Catching Up

It's been almost a week since my last post, and longer since I posted regularly. We've been busy here at Powell with the Cochrane Summer Economics Institute for the past week. And there was much going on prior to that. Consequently, I have a lot of resources that I want to bring to your attention. And now that you've got the summer to "pause and reflect," it is as good a time as any.

The first item I want to draw to your attention is an opinion piece from The Wall Street Journal, earlier this month.

It's by Todd Bucholz, author of New Ideas from Dead Economists: An Introduction to Modern Economic Thought. The book is entertaining and is one of my favorites on the topic.

Bucholz's WSJ article offers a perspective on the current economy that deserves some thought. He points out that overextending ourselves for purposes of immediate gratification had some negative effects; we need to be careful not to overreact. Consumption has virtues in that it is the actual measure of rising standards of living. Technology, improvements in health care and life expectancy, and reliable communications are examples of what our "consumerism" has brought us. Indeed, something that is worth noting is that there tend to be more improvements and advances to general standard of living in good times, than in bad - if for no other reason than there are resources to pay for them. There are downsides to a go-go economy, but as Bucholz's title notes, "There Is No Upside to a Down Economy." While I don't agree with the sweeping generalization, there are certainly very few upsides.

A second item that I hope you will find interesting is this article from The Economist. It references an interesting paper by a pair of professors at the Kennedy School at Harvard. And while much of the technical analysis was beyond my level, the data tables and conclusion were most interesting. The tendency revealed in the paper makes sense and, in my opinion, offers further support for the role of institutions (particularly informal institutions of the type we see in cultural norms) in decision-making, even when making decisions about policy.

Item number three comes from The Detroit News in my home-state of Michigan. They put together a very interesting interactive graphic on GM's global reach. The interactive maps allow you and your students to visualize the impact of General Motors plants, suppliers and retirees around the country, and understand the true global nature of the auto-maker. (It's worth noting to your students that GM is not unique in their global reach and impact.)

Don Boudreaux at Cafe Hayek provides a pointer to the fourth item - this post on the site of The Fraser Institute.

The Fraser Institute is a market-oriented organization in Canada. I find their materials interesting. But this post featuring Dr. Boudreaux was especially so. While I admit I am in agreement with his argument, I especially enjoyed the Q-and-A that followed it. I thought the questions were interesting, and Boudreaux provided solid answers. You might want to consider whether the article is worth sharing with your students if you want them to understand the pro-globalization argument and how it addresses certain concerns.

The Marginal Revolution blog gets thanks for pointing out the next item. Most of you are aware of, and many of you may actually use the classic I, Pencil essay by Leonard Read, either in total or in summary. The idea, of course, is that no one person can make a pencil. Yet the impersonal forces of the market bring together a myriad of people and processes in such a way as to put the simple pencil in your hand at a ridiculously low cost. Enter "The Toaster Project."

The idea behind The Toaster Project is try to build from scratch an appliance that can be purchased for about $6.60 at current exchange rates. The process will illuminating, and while I detect a certain "outcome bias" in the author's material - he appears to want to show that we spend too much time and effort on a process that many would deem frivolous or adding little to life - the lesson can still be enlightening in explaining how markets work and the marginal costs/benefits of an economic system that is market-based, for the most part.

The penultimate resource in this post was the result of a tip from Arts & Letters Daily.

Fareed Zakaria's article from the June 22, 2009 issue of Newsweek like Bucholz's provided some food for thought. One of the most important ideas was that, despite our desires for "justice" and punishment for anyone we view as a perpetrator, we need to remember that "markets are not about morality. They are large, complex systems, and if things get stable enough, they move on." In moving on, they demonstrate something that is valuable, while still being unsettling. As Zakaria later puts it "Capitalism means growth, but also instability. The system is dynamic and inherently prone to crashes that cause great damage along the way." As he points out, this was not so much a failure of capitalism, but of finance. But the lessons to be learned go beyond both. I encourage you to read his article.

The final piece was in the Fall 2008 issue of Region Focus published by the Federal Reserve Bank of Richmond. (Once again, thanks to Marginal Revolution for the pointer.)

The author develops a brief history of the U.S. policy of subsidizing homeownership. Various aspects of this policy, with roots in the Great Depression, have been fingered as leading to the collapse of the housing market at the beginning of the current recession. For those who would like to better understand the connection (notice I didn't say causation), you would search far and wide before finding another explanation as well-written and thought-provoking as this one.

I'm going to try to get back on a more regular posting schedule, but hopefully this makes up for lost opportunities. I look forward to your comments.

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.
6. Do what you do best, trade for the rest.
7. Economic thinking is marginal thinking.
and
8. Quantity and quality of available resources impact living standards.

Economic Thought(s)

At the end of last week, I had the privilege to attend the Summer Institute in the History of Economic Thought at the University of Richmond. It was an amazing experience for anyone interested in the subject as I am, and the only down side was that family and professional obligations kept me from attending the last half of the program.

One of the best aspects of the institute was the chance to meet with scholars both renowned and up-and-coming, and have the chance to hear them discuss ideas and topics that I find fascinating. One of the attendees was David Warsh, author of the Economic Principals blog, who does a better job of raising questions than I could. And it was a genuine pleasure to meet him. Long-time readers of this blog will remember I reviewed his book Knowledge and the Wealth of Nations in a previous post.

I’ll try to write more about the conference later this week.

Much Ado About Nothing?

Ezra Klein at The Washington Post had an interesting post yesterday, the gist of which is that we may be worrying too much about the Chinese cashing in our securities. He may be right. If my calculations are correct, and based on the information in the pie charts, the Chinese hold only about 6% of our debt - little more than state and local governments in the U.S.

This is an interesting bit of economic math to share with your students...especially those who want to know why they have to be able to read graphs and charts.

I look forward to your comments.

Dreamliner Update

Back in 2007, I wrote a couple posts on the Boeing 787 Dreamliner. In the first, I wrote about how the plane was an excellent example of globalization and interdependence in the aerospace and technology. In the second, I wrote about how production had run into some snags.

Well, the term "snags" doesn't begin to describe the problems Boeing has with this amazing piece of machinery. The plane is still not ready for delivery, and, because of the economic downturn, the company is losing orders. The plane itself is still an amazing piece of technology and I still think it makes an interesting example of the way modern technology is an amalgam of the skills and resources in various countries.

Today, there was an interesting story on Portfolio.com (HT Arts &Letters Daily), that brings the story up-to-date, and provides some superb graphics to illustrate the both the original idea and the problem it presents for Boeing. One graphic in particular (link at end of fifth paragraph) not only shows the origin of various components, but provides information if on how certain components impact production.

I look forward to your comments.

This post references the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.
and
6. Do what you do best, trade for the rest.

Ticket Prices and the Boss

Back when I was first teaching, some of my students were enamored with a singer they only referred to as “the Boss.” After some time, I learned who they spoke of and came to appreciate why they spoke of him so highly. I even managed to get tickets to the “Born in the U.S.A.” tour when it was in Detroit (Pontiac Silverdome to be exact). But that's another story. However, as I’ve aged and as Bruce aged, our tastes diverged.

Come this morning, and I find a couple stories about the pricing and availability of concert tickets, and “the Boss” is the hook for both of them. The first was on NJ.com (HT to Mark Perry at Carpe Diem). The second I found when I got to one of The Wall Street Journal’s blogs.

It seems that one of the reasons it’s hard to score the best seats at a concert is that the artists typically hold some back for “family and friends.” Also, other contacts in the business (producers, label execs, etc.) have access to tickets ahead of the crowd – professional courtesy we might call it. And let’s face it, it’s not unlike athletes getting tickets for family and friends for “big games.” I wouldn’t be surprised if it’s part of the compensation package for some artists or athletes or whatever. But a question occurred to me, and I’d like to hear your thoughts.

Is there much difference in what goes on with tickets in the entertainment/sports industry from some of the scandals we've learned of in the financial industry? To me, it’s similar to insider trading. Pulling a quantity of tickets from the pool is bound to affect the market price. And it seems to me it’s not unlike skimming the best off the top for people on the inside. That seems similar to a Ponzi scheme. I’d love to hear some other views. After all, I believe in markets, but I think markets need to be fair. I don't see a problem with paying top dollar for tickets if the tickets are fairly available. And scalping seems to be about finding the true price of the service. But keeping them from the market seems different. Is it just accruing extra value due to time utility? Or is it a lack of transparency? There are a lot of ways to go with this, I think.

By the way, there are a couple of interesting podcasts on scalping at the EconTalk website. This one links to a discussion between host Russ Roberts and Duke economist Mike Munger. This second one is Russ Roberts talking to a scalper, a merchandiser, and even the police about scalping. They're both good and they both help stir the water.

This post references the following Keystone Economic Principles:
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.

Geitner and Summers on Reform

Today's issue of The Washington Post contained an article coauthored by Treasury Secretary, Timothy Geitner, and Director of the National Economic Council, Larry Summers.

In it, they unveiled the proposed reform of the financial sector that many have been waiting for. There are a couple of interesting aspects to this proposal that, for economic educators, could be valuable examples for the classroom. I'll share my thoughts, and I hope you'll share yours.

My only real point of contention with the authors is in the first paragraph, and I suspect many would say I'm nitpicking. Geitner and Summers state that the financial system failed to perform its function as a reducer and distributer of risk. Now, I won't disagree about risk-reduction. But I don't see how risk could have been distributed any more widely than it was. The sub-prime mortgages, converted to mortgage-backed securities, and then hedged with credit-default swaps managed to inflict losses all around the world; with the subsequent impact of causing a crisis in global credit markets and a recession that has hit just about everyone. I'm not sure how much farther the risk could have gone.

Anyway, that comment was not part of the reform package, so it probably doesn't merit any more attention. The four main points of the proposal do.

The first point calls for increased capital and liquidity requirements for large firms to offset the impact of potential systemic stress. And those firms that are the most interconnected will now be subject to consolidated supervision by the Federal Reserve. The first part means that bigger firms need to have a bigger cushion to offset not just risk, but the magnitude of risk they face because of the firm's wider exposure. The last part, by my reading, seems to be a restatement of the "umbrella regulator" idea that was included in Gramm-Leach-Bliley at the end of the 1990s; i.e., a form of it has been proposed before, just not carried out to this extent.

The second point is fairly logical. It basically links the lender to the borrower to a greater extent. In essence, it creates a stronger incentive for originators to make good loans because it will affect the bottom line. Hopefully, firms will no longer just write them, repackage them, and get rid of them. With some skin in the game, the incentive is to provide greater scrutiny. How much? We don't know yet, but I suspect the incentive is linked to amount of interest the originator is required to maintain.

Consumer and investor protection through stronger regulation seems to be the key to point three. I suspect much of this may rely on greater transparency - more information for consumers and investors - and greater access to recourse.

Fourth, the creation of a process to quickly resolve financial problems seems to be in order. However, a process that is not enforceable is as good as no process. The trick here may be how to protect the taxpayer and the investor/consumer without denying due process. This could be one of the tougher points to carry out.

Finally, there is a call for greater international cooperation. And while that also sounds commendable, it's a different thing to bring sovereign nations to the table and suggest they give up some sovereignty.
If you don't believe it, look up Doha.

We all need more detail on this and the details now vs. the detail on the final legislation are entirely different matters. Nevertheless, it will be interesting to watch.

I look forward to and welcome your thoughts.

This post references the following Keystone Economic Principles:
2. There ain't no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.
and
5. Incentives produce "predictable" responses.

Using Incentives

One of the current national debates is about how to control health care costs. It is easy to point to issues of supply and demand and how these forces affect the cost of health care.

One can also discuss the disconnect between many consumers of health care and the payment system that reimburses the producers. (I'm ignoring copayments not because they don't matter, but because there is often a disconnect between copayments and the cost of the treatment.)

But today there was an interesting opinion piece in today's issue of The Wall Street Journal by the CEO of Safeway. It seems that company is using a basic concept of economics to help constrain costs. By linking an employee's share of the cost to employee behavior (smoking, weight, heart health, etc,) Safeway is providing an incentive to change behavior.

While some may not respond to the incentive (their marginal cost/benefit analysis may be such that they choose not to), others have changed behavior - improving their health and reducing their draw on the health care system.

It's an interesting article and worth "filing away" for next fall.

Take a look and share your thoughts.

Globalization and Mickey D

Do you have trouble connecting global issues to your students' lives? Here's an interesting story that was on Marketwatch a few days ago that can bring the idea home.

The article points out that McDonald's had a decent month in May from the standpoint of "same store sales." That's an important measure of success and viability for a firm like McDonalds because it provides a stable basis for future growth. A company may grow by opening new stores, but if the new stores just shift demand from existing locations, or if existing locations can't generate enough revenue to "keep the lights on," the business is probably not sustainable.

But for our purposes, the key to this story is farther down. When exchange rates are factored in, the sales are actually down. That means when the improved sales in other countries were recalculated to dollars, things looked worse. This is likely because the dollar strengthened against a number of key currencies from March through May. Consequently, it took more units of foreign currency to equal a dollar in many markets. When sales were converted to dollars, the increase "disappeared".

If you want to take this idea farther, this story becomes particularly ironic because a McDonalds product is one measure of purchasing power parity - The Big Mac Index found in The Economist. (The link takes you to a simple explanation and an excellent video explaining the Index. The most recent publication of the index is February, 2009 - just prior to the period in question.)

Please share your thoughts.

This post references the following Keystone Economic Principles:
2. There ain't no such thing as a free lunch.
4. Economic systems influence choices.
6. Do what you do best, trade for the rest.
7. Economic thinking is marginal thinking.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.

Inflation & Deflation

Robert Samuelson had an interesting piece in The Washington Post on Sunday.

In it, he discusses price stability, approaching it as a discussion of whether we face a greater threat from inflation (a general rise in prices) or deflation (a general fall in prices). He cites two eminent economists: Alan Meltzer who believes inflation is the greater threat, and Paul Krugman who sees deflation as more likely. If we judge from recent actions of the Federal Reserve, they're lining up with Dr. Krugman. But we'll find out more on June 23 when the Federal Open Market Committee (FOMC) concludes its next meeting. The current Summary of Current Economic Conditions (Beige Book) certainly doesn't seem to presage an inflation problem.

But Samuelson's article has value beyond the discussion. In it, he refers fleetingly to the role of consumer expectations. This idea is important. Essentially, this means that whether the nation experiences inflation or deflation depends partly on what we expect as participants. For these expectations will likely influence our actions. If we expect inflation, we likely will start acting in ways that will help inflation along - spending rather than saving to avoid price increases for example. If we expect deflation, we will like go the other way - holding back on spending out of fear of a slower economy which would only slow things further.

But Samuelson goes on to make a more important point. And that point has to do with the structure of the Fed. Mr. Bernanke's term as Chairman of the Board of Governors ends in January. And Chairman Bernanke is on record that the Fed has pledged to preempt high inflation. That pledge is highly valued because it is based on the credibility of his predecessors, Paul Volcker and Alan Greenspan, as inflation fighters, and stretches back more than 25 years. Samuelson points out that nominating Bernanke for a second term as Chairman could do much to eliminate uncertainty and could offer some sense of commitment to price stability to all participants in the economy.

What are your thoughts? Do you discuss the role of expectations with your students? And do you think the Fed's leadership has any impact on expectations? I know the school year is about over, but hopefully we can continue discussions, and help you get some ideas for next fall. I look forward to your thoughts.

***UPDATE***
One of this blog's regular readers pointed out two additional items for consideration. The first is this opinion piece by Arthur Laffer from today's edition of The Wall Street Journal. Laffer falls squarely in the more inflation camp.

The second is this speech by Jeffrey Lacker, President of the Federal Reserve Bank of Richmond before the North Carolina Senate Appropriations Committee. President Lacker is an inflation hawk, and although that might cause you to place him in the same camp with Laffer and Meltzer, take a look at the final few paragraphs of his speech where he addresses inflation. He evidently doesn't fall into the inflation or deflation camp at the moment, expressing confidence that consumer expectations are firmly anchored at the moment.


This post references the following Keystone Economic Principles:
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
7. Economic thinking is marginal thinking.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.

This Is So Cool....

HT to Mark Perry



Show this to your students and ask what some of the implications are for workers? for job skills? for infrastructure? for product quality? for competition?

This post references the following Keystone Economic Principles:
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
8. Quantity and Quality of available resources impact living standards

Aid Debate

One of the topics "near the end of the book" for many economics classes is economic development. This is unfortunate because students frequently ask about the efficacy of giving aid to other nations in order to help them develop - particularly if they see unmet needs in the U.S.

One of the standard responses has always been that U.S. aid to foreign nations is a small part of the federal budget, especially compared to other items. This is true, but doesn't address their point regarding opportunity cost. The issue can also cover charitable aid from private sources. Here, the usual response there is "people are free to give their money as they see fit." Both answers avoid the debate about the efficacy.

Foreign aid is, admittedly, a large and complex issue. But the popular media seems to be renewing interest in it, particularly as it relates to the continent of Africa. Much of that renewed interst is due to the work Dambisa Moyo and her book Dead Aid. A few of the "big names" in the profession have been involved in this issue for some time, but Moyo's work has sparked new interest, largely due to her background and experience.

If we can judge from this article on voxeu.org, William Easterly, author of The Elusive Quest for Growth and White Man's Burden shares Moyo's view.

This artice on voxeu.org would seem to put Jeffrey Sachs, author of End of Poverty and Common Wealth among those who disagree.

Both make strong arguments. I can see where aid without accountability can be wasted - particularly in an institutional setting where corruption may be sanctioned or, at the very least, accepted. But it is also hard to ignore that even simple resources (mosquito nets) can have a significant marginal impact in many of these nations.

There are other resources that you might want to examine if you choose to use this topic with your students. There is an interesting panel debate on National Public Radio with Easterly on one of the panels.

And there are five interviews on the topic of poverty and development at EconTalk. (Although a few of them don't necessarily restrict themselves to Africa.)

If you are trying to get students to think and look outside "their world", or if you just want students to see the value economic thinking can bring to solving real world problems, I encourage you to look at some these of resources. And if you know of others, please share your information here.

This post references the following Keystone Economic Principles:
4. Economic Systems Influence Choices.
7. Economic thinking is Marginal Thinking.
and
8. Quantity and Quality of available resources impact living standards

Slideshows for Use in the Classroom

I ran across some interesting slideshows that can be used with your students. CNBC has put together a number of them, but the three I found most interesting were the following:
US Trading Partners
What Does a Trillion Look Like?
and
Holders of U.S. Debt

I think your students will find the information interesting as it sometimes run counter to "popular opinion." I’m sure many of them will not be able to correctly identify, in order, the top three trading partners. Likewise, I wish the folks at CNBC had broken out the "#1" position on the U.S. Debt slide show. It would be interesting to see exactly where the federal debt is held.

I know the Federal Reserve holds a healthy chunk as a result of monetary policy and other efforts related to the current recession. But I also know a substantial amount is held by Social Security, and some by other agencies. Regardless, the presentations should provide some interesting information for classroom openers or closers (those short discussions at the beginning or end of class).

There are others that can easily be integrated into personal finance, government and current events, as well as economics. Which ones would you find most useful with your students?

This post references the following Keystone Economic Principles:
2. There Ain't No Such Thing as a Free Lunch.
and
6. Do what you do best, trade for the rest.

Crowding Out

A reader (Hi Laura) sent a link to this interesting article from The Globe and Mail. The authors contend that government stimulus should not stifle the recovery. One of the more interesting aspects of the article is their counterargument to the "crowding out" idea - government spending replacing private sector spending. It is eloquent and worth reading.

Concern about the stimulus plan resulting in crowding out is not restricted to one ideological group or the other, however. The Congressional Budget Office cited concerns about it as recently as two months ago (note "Long Term Effects"). I don't think the CBO is a conservative think tank. And while they were specifically looking at financial markets, not all markets; the CBO letter does seem to raise legitimate concerns about resource allocation.

My concern remains whether the government is in a position to better allocate unused resources, or whether markets can do it more efficiently.

I look forward to your thoughts.

This post relates to 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.
and
4. Economic systems influence choices.