Friday, July 27, 2007

Deep, But Interesting Reading

I just finished Barry Eichengreen's Golden Fetters: The Gold Standard and the Great Depression, 1919 - 1939. I decided to read this book after reading Essays on the Great Depression by Fed Chairman Ben Bernanke (see review on May 3). Chairman Bernanke cited Eichengreen's book several times. With each successive citation I thought to myself "This seems to be an important book. I should look into it." And although I had already begun reading Golden Fetters, I received additional impetus when Chairman Bernanke recommended the book at an employee meeting at the Chicago Fed in June, 2007. I'm glad I read the book.

The book is not one most people would pick up as a "summer read." It is a history about the most significant economic event of the twentieth century. For many it will take a dedicated effort. But Eichengreen provides a great deal to digest to anyone who finds the Great Depression an interesting WORLD event, beyond the shores and borders of the United States.

Eichengreen's main point is that the rush to return to the gold standard by major economic powers at the end of World War I failed to bring the stability that many remembered from the pre-war period and hoped to regain. Unfortunately, the players failed to recognize that the economic environment had changed. Prices and wages had escalated in all the economies with the war. This meant that a return to the prewar standard would call for a return to pre-war wages as well as prices. While many pursued this, it ran afoul of new political and economic realities. Wages had escalated and workers were not willing to give up their nominal and real gains; and governments were not prepared to counter the growing political power of the workers in the shadow of the Russian Revolution.

Eichengreen also points to the lack of cooperation among the economic powers to support the gold standard in other countries. That cooperation had been a significant reason for the success of the standard pre-WWI. The lack of cooperation made it much harder for any nation to attain or maintain the standard in the post war environment.

Finally, the failure of the United States, the largest holder of gold at the outbreak of the Depression, to use that gold to kick start the money supply and economic activity is interesting. Only when the U.S. goes off the gold standard does it begin to see what I would call significant economic expansion - and this matches the experience of many other countries. Those that go off gold first, recover first - those that wait until the end, recover last. And by that time, the winds of World War II are beginning to blow, creating yet another economic environment.

I would recommend this book to any teacher who would better understand this important era in U.S. and world history. It may be a challenge, but the insights are valuable.

I look forward to your comments.

Posted by TSchilling at July 27, 2007 11:06 AM

Reading your blog entry on Eichengreen's book gave me an idea--an active learning lesson on the Gold Standard could be an excellent tool for high school teachers. I don't think anyone has ever done that before. It would be interesting if the activities in the lesson could simulate the difficulties of getting back to a worldwide gold standard in the presence of significant macroeconomic and international shocks.

Posted by: Andrew H. at August 1, 2007 10:20 AM

Friday, July 20, 2007

Trade Distortions

This will be the last post for today. I promise. I'm just trying to get caught up, and there's been a lot of interesting things to post about at the same time I've been doing workshops here.

Whenever I try to teach about trade, I try (not always successfully) to talk about the impact of all kinds of trade distortions. Students usually understand tariffs easily enough. When a tax is paid to bring an item into a country, that is an additional cost incurred and is reflected in the price paid by the consumer. A little harder for some of them to understand are non-monetary barriers represented by quality requirements applied to foreign goods and numerical quotas. They usually understand how numerical quotas reduce supply, thereby increasing scarcity and artificially driving up the price. Quality issues are different because nations frequently impose quality controls on product produced domestically. Is this a distortion? One can argue.

But the hardest distortion for students to understand is frequently the subsidy. It is sometimes hard for students to see that the country that is subsidizing an activity is actually charging its own citizens to provide goods/services at a lower price. That may not be an issue if the consumption is domestic. It can be an issue if it has impact in the international market place.

Earlier this week, The Wall Street Journal published an article on how the Global Fishing Trade Depletes African Waters (subscription required). (However, you may find it somewhere on line by typing the title into your browser.)

The article explains how fishermen in Mauritania are suffering because fishing fleets from other nations are over-fishing the waters they depend on for their livelihood. Larger nations (China, Russia and Spain are mentioned) pay fees to the Mauritanian government for the right to fish in their waters. But often, those same countries provide subsidies to their fishing fleets. The subsidies reduce the cost of operation. This in turn can reduce the price of the product. This in turn can increase demand. You and your students can take it from there. The Mauritanian fishermen apparently receive no subsidies or other support. Consequently, their incomes are affected. This is a great article with lots of discussion possibilities.

Your comments are welcome, as always.

Posted by TSchilling at 3:17 PM | Comments (0)

A Perspective on Wealth

You can find an interesting, interactive graphic from The New York Times on the 30 wealthiest Americans. It has adjusted the value of their fortunes for inflation for to make proper comparisons. What I found interesting was the small number of currently wealthy in this club (Bill Gates and Warren Buffet). And I suspect there are quite a few names on this list that students either never heard of, or forgot that you mentioned.

HT to Division of Labour.

Your comments are welcome, as always.

Posted by TSchilling at July 20, 2007 2:33 PM

Some Help Teaching the Basics

There was a very good article on money and growth in the July 20, 2007 issue of The Wall Street Journal (subscription required). David Henderson does a good job debunking the all too common belief that growth generates inflation. And most importantly, he uses the basic "equation of exchange" - M * V = P * y. (Some of us learned P * Q, but I won't quibble.)

I found that this equation is one of the most helpful when teaching basic economics. It answers many questions (like the one that is the basis of the article), and helps students understand that money is, after all, a tool of economies. Henderson does a good job showing how growth is not, in itself, inflationary by manipulating the variables in the equation and showing how many people can get the wrong impression. It's worth your time to find and read.

Helpful hint: you may be able to find the entire article if you use your search engine to search the news category for the author.

Please share your thoughts on the article.

Posted by TSchilling at July 20, 2007 11:22 AM

At the Fed Camp, you said that mv was nominal and pq was real. If v and p are constant and I divide both sides by p, do I have real money?

Posted by: mike fladlien at July 27, 2007 4:30 PM

Thursday, July 12, 2007

Unintended Consequences, Part II

Back on May 18, I posted on the policies promoting ethanol production. Now today, Dr. Henry I. Miller has an interesting post on TCS Daily that gives us a little more to consider. Just one more aspect to use when discussing the concepts related to economic policy-making.

I look forward to your comments.

Posted by TSchilling at July 12, 2007 10:10 AM

As you note, there is often a disconnect of this type. It is especially true of issues involving economics, since public understanding is especially low. There is a special problem with ethanol. Not only does it seem like a good idea at first glance, it has strong interest group support. And finally, any Presidential candidate expecting to do well in the Iowa caucus, an early, field-winnowing test, must be an active ethanol supporter.

Thanks for the pointer to a good article, Tim.

Posted by: Jeff Miller at July 12, 2007 2:50 PM

Great article and I look forward to using it in class to discuss unintended consequences. The article is ripe with important information regarding energy efficiency, the costs of using corn to produce ethanol and the projection of
what could happen if the corn yield is affected by drought or disease. This article is can be used to demonstrate supply and demand problems, the effects on current food prices and lead into a discussion on current headline inflation numbers. We certainly benefit from your keen lookout for articles we can use in the classroom. Thanks Tim.

Posted by: Julie Chismar at July 19, 2007 1:35 PM

Tuesday, July 10, 2007

Globalization, Labor, and Detroit East

Once again, there's an interesting article in The Wall Street Journal that can be used to illustrate an abundance of topics. On the front page the Tuesday, July 10, 2007 issue is a story on the Shortage of Skilled Workers in Eastern Europe (subscription required). As I read it, I began ticking off topics that this could prove useful in illustrating.

The most obvious (to me at least) is how markets impact on prices -- in this case the price of skilled labor. The auto plants in Bratislava (now referred to as Detroit East because of the large number of auto plants) are having trouble finding and keeping high-skilled workers. Many of the existing workers are moving to Western Europe, which creates labor shortages, which puts upward pressure on wages (and prices). This raises living standards, but it also can translate to inflationary pressures. This last item can attract the attention of central bankers in these countries.

I also remembered my early economic lessons. When we studied the factors of production, labor was of particular interest because of its "unique characteristics", among which was "immobility." This referred to the fact that, all things being equal, people prefer not to move. Parts of this story would seem to contradict this. The willingness of people to move for a job would seem, at the surface, to be a factor in globalization. One can look at issues related to immigration for support here. But the story also gave an example to support the "immobility" characteristic. The story cited the plight of a Polish factory worker who knew there were jobs in another town, but chose not to move for economic and personal reasons. This topic alone can provide a lot of discussion with students.

Finally, if one wants to link to the topic of "offshoring", there's a tie-in. Towards the end of the story, the authors mention that if labor shortages grow, some employers may look elsewhere. The combination of lack of skilled workers (due to emigration and an aging population) and the resultant rising wages have firms looking to move production to other countries - some in Eastern Europe, like Ukraine and Bulgaria - and some elsewhere, like Morocco. Still others are importing workers from Central Asia. And the changes in cultures that come as social groups mix are one more aspect of an increasingly global economy.

As always, your comments are most welcome.

Posted by TSchilling at July 10, 2007 10:59 AM

You never know where you will find an economics lesson. Your discussion of "immobility" reminded me of a Dear Abby column, where a wife writes seeking advise about moving. The husband can find work if they move, but family ties
make the move difficult. It is a good anecdotal illustration of immobility.;_ylt=Ar1kxZX_GvNMcftW.ir7nYHNbbUC

Posted by: Amanda G. at July 10, 2007 11:57 AM

If an employer has to pay more to his employee, how is that inflationary? The employer has less money that he can spend on other goods and services if he spends more on his employees. An increase in the relative price of auto workers in no way translates into an increase in the general price level.

This sentence speaks volumes, however. "This last item can attract the attention of central bankers in these countries." Here is the cause of your inflation! The central bankers attempt to accomodate a rise in the relative price of auto workers by monetary expansion is the true cause of inflation. Cost-push theories of inflation are bunk. The source of inflation is the Central Bank.

Posted by: Tom at July 10, 2007 2:09 PM

Monday, July 9, 2007

Globalization and the 787

There was an interesting article in the first section of the Saturday, July 7 issue of the Chicago Tribune. Tribune reporter Julie Johnsson wrote a good article on the roll-out of the Boeing 787 Dreamliner (fee required for article). It included an illustration of the aircraft that showed the nation of origin for many of the assemblies.

Unfortunately, the illustration doesn't come up on the Trib's web site. You can see a good illustration and chart (with a bit more detail) at the Seeking Alpha blog which follows transport stocks. The stories on this aircraft can be used in discussion trade and globalization a couple of ways.

From the production side, the variety of sources for the components is impressive. There are 17 firms in 10 nations identified with the major assemblies. One presumes that many of the smaller components or materials on each assembly come from still other sources. The assemblies are then shipped to Boeing's Everett, WA plant for final assembly.

On the "consumption" side, a truly impressive list of airlines that will be flying the 787 is listed on Boeing's 787 page (link is no longer operative). Sales of the 787, either directly to the airlines or to leasing companies supplying aircraft to the airlines, represent a significant trade flow.

That brings us to one more aspect of teaching about trade. When examining trade data with students, it is important that they pull the information apart. If students see trade data that includes aircraft, they need to recognize that the components that are assembled into the final product can have numerous origins. The firms that contributed, from design, to basic materials, to sophisticated sub-assemblies, to final components, all employed workers. Those workers brought skills to the task and were compensated for their skills. Their compensation will allow them to participate in the world-wide market place.

The world is becoming one, big market, with goods, services, and payments constantly circulating and constantly growing and generating more activity.

Posted by TSchilling at July 9, 2007 2:24 PM

Thursday, July 5, 2007

An Article Fraught with Possibilities

I've been busy with workshops and other things the past 10 days or so. Even so, I should have caught this article before now. I need to thank my fellow Fed blogger, Bill Testa for bringing it to my attention.

The May 12th issue of The Economist had an outstanding article in its "Economic Focus" piece. Titled To Do with the Price of Fish (article is now premium content); the article can be used to illustrate a number of concepts. The article itself is based on another in the August 2007 issue of the Quarterly Journal of Economics titled "The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector". It is a study on how fishermen in the south of India use cell phones to help them deliver their catch to the best market. While that may not sound intriguing from the description, there is a lot that can be used.

The beach markets for the sardine fishermen often would vary significantly in price; even though they were relatively close. (The article cites 27 buyers over a 15 km - about 9 m - stretch of coast.) Prior to the introduction of cell phones a few years ago, the fishermen would usually take their catch to the nearest point only to find that market oversupplied and prices too low to accept, or buyers not interested. Catches were dumped into the sea when they couldn't be sold. With the advent of cell phones, the portion of fishermen willing to travel to sell jumped from 0% to 35%. Fishermen's profits rose 8%, consumer prices fell 4%.

So which concepts can be tied to this article? In a short time, I thought of ways to connect the story to the following: capital, information and price discovery, law of one price, price, productivity, profit place utility, returns to capital investment, returns to trade, and supply and demand.

There are probably more. What do you see?

Posted by TSchilling at July 5, 2007 12:49 PM

How about how technology increases information and increased the supply curve. In equilibrium, everyone has all the relevant information. Without stretching it too far, you've got them all.

Posted by: mike fladlien at July 5, 2007 9:49 PM