On the surface, two articles that popped up yesterday seem to be at odds. The cover story for the new issue of The Economist asks "What Went Wrong with Economics?" Yet the first page of the Personal section in yesterday's edition of The Wall Street Journal touts economists as "The New Stars of the Blogosphere."
Is economics (and by extension, are economists) to be reviled or revered? As it turns out, there's a bit of truth in both pieces. And the real story lies somewhere between the two extremes.
Let me start with the downer. The piece in The Economist spends considerable time on the fact that economists failed to see the current economic crisis developing. According to the intro paragraph, prior to the housing market collapse, economics was seen as the way to explain just about everything "from drug-dealing to sumo-wrestling." But then the bubble burst, financial powerhouses failed and policy-makers and theorists scrambled for an explanation.
The article continues by pointing out the problems were largely the result of shortcomings within the two areas of macroeconomics and financial economics. And in both cases, the cause may have been unjustified confidence in certain topics of study. As is often the case, it may have been the outsiders who were part of the problem - taking ideas and theories and fitting them to the moment rather than taking them to heart.
But as we see in the article and as was mentioned here recently, the event may provide the impetus for new interest the area and new research on relevant topics. That is often the case in this and other professions. And that provides a lead-in to the second article.
The Wall Street Journal piece talks about how economist bloggers have seen a rise in popularity. Economists with the ability to translate the complicated into the colloquial, to explain without equations, have been partially responsible for increased interest in the workings of the economy at all levels. And some of the bloggers highlighted are among the best. (Additional links in the story lead to lists of the top blogs, ranking them for originality, “geekiness,” and readability. (Several of them are on my blogroll.)
My question for you is "has the current economy increased your interest and your students' interest in things economic?" I look forward to your comments.
Friday, July 17, 2009
Thursday, July 16, 2009
Measures and Measurement
In many economics courses, teachers will spend time explaining the various economic statistics that are released regularly. This is good because the information can provide some basic guidance about the past, current or possible future state and can be helpful in making economic decisions. But there is a problem.
One often gets the idea that the data contains more information than it actually does. And almost as often, one may think the data contains less. At which point, many of us and many of our students may wonder "what's the point?"
Ryan Streeter raises the same question in a recent issue of American Interest (hat tip to Arts & Letters Daily). In his article, he notes that the data we collect and depend was inadequate when came to forecasting the current downturn. That's debatable. There were many people who foresaw problems and said so. I suspect many of us actually were unable or unwilling to see what they saw.
Nevertheless, whether the information was or was not there, we are unraveling a financial and economic mess that was many years in the making and may take a while to unravel. In the interim, Streeter points out that politicians call for better regulation to avoid a relapse. But they miss the fact that better regulation presupposes better monitoring, which in my mind presupposes adequate (and improved) measurement. Streeter then discusses four basic economic measures we use to measure our collective health and finds them wanting. It is to this point that this blog is addressed. For while I agree with his call to action, I think that part of the problem is a basic misunderstanding of what the data does and does not say. That is where we need to focus when discussing economic measures with our students. And just for the record, I'm willing to stand corrected on my understanding, as well.
The four measures that are the focus of this piece are Gross Domestic Product (GDP), the Savings Rate, the Consumer Price Index (CPI), and the Poverty Rate. The author then suggests some possible remedies. While they are admirable, they also have the potential for problems.
Gross Domestic Product - Streeter makes an excellent early point. While consumerism is painted as a "bad thing" by most - consumption is the point for economics. By that I mean, and I read him to mean, that it is the satisfying our wants (consuming) that drives economic activity. We teach our students that our wants are unlimited. Indeed, I tell my students that they stop wanting only when they die.
He points out that goods and services are counted as consumption when purchased. He goes on to point out that this true even if "people cannot afford them and probably do not need them." Putting the normative aspects of that statement aside, the problem he cites can be countered by realizing that each individual has different time horizons for need - my mother always kept a well-stocked pantry that contained items she used rarely. But she did intend to use them and purchased them when the price was attractive.
Conversely he talks about goods that are produce but sit unsold - inventories. Granted they are produced with the intention of someone consuming them, but inventories can build. And while technically this falls under the heading of investment (I in the GDP equation), it still is a problem for consumption. The counter argument is that inventory problems are less now than they were because many producers have gone to lean manufacturing processes to reduce the problem. Still it exists and can be brought into classroom discussion.
Streeter then brings up an interesting point - citing Adam Smith he discusses productive and unproductive labor. What many feel are unproductive, others may feel is productive. The value of some of the services cited in the article, like beauty, is in the eye of the beholder. And probably are measured by opportunity cost and personal utility. If having someone do something for me (my taxes, my lawn, my will) frees me to do other things I am better at or enjoy more, I don't think that's "unproductive." And I think a case can be made that it's making me more productive.
Savings Rate - Here Streeter's explanation is likely to surprise many, and rightly so. He points out that much of what most of us consider saving is not counted as such. Money invested in 529s, 401(k) s and Roth IRAs are not counted as savings. This explains the headlines that, until recently, decried our falling (and sometimes negative) savings rate. This happened at the same time that more and more of us owned stocks, bonds, mutual funds and real estate. Conversely, without knowing this, many of us may have wondered why with a now rising savings rate the financial markets aren't doing better.
Consumer Price Index - This issue is batted around regularly. One need only look back a few days on this blog to see a post relating to it. The real issue may not be what consumption is missed by the CPI, but rather why we obsess about the measure. Granted it's easy to understand. But it's also easy to understand the shortcomings. That's why many agencies use other broader measures of inflation and consumption like the Personal Consumption Expenditures (PCE).
Poverty Rate - Streeter discusses many of the shortcomings of this measure, noting it was originally based on subsistence diet - a minimal measure of consumption, if you will. I would add one thing to his discussion, the fact that the measure should consider regional differences. Anyone who has moved around knows that it costs more or less to live in some parts of the country than others. Consequently, a measure of a subsistence diet - or a minimal level of consumption - should account for the differences.
In the end, the author discusses some ways to remedy the flaws of many of our economic measures. I found his call for a way to internalize risk in the measures interesting, but unworkable; if only because the future is unknowable. We can improve ways of measuring the potential for risk, but ultimately we can't eliminate it. There will be "black swans," the unexpected. And it is not illogical to base future expectations on past performance, because that's all we have to go on.
A dynamic economy is by its nature unpredictable. This does not mean Streeter's call for better measures should be ignored. But we go too far if we think improvement will provide us with perfect foresight. One of the things that this financial crisis will do, like all crises before it, is focus our attention on developing new and better understanding of how the economy works and how to measure new things. But I suspect we'll always be a little behind.
I welcome your thoughts.
One often gets the idea that the data contains more information than it actually does. And almost as often, one may think the data contains less. At which point, many of us and many of our students may wonder "what's the point?"
Ryan Streeter raises the same question in a recent issue of American Interest (hat tip to Arts & Letters Daily). In his article, he notes that the data we collect and depend was inadequate when came to forecasting the current downturn. That's debatable. There were many people who foresaw problems and said so. I suspect many of us actually were unable or unwilling to see what they saw.
Nevertheless, whether the information was or was not there, we are unraveling a financial and economic mess that was many years in the making and may take a while to unravel. In the interim, Streeter points out that politicians call for better regulation to avoid a relapse. But they miss the fact that better regulation presupposes better monitoring, which in my mind presupposes adequate (and improved) measurement. Streeter then discusses four basic economic measures we use to measure our collective health and finds them wanting. It is to this point that this blog is addressed. For while I agree with his call to action, I think that part of the problem is a basic misunderstanding of what the data does and does not say. That is where we need to focus when discussing economic measures with our students. And just for the record, I'm willing to stand corrected on my understanding, as well.
The four measures that are the focus of this piece are Gross Domestic Product (GDP), the Savings Rate, the Consumer Price Index (CPI), and the Poverty Rate. The author then suggests some possible remedies. While they are admirable, they also have the potential for problems.
Gross Domestic Product - Streeter makes an excellent early point. While consumerism is painted as a "bad thing" by most - consumption is the point for economics. By that I mean, and I read him to mean, that it is the satisfying our wants (consuming) that drives economic activity. We teach our students that our wants are unlimited. Indeed, I tell my students that they stop wanting only when they die.
He points out that goods and services are counted as consumption when purchased. He goes on to point out that this true even if "people cannot afford them and probably do not need them." Putting the normative aspects of that statement aside, the problem he cites can be countered by realizing that each individual has different time horizons for need - my mother always kept a well-stocked pantry that contained items she used rarely. But she did intend to use them and purchased them when the price was attractive.
Conversely he talks about goods that are produce but sit unsold - inventories. Granted they are produced with the intention of someone consuming them, but inventories can build. And while technically this falls under the heading of investment (I in the GDP equation), it still is a problem for consumption. The counter argument is that inventory problems are less now than they were because many producers have gone to lean manufacturing processes to reduce the problem. Still it exists and can be brought into classroom discussion.
Streeter then brings up an interesting point - citing Adam Smith he discusses productive and unproductive labor. What many feel are unproductive, others may feel is productive. The value of some of the services cited in the article, like beauty, is in the eye of the beholder. And probably are measured by opportunity cost and personal utility. If having someone do something for me (my taxes, my lawn, my will) frees me to do other things I am better at or enjoy more, I don't think that's "unproductive." And I think a case can be made that it's making me more productive.
Savings Rate - Here Streeter's explanation is likely to surprise many, and rightly so. He points out that much of what most of us consider saving is not counted as such. Money invested in 529s, 401(k) s and Roth IRAs are not counted as savings. This explains the headlines that, until recently, decried our falling (and sometimes negative) savings rate. This happened at the same time that more and more of us owned stocks, bonds, mutual funds and real estate. Conversely, without knowing this, many of us may have wondered why with a now rising savings rate the financial markets aren't doing better.
Consumer Price Index - This issue is batted around regularly. One need only look back a few days on this blog to see a post relating to it. The real issue may not be what consumption is missed by the CPI, but rather why we obsess about the measure. Granted it's easy to understand. But it's also easy to understand the shortcomings. That's why many agencies use other broader measures of inflation and consumption like the Personal Consumption Expenditures (PCE).
Poverty Rate - Streeter discusses many of the shortcomings of this measure, noting it was originally based on subsistence diet - a minimal measure of consumption, if you will. I would add one thing to his discussion, the fact that the measure should consider regional differences. Anyone who has moved around knows that it costs more or less to live in some parts of the country than others. Consequently, a measure of a subsistence diet - or a minimal level of consumption - should account for the differences.
In the end, the author discusses some ways to remedy the flaws of many of our economic measures. I found his call for a way to internalize risk in the measures interesting, but unworkable; if only because the future is unknowable. We can improve ways of measuring the potential for risk, but ultimately we can't eliminate it. There will be "black swans," the unexpected. And it is not illogical to base future expectations on past performance, because that's all we have to go on.
A dynamic economy is by its nature unpredictable. This does not mean Streeter's call for better measures should be ignored. But we go too far if we think improvement will provide us with perfect foresight. One of the things that this financial crisis will do, like all crises before it, is focus our attention on developing new and better understanding of how the economy works and how to measure new things. But I suspect we'll always be a little behind.
I welcome your thoughts.
Tuesday, July 14, 2009
Where Does the Money Go?
Mark Perry at Carpe Diem provides a link to an interesting graphic. (Click on the link he provides to go to source. Click on the image to get a larger jpg file.) It's based on data from the Bureau of Labor Statistics, and it shows how an average family's income is allocated.
It provides some insights into what we spend our money on, and can provide a springboard for discussion on budgeting in a personal finance class, but also how we measure inflation. I suggest the latter is a possibility because the segments seem to match (quite closely) the major categories of the Consumer Price Index (CPI) market-basket that was in this graphic in The New York Times in May of 2008.
The NY Times piece is more detailed, breaking down the categories into specific items. That breakdown may actually explain the differences between the categories of the two graphics. Because the CPI is a month-to-month measure, it needs to measure the same things the same way. The same items purchased at the same source.
But because we don't shop that way, our basket can differ and frequently does. We look for substitutes, and we may even change where we buy what we buy. But the categories in both graphics are still useful. They can be used as a basis for a budgeting exercise, but also to discuss what could be changed.
I'd be interested to hear your thoughts on the usefulness of these two graphics for the classroom.
This post references the following Keystone Economic Principles:
1. We all make choices.
2. There ain't no such thing as a free lunch.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.
It provides some insights into what we spend our money on, and can provide a springboard for discussion on budgeting in a personal finance class, but also how we measure inflation. I suggest the latter is a possibility because the segments seem to match (quite closely) the major categories of the Consumer Price Index (CPI) market-basket that was in this graphic in The New York Times in May of 2008.
The NY Times piece is more detailed, breaking down the categories into specific items. That breakdown may actually explain the differences between the categories of the two graphics. Because the CPI is a month-to-month measure, it needs to measure the same things the same way. The same items purchased at the same source.
But because we don't shop that way, our basket can differ and frequently does. We look for substitutes, and we may even change where we buy what we buy. But the categories in both graphics are still useful. They can be used as a basis for a budgeting exercise, but also to discuss what could be changed.
I'd be interested to hear your thoughts on the usefulness of these two graphics for the classroom.
This post references the following Keystone Economic Principles:
1. We all make choices.
2. There ain't no such thing as a free lunch.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.
Friday, July 10, 2009
Price and Rationality
One of the most fundamental assumptions in economics is the assumption of rationality - that economic actors are making rational decisions - comparing costs and benefits and searching for the lowest price. Notice I said lowest price, not lowest opportunity cost. That's something I will return to.
First, thanks to Arts & Letters Daily, I ran across this review by Janet Maslin in The New York Times. In the review, the author compares two books - Free by Chris Anderson, and Cheap by Ellen Ruppel Shell.
It appears that Ms. Maslin is not enamored of either book, but both provide an interesting place to start a conversation. While I've not read either book, I have heard interviews with both authors. Anderson was interviewed by Russ Roberts on EconTalk, and Ms. Shell was interviewed on National Public Radio's Talk of the Nation yesterday.
I won't get into issues with normative vs. positive economics. Some of the quoted data is selective. This is to be expected. What moved me to this post is an observation that it boils down to choices and institutions. How our values are shaped, or for this discussion, how our perception of value is shaped by the institutions - the rules, whether formal or informal, that help us shape the choice. Those institutions, whether laws or personal beliefs, help us determine our true opportunity cost. By factoring our personal incentives into a decision, we arrive at a more extensive decision-making matrix. Thus we have a more complete understanding of our true opportunity cost. And we make better choices for ourselves.
As a final point, we should remember that price demonstrates one of the basic functions of money in an economy - that of "a measure of value." It may help to think of it this way - price provides a common language to facilitate decision-making. However, we still have to translate that language into our personal value system, within the context of our wants and needs. It is a measure of value, not the measure of value.
I would recommend spending a little time on this issue. The New York Times review is a good place to start. The podcast interviews can also provide you with some insights. And the books may provide you with more mental fodder.
I welcome your comments, particularly if you've read either or both books.
This post references the following Keystone Economic Principles:
1. We all make choices.
2. There ain't no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.
7. Economic thinking is marginal thinking.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.
First, thanks to Arts & Letters Daily, I ran across this review by Janet Maslin in The New York Times. In the review, the author compares two books - Free by Chris Anderson, and Cheap by Ellen Ruppel Shell.
It appears that Ms. Maslin is not enamored of either book, but both provide an interesting place to start a conversation. While I've not read either book, I have heard interviews with both authors. Anderson was interviewed by Russ Roberts on EconTalk, and Ms. Shell was interviewed on National Public Radio's Talk of the Nation yesterday.
I won't get into issues with normative vs. positive economics. Some of the quoted data is selective. This is to be expected. What moved me to this post is an observation that it boils down to choices and institutions. How our values are shaped, or for this discussion, how our perception of value is shaped by the institutions - the rules, whether formal or informal, that help us shape the choice. Those institutions, whether laws or personal beliefs, help us determine our true opportunity cost. By factoring our personal incentives into a decision, we arrive at a more extensive decision-making matrix. Thus we have a more complete understanding of our true opportunity cost. And we make better choices for ourselves.
As a final point, we should remember that price demonstrates one of the basic functions of money in an economy - that of "a measure of value." It may help to think of it this way - price provides a common language to facilitate decision-making. However, we still have to translate that language into our personal value system, within the context of our wants and needs. It is a measure of value, not the measure of value.
I would recommend spending a little time on this issue. The New York Times review is a good place to start. The podcast interviews can also provide you with some insights. And the books may provide you with more mental fodder.
I welcome your comments, particularly if you've read either or both books.
This post references the following Keystone Economic Principles:
1. We all make choices.
2. There ain't no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.
7. Economic thinking is marginal thinking.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.
Thursday, July 9, 2009
Housing Bust in an African Village
I love it when I find a resource that provides me with the ability to introduce and/or explore a multitude of concepts. It provides flexibility for me; with frequent reference, it becomes a baseline resource for the students; and it illustrates how many aspects of economics come together in an otherwise unnoticed event.
That's what I found when I ran across this story
in today's edition of The Wall Street Journal. While the video is interesting, it doesn't do the story justice (a rare occasion when a moving picture is not worth however many words are in the text).
The story in the paper touches on so many topics:
1) Globalization as the housing bust is the result of worldwide rise in commodity prices and the decision by mining conglomerate Rio Tinto to begin mining in the region.
2) Markets, prices and money as the influx of workers creates decisions among the villagers to first barter for their own homes, and then start charging ever-rising money prices.
3) Entrepreneurship as villagers begin using the money rents to purchase new materials in a speculative effort to meet demand.
4) Business cycle with the boom-bust of the iron-ore market following the global turndown and, in turn, causing falling wages and unemployment.
And I haven't even touched on all the possibilities. This single article offers a myriad of opportunities for integration in the classroom. I hope you'll find it useful. I look forward to your comments, as always.
This post references the following Keystone Economic Principles:
1. We all make choices.
2. There ain't no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.
That's what I found when I ran across this story
in today's edition of The Wall Street Journal. While the video is interesting, it doesn't do the story justice (a rare occasion when a moving picture is not worth however many words are in the text).
The story in the paper touches on so many topics:
1) Globalization as the housing bust is the result of worldwide rise in commodity prices and the decision by mining conglomerate Rio Tinto to begin mining in the region.
2) Markets, prices and money as the influx of workers creates decisions among the villagers to first barter for their own homes, and then start charging ever-rising money prices.
3) Entrepreneurship as villagers begin using the money rents to purchase new materials in a speculative effort to meet demand.
4) Business cycle with the boom-bust of the iron-ore market following the global turndown and, in turn, causing falling wages and unemployment.
And I haven't even touched on all the possibilities. This single article offers a myriad of opportunities for integration in the classroom. I hope you'll find it useful. I look forward to your comments, as always.
This post references the following Keystone Economic Principles:
1. We all make choices.
2. There ain't no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.
Wednesday, July 8, 2009
Ascent of Money
I've been watching this program online. Episode one of the four-part series is available in its entirety. There's also a two-hour "short version" of the entire series that is equally interesting - although it's organized a bit differently. Either way, I encourage you to watch this. Fergusson is a wonderful storyteller, and the subject is inherently interesting - doubly so in the current environment.
This post references the following Keystone Economic Principles:
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
and
8. Quantity and quality of available resources impact living standards.
This post references the following Keystone Economic Principles:
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
and
8. Quantity and quality of available resources impact living standards.
Monday, July 6, 2009
A New Resource from PBS
Just in case you aren't aware, a new special will be airing this Wednesday evening (July 8) on many Public Broadcasting System (PBS) stations. For those of us who enjoy economic history, it should prove interesting. The Ascent of Money, hosted by Niall Fergusson, looks at a topic most of our students find interesting, at least superficially. I will be watching it, but you can get a preview here.
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