates prices, a VAT can encourage saving. 

4. What is wrong with a VAT?

It is regressive. That is why the UK VAT, for example, excludes food. Also, a VAT can be complex.

5. When was the VAT created?

The VAT was invented in 1954 by Maurice Laure, a French tax official.

You can see where all of this is heading. It's complicated. The basic issue, though, is if we spend more, we need more revenue.

The Economic Life 

In the U.S., the personal income tax generates 44% of all tax revenue while social insurance taxes account for 42%. Corporate income taxes are a distant third at 7%.

Can we assume that seat belts make us safer? Maybe. Writing about seat belts in 1975, University of Chicago economist Sam Peltzman described what we now call the Peltzman Effect.

Sam Peltzman said that yes, seat belts do make us safer. However, making us safer has an unintended consequence. Because seat belts protect us, we might drive more dangerously. As Peltzman describes it, when regulation changes incentives, people's response can offset the intent of the regulation.

Since the Peltzman Effect was first proposed, researchers have explored its broader implications. The availability of flood insurance can encourage people to build waterfront homes. Taking Lipitor might increase the amount of cheese and steak that we consume. And today, the Peltzman Effect is cited when financial reform is discussed. Doesn't it make you think about "Too big to fail"?

The Economic Life

In economic terms, seat belts lower the cost of dangerous driving. Thinking of the law of demand, lower cost creates an increase in quantity demanded. If the cost of  dangerous driving drops, some people will accept the risk more readily. 

Why, you may wonder, is an economist presenting a major address today at the Association of American Geographers? Looking back and looking forward, Paul Krugman's speech provides the answer.

Economic geography involves mathematical modeling and also costume jewelry in Providence, RI and detachable collars and cuffs in Troy, NY. A 2008 World Bank report says that it involves seeing the world through a 3D lens: density (cities), distance (migration), and division (barriers).

Economic geography takes us at first to the regional specialization that characterized the growth of US manufacturing during the 19th century. But then, we need to go to Wenzhou, where 95% of the world's cigarette lighters are now made, elsewhere in China, and to other developing nations.

The point of all of this? Together, economics and geography create a synergy through which we can better understand regional specialization and economic growth in developing nations.

The Economic Life

The World Bank's 3D's involve the Density that we find in population centers, the Distance that people migrate to enjoy economic opportunity, and the Division that needs to be overcome when migration is blocked by political barriers.

Have you ever thought about the connection between your dog and the economy? During an interview on NPR's "Fresh Air", Michael Schaffer, author of One Nation Under Dog, spoke about dogs' lives. A lot of his stories relate to the onset of two career families:

• In 2 worker households, dogs were increasingly left alone during the day and began to experience separation anxiety. The solution was an antidepressant.
• According to Schaffer, pet antidepressants are beef flavored. Otherwise, they are chemically identical to human antidepressants.
• Pet related goods and services are a part of a $43 billion industry.
• Two career families typically need dog walkers. There are dog walking certification organizations. 
• Manhattan has pet taxi drivers.
• Pet grooming has become a major industry. Shaffer hypothesizes that the growth began when pets started sleeping with us instead of in the doghouse in the back yard. 
• Dogs' names have changed.  Decades ago, a dog might have been named Fido. Now the dog is Frank.
• The pet hotel business is growing. (Shaffer visited the Wag Hotel in San Francisco.)
• According to a recent Economist article, increasing numbers of pets have been abandoned because of the impact of the recession. 

The Economic Life

According to the Department of Labor, 90% of our spending typically is for "food, housing, apparel and services, transportation, healthcare, entertainment, and personal insurance and pensions." I was not able to find a pets category.

Imagine a "u" attached to a slightly (or considerably) higher upside down "u" and you are looking at 2 business cycles. A business cycle includes a peak, a contraction, a trough, and an expansion. Most people think that this recession started during December, 2007 (the top of the first "u") and ended during July, 2009 (the bottom of the first "u"). However, the definitive word will come from the National Bureau of Economic Research (NBER) and they are not quite sure yet.

The NBER tells us when recessions start and when they end. While primarily, they base their decision on the GDP, other data is considered: 

1. Real GDP: the dollar value of  goods and services produced in the U.S.; measured quarterly by the Bureau of Economic Analysis (BEA).
2. Real Personal Income: the amount we earn excluding transfer payments (such as social security, welfare, and other government paychecks that do not pay for a good or service); measured monthly.
3. Employment: the percent of the labor force that is unemployed and looking for a job; measured monthly.
4. Industrial Production: manufacturing production; measured monthly.
5. Sales volume: from manufacturers and retailers; measured monthly.

The Economic Lesson

A recession is the period between a peak and a trough. Thinking back to our "u", it is the left side, the trip downward. In economic terms, as we travel down the left side of the "u", the GDP is either growing more slowly or actually diminishing. While most of us say that a recession is defined as two consecutive quarters of declining GDP, the NBER says that the quarters do not have to be next to each other.

Following up on yesterday's post, I discovered how important product placement can be. Sometimes movie makers decide the products beforehand, before they even complete the script and select the stars. Fees for a "starring" product can total millions. 

Up in the Air? Including Hilton HHonors Diamond V.I.P. meant free rooms. But meanwhile, Hilton oversaw accuracy for their uniforms, service, details. For its participation, American Airlines helped to market the film. 

The 28th Amendment?  Movie makers were contemplating where to insert a fast food scene before the scene was written. (Film has not been completed.)

Wearing economic glasses as you watch your next movie or TV show, you might get some extra insight if you watch for product placement.

The Economic Lesson

If profit equals total revenue minus total cost, then product placement certainly helps the bottom line. Also though, we should not forget the opportunity cost of these profit generating decisions. Is artistic quality influenced? 

Heinz Ketchup had a cameo but Apple was a star.  I saw The Girl With The Dragon Tattoo yesterday and started to think about product placement. In this excellent film, while Heinz ketchup played a fleeting role during a scrambled eggs breakfast, Apple laptops were a recurring presence throughout the film

How did Apple get this advertising? According to a 2006 Washington Post article, Apple does not pay for it. Still, though, they work very hard to get it and probably provided the computers.

Carrie Bradshaw used an Apple in Sex and the City, as did the "good guys" in 24, and Alec Baldwin in It's Complicated. To see the films in which Apple appeared, you might want to look at brandcameo.

The Economic Lesson

As oligopolies, large firms with few competitors have many consumers with which to communicate. Films are one vehicle for contacting a large audience. Other characteristics of oligopolies include sticky prices, mass production, product differentiation (though not always as with steel), and the need to advertise.

When we think about taxes, we should look at yachts. In 1990, because of a new luxury tax, anyone who purchased a yacht paid 10% more. The result? People stopped buying domestically made yachts. Yacht makers went out of business and the government never collected the revenue it sought. After the tax was repealed in 1993, sales increased.

Fast forward to 2010. On April 6th, the Florida house capped the tax on yachts at $18,000. Consequently, people buying boats sold for $300,000 or more got a tax cut. The result? Supporters claim sales will increase because boat buyers will no longer go elsewhere to avoid the tax.  In response, opponents say this tax cut will not help most Floridians, especially the unemployed and those with declining home values.

The debate about a tax on luxury items returns us to taxing dilemmas. Government's search for more revenue is complex.  The most politically attractive solutions might not always become fiscally fruitful.

The Economic Lesson

In addition to progressive income taxes and luxury taxes, Congress can look at other tax approaches. They can consider higher sales or estate taxes, a value added tax on manufacturing firms, and a flat tax for everyone. Whichever they select, the incentives they create will shape the response and the revenue they generate. 

Some people believe that government spends more when it has an affluent population to pay for it.  In a recent NY Times column, David Leonhardt presents a slightly different perspective. Instead, he says that because we are a more affluent society, we want government to spend more. As he expresses it, "A tax increase is...a result of a society becoming richer." As economic growth accelerates, so too does what people want from government.  We want additional services; we want a transport infrastructure; we want medical care.  

So far, how have we funded these wants?

• On the revenue side, federal taxes have totaled close to 18% of GDP.
• The individual income tax is our largest source of revenue.
• The second largest source is social insurance taxes (social security and Medicare) while corporate taxes are a distant third. 
• During the 1950s and 1960s, the top marginal tax rate was actually 91%.

Where do we go from here? More tomorrow...

The Economic Lesson

There are three basic tax approaches: 1) Progressive taxation: the affluent pay a higher percent of their income than those who have less. 2) Regressive taxation: those who have less pay a higher percent of their income than those who have more. 3) Proportional taxation: everyone pays the same percent of their income. Our individual income tax system is progressive, sales taxes are regressive, and the Medicare tax is an example of a proportional tax.

In an October NY Times op-ed, Calvin Trillin describes a (hypothetical) conversation in a midtown bar about the financial crisis. "The financial system nearly collapsed because smart guys had started working on Wall Street." By contrast, decades ago, a top student became a federal judge or a professor. Meanwhile, the bottom third went to Wall Street. More recently though, "Smart guys started going to Wall Street." and invented derivatives and credit default swaps.  "But who was running the firms they worked for? Our guys! The lower third of the class. Guys who didn't have the foggiest notion of what a credit default swap was...!" 

I only remembered Trillin's column because of yesterday's Financial Crisis Inquiry Commission (FCIC) testimony from Chuck Prince, former head of Citigroup and Bob Rubin, Citigroup "senior counselor" and former Secretary of the Treasury. 

Please do read Trillin's column and then listen to yesterday's testimony. Your opinion? Also, check this baseline scenario comment on Alan Greenspan's testimony.

The Economic Lesson

The FCIC is being compared to the Pecora Commission. Between 1932 and 1934, the Pecora Commission investigated "stock exchange practices and their effect on American commerce, the national banking system, and the government securities market. They also addressed issues of tax evasion and avoidance." Their impact is reflected by the content of the Banking Act of 1933 (Glass-Steagall), the Securities Act of 1933, and the Securities Exchange Act of 1934. A St. Louis Fed paper has the documents. 

Whenever you consider doing something extra, you are thinking at the margin.

• When airlines decided to charge travelers for more than one bag, they were thinking at the margin.
• Still thinking at the margin, they realized they could generate considerable extra revenue by getting paid for extra baggage.
• Also thinking at the margin, some travelers stopped taking an extra bag.
• Still though, airlines' extra (marginal) revenue increased by $1.5.billion.
• Then, because planes had less extra baggage, extra fuel was no longer necessary.
• Less fuel meant extra profits and larger profit margins.
• For baggage handling injuries and bag losses, there were fewer extras.
• Fewer bags meant extra room for cargo (which is more lucrative for the airlines).
• However, flight attendants are experiencing extra injuries because passengers are jamming bigger bags into the overhead racks.
• And finally, airlines have always thought about extras because one extra passenger on a plane typically costs them the price of an extra meal.  

The Economic Lesson

Whenever anyone considers the cost and benefit of something extra, that person is thinking at the margin. The margin is an imaginary line that separates the current amount you are doing from the extras you might be contemplating. As you can see, airlines have been doing a lot of thinking at the margin.

Re a March 21 post about frugal fatigue...

For a fifth straight month, consumer spending is up, meaning perhaps that we are headed for a "V" recovery?  

Data from the most recent Bureau of Labor Statistics (BLS) report indicates that internet spending on computer information services is soaring while purchases of newspapers and magazines are plummeting. Predictably, between 1999 and 2008, with the largest decline, the "under-25 population" spent 58% less on newspapers and magazines; those 65 and over spent the most on real print media but still decreased their spending by 22%. The report includes a great graph.

Re a March 27 post about the yuan...

Economist Don Boudreaux responds to Planet Money's description of Chinese currency manipulation saying instead that their policy can also have a positive impact on trade by making the value of the yuan more predictable.

Hoping to settle differences during the next G-20 meeting, Treasury Secretary Geithner will postpone his report to the Congress on Chinese currency policies.

The Economic Lesson

Characterized as structural change, diminished demand for magazines and newspapers is an example of an industry contracting as demand shifts to new technology.  

On Economics:

Economics is "the study of mankind in the ordinary business of life."   Alfred Marshall, 1842-1924 (U.K. economist).

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." Friedrich von Hayek, 1899-1992 (Austrian-born, U.K. citizen economist).

"...persons, with big wigs many of them and austere aspect, whom I take to be Professors of the Dismal Science."  Thomas Carlyle, 1795-1881 (Scot. teacher, writer, satirist), on the (sometimes) dreary character of economics.

On economists:

"In the long run we are all dead."  John Maynard Keynes, 1883-1946 (U.K. economist), referring to economists' emphasis on the future impact of their ideas. 

"Give me a one-handed economist. All my economists say, "On the one-hand; on the other." Harry Truman, 1884-1972 (U.S. president).

The Economic Lesson

Economics books say that economics is a social science that explores how we produce and distribute scarce resources (land, labor, capital).

Thinking of how Economics is Everywhere, I am reading The Literary Book of Economics in which economist Michael Watts displays the connection between literature and major economic ideas.  

Discussing 78 examples, from fiction, nonfiction, and poetry, he includes the connection between Dickens's Hard Times and negative externalities, Amy Tan's Joy Luck Club and the efficient market hypothesis, and Jon Krakauer's Into Thin Air and price elasticity of demand. Similarly, while David Sedaris surely was not thinking about labor markets when he debated whether he needed a job after finding $50, he was indeed thinking economically.

The Economic Lesson

Concerning so much more than money, when we slice away all of its complexities, economics is fundamentally about making choices among scarce resources.

The Plunge Protection Team is composed of the chair of the Federal Reserve, the Secretary of the Treasury, the SEC, and the Commodities Futures Trading Commission.  Officially called the Working Group on Financial Markets, this group was formed after the 1987 stock market crash. As described in a 1997 Washington Post article, its mission has been to monitor and prevent financial crises.

Proposed financial regulation from the Chris Dodd committee includes creating a Financial Oversight Stability Council that is charged with "identifying, monitoring and addressing systemic risk." 

Comments?

The Economic Lesson

To see the content of major federal banking and financial regulation during the past century, this link provides a list of laws and their content. It is excellent.

Is there a "lock box" with surplus social security funds? Sort of.  

In 1983,  when we had inadequate funding for the social security program, a commission led by Alan Greenspan suggested extra sources of revenue for a Social Security trust fund. As a result, primarily through higher payroll taxes, more was collected for social security than they needed then and the money was put aside.

Here is where you can imagine a lock box. Theoretically kept in the lock box, U.S. treasury securities were purchased with the social security surplus. As a result, social security surplus revenue became available to the U.S. government to spend until the social security administration needed the money.  

Fast forward to now.  In a recent NY Times article, we learned that this year social security benefits exceeded social security revenue.  Because the recession was the likely cause, all should return to normal soon. But what is normal? Normal means that in 2016, the program will face a tipping point and pay-outs will consistently exceed revenue.

Are you concerned about the future of social security? Comments?

The Economic Lesson

Hoping to give "ownership" to all of us, the creators of Social Security designed a universal pay-as-you-go program in 1935. When we "pay-as-you-go", we are giving today's workers' payroll tax dollars to today's social security recipients.

A recent Daily Mail article about President Sarkozy's height sensitivity reminded me of studies that relate height to success.  

But first, some height stats:

• Nicholas Sarkozy (France): 5'5"
• Barack Obama (U.S.): 6'2"
• Angela Merkel (Germany): 5'8"
• Gordon Brown (U.K.): 5'11"
• Stephen Harper (Canada) 6'2"
• Carla Bruni Sarkozy (French first lady): 5'10"
• Napoleon Bonaparte: 5'6"
• 39 U.S. presidents were taller than average while 5 were shorter

A 2004 New Yorker article has wonderful facts about the economic implications of height: 

• The tallest in Europe, the average male in the Netherlands is 6'1" and the average female is 5'8". Consequently, homes, cars, ambulances and clothing need to be redesigned.  Ceilings need to be higher and ambulances need to be longer.
• Taller men earn more.  One study indicated that an average six footer will earn close to $165,000 more than someone who is 5'5" during a 30 year period.
• Historically, as cities grew larger, humans became shorter. Economists theorize that deficient nutrition was the cause.
• Height corresponds to economic growth. When affluence grows, so too do people.

The Economic Lesson

Called anthropometric history, the history of human height has become an economic field of study. Economists use height data to form hypotheses about GDP, national affluence, food consumption, real family income, wages and prices.

From a Forbes.com, 2006 reader survey, the 10 best money movies:

1. Wall Street (1987; 35% of votes)
2. Trading Places (1983; 10% of votes)
3. The Sting (1973; 6% of votes)
4. Ocean's Eleven (1960; 5% of votes)
5. Boiler Room (2000; 5% of votes) 
6. It's a Mad Mad Mad World (1963; 4% of votes)
7. Casino (1995; 4% of votes)
8. Glengarry Glen Ross (1992; 4% of votes)
9. The Treasure of the Sierra Madre (1948; 4% of votes)
10. American Psycho (2000; 3% of votes)

Having discovered a paper that explained why American films tend to present a negative view of business, I was especially interested in seeing which films were discussed.

"Evil" Firms and Capitalists: The Godfather (1972), The China Syndrome (1979), Norma Rae (1979), Wall Street (1987; remember Gordon Gekko?), Robocop (1987),  Pretty Woman (1990), A Civil Action (1998), The Constant Gardener (2005), Michael Clayton (2007), American Gangster (2007) 

Pro-business: Schindler's List (1993) Jerry Maguire (1996, Tom Cruise) You've Got Mail (1998, Tom Hanks and Meg Ryan) Pursuit of Happiness (2006, Will Smith)

Where would you place Eddie Murphy's Trading Places? Others you might add?

In a recent WSJ interview, Nobel laureate Gary Becker tells us that, "Markets are tough to appreciate." The reason, he says, is people feel government can better care for them than a profit seeking individual. Calling markets counterintuitive, Becker sees why people question the benefits of a system that seems to harm the unfortunate. For him though, the key is economic growth which only a market can create.  

Becker also comments on the cost of health care. Implying that incentives rather than government provide the solution for cutting health care costs, he compares health care spending in Switzerland and the United States. Yes, the Swiss spend close to 11% of GDP on health care and we spend approximately 17%. However, for him, insight comes from asking who does the spending. In Switzerland, 31% of the total is from individuals;  for us, only 12% of total health care spending is an "out-of-pocket" expense. 

Hearing Gary Becker's ideas reminds me of a quote from William Bradford about Plymouth Plantation in 1623: "So they began to think how they...could...obtain a better crop than they had done...At length...the Governor...so assigned to every family a parcel of land...This had very good success, for it made all hand very industrious..."

The Economic Lesson

Whether your bias is more government or less, still we always can conclude that the incentives created by a decision will determine its outcome.

Opening on April 1 in NYC, the Exchange Bar & Grill has food and drink prices that respond instantaneously to demand.  As described in a Reuters article, if everyone wants hot wings, then, in $.25 increments, the price increases; if no one wants them, the price drops. Prices, though will not fluctuate more than $2 higher or lower than a base number.  That means that you would not pay more than $9.00 or less than $5.00 for 6 hot wings because their starting price is $7.00. The restaurant has a ticker tape that will display price fluctuations.

The Economic Life

I have been wondering how we might graph the changing price for hot wings. Is quantity supplied constant or upward sloping? Is the demand curve shifting? Or do we just have a horizontal perfectly elastic supply curve that moves when management shifts it?

Pondering health care reform, I began to wonder whether sin taxes would become Pigovian taxes.

A sin tax focuses on the impact of a behavior on an individual. Levied on something that society believes is "bad" for a person, a sin tax typically targets habits like smoking or alcohol consumption. Its goals involve generating revenue and minimizing the behavior. 

By contrast, a Pigovian tax focuses on the impact of a behavior on society. Air pollution, for example, can harm the people who live near a noxious factory. If untaxed, the factory continues producing while society suffers. However, if the factory has to pay when it pollutes, production becomes more expensive.  As a result, the supply of the item decreases and society is compensated.

Have societies with universal health care coverage transformed sin taxes (which relate to the individual) into Pigovian taxes (which impact society)?

The Economic Lesson

First defined by Arthur Pigou (British economist, 1877-1959), a Pigovian tax increases the cost of an activity involving two parties that has a negative impact on a third, unrelated group.  Also called a negative externality, the harm experienced by the third party reflects a failure of the market to price the activity accurately because the market did not account for its cost (harm). When a tax or a fee is imposed, the cost of production increases. Consequently, the item's supply curve shifts leftward. 

Harvard professor Niall Ferguson, called China a currency manipulator in a recent interview. Next month, Treasury Secretary Tim Geithner will let us know if he agrees. The United States has not formally called China a currency manipulator since 1994.   

According to a Planet Money podcast, this is why China could be called a currency manipulator:

1) A U.S. business buys Chinese made goods. 2) The U.S. business pays for its purchase in dollars. 3) Needing yuan and not dollars, the Chinese factory uses its dollars to demand yuan at a local bank. 4) Here is the tricky part. Lots of quantity demanded for yuan should shove its price up.  But it does not. Why? Because the Chinese government adds to the yuan supply which shifts the supply curve downward and maintains the price of the yuan. China's intervention could be called currency manipulation.

Next question.  Why should we care?  We care because when a currency is too cheap, world demand for that nation's goods soars and production elsewhere suffers.  If left alone, though, currencies self-correct. As quantity demanded increases for a cheap currency, it becomes more expensive. Soon, people buy fewer goods from that country and more from other nations whose goods become relatively cheaper.  Like a seesaw, currency values go up and down, always equalizing as long as governments do not interfere.  

The Economic Lesson

How does money become more or less expensive? As always, it is all about demand and supply. Buyers want more goods and services that they buy for yuan or yen when they are cheap and less when they cost more.

Yuan or yen?  If each fluctuated freely, it would depend on demand and supply.

Growth or a safety net? Thinking at the margin, an increasing number of European policy makers are debating a change.

The result is a classic economic dilemma. Unemployment and medical insurance, pensions, licensing protections, and job guarantees can each tug GDP downward if they are government mandated. Between 2000 and 2007, eurozone economic growth averaged a sluggish 1.7%. By contrast, though, millions of individuals lead better lives because of government support. Thinking at the margin, the tradeoff is more growth or a bigger safety net. Because of scarcity, we cannot have everything.

Greece's fiscal problems are a consequence of enlarging the safety net. One Chinese official is quoted as saying the Greek fiscal crisis is only "the tip of the iceberg."  Implying that the choice has to be a smaller safety net, he believes that the spending problem extends far beyond Greece to the entire eurozone.  

Interesting facts:  According the OEDC, average number of actual working hours in 2008:  US: 1792, Netherlands: 1389, France: 1542;  But why is Greece 2120? Korea exceeds all and has the least vacation time.

The Economic Lesson

Economically speaking, the definition of scarcity is limited quantities. Because there are limited quantities of the factors of production (land, labor, capital), whenever we allocate resources for one good or service, we have less to use elsewhere.  The only remedy is economic growth.

"Independent" is the first word that comes to mind when I think about the Federal Reserve. Overseeing the supply of money and credit, the Fed is supposed to be an independent Federal agency.

I wonder how the following basics of the Dodd committee's financial reform proposals will affect the Fed's efficacy and structure.

1. A financial consumer watchdog agency would become a unit of the Fed. Having some independence, its head would be appointed by the president and confirmed by the Senate. (Organizationally, how would a new independent agency function within the Fed?)

2. The Fed would regulate the larger banks.  The FDIC and the OCC (Office of the Comptroller of the Currency) would regulate the smaller ones. (As a result, certain regional Fed banks could lose authority over most of the banks they now regulate.)

3. The Fed (with the FDIC and the Treasury) would be involved in a liquidation process for large banks.

4.  A new council to assess systemic risk would place high-risk non-bank firms under the Fed's oversight.

5.  The Fed would implement the policy of an inter-agency financial council chaired by the Treasury. (Is independent, non-partisan action feasible here.) 

An interesting note: Dr. Bernanke hopes that the concept of a living will, written by each large financial institution, would be considered.

The Economic Lesson

Rather similar to the human circulatory system, healthy banks are a fundamental necessity because they pump the money and credit around our economy that we need to produce goods and services.

Do you approve of Pigovian taxes?  These are taxes levied on seemingly undesirable behavior in order to compensate for their negative impact on society.

soda tax: Among other municipalities, New York State and Philadelphia are proposing soda taxes.

bag tax:  Implemented in Washington D.C. as of January 1, a five cents tax on plastic bags. 

911 tax:  In Tracy, CA, if you call 911, it will cost you.  Some people are deciding that a cab is cheaper.

elevated library late fees: In San Jose, CA  an overdue library book could cost you 50 cents a day.

The Economic Lesson

Pigovian taxes, named after economist Arthur Pigou (1877-1959), are based on the idea that undesirable behavior creates a cost for society. Therefore, a tax is essentially a "payback"  that offsets the cost and/or minimizes the behavior because it becomes more expensive.  The negative result is also called a negative externality.

The impact of a recession might not be entirely what we expect.

A recent study from the University of Ottawa suggests that we sleep more during a recession. Canadians slept two hours and 34 minutes more per week.

Hypothesizing that it makes people happier, a U.K. hairdresser saw a 67% "surge" in blond hair dye sales. 

Daniel Gross believes that Americans, in what he quotes a sociologist as calling the "great reset", want to be healthier.  As a result, they are buying more vitamins. 

Rather interestingly, perhaps contradicting the healthy theory, Daniel Gross also points out in the same Slate article that McDonald's sales rose during the recession.

Finally, I heard during a podcast that because we vacation less during a recession, shark attacks have diminished.

The Economic Lesson

Does all of this take us back to demand, supply, and prices?  During a recession demand and supply shift, mostly downward, but not for everything. 

When U.S. senators consider whether to respond to an undervalued Yuan, they can check the most recent Big Mac Index.  Big Macs are 49% cheaper in China than in the U.S. According to The Economist, we would pay $3.58 for a Big Mac here and the equivalent of $1.83 in China.  An easy way to see the relative value of the dollar, the Big Mac Index lists prices in countries that include Japan ($3.54), Norway ($6.87), and Saudi Arabia ($2.67).

The Maharaja Mac, sold in India, is not included in the Big Mac Index because it has a chicken patty instead of beef. In Israel, at kosher McDonald's, Big Macs are also not listed in the index because the cheese is excluded.  

The Economic Lesson

The Big Mac Index is all about purchasing power parity (PPP). Saying that the Big Mac Index provides "food for thought," a paper from the St. Louis Fed describes purchasing power parity as a foundation of international economics. Usually based on a "market basket" of goods and services, PPP helps us to compare currencies and predict how their value will change if their purchasing power is not equal. As I mention in a 1/07/10 post, Timothy Taylor presents an excellent PPP discussion in "America and the New Global Economy," Part 1.    

Some of us are suffering from frugal fatigue. According to a New York psychologist, symptoms could include anxiety, fear, depression, and even the common cold. The cause is stress from watchful, recessionary budgeting which for certain people is no longer as fun and chic as it was. Statistically, the evidence could be found at J. Crew.  Their fiscal Q4 sales soared 19%--the best gain in 9 quarters. 

The Economic Lesson

Typically, income changes cause demand curves to shift.  Higher income means we demand a larger quantity of a certain good or service;  lower income means the opposite. But not always. Goods that economists call inferior (Spam, cheaper cuts of meat, supermarket house brands) have the opposite impact on the curve. During a recession, we buy additional inferior goods and, as a result, shift their demand curve to the right.

Let's not look at CDOs, SIVs, ARMs, TIPs or ATMs. Nor do we need specifically to consider credit default swaps, securitization, hedge funds or venture capital. Instead, we can go to the question that Robert Litan asks at the end of his 47 page Brookings paper on financial regulation:

"What deserves preemptive screening?"

During the past century our government has decided which products need screening before entering the market and those that will receive regulatory oversight only after a problem is identified.  Pharmaceutical innovation is the perfect example of prior approval. By contrast, car, train, and plane makers regularly implement progress without a regulator's restraint.  Only when they have a problem have government regulators intervened.The question we now face is how to regulate financial innovation? Before or after?

In his paper, Litan expresses concern that prior restraint of new financial products could retard the progress that has fueled GDP growth, created convenience, and facilitated monetary distribution. With cost/benefit analysis of an array of new financial products from the past three decades, he illustrates the good, the bad, and the so/so. Disagreeing with the Volcker Rule, Litan then asks if the cost will be too great if innovation is constrained by prior approval. 

Your opinion?

The Economic Lesson

For every decision, there are costs and benefits. Defining cost as sacrifice, economists encourage all of us to assess cost and benefit when making a decision--to say, "On the one hand...but then on the other...."  For that reason, Harry Truman once asked for a one-handed economist.    

Instead of a garage or a laboratory, think of an office or a conference room. And, rather than a computer or an aircast, imagine a junk bond or a bank account.  All of these products, at one time were invented.  

In a recent Brookings article,  Robert Litan discusses the products created by financial innovation. His purpose, which we will look at tomorrow, was to reply to Paul Volcker's negative view of recent financial innovation.  For now, let's just identify a variety of relatively new financial products (inventions). 

Grouping the new products into the financial function that they affected, Litan includes the following: 

Payments:  ATMs, credit card expansion, debit cards

Saving: money market funds, indexed mutual funds, hedge funds

Investment: ARMs, home equity lines of credit, collateralized debt obligations

Risk-Bearing: futures options, credit default swaps

The Economic Lesson

Imagine a convex line on a graph with goods as the Y-axis and services as the X-axis. Then, because someone invents something--maybe the computer--the line moves outward because that society is able to produce more. The "rounded outward" line is called a production possibilities frontier. It displays maximum productive capability.  With innovation, productive potential typically increases. 

What happens when you build an airport and nobody uses it?  China has an answer. Although China faces underutilization as it develops its transportation infrastructure in the air, by rail and roads,  it seems to be continuing.

China's policy took me to a recent Econtalk podcast from Russ Roberts.  Focusing on trade, Adam Smith, and David Ricardo, he began by saying that, "self-sufficiency is the road to poverty". By contrast, affluence grows when people specialize and trade.  However, people can sustain specialization only when they have demand.  And when demand grows, specialization will spawn technology, knowledge, and wealth.  A transportation network is a fundamental requisite for specialization and the innovation that Roberts says market size stimulates.

The Economic Lesson

As the rationale behind trade, David Ricardo's principle of comparative advantage says that overall productivity will increase when people specialize in whatever has the least opportunity cost.  Saying specialization has so many benefits that even when two nations have identical opportunity costs they should trade, Roberts takes Ricardo a step further.

What if there was a miracle food that helped fight colds, prevent cancer, heart disease, and cataracts, and fostered healthy bones? According to several non-medical web sites, there is one. It's broccoli.

And what if another food promoted diabetes, obesity, osteoporosis, dental cavities, kidney stones, high blood pressure, and maybe even heartburn? Some say soda does this to us.

In yesterday's NY Times, an article described a recent study that indicated a tax on soda limited its intake.  Should we support "sin taxes"?  Quoted in Econ 101 1/2, Napoleon III "was once implored by a lady to forbid all smoking on the grounds that it was a great vice.  Laying aside his cigar he replied, 'This vice brings in one hundred million francs in taxes every year.  I will certainly forbid it at once--as soon as you can name a virtue that brings in as much revenue.'" 

The Economic Lesson

Contemplating decisions, assessing opportunity cost through an opportunity cost chart is always a handy way to gain insight.  At the top we would have "tax soda" and the alternative, "don't tax soda".  Then, for each choice, we could list the benefits.  Two benefits of the tax would be healthier individuals and more state revenue.  Two benefits of no tax would be individual freedom and jobs for the soft drink industry.  Which benefits are you willing to sacrifice?

Between 1932 and 1934, the Senate's Pecora Commission, named after its general counsel, amassed 12,000 pages of testimony.  Its focus was the impact of stock exchange practices on banking, securities, and commerce.  Subsequent major financial legislation was based on the work of the Pecora Commission.

Fast forward to 2009 when the Financial Crisis Inquiry Commission (FCIC) was created by The Fraud Enforcement and Recovery Act.  Similar to Pecora, its mission is to investigate a financial crisis: the panic of 2007. With its report due during December, 2010, the commission has begun its hearings.

A question. We heard yesterday that the Senate Banking Committee, led by Senator Dodd, has proposed 1336 pages of legislation to prevent the panic of 2007 from recurring. If the FCIC has just begun its investigation, why is there a major legislative proposal preceding its feedback? 

Does this approach sound like the tv game show, Jeopardy?

The Economic Lesson

The federal government guides our economy in three basic ways: fiscal policy (spending, borrowing, taxing), monetary policy (supply of money and credit) and regulatory policy.

New rules might not always have the results regulators expect.  Starting on April 29, any airplane that sits on the tarmac for longer than 3 hours will be fined up to $27,500 per passenger.  For a Boeing 737, that could mean $4 million.  Continental's CEO responded, "Here's what we're going to do: We're going to cancel the flight." And Delta and Jet Blue, concerned about a closed runway at New York's JFK, asked for temporary exemptions.  The goal of the rule? To help passengers.  The result? Perhaps canceled flights that do more harm than good.

Here, let's think economically.  The primary goal of every business is to maximize profits.  If large fines seem imminent, firms will try to avoid them.  It appears that the Continental reaction is not what the DOT had in mind.  Still, we cannot be sure of the airlines' profit maximizing response until after April 29.

The Economic Lesson

Thinking of the impact of a new rule returns us to incentives.  The incentives that new rules create will determine their success.

In Part 1 of the Teaching Company course, "America and the New Global Economy," Professor Timothy Taylor discusses the origination of the euro. Four goals he says were sought: free movement of people, goods, services, and capital.  Central especially to people and goods moving from country to country was not only a common currency but also roads.
So, I returned to the Google World Bank statistics site to check out the proportion of European roads that were paved.  Starting with the world, I discovered that the overall average in 2000 was 36.3 percent.  Then, I added the original 12 eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Neatherlands, Portugal, and Spain.  Seven nations were at 99 percent or higher!  Only one was close to 60 percent.  Which ones?  I suggest you go there to look.

The Economic Lesson
A transportation infrastructure is crucial for economic growth.  In the United States, we started with roads, soon had a canal infrastructure, and then saw a railroad network develop. A eurozone goal, free movement across varied economic regions, was achieved in the United States long before the end of the 19th century.

Reading that China might be concerned with an annual 3.5 percent inflation rate, I wondered how that compared to other countries and the world.  At a Google site with World Bank data, not only did I get some answers, but I had some fun.  Graphically, this site lets you compare data between countries, among countries, and with the overall world rate.  For example, with inflation, I first discovered a world rate of 8.06 percent (2008) and then added China and saw that in 2008, it was not far from the world statistic.  Then, I started to have some fun by adding Zimbabwe.  The graph looked amazing.  With the world zigzagging rather consistently, Zimbabwe, by contrast, goes vertical in 2003!

I suggest taking a look.

The Economic Lesson
Inflation matters. A typical goal of monetary authorities is price stability which means close to zero inflation.  When prices are not stable, businesses have difficulty planning ahead, wages rapidly lose purchasing power, and interest rates soar because lenders would otherwise lose money.  As a self-fulfilling prophecy, inflationary expectations build unless a central bank such as the Federal Reserve controls the upward spiral.

In a wonderful story, NPR looked at "The Jobs of Yesteryear."  Among those they discussed were pinsetters, elevator operators, icemen, and lamplighters. For each one, while technology made the occupation obsolete, the economy benefited with a higher GDP and a better standard of living.

More specifically...

In bowling alleys, during the beginning of the 20th century, a pingirl or a pinboy would have been stationed near the gutters waiting to pick up and reset the the pins after they were knocked down.    As late as the 1940s, you could still find pinsetters.

Manually driven, the first elevators were operated by men and women who controlled the levers and "drove" the lift.  Even when push buttons were first used, because people could not stop at multiple floors, they still needed operator driven elevators.  (Unable to stop in between, each trip went from one floor to a selected destination.) Around 1950, the need for elevator operators began to dwindle.

How to keep ice boxes cold before the electric refrigerator became commonplace?  Hauling 25-100 pound chunks of ice, the iceman came to neighborhoods several times a week.  During the 1940s, icemen became obsolete.

In 1900 or so, in NYC, lamplighters were supposed to light 200-300  gas streetlights an hour. 

The Economic Lesson

Hearing about obsolescence, economists would cite structural change.  Used economically, structural refers to the building blocks of an economy.  When the basic building blocks change, economic life is transformed.  Indeed, with the arrival of such new technology as electricity, the auto, and the transistor, we had progress as a plus and structural unemployment as a minus until those workers were retrained with skills that were more suited to the new economy.

In 2005 you could have paid $4 million (an all time high) for a seat on the New York Stock Exchange (NYSE) but you would have had almost nothing on which to sit.  Looking down from the balconies overlooking the huge trading floor of the NYSE, until now, you would have seen most people standing at the multiple trading posts that dominate the floor and at the broker stations to the side.  Now though, as part of a $10 million renovation, certain floor traders will have new stations, brighter lighting, curved glass walls, and, for the first time in recent history, chairs.

Owning an NYSE seat meant that you or your firm had the right to trade securities on the exchange.  Today, with Euronext owning the NYSE, traditional seats are no longer for sale.

The Economic Lesson

The history of the NYSE dates back to 1792 when 24 of the new nation's financiers signed the Buttonwood Agreement.  Named for the tree under which they gathered to trade securities at 68-70 Wall Street, these gentlemen agreed to a specified commission and mutually preferential treatment. When continuous trading began in 1871, members no longer sat in their chairs for scheduled stock auctions.

Are 19 banks "too big to fail?" Listening to Bloomberg radio, I heard that four banking firms control close to 50 percent of their industry's assets, that the top 19 control 85 percent, and that the bottom 8000 control 15 per cent.  An FDIC report from 2006 described a similar trend.

In a recent econtalk podcast, Gary Stern, past head of the Minneapolis Fed said that "too big to fail" distorts markets.  Explaining why, he said that once creditors expect that an institution will be rescued, no matter how risky its behavior, its demand curve shifts lower than it should be for that institution's securities.  The result is "mispricing".  With borrowing less expensive, risky behavior is fueled with funds.  Place that fund supply on steroids as before the 2007 panic and you have the potential for a "systemic" calamity.  And, going full circle, if systemic calamity is possible, than those big enough to cause it, cannot fail.  The challenge is to stop that cycle. 

Is the solution smaller financial institutions?  As happened during the late 1970s, when banks were prohibited from competing and growing freely, other financial firms took away the banks' business with a better deal--a higher return and new financial products-- for their customers.  As a result, the attempt to preserve healthy institutions wound up threatening their survival.  Today, we have an international financial community ready to offer "better deals" if we limit our banks.  And, we also have an industry where new products, that regulators never imagined, surface daily. Is the solution new regulations?  Enforce existing regulations better? Permit failure and let the market take care of itself? Your comments?

The Economic Lesson

Whenever banking is discussed, someone always refers to Glass-Steagall as a benchmark.  Passed in 1933, Glass-Steagall is primarily associated with creating the FDIC and requiring banks to spin off their investment banking activities as separate firms. Repealed in 1999, actually, Glass-Steagall had gradually been unraveling since 1980.  

Said to have been one of the least-prepared countries to transition to euro cash, Greece was an original participant in the euro launch on January 1, 2002.  In the first major euro robbery, in Athens, a gunman ran off with 76,000 euros ($68,400).  During the early days of the launch, in Greece, only 50,000 of 300,000 businesses had been supplied with the new currency.  By contrast, in Denmark,  where "there were big queues at cash machines but it was very jolly with champagne," the transition was virtually flawless and universal. 12 countries in all, amazingly, accomplished the massive task of circulating 6 billion euro notes and 40 billion coins.

But why?  We could say that it all came down to transaction costs.  Moving from country to country meant switching from escudos (Portugal), to francs, to guilders, to 12 currencies in all if we just look at the countries that initially pooled their monetary lives.  While tourists found it daunting, businesses had even more trouble.  Uniformity would not only stimulate travel and commerce, it also presented the potential for a world currency to rival the dollar. 

In a recent NPR Planet Money podcast, we hear how the creation of a single currency made sense but also created problems.  When acting alone, a country with fiscal problems might see its own currency decline in value internationally.  The decline served as a self-correcting mechanism that could ultimately solve the original fiscal difficulty.  Now, with 16 different fiscal policies and 16 different economies BUT ONE currency, the self-correcting mechanism is gone.

Perhaps all of this just returns us once again to opportunity cost.  Whether looking at the creation of the eurozone or its preservation, the benefits far exceed the costs for its members.

The Economic Life

Governments can influence economic activity through monetary policy.  Focusing on the supply of money and credit, the goal of monetary policy in the United States is stable prices, steady growth, and low unemployment. 

How much should government spread the wealth?  In a recent speech, Harvard economics professor Gregory Mankiw gives an answer by focusing on two issues.

The first issue involves the facts:  Beginning with a Warren Buffett story, Dr. Mankiw then shares some recent data.  Although Warren Buffett pays a 17.7 percent tax rate while his assistant's 30 percent rate exceeds his own, Dr. Mankiw challenges Mr. Buffett's conclusion that our system is insufficiently progressive.  As support, he cites the following average tax rates in the United States:

The poorest quintile pays a 4.5 percent rate (average income of $15,400). The middle quintile pays a 13.9 percent rate (average income of $56,200).  The top quintile pays a 25.1 percent rate (average income of $207,200). The top one percent pays a 31.1 percent tax rate (average income of $1,259,700.)  Qualifying, Dr. Mankiw does point out that the rate for the top quintile includes 9.1 percent in corporate taxes.  As for Mr. Buffett, Dr. Mankiw wonders whether his rate is relatively low because of the dominance of capital gains income which has a 15 percent rate. 

The second issue is more philosophical:  We have to decide who should pay more by considering what we believe is fair to everyone and what we believe is best for everyone.

Indeed, millions of people will feel that it is both fair and better for society to have those with higher incomes pay a lot more than they now pay. Those who have less will get more, society will be more egalitarian, and no one will live beneath a certain standard. 

But, on the other hand, as Dr. Mankiw asks, "Is it good for all to have a few pay a lot?"  Will overall well-being diminish if we penalize the affluent?

Mankiw does say that if the affluent enjoy more services from society, perhaps they should pay in return.  If the affluent harm society in any way, perhaps they owe compensation.  But still he wonders whether it can ever be fair for people to pay over a third of their earnings in taxes.

The answers?  We won't all agree.  But...building from accurate facts about who currently pays what, and knowledgeable opinions about why, each of us can wisely decide how much government should spread our wealth.

The Economic Life

Contemplating taxes takes us to three approaches: Progressive taxation takes a higher percent from those who have higher incomes.  Regressive taxation takes a higher percent from those with lower incomes.  Proportional taxation takes the same percent from all.  Our current income tax approach is progressive while a sales tax is regressive.

When slicing a bagel, most people use a knife.  Others prefer the bagel guillotine or the Brooklyn Bagel Slicer.  With annual sales near 80,000, the bagel guillotine has been described as "history's most successful bagel-controlling device" by its inventor.

In fact, during 2008, 1,979 bagel-related injuries (BRIs) landed people in the ER according to our government's National Electronic Injury Surveillance System.  (At 3,464, chicken-related injuries are most common while wedding cake cuts, at less than 100, are rare.) Worried that litigious eaters would slice a finger, Lender's pre-slices their frozen bagels.

In so many ways, bagel slicers take us to basic economics. We could begin with incentive propelling invention in a market economy.  We could go to the GDP and see that a bagel slicer adds to the value of goods and services we produce each year.  And, we can look at the federal budget for the cost of running the National Electronic Injury Surveillance System.

Indeed, all of this relates to Adam Smith and the potential of a market system.

The Economic Life

The GDP has four components: Consumption Expenditures, Gross Investment, Government Spending, Exports minus Imports.  When we buy a bagel guillotine, it gets added to the consumption category.  If a bagel store or the government buys one, the cost is added to those components.  And finally, if any are sold beyond U.S. borders, it would appear in exports.

From our "Economics is Everywhere" file:  Reviewing 20 years of research, a panel of 41 experts concluded that the asteroid that struck Mexico (at Chicxulub--chick-shoo-loob), 65 million years ago, extinguished the dinosaur population.  The impact would have been so colossal that it resulted in a global winter because of the debris catapulted into the atmosphere.
Not convinced?  You could look at What Bugged the Dinosaurs: Insects, Disease, and Death in the Cretaceous from Princeton University Press for an alternative theory.

Reading about asteroids soon took me to our the FY2011 federal budget to see what we are doing now.  And sure enough, I discovered that asteroid research funds increased under NASA's budget.  Among the multiple asteroid programs is one that NASA has established with Saudi Arabia.

The Economic Life
Our federal budget is dominated by defense and entitlements which include social security, Medicare, and Medicaid spending.  Receiving $19 billion from a budget totaling close to $4 trillion, NASA spending is relatively small.  Anyone worried about the burgeoning deficit would see that austerity for asteroid research would have little impact as would cuts in most discretionary spending.

A confession:  I have never disliked the “robber barons.”   Written by Matthew Josephson (1899-1978), The Robber Barons told us how the great nineteenth industrial empires were built.  Emphasizing the misdeeds of Rockefeller, Carnegie, Frick, and their contemporaries, the author helped readers to perceive a cast of villains. 

In an opinion article in yesterday’s Wall Street Journal, Daniel Henninger says we need more “robber barons” to reinvigorate our economy.  He recommends a book by Burton W. Folsom in which the “robber barons” are categorized as market entrepreneurs or political entrepreneurs.  People like Rockefeller (oil), Carnegie (steel) and J.J. Hill (railroads) who build businesses, create jobs, and compete fiercely are market entrepreneurs.  By contrast, Robert Fulton who was given a monopoly on Hudson River steamship traffic for thirty years, was a political entrepreneur.

You can predict who Henninger prefers.  Saying market entrepreneurs are the most productive, he asks our President and our Congress to ignore conspicuous consumption and instead establish a regulatory environment that nurtures them.  

The Economic Life

We could say that the infrastructures that were built during the nineteenth century created a strong foundation from which our economy soared.  Starting with the Erie Canal (1825) and culminating (perhaps) with the transcontinental railroad (1869), we built a transportation infrastructure that let us form a national market and regionally specialize.  A bit later in the century, we built our financial infrastructure.  With money moving across the land as the New York Stock Exchange and an investment banking world emerged, we could finance businesses and support entrepreneurial vigor.  Market entrepreneurs were the people who built our transportation and financial infrastructures.  

As George Bailey in “It’s a Wonderful Life,” Jimmy Stewart faces a bank run.  On his wedding day, hoping to save his bank, George first gives out the bank’s cash and then his honeymoon money to a long, agitated line of panicked depositors.

During the bank run, in two sentences, George Bailey summarizes the basics of banking. "You're thinking of this place all wrong, as if I had the money back in a safe. The money's not here. Your money's in Joe's house ... and a hundred others," George Bailey is referring to a fractional reserve system in which banks keep part (a fraction) of a deposit in reserve and then loan and invest the balance. 

Through loans and investments, just as the heart pumps nutrients around the body, banks and other financial institutions pump money around the economy. And, just like we need a healthy heart, we need healthy financial institutions for economic growth.  How to maintain healthy financial institutions is a question our Congress has repeatedly had to ask. 

I keep thinking of a pendulum swinging back and forth between more and less government regulation.  During the 1930s, government regulation increased.  In 1980, regulation diminished somewhat as banks needed more freedom to compete in a changing financial environment.  In 1999, with the repeal of the Glass-Steagall Act, the pendulum continued its swing toward less government.

Now, where should it go?

The Economic Life

Between the Civil War and the First World War, we had banking panics in 1873, 1884, 1890, 1893, 1896, 1907, and 1914.  “It’s a Wonderful Life” looked at the banking panic of the early 1930s. Many banking crises led to reform legislation.  Initially celebrated, the reforms eventually failed. 

When tipping, we all have a tipping point.  It might sound reasonable to leave a dollar tip.  But, if a Tall Vanilla Latte costs $3.37, is a thirty percent tip too much?  Yes, says one NY Times blogger. On the other side, Starbucks baristas say that they earn more from tips than hourly pay.  After a California court decided that Starbucks' shift supervisors could not share the tips pool, an appeals court reversed the decision.

Another way in which customers are asking themselves, "How much extra?" involves calories.  With New York City the first in 2008, municipalities around the nation are requiring that calorie information be posted.  Has it made a difference?  According to a Stanford Business school study, yes. 

The Economic Life

Starbucks' customers and employees both are wearing their economic lenses. Whenever they consider the cost and benefit of something extra, they are thinking at the margin.  Thinking at the margin is thinking economically.