Expanding Our "Who's Who"

The current economy has given teachers ample opportunity to reference the "big names" in economic theory - Smith, Keynes, Friedman, Samuelson. It has even provided some renewed interest in less-known although not less-important thinkers like Fisher and Schumpeter.

But what has made this recession truly remarkable has been the increased public notice given to those whose names are generally known only to students of economic thought or referenced in articles read only by other economists. Two of the names in this latter category are Hyman Minsky and Arthur Cecil Pigou. (I admit to knowing nothing about Minsky until a few months ago, and only a little about Pigou.)  The fact that these names have come in to the public light means that you, being an interested economic educator, may have seen them referenced. You may have done some research on them. You may even have seen the two articles I am about to discuss.

The first is on Hyman Minsky and appeared back in September in The Boston Globe. Minsky was a Keynesian, and wrote about poverty and financial systems. It is his focus on the latter that many are citing in the current wave of Minsky popularity. He believed that financial instability was inherent to the capitalist system, and he saw debt as a significant factor in financial instability. The over-issuance of products like mortgage-backed securities and collaterlized-debt obligations (MBS and CDO) would certainly seem to fit the bill.

The second was in The Wall Street Journal (free content at this writing) this past weekend, and is about Arthur Cecil Pigou. Pigou was a contemporary of Keynes but not a Keynesian. He was the designated successor to Alfred Marshall and, as such, is considered a member of the neo-classical school. However, what is bringing him to the spotlight now is his work on social costs or externalities, as they are now called. His focus on that aspect of markets and market decisions makes him particularly relevant for discussions about health care, global warming, and even the financial crisis. And I’m sure many of you are already aware of Greg Mankiw’s Pigou Club.

I would welcome any leads to other articles of note on either of these economists.

The Agent-Principal Problem

As you know, the "agent-principal problem" arises from a misalignment of incentives.  One of our readers has identified a clip from the television show, The Office that illustrates the agent-principal problem quite nicely.
The relevant section is 9:25 to about 15:05.

While I don't watch the show, I looked at the clip and it does the job.  Thanks for the "heads up," Mr. B.

Shopping - More Is Less

According to stories from The Washington Post and The Wall Street Journal (subscriber content at time of writing), more of you were out there on Friday, but you spent less. Let's see how Cyber Monday goes, as well as the rest of the shopping season.

Interdependence Can Mean Independence

As dad to a young man with a disability, I am often drawn to stories about people with disabilities who find or are given ways to succeed and achieve a level of independence. And when I don't find them on my own, others bring them to my attention. This story I found on my own. It's from today's edition of The Wall Street Journal (free content at this writing). The story chronicles the ups and downs of a Toledo concern that hires and provides jobs for the disabled. Far from the normal "sheltered" work environment, this firm has managed to secure some nice contracts from auto manufacturers, even securing the "Q1" designation from Ford as a supplier.

But, as we know, the recession has hit the auto industry particularly hard. That has rippled through to Lott Industries, and to its employees. The result is that the firm is struggling and the workers, who sometimes don't understand how the larger world impacts their world, have to adjust.

I think the article's value lies in its ability to show us how economic activities and choices ripple through to places we don't expect. I highly recommend it, and I welcome your thoughts.

"Opportunity Cost" at Notre Dame

My friends know I'm a college football fan. And one of the top stories this weekend is the fate of Notre Dame head-coach, Charlie Weis. The Wall Street Journal included this piece in today's edition. It basically shows what else could have been purchased with the compensation Coach Weis is expected to take with him, should today's game prove to be his last.

I would modify it. One presumes that another coach would have been hired, and that coach would have had a salary. But it still is interesting to put a coach's salary in "equivalent" values. Undoubtedly, having a good program ripples through in terms of additional revenues and contributions. Nevertheless, it helps to understand the choices we make, and the priorities we appear to have in making those choices.

For the Day After...

Macro impacts of micro decisions



and "no, I'm not shopping today."  (However, the rest of my family is doing their part to shorten the recession.)

Something about Money

When we teach money, either in a personal finance or an economics class, we frequently give little time to the whys and hows - why we use money and how it has evolved to its current state. And we often ignore some of the interesting paradoxes that it engenders. This would appear to be a book (review courtesy of The Economist) that could provide some background for that type of discussion. I know, you're thinking, "it's not tested, so I don't have time." But if the diversion can get your students to think more deeply about what money really is, the understanding might have some positive spillovers.

If anyone is familiar with it, I would welcome comments.

Happy Thanksgiving

By way of Ezra Klein at The Washington Post.

Enjoy your holiday.

Just in Time for Black Friday...

there is a series on Big Think on The Science of Savings. I will have to admit, I just found it and I've not had time to do more than peruse it.  But the subjects and the people being interviewed are both enough to draw my attention. 

If it's half as good as I think it will be, it should offer some useable bits and pieces, particularly for personal finance courses.  I'll try to comment here once I've gone through it.  Please share your thoughts, as well.

Decision-Tree for Fast Food

Here is an interesting "decision-tree" matrix on fast food (HT to Chartporn). Some of the questions might make it inappropriate for some classes. But you may get a chuckle out of it. And if you do find it usable, all the better.

I welcome your thoughts on its usability.

Market Skills: Technology vs. People

As economies change, the need for skills can change. This cartoon might be an example of a chicken-or-egg situation, but there's a clear message.



What do you think?

A Bit of Macro over the Weekend

I ran across two items that might be of interest to you. The first is a paper from a pair of Harvard professors. (HT to Greg Mankiw.) Their research is noteworthy for its conclusion: "Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases." Their results on fiscal adjustments to reduce deficit and debt to GDP ratios are also counter to what is happening. On the surface this seems to have some intriguing implications.

I wouldn't change my AP course section on fiscal policy just yet. The test is, after all, the test. Nevertheless, this might be food for discussion. And it's certainly worth following. It's a short paper and very readable. 

The second item I ran across is a human-interest story from The Washington Post. It is largely an anecdotal account of how the recession forced a promising student to re-evaluate her goals and training. We often teach that the business cycle helps an economy reallocate resources to their "best use." (I can certainly identify with that.) And while you might have a hard time making a case that this situation is the best use of well-educated young woman's talent; you might be able to make the case that the road she was on might not have been the best use, either.

I know anecdotes are not data. But as someone told me recently, the plural of anecdote is data. I welcome your comments.

Gift Idea for the Holidays

For those of you looking for an unusual gift for that hard-to-buy for economics fan, give this a look.  Check this out.

HT to the Austrian Economists by way of Marginal Revolution.

Top-down Versus Bottom-up

There was a very interesting post on Voxeu.org the other day. The upshot was that bottom-up economics is better than top-down. When I first read the title, I was expecting a discussion of trickle-down vs. trickle-up. But that was not the case. Based on some research from other sciences, the author makes a case for the way we develop and use simple rules (institutions?) to help us make sense of the economic environment, and to help us make decisions. But more intriguing was the author's contention that expectations-based models (thought of as anti-central planning by many) are actually more closely related to top-down models that depend a relative few to make decisions. I think it's worth your time. I'd be interested your responses.

Globalization's Effects?

The Globalization 101 website has what I consider to be a very good and useful definition of globalization. What I like about it, and why I use it with my students, is that it takes in "non-economic" factors - culture, technology, and politics - when examining the impact of Globalization.

Once you've examined it, I invite you to check out this article from yesterday's edition of The Wall Street Journal.

On reading it, I remembered the violent and sad past of unionization in the U.S., and was wondering whether India will face a similar pattern, or whether it can be avoided with a turnaround in the global economy? The graphics are also gripping. I welcome your thoughts.

Religion as an Economic Institution

Regular readers of this blog know one of my interests is the impact of economic institutions (the rules and organizations of a system) on our decision-making. Among the effects I find most interesting are those that are rooted in what I call "informal rules." These include beliefs and personal codes of conduct that we are exposed to by family, friends and other affiliations, including any religious upbringing. They are not "formal" in the sense that they are mandated by an authoritarian organization (government) with the power to provide and enforce incentives.

Not only do these beliefs affect our decision-making, but they can impact how we view the larger world around us. To this end, they are important. And they are often slow to change.

This brings us to two articles (HT to Arts & Letters Daily) that caught my eye this morning. The first is from The American, the online journal of the American Enterprise Institute - an ideologically conservative think-tank. The other is from an ideologically more liberal newspaper, The Boston Globe.

As I read them, they both seem to conclude that societies that tend towards religious freedom (including freedom from religion) tend to be more economically successful. This reinforces one of the themes in my Global Economics class: that trade can have a positive effect on and is positively affected by the open exchange of ideas.

The studies cited in both do not imply a causal relationship, merely a correlation that indicates a need for further study. Take this excerpt from the end of The Boston Globe piece.

McCleary (a researcher at Harvard) says the lesson of their results isn't that governments should boost religion, but simply that they should recognize that it has some value, and avoid regulating it too heavily.

I would welcome your observations on these articles.

Money Velocity

For those of you who teach money and monetary policy, the equation M*V=P*Q is probably part of your discussion. But if you have trouble with a clear explanation for "V", Bryan Caplan at EconLog has something you might want to use. It helped me.

What do you think?  Is this explanation helpful?

Cash 4 Clunkers

National Public Radio's Planet Money blog has an interesting podcast assessing the effectiveness of the "Cash for Clunkers" program. It's about 15 minutes long, so you can download it to your mp3 player, and get through it relatively quickly. Do you think it was effective? Did it increase sales or just shift them in time? I look forward to your comments.

Old Time Recession

Finally, a bit of video satire to start the week off.

HT Greg Mankiw.

Something Light

First, it's important to remember that our wants are endless.

Second, opportunity cost differs from person to person and is relative.

Econ in Music for Early Elementary

Here are three songs for young children that can be used to introduce economic ideas. And all can be downloaded for under a dollar.

The first is Iko, Iko by Parachute Express. You may also know it as the "Jambalaya" song. The song is about making jambalaya. Students should be able to identify human resources, natural resources and capital resources in this song.

The second is When I Build My House, also by Parachute Express. The lyrics talk about a number of tasks involved in building a house (hammering nails, laying bricks, painting the walls). The refrain is "When I build my house there's so much to do. It's fun when you come along and help me too." The concepts that can be integrated with this song are division of labor (splitting up the work) and specialization (the person who is best at each task).

The final song is Sittin' Down to Eat by Bill Harley. It's a fun song about a meal interrupted by all kinds of large animals. Each is invited to join the meal. But when a caterpillar finally joins, the house explodes. It offers an insight into the concept of marginal cost/benefit. One by one, the house gets crowded until the addition of one more imposes a significant cost.

I hope these are useful for you. I welcome comments.

Downwardly Sticky

We often tell students that one of the reasons markets don't adjust quickly is that prices are sticky. We emphasize that they are especially sticky to the down side. By that, we mean that while most suppliers (whether of products, resources, or labor) or more than happy to see their price move to the upside, they are reluctant to adjust in the other direction.

A corresponding aspect of this is downwardly sticky consumption. Once we get used to consuming certain levels of goods or services - a certain standard of living, we are reluctant to give it up.

Here's an article from today's issue of The Wall Street Journal (free content at this writing) that examines this behavior. (Note: it includes a good video, an interesting slide show, and links to some thought-provoking parallel articles.)

I think it has some possibilities for discussing decisions in the marketplace; and I think it has some real uses in personal finance courses. Students could read the article and easily make lists of behaviors that were self-defeating when faced with no income and limited resources. And the list doesn't have to just deal with what the individuals "could have done." In some cases, there are behaviors that are still going on that could be changed.

This discussion gives you a chance to revisit concepts such as choice, value received, marginal cost/benefit, and opportunity cost. You can even ask students what they have given up or would be willing to give up to help their family “make ends meet.”

I look forward to your comments.

The Structure Has Changed

Over the weekend, I ran across a short article at American.com, the site of The American Enterprise Institute. It was relevant, because my class had only recently discussed the types of unemployment and we're about to delve into policy impact on economic problems.

The piece, by Arnold Kling of George Mason University, contends that the fiscal policy approaches advocated by John Maynard Keynes may not be appropriate for the current economy - largely because the current system is structured differently.

That relates to what we've been talking about and what we will be talking about in class. Policies to address cyclical unemployment should be different from policies that affect structural unemployment. And most economists would agree that frictional unemployment is a good thing.  The Great Depression was mostly a cyclical downturn but very large. There were some structural aspects. The current recession is what? Cyclical? Structural? How much of each? And even if we contend that it is largely cyclical, the structure of the current economy is different. The institutional aspects that set up various incentives are vastly different after 70 years. Consequently, stimulating manufacturing and agriculture will not have the effect it did in the 1930s, while stimulating services of various kinds will also be different.

What are your thoughts?

Correlation and Causation

Economists Do It with Models had an excellent post on correlation and causation containing this great cartoon. I highly recommend the post and the cartoon.

Globalization in Reverse?

Finally, one of the topics of my Global Economics class is how trade can allow cultures to share. McDonald's is an oft-cited example. Just consider the fact that the Big Mac is considered a "universal commodity" as the basis for the Big Mac Index.

But how many of these McDonald's products have made it to the U.S.? (HT Marginal Revolution.)

Granted, it is an example of a multi-national adapting to local markets, but still... One would expect some reverse flows, wouldn't one?

I look forward to your comments.

Something on the Light Side...to Make Us Think

Here's something light to start off the weekend.



That's one way to reform Social Security, although it sounds like the old idea of "we have children to secure our old age." I posted on some research about that recently.

Subsidized Risk

I ran across this opinion piece in today's issue of The Wall Street Journal.

I think it does a very good job of explaining how institutions introduce moral hazard to the larger system. (And I love the image.) The changes that result from policy are sometimes subtle, but they eventually get to be assumed. And we know how to spell assume.

Unintended Consequences and Negative Externalities

Finally, here's a very thought-provoking opinion piece from yesterday's edition of The Boston Globe (***UPDATE*** HT to Greg Mankiw.) on how incentives set up to promote one policy can have a negative effect on another, creating negative externalities that have to be accounted for in the process.

Unintended consequences are a result of any decision because we can't foresee everything. That doesn't mean we shouldn't do a good job in trying to find as many as we can.

I welcome any comments. Have a good weekend.

Supply, Demand, Price, Markets, Yadda-yadda

If you’re looking for some current issues to help illustrate your discussions about prices (how they are set, how they influence behavior, how they are influenced by behavior, how they act as a rationing mechanism, etc.) you could do worse than a couple of stories that have popped up over the past few weeks. You probably are already using them, but just in case they’ve slipped under your radar, here they are.

The first was in The New York Times about three weeks ago. The story is about how chicken wings, that finger-food favorite and former loss-leader for sports bars, have now become more expensive than boneless chicken breasts, the former gold standard of the poultry market. The story offers opportunities to move supply and demand curves, discuss cost/price issues, and even talk about substitutes, elasticity and inferior goods.

The second story was in The Wall Street Journal about a week ago. (I wish I could tell you with certainty that it’s free content. Sometimes it is. Sometimes it isn’t. If you run into a “subscriber content notice”, insert “Amid Price War, Three Retailers Begin Rationing Books” into your browser. You should be able to find the whole story. If that doesn’t work, the basic story has been covered by other news outlets like this segment from CBS News.)



It seems that traditional book-sellers are up in arms because Wal-Mart, Amazon and Target have started a price war, and newly released and soon-to-be-released popular books are the ammunition. That’s to be expected. However, the three sides in the war are discovering that “price acts as a rationing mechanism” and have had to decide how to distribute the goods when price is “below market.”

Let me know how these stories work. Or if you are already using them, please share your experience with other readers.

People Respond to Incentives...

but it also depends on whether they think short-term or long-term.

It Takes a Certain Kind of Nerd...

and I'm the right kind.

If you were frustrated that the contestants in the Jeopardy clip below did so poorly, try this quiz.
(HT to Marginal Revolution.)

Follow-up to Job Counting

This is a humorous follow-up to my post of a couple days ago on jobs created and saved. It is from one of The Wall Street Journal blogs and explains why counting jobs saved/created is very difficult and may even be impossible. This can also be filed under "an anecdote is not data, but the plural of anecdote is data."

Some Classroom Resources

First is this item from National Public Radio's Planet Money blog. It's about a teacher in New York who is using Planet Money podcasts in the classroom. It includes some lesson ideas. I found some interesting, some not so. But I got some ideas out of it. You may get some as well.

Second, is an item from the Federal Reserve Bank of St. Louis's Liber8 newsletter. It's a three-page article on how modern macroeconomic schools of thought view the current financial crisis. With all the discussion about why the crisis wasn't foreseen, and what certain schools of thought lack, it is still interesting to look at the underlying assumptions when discussing policy responses. It's in .pdf format, but is full of interesting active links.

Finally, is this video from the Federal Reserve Bank of Cleveland. It is part of the Cleveland Fed's interesting and engaging Drawing Board series looks at how inflation is measured.



While it may spend more time than necessary on one specific (new) way to measure inflation, it does a good job of explaining why accurate measurement is important, as well as how the Consumer Price Index (CPI) is put together, and even a short discussion about "core" inflation. It is a little more than eight minutes long and could be used to set up the discussion about price stability and measurement.

I welcome your thoughts on any of these resources.

Depression Diary - A Resource for History Teachers

Yesterday's edition of The Washington Post contained some excerpts from a recently published book, The Great Depression: A Diary. On the strength of the excerpts alone, I'm adding it to my carousel at left.

If you teach American History and you want to integrate a little economics, this looks to be a wonderful resource. One of its strengths is its apparent focus on middle-America, rather than the financial centers.

I'd welcome any comments. I'll try to add it to my reading list and review it when I'm done.

Amidst the Euphoria: Thoughts about Jobs and GDP

There are a number of items I want to bring to your attention today. One is in a separate post above, but these two deserve to be grouped together.

The first is an opinion piece from today's edition of The Wall Street Journal. The author points out that claims from or about any administration, and I underscore any administration about its ability to create, save, destroy is optimistic at best. Unless everyone is employed by government and in a very small economy, there is just no way to work through the details of every job to verify the claim. The best one can do in a very large, dynamic economy is look at net gains/losses in jobs. And even then, to claim success or blame failure on a specific program is questionable.

The second item is a post from John Taylor's blog. He does a good, short analysis of the recently released third quarter GDP numbers.

He attributes much of the improvement to changes in business inventories. He credits little to government stimulus, although I'm not sure about the stimulus package's impact on production of final goods and services. Using the C+I+G+(x-m) formula, the clear leader appears to be "C". If consumer spending is increasing, and business inventories are getting leaner. I would think that might lead to a turnaround in hiring, depending on productivity gains from existing labor. I agree with his overall analysis.  But as stated above, I'm not sure that means that any government program can be credited or faulted with economic performance in an economy as large and diverse as ours. For an administration to take credit, or for critics to find fault is to fail to grasp the complexity of the U.S. economy.

However, this will bear further watching, and should make for a lot of good examples for classroom use.



I welcome your thoughts.

Job Security?

Finally, the video clip below doesn't say much for the average (or some may say above average) TV contestant. Do you think it can translate into job security for economic educators?



HT to Marginal Revolution.

Buy Local & Gains from Trade

First, if you haven't heard, Steven Landsburg, the author of The Armchair Economist has a new book out, The Big Questions. (Once I get a chance to read it, I'll review it and maybe add it to the carousel.  In the interim, don't wait on me.) He also has an entertaining blog to go with it.

That being said, check out his take on "buy local." At the very least, it should generate some discussion when discussing comparative advantage and gains from trade.

I welcome your thoughts.