As economics teachers, this opinion piece from today's edition of The Washington Post says a lot and says it clearly.
I'd be interested in your reactions.
Thursday, July 30, 2009
Wednesday, July 29, 2009
Supply & Demand
I think those of us who teach economics face a regular problem - teaching about supply, demand and price. The concepts themselves seem obvious and simple. But start changing things and the students can go from acceptance to rejection.
This post on The Money Illusion blog (HT to Greg Mankiw for the pointer) examines how easily we can get confused by what seems to be a simple process. The comments are also worthwhile.
My experience has been students frequently have a rough time in knowing when to "move the curve" and when to "move along the curve" in their analysis. There are other factors: availability of acceptable substitutes, elasticity of demand, changes in income, etc. that can play a role, but if the students don't make the first choice correctly, thinking about the rest may not do them much good.
I'd be interested in your comments. Do you have trouble with these basic ideas when teaching your students?
This post references the following Keystone Economic Principles:
1. We all make choices.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.
This post on The Money Illusion blog (HT to Greg Mankiw for the pointer) examines how easily we can get confused by what seems to be a simple process. The comments are also worthwhile.
My experience has been students frequently have a rough time in knowing when to "move the curve" and when to "move along the curve" in their analysis. There are other factors: availability of acceptable substitutes, elasticity of demand, changes in income, etc. that can play a role, but if the students don't make the first choice correctly, thinking about the rest may not do them much good.
I'd be interested in your comments. Do you have trouble with these basic ideas when teaching your students?
This post references the following Keystone Economic Principles:
1. We all make choices.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.
Tuesday, July 28, 2009
Credit Cards for Teens?
One of the blogs I check regularly but too infrequently is The Juggle. It is one of the blogs of The Wall Street Journal and focuses on the choices and trade-offs we make between family and career.
A recent post asked "Should Your Teen Have a Credit Card?" The comments alone are worth reading. The post addressed new federal legislation and the topic has been dealt with before. I fall on the side of the best place to teach responsible money management is the home. But I also hear and understand the argument that many parents don't handle credit cards well - why should we expect them to do a good job?
But I have a slightly different question for those of you actually teach financial literacy and money management. Presumably, you know the subject - that's not to say you've not made missteps. No one is alleging infallibility. But since you know the subject and have studied the ins and outs of credit cards, how do you feel about YOUR teen having a credit card? (And I'm particularly interested in teens age 15 to 18. I happen to agree that those aged 18 - 21 are adults and should be expected to accept responsibility for their own actions.) Should younger teens learn about credit at home, in a controlled environment? Or should we teach them, warn them, and wait for them to enter the marketplace on their own, with us prepared to provide some/any sort of safety net? 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.
and
3. All choices have consequences.
A recent post asked "Should Your Teen Have a Credit Card?" The comments alone are worth reading. The post addressed new federal legislation and the topic has been dealt with before. I fall on the side of the best place to teach responsible money management is the home. But I also hear and understand the argument that many parents don't handle credit cards well - why should we expect them to do a good job?
But I have a slightly different question for those of you actually teach financial literacy and money management. Presumably, you know the subject - that's not to say you've not made missteps. No one is alleging infallibility. But since you know the subject and have studied the ins and outs of credit cards, how do you feel about YOUR teen having a credit card? (And I'm particularly interested in teens age 15 to 18. I happen to agree that those aged 18 - 21 are adults and should be expected to accept responsibility for their own actions.) Should younger teens learn about credit at home, in a controlled environment? Or should we teach them, warn them, and wait for them to enter the marketplace on their own, with us prepared to provide some/any sort of safety net? 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.
and
3. All choices have consequences.
The Big Mac Index
I’m a bit late on this, but…it's been almost two weeks since The Economist published their most recent Big Mac Index. This can be an interesting tool to use when discussing exchange rates in your economics class. We often spend time explaining how exchange rates allow us to price and trade goods across national borders. And the easiest next step is to start taking local prices and converting them to foreign currencies using established rates.
But as the accompanying story explains, that should not be the end of the discussion. Exchange rates alone don't usually fully explain the prices of goods in different countries. The currencies themselves may not move freely within a market, or may be subject to other pressures depending on the state of the economy and expectations in still other countries. This explains why an index is used to measure these possible effects.
By using a standard commodity (in this case, McDonald's Big Mac), we can measure prices against a single good across many countries and see how those prices conform to differences in exchange rates. Prices that vary significantly from simple exchange rate prices are either over-valued (too strong - benefitting importers in those countries and hindering exporters) or under-valued (too weak - benefitting exports and hindering importers). That can then be used in conjunction with the balance of trade for countries to see if there is an effect.
For those of you who teach exchange rates, do you integrate the Big Mac Index and does it help? I look forward to your comments.
This post references the following Keystone Economic Principles:
3. All choices have consequences.
and
4. Economic systems influence choices.
But as the accompanying story explains, that should not be the end of the discussion. Exchange rates alone don't usually fully explain the prices of goods in different countries. The currencies themselves may not move freely within a market, or may be subject to other pressures depending on the state of the economy and expectations in still other countries. This explains why an index is used to measure these possible effects.
By using a standard commodity (in this case, McDonald's Big Mac), we can measure prices against a single good across many countries and see how those prices conform to differences in exchange rates. Prices that vary significantly from simple exchange rate prices are either over-valued (too strong - benefitting importers in those countries and hindering exporters) or under-valued (too weak - benefitting exports and hindering importers). That can then be used in conjunction with the balance of trade for countries to see if there is an effect.
For those of you who teach exchange rates, do you integrate the Big Mac Index and does it help? I look forward to your comments.
This post references the following Keystone Economic Principles:
3. All choices have consequences.
and
4. Economic systems influence choices.
Bit of Humor
One of the strongest visual images when teaching economics is Friedman's helicopter. We use it when explaining how an increase in the money supply can lead to inflation with no real increase in production.
It is also frequently used to illustrate solutions and problems. In the case of the former, I remember a discussion earlier this decade when I was still at the Federal Reserve Bank of Chicago. We were having a discussion at lunch and the topic then was deflation. One of my colleagues from the research department indicated that, ultimately, deflation was probably not a long-term threat. "We're the helicopter," he said, inferring that the central bank has the ability to increase liquidity and ultimately drive prices higher. The image was so clear that I even adopted it for use on the t-shirts we gave to our Fed Challenge students with a statement "be the helicopter."
Currently one of the major concerns about the economy is that the Fed may have created too much money and provided too much liquidity to counteract the downturn. I don't worry excessively about that, as I am confident the Fed will not trade the credibility it gained as an inflation fighter through the 80s and 90s. (See this report of a recent interview by The Wall Street Journal with Philadelphia Fed President Charles Plosser.) That battle was too hard. One of the key lessons learned was while the Fed has numerous goals as seen by Congress (growth, employment, price stability), one thing is clear - central banks can influence the level of prices through monetary policy.
Anyway, this video on yesterday's Marketwatch site uses the image once again to illustrate the job of a central bank.
And can be used to introduce the analogy and explain the link between money and prices. And while it may be harder than "flying backwards," the tools remain.
I look forward to your comments.
This post references the following Keystone Economic Principles:
2. There ain' t no such thing as a free lunch.
3. All choices have consequences.
and
4. Economic systems influence choices.
It is also frequently used to illustrate solutions and problems. In the case of the former, I remember a discussion earlier this decade when I was still at the Federal Reserve Bank of Chicago. We were having a discussion at lunch and the topic then was deflation. One of my colleagues from the research department indicated that, ultimately, deflation was probably not a long-term threat. "We're the helicopter," he said, inferring that the central bank has the ability to increase liquidity and ultimately drive prices higher. The image was so clear that I even adopted it for use on the t-shirts we gave to our Fed Challenge students with a statement "be the helicopter."
Currently one of the major concerns about the economy is that the Fed may have created too much money and provided too much liquidity to counteract the downturn. I don't worry excessively about that, as I am confident the Fed will not trade the credibility it gained as an inflation fighter through the 80s and 90s. (See this report of a recent interview by The Wall Street Journal with Philadelphia Fed President Charles Plosser.) That battle was too hard. One of the key lessons learned was while the Fed has numerous goals as seen by Congress (growth, employment, price stability), one thing is clear - central banks can influence the level of prices through monetary policy.
Anyway, this video on yesterday's Marketwatch site uses the image once again to illustrate the job of a central bank.
And can be used to introduce the analogy and explain the link between money and prices. And while it may be harder than "flying backwards," the tools remain.
I look forward to your comments.
This post references the following Keystone Economic Principles:
2. There ain' t no such thing as a free lunch.
3. All choices have consequences.
and
4. Economic systems influence choices.
Examining The Great Recession
When discussing business cycles, teachers usually list the component parts (trough, expansion, peak and recession), but often the discussion needs some connection to recent and current conditions to give it color, and some historical connection to give it relevance.
Today's issue of The Wall Street Journal has an article (subscriber access at this writing) that does that and does it well. (I would suggest poking around with your browser to see if you can find it elsewhere.)
The article examines the current recession (dubbed the Great Recession) and compares it previous post World War II downturns, looking particularly at changes in personal consumption, gross domestic product, income, payrolls and unemployment. What we see is that while the current recession is not the worst, it is among the longest. (I'm reminded of research by Dan Ariely on whether a little pain over a long period of time is better than a lot of pain over a short period, but that's another issue.)
The article link provided above does let you access some interactive graphs to look at economic performance as measured by a number of indicators over time. You can get a long-view as well as examining specific downturns since World War II.
I hope you can find the full article. But regardless, try to access the interactive graphics. They are worth your time.
This post references the following Keystone Economic Principles:
4. Economic systems influence choices.
and
8. Quantity and quality of available resources impact living standards
Today's issue of The Wall Street Journal has an article (subscriber access at this writing) that does that and does it well. (I would suggest poking around with your browser to see if you can find it elsewhere.)
The article examines the current recession (dubbed the Great Recession) and compares it previous post World War II downturns, looking particularly at changes in personal consumption, gross domestic product, income, payrolls and unemployment. What we see is that while the current recession is not the worst, it is among the longest. (I'm reminded of research by Dan Ariely on whether a little pain over a long period of time is better than a lot of pain over a short period, but that's another issue.)
The article link provided above does let you access some interactive graphs to look at economic performance as measured by a number of indicators over time. You can get a long-view as well as examining specific downturns since World War II.
I hope you can find the full article. But regardless, try to access the interactive graphics. They are worth your time.
This post references the following Keystone Economic Principles:
4. Economic systems influence choices.
and
8. Quantity and quality of available resources impact living standards
Friday, July 24, 2009
Better than Aid, Increase Trade?
An op-ed piece in today's issue of The Washington Post took me on a roundabout trip, discovering a number of resources that, while not directly useful with most students, offer some ideas and background for teachers. And they some have value for those of us who teach U.S. history as well as economics.
The author of the Post piece discusses how we rationalize turning inward in times of recession, seeking to protect our industries and our workers. The problem is everyone else does the same, despite platitudes to the contrary. However, he offers an interesting alternative that would have the benefit of helping the poorer nations, while putting the U.S. back on a pro-trade track.
I then ran across this article in The Economist. Two American economists, whose work I admire greatly and try to read whenever I run across it, have a paper that examines and connects the gold standard, monetary policy, and trade protectionism during the Great Depression. Barry Eichengreen and Douglas Irwin have co-authored a paper for the National Bureau of Economic Research (full paper here) that offers some interesting as well as perplexing ideas.
While I've only skimmed the paper, the case is intriguing and not unfamiliar to those who are familiar with Eichengreen's and Irwin's work. Eichengreen has previously linked the gold standard and monetary policy to economic performance in the Depression. And Irwin is well-known for his work on trade. The idea that joins these two is one that posits the desire to return to a gold standard, albeit under a different institutional fabric from that which existed prior to World War I. Once in place, the political efforts necessary to support currencies also must respond to different political pressures and goals than existed in the global economy prior to the Great War. I will read it more thoroughly, but the tables and graphs alone have already provided some interesting mental wandering.
Finally, in a related article in The Economist, the potential for a slow recovery to world trade is highlighted. As the author states, if the issue was just global demand, we might be able to expect a rebound that was just as robust as the fall-off was anemic. As demand comes on line, trade should increase virtually lock-step.
But the author points out that two other factors may mitigate the recovery - the previously mentioned rise in protectionism, and trade politics. The two go hand in hand. For policy-makers around the world seek the approval of those they represent. And as we know, once a law or barrier is put in place and a benefit received - real or perceived - it is hard to remove.
I welcome your thoughts. Have a good weekend.
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.
and
6. Do what you do best, trade for the rest.
The author of the Post piece discusses how we rationalize turning inward in times of recession, seeking to protect our industries and our workers. The problem is everyone else does the same, despite platitudes to the contrary. However, he offers an interesting alternative that would have the benefit of helping the poorer nations, while putting the U.S. back on a pro-trade track.
I then ran across this article in The Economist. Two American economists, whose work I admire greatly and try to read whenever I run across it, have a paper that examines and connects the gold standard, monetary policy, and trade protectionism during the Great Depression. Barry Eichengreen and Douglas Irwin have co-authored a paper for the National Bureau of Economic Research (full paper here) that offers some interesting as well as perplexing ideas.
While I've only skimmed the paper, the case is intriguing and not unfamiliar to those who are familiar with Eichengreen's and Irwin's work. Eichengreen has previously linked the gold standard and monetary policy to economic performance in the Depression. And Irwin is well-known for his work on trade. The idea that joins these two is one that posits the desire to return to a gold standard, albeit under a different institutional fabric from that which existed prior to World War I. Once in place, the political efforts necessary to support currencies also must respond to different political pressures and goals than existed in the global economy prior to the Great War. I will read it more thoroughly, but the tables and graphs alone have already provided some interesting mental wandering.
Finally, in a related article in The Economist, the potential for a slow recovery to world trade is highlighted. As the author states, if the issue was just global demand, we might be able to expect a rebound that was just as robust as the fall-off was anemic. As demand comes on line, trade should increase virtually lock-step.
But the author points out that two other factors may mitigate the recovery - the previously mentioned rise in protectionism, and trade politics. The two go hand in hand. For policy-makers around the world seek the approval of those they represent. And as we know, once a law or barrier is put in place and a benefit received - real or perceived - it is hard to remove.
I welcome your thoughts. Have a good weekend.
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.
and
6. Do what you do best, trade for the rest.
Thursday, July 23, 2009
Fiscal Policy Graphic
Actually the title does not do this justice. This is a graphic that I would think many economics and government teachers (AP or otherwise) would want to have in their classroom. (Just click on the image to enlarge and see the detail.
HT to The Big Picture for the link.
HT to The Big Picture for the link.
Deja-Vu All Over Again...
I was looking at some old cartoons from The New Yorker recently, when I ran across this one from 1992. It sounded like something I had heard recently...
Podcast Resources for Personal Finance and Economics
Recently, I've been listing to podcasts of lectures given at the London School of Economics (LSE) and I found a series that were particularly interesting. However, before I address them, I want to discuss the LSE podcasts in general.
First, on the positive side, the speakers I’ve listened to are all top-notch authors, economists and politicians, many of whom we in the United States may not have an opportunity to hear. The format allows the speakers to speak for a period of 50 minutes to an hour, and then covers questions from the audience. As a result, many of the podcasts are well over an hour in length and very informative.
The problem with the podcasts is that, because these are formal lectures and presentations, the speakers (particularly the authors and academics) may use slides or other audio-visual aids which unfortunately aren't included or even accessible on the web site. As a result, some points may be lost. Additionally, the sound quality of the LSE podcasts has been, at least among the ones I've listened to, of uneven quality.
That aside, the series of three podcasts that covered the Lionel Robbins Lectures in November 2007 were particularly interesting to me. The presentations were on the Psychology of Saving and Investing and were delivered by Dr. David Laibson, Professor of Economics at Harvard University. He presented a very comprehensive look at the sometimes contradictory ways we reach financial decisions. He referenced behavioral studies, as well as field studies and offered interesting ideas on why we look at the future the way we do, and how this may affect our choices. More importantly, he presented a very strong argument for using certain defaults to encourage participation in financial plans. And he raised very real concerns about the normative vs. positive aspects of using defaults in this way.
I'm not sure there's a lot here to share with students in the average high school personal finance or economics course, but I do think there's some very interesting background that will deepen your discussions, and offer explanations for financial behavior. I highly recommend them. I would also be very interested in your thoughts on them.
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.
and
7. Economic thinking is marginal thinking.
First, on the positive side, the speakers I’ve listened to are all top-notch authors, economists and politicians, many of whom we in the United States may not have an opportunity to hear. The format allows the speakers to speak for a period of 50 minutes to an hour, and then covers questions from the audience. As a result, many of the podcasts are well over an hour in length and very informative.
The problem with the podcasts is that, because these are formal lectures and presentations, the speakers (particularly the authors and academics) may use slides or other audio-visual aids which unfortunately aren't included or even accessible on the web site. As a result, some points may be lost. Additionally, the sound quality of the LSE podcasts has been, at least among the ones I've listened to, of uneven quality.
That aside, the series of three podcasts that covered the Lionel Robbins Lectures in November 2007 were particularly interesting to me. The presentations were on the Psychology of Saving and Investing and were delivered by Dr. David Laibson, Professor of Economics at Harvard University. He presented a very comprehensive look at the sometimes contradictory ways we reach financial decisions. He referenced behavioral studies, as well as field studies and offered interesting ideas on why we look at the future the way we do, and how this may affect our choices. More importantly, he presented a very strong argument for using certain defaults to encourage participation in financial plans. And he raised very real concerns about the normative vs. positive aspects of using defaults in this way.
I'm not sure there's a lot here to share with students in the average high school personal finance or economics course, but I do think there's some very interesting background that will deepen your discussions, and offer explanations for financial behavior. I highly recommend them. I would also be very interested in your thoughts on them.
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.
and
7. Economic thinking is marginal thinking.
Round Pound
I ran across this interesting piece on the BBC web site. It seems that some retailers in Great Britain are moving away from the old strategy of pricing things at just under a pound (U.S. equivalent of just under a dollar) and they are meeting with some success.
This got me thinking about the number of "dollar" items that have sprung up in the U.S. recently. Several fast food restaurants have "dollar" menus, or "value" menus with items priced at a dollar each. Other stores have dollar bins with select items priced at a dollar each instead of the hitherto traditional 99 cents. Given that we frequently still end up paying an odd amount because of sales taxes, I hadn't really thought about it. But the article raises a question, has the traditional pricing strategy of "keeping it under the next level" (99 cents instead of a dollar, $4.99 instead of $5, etc.) begun to fall by the wayside? Have consumers in the U.S., the U.K. and presumably elsewhere "wised up" to this pricing misdirection and mentally made the shift to rounded pricing?
Is it possible that consumers are no longer seeing the price as "under", but just rounding up? And if that's the case, does convenience really enter into the transaction, as the article implies? If so, does the marginal benefit of dealing with one coin exceed the cost of paying an extra penny? Or does the fact that there are taxes on the sale just change the amount of change we receive? Given the shift toward paying electronically, does it matter?
One further issue may be whether this is an early sign of the death of the penny. That issue has been argued a long time in the U.S., but I'd like to know if the demand for the diminutive coin (and its English cousin) has fallen off.
What do you think? For those of you teaching personal finance or marketing, how does the psychology of pricing fit into your class? I look forward to your comments.
This post references the following Keystone Economic Principles:
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.
This got me thinking about the number of "dollar" items that have sprung up in the U.S. recently. Several fast food restaurants have "dollar" menus, or "value" menus with items priced at a dollar each. Other stores have dollar bins with select items priced at a dollar each instead of the hitherto traditional 99 cents. Given that we frequently still end up paying an odd amount because of sales taxes, I hadn't really thought about it. But the article raises a question, has the traditional pricing strategy of "keeping it under the next level" (99 cents instead of a dollar, $4.99 instead of $5, etc.) begun to fall by the wayside? Have consumers in the U.S., the U.K. and presumably elsewhere "wised up" to this pricing misdirection and mentally made the shift to rounded pricing?
Is it possible that consumers are no longer seeing the price as "under", but just rounding up? And if that's the case, does convenience really enter into the transaction, as the article implies? If so, does the marginal benefit of dealing with one coin exceed the cost of paying an extra penny? Or does the fact that there are taxes on the sale just change the amount of change we receive? Given the shift toward paying electronically, does it matter?
One further issue may be whether this is an early sign of the death of the penny. That issue has been argued a long time in the U.S., but I'd like to know if the demand for the diminutive coin (and its English cousin) has fallen off.
What do you think? For those of you teaching personal finance or marketing, how does the psychology of pricing fit into your class? I look forward to your comments.
This post references the following Keystone Economic Principles:
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.
Friday, July 17, 2009
Economics and Economists - Trusted or Tainted?
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.
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.
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.
Economics and a New GM Plant
According to this story from The Wall Street Journal, politics was a factor in a recent decision by General Motors. I would disagree. If decisions are made according to decisions and economic institutions, I think this is clearly a decision of economy - political economy. I suspect Captain Renault would have thoughts on the subject.
Post on A Previously Mentioned Resource
This past Thursday, I provided a link to an interesting resource found on the site of the Council on Foreign Relations. I had a chance to dig into it over the past weekend and I was not disappointed. The video was high quality; the timeline was helpful and took a long view; and the interactive map interesting. Overall, I found the presentation to be thought-provoking and well-organized. I would recommend it as a background resource for teachers. And I think it has possibilities for direct use with more advanced classes.
I would be interested in other opionions.
I would be interested in other opionions.
Thursday, July 2, 2009
New Resources on the Economic Crisis
A very interesting and comprehensive resource on the current economic crisis has been created by The Council on Foreign Relations. You can find it here.
While I've not had time to examine it thoroughly (it's been added to my "to do" list for this weekend); it should prove to be valuable for the classroom economics teachers at either the high school or introductory college level. I could also see possibilities for current events or modern history courses.
As I said, I plan to delve into it this weekend, but I would welcome and encourage any comments from other educators.
This post references the following Keystone Economic Principles:
8. Quantity and quality of available resources impact living standards.
(At this point, I'm talking about resources to help impact YOUR living standards - or your profession to be more precise.)
While I've not had time to examine it thoroughly (it's been added to my "to do" list for this weekend); it should prove to be valuable for the classroom economics teachers at either the high school or introductory college level. I could also see possibilities for current events or modern history courses.
As I said, I plan to delve into it this weekend, but I would welcome and encourage any comments from other educators.
This post references the following Keystone Economic Principles:
8. Quantity and quality of available resources impact living standards.
(At this point, I'm talking about resources to help impact YOUR living standards - or your profession to be more precise.)
Wednesday, July 1, 2009
What I've Been Watching
Over the past couple of nights, my wife and I were watching the DVD of the recent film, New in Town.
The film, which features Renee Zelwegger and Harry Connick, Jr. is a fairly predictably romantic comedy. It was enjoyable. (Why does he always seem to get cast as the down-to-earth local?)
The film focuses on Zelwegger's character, a rising corporate star from Miami who, in order to secure a promotion, volunteers to go to Minnesota to oversee a product transition and downsizing. Things don't go as planned, and the plant is soon slated for closure. Enter an interesting economics lesson.
In the first part of the film, you might be thinking about Schumpeter's concept of "creative destruction", only to move towards "destruction", as the situation grows worse. But in last third of the film (Chapter 18 on the DVD scene selections, or about one hour into the film), the film does a good job of illustrating another aspect of Schumpeter's work - the role of the entrepreneur.
Schumpeter saw the role of the entrepreneur five ways:
This post references the following Keystone Economic Principles:
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
and
6. Do what you best, trade for the rest.
The film, which features Renee Zelwegger and Harry Connick, Jr. is a fairly predictably romantic comedy. It was enjoyable. (Why does he always seem to get cast as the down-to-earth local?)
The film focuses on Zelwegger's character, a rising corporate star from Miami who, in order to secure a promotion, volunteers to go to Minnesota to oversee a product transition and downsizing. Things don't go as planned, and the plant is soon slated for closure. Enter an interesting economics lesson.
In the first part of the film, you might be thinking about Schumpeter's concept of "creative destruction", only to move towards "destruction", as the situation grows worse. But in last third of the film (Chapter 18 on the DVD scene selections, or about one hour into the film), the film does a good job of illustrating another aspect of Schumpeter's work - the role of the entrepreneur.
Schumpeter saw the role of the entrepreneur five ways:
1. Introduction of a new product.If you watch the last 30 minutes of the film (fast forward through the mushy parts), you can identify at least three. Do you agree?
2. Using new or different inputs to produce a product.
3. Introduction of new technology or process.
4. Opening a new market.
5. Creating a new economic organization.
This post references the following Keystone Economic Principles:
4. Economic systems influence choices.
5. Incentives produce "predictable" responses.
and
6. Do what you best, trade for the rest.
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