Friday, May 29, 2009

Demand Curves Slope Downward, Evidently

Earlier this month, I posted on the decision of a couple consumer products companies to try to ride out the downturn by stressing the value of their higher priced products.

It now seems one of them is rethinking the idea. According to this story (free at this writing) in today's edition of The Wall Street Journal, consumer giant Proctor and Gamble will be boosting offerings of lower-priced products. This comes after P&G issued a lower than expected earnings forecast for its next fiscal year which begins July 1.

It seems that its lower priced products have outperformed the premium-priced items. Evidently, when people have less money to spend they buy more of the lower-priced items than they do of the premium brands.

I think you can even work in substitution effect, opportunity cost, scarcity, and a whole raft of other economic concepts.

What do you think?

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.
7. Economic thinking is marginal thinking.

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.

Understanding Fiscal Policy

First, thanks to Izzit.org for the pointer.

Here's an interesting piece on business/government cooperation.

To think, businesses benefit from legislation. Next we'll be hearing that politicians backing the legislation receive contributions from these same businesses.

Captain Renault is "shocked."

(For the younger readers of this blog, if you've not seen the classic film Casablanca, one of the characters, Captain Renault, is "shocked" to discover gambling is going on in Rick's Cafe - just as his winnings are delivered.)

This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

Thursday, May 28, 2009

When Will It End?

I'm not referring to the school year, although for some it may have ended already. Others may have a week, two, or even more to go. Regardless, I suspect it's going to be difficult to think about next fall, much less get your students to do so. However, I ran across something that might be useful if you are inclined to focusing on the future and/or trying to get your students to do the same.

This piece was in a recent issue of The Wall Street Journal. It goes beyond the traditional "two consecutive quarters of negative GDP growth" that we often hear when some try to define a recession. The article points to different economic data that might indicate the recession is bottoming or has bottomed. And because a lot of things can change in two or three months, this might make an interesting item for teacher edification, or to share with students that you know you'll see in the fall. Hopefully, some of them share your enthusiasm and excitement about economics. This will give that energy some focus.

Have them chart/journal the data. Or if they think of other bits and pieces of data that might be a precursor to the economic turnaround, have them cite it and explain the connection. They can even throw in anecdotal observations from their summer jobs and/or vacations. It won't be easy, but worthwhile things rarely are. And think of all the possible grist for discussion you'll have after call the first roll in September (or August as the case may be).

I will continue blogging through the summer. If you currently receive my emails at school and want to redirect them to your home, just let me know and we'll change the notification list. That will avoid an "overfull" inbox when you return, or our dropping you from the mail list because your full inbox bounces back to us.

As always, I look forward to your comments - even in the summer.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.
and
4. Economic systems influence choices.

Friday, May 22, 2009

Rock Stars

A couple years ago, when I first read The World is Flat, I was struck by one of his statements.
"In China today, Bill Gates is Britney Spears. In America today, Britney Spears is Britney Spears - and that is our problem."

I couldn’t help but be reminded of it when I saw this commercial.


Here are some questions for your students:
Who affects the overall quality of life more, engineers, entrepreneurs or entertainers?
Are things changing?
Is “Britney Spears still Britney Spears”, or is the current economy changing our priorities?
This post relates to the following Keystone Economic Principle:
8. Quantity and quality of available resources impact living standards.

Wednesday, May 20, 2009

What's in the (Credit) Cards?

There is a flurry of stories in the media this morning regarding a bill passed by the U.S. Senate yesterday regarding credit card reform. It is reported that the House of Representatives will now take up the bill, and if passed it could be on President Obama's desk by next week. The Wall Street Journal, The Washington Post and The New York Times all have major stories (and all free content at this writing), many of them with very good graphics and even some video that outline the major changes.

Many of the changes highlighted in the stories run along the line of what's good about the proposed legislation, i.e. what will benefit consumers. And there is a lot in the Senate bill that stands to benefit consumers. (The final bill will have some changes, so it's worth following the progress.) Issues like interest rate restrictions, how payments are to be handled, grace periods, fine print, and credit cards for minors are part of the bill. Many, if not all of these, are covered in some of the graphics in the story. The graphics alone are worth taking a look at.

The downside of these proposed changes is a bit more complex and the explanations are not easily explained by graphic presentation, evidently. But as we know from studying economics, there's the TANSTAAFL principle. (There Ain't No Such Thing As A Free Lunch.) The consequences range from the intended - the cost of credit being shifted to people who pay their balance in full - to the unintended - less credit available for people with poor credit. Some of these discussions have been fleshed out more on a number of blogs such as this one and this one, both at The Wall Street Journal.

However, I would recommend a book that, while not talking exclusively about credit cards, does explain our fascination with credit and the evolution of credit availability from a privilege (only those who can afford it get it) to a right (everyone is entitled to access to credit). It's title is Money of the Mind and it's by James Grant. The book is 15 years old and, as a consequence, only takes us up through the 1980s. However, the pattern of bringing more and more credit to more and more people provides some insight into what happened through the 1990s and into this decade, and the resulting consequences.

As to what all this means for your students, while the bill has not taken its final shape, the intent is for it to go into effect early next year. One of the things you can do now is discuss the ramifications of the legislation along these lines:

1. What will be the impact on size of the credit market - how many people will be eligible to get credit cards - based on some of the proposed changes?
2. If demand (the number of customers) changes, what happens to the price of credit?
3. If banks cannot cover risk or make a profit at a given price, what can they do to the supply of credit to change the price?
4. If people (consumers) get less (fewer benefits) and are charged more, are they likely to change their spending patterns?
5. Given that using credit is usually a choice, what incentives to use or not use are created by the changes?
6. Do these changes create externalities (costs or benefits that accrue to parties outside the transaction) that will complicate the pricing of the service?

Given the current state of the economy, and the circumstances that helped to bring it about, I find the method and the timing on credit card reform interesting. In some ways it is predictable, and maybe even overdue. In others, it would seem to be counterproductive.

Please share your thoughts or encourage your students to share theirs.

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.
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.

Tuesday, May 19, 2009

Global Trade and Supply Chains

The process of producing goods and services tends to be longer and more complicated than our students think, and certainly longer than even many adults know. Consequently, it's good to find a short article that illustrates the various stops in a "supply chain", while also providing an excellent example of globalization and interdependence when discussing trade. Yesterday's edition of The Wall Street Journal contained this article (free at time of writing) which can do all of that.

Superficially, the article is about Zoran, a California chip-maker. The firm has to deal with reduced orders in a time of "lean manufacturing" and "just-in-time (JIT)" inventory management. Those concepts, while helpful in helping larger manufacturing firms control costs when properly implemented, can be problematic on the smaller firms farther up the chain.

However, the article contains a graphic titled "Life of a DVD Player “that does an excellent job of connecting the dots that link basic materials to final product made available to the consumer. It shows how such far-flung locales as Minnesota, Japan, China, Taiwan and California are all involved in one component. (That would not be an example of JIT, which was based on fairly close proximity of suppliers.) It can be used to demonstrate how falling consumer demand ripples throughout the world economy for an example of globalization and interdependence. I also like the fact that it can be used to illustrate one of the key problems with trade data - point of origin.

Because markets are multi-layered and interlinked, it is virtually impossible for any nation to track where imported goods actually originate. The easiest way is to ascertain what the last stop was before it got to the final destination. If we use the graphic, chances are the Toshiba DVD player at Best Buy was probably counted as an import from China, even though the nameplate is for a Japanese firm. But one can easily see that is a gross oversimplification. The production of one specific chip involved a number of countries and workers in those countries. Chances are other components, from the case to the wiring, involved numerous others. From that standpoint alone, one should be able to demonstrate that trade barriers can easily have a negative impact on many countries, including the country imposing the barriers.

Another interesting resource is this flash presentation at the YaleGlobal online site. It examines the television industry - not program production but actual manufacturing. It does NOT connect to the 'lean manufacturing' theme of the WSJ article, but still provides an interesting example of globalization over time.

Please share your reaction.
This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
6. Do what you do best; trade for the rest.
and
7. Economic thinking is marginal thinking.

Institutions Affect Choices

In this case from the Luann comic strip, one might argue for an informal and voluntary institution in the form of a basic human response.

Luann

This post relates to the following Keystone Economic Principles:
1. We all make choices.
and
5. Incentives produce “predictable” responses.

Maybe...

we are near the bottom. I mean when it's the subject of a cartoon in The New Yorker...

Monday, May 18, 2009

Buy High, Sell Low?

When teaching students about investing, one of the first adages we tell them is "buy low, sell high." What often follows is an explanation of the fact that many investors do the opposite - sometimes out of necessity - but also as a result of some basic emotions like greed or fear.

But because we each have different risk profiles, our timing may be off when it comes to investing. When a market is growing, we may put off getting in, depending on our fear/suspicion/concerns about whether or not the market is really going to continue growing. Likewise, our inability to let go of the bad or our overconfidence in our ability to pick the winners, may keep us from selling in the early stages of a market decline.

There are other reasons that we may act this way, of course. But the fact is that many of us do act contrary to the basic wisdom. There is an article (free content at this writing) in today's edition of The Wall Street Journal that illustrates what happens when investors get the timing wrong. You can certainly make a case that the selling should have been done before February 2009. But, to borrow and overuse another old aphorism ,“Hindsight is 20-20.”

Do you think this article would be worth sharing with your students? Is there value in illustrating what many consider to be self-evident? Does this open other opportunities? Another adage is "don't try to time the market." But is that another important lesson for another day, or a continuation of this lesson?

I look forward to your comments.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
and
3. All choices have consequences.

Friday, May 15, 2009

Coincidence, Correlation or Causation?

While I might be convinced this is more than coincidence, correlation is not causation. And while I don't think the author claims that it is, it certainly came across that way to me.

I think it may have more to do with similar cultural values and beliefs (institutions) other than taxation influencing the choices of the inhabitants. What do your students think? Does the author make the case that high taxes can lead to happiness? Are there other routes than through government-provided services?

I look forward to your comments.

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.
4. Economic systems influence choices.
and
8. Quantity and quality of available resources impact living standards.

Smoot-Hawley Revisited, Again.

While I hope this doesn't play out the same way, this article from yesterday's edition of The Washington Post may be something to be concerned about.

The original Smoot-Hawley Tariff was not expected to have the impact that it actually did. The original bill (as outlined in this article from The Economist) was designed to set tariffs on agricultural products from a small number of countries. The final version suffered from so many add-ons that it effectively injured world trade just as the economy was dealing with a downturn. Bad timing to say the least. Is retaliation something that should be expected when passing this type of legislation? My view says yes, but I may be missing something.

Let's hope thing don't get out of hand, just as we were starting to see "green shoots." I look forward to your comments.

This post relates to 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.

Thursday, May 14, 2009

What a Difference 18 Months Can Make: India's Growth & Infrastructure

Yesterday's edition of The Wall Street Journal had an excellent article about problems facing India's growing urban centers. It had links to some informative interactive graphics, a slide show about one urban center - Lucknow, and an informative video. It is a rich resource for a variety of teaching environments including world history, current events, geography and economics, and I strongly recommend it.

That piece also reminded me of another article from the same source that I read about 18 months ago. That one spoke about the then surging Indian economy's positive effects on the poor. After a bit of digging, I found a link to it. It also has an excellent series of interactive graphics, and despite being 18 months old offers some interesting possibilities for discussion.

In the older article, the main point is that economic growth is an engine for social change. Public education was expanding and offering opportunity for many with a subsequent result that the caste system was slowly falling apart. There was a new confidence and a belief that the state may not necessarily be the best director of economic growth. And many of India's rural poor were choosing to move to the cities where they saw greater opportunity.

The more recent article speaks to the result of that movement. While opportunity did exist, much of it has dried up with the slack global economy. But the poor have not returned to their villages. They still choose the potential of the city despite a woeful lack of public services. Part of that shortfall is the result of insufficient funding, but part of it remains competition for use of public funds among overlapping governmental authorities. Large monuments to government officials are touted as "make work" projects. Funds are diverted to build modern roads providing access to monuments, rather than building bridges or water treatment plants, largely as a result of a decision made by government agencies.

In fairness, the rate of population growth would strain the resources of the cities even in the best of times. But the stories, when read together, provide an interesting problem for discussion about pubic goods and services, the role of government, and the productive value of infrastructure in promoting growth and opportunity.

I'm sure there's more to discuss than I've outlined, but the articles are well-written and additional information provides a rich resource for classroom use. I look forward to your comments.

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.

4. Economic systems influence choices.
and
8. Quantity and quality of available resources impact living standards.

Wednesday, May 13, 2009

Resources on the Financial Crisis

While I've not had time to review everything on the site, it has enough credibility that I have no qualms forwarding it to you.

The Carnegie Council has put together Essential Resources on the Global Financial Crisis. I have read some of these articles before. There are some that I agree with and others that I don't agree with; but all are well-written, and provide a solid examination of the issues. They are, at the very least, a valuable source of balanced arguments and prescriptions.

I hope you find time to get to theml. It is, after all, almost the end of the school year. But there's still time to put them on that summer reading list. (I suspect that's what I'll be doing.)

This post relates to the following Keystone Economic Principle:
8. Quantity and quality of available resources impact living standards.

Credit Crunch of 1294?

The current recession has been compared to a number of other economic downturns - the early 1990s, the early 1980s, the 1930s (most often used), the 1907 Panic, and even a couple of events in the 19th century. This is the first time I recall it being compared to an event in the 13th century.

This article from the Voxeu blog is a short, interesting read. Like the current situation, part of the problem was an inability of financial institutions to meet short-term obligations by converting long-term assets to cash. This was compounded with an inability to borrow additional amounts in the short-term.

I was interested in the resulting fiscal and monetary policy approaches used by parties to solve the crisis - neither of which seems to have been good for the economies involved. I wonder if there are lessons to be learned here?

This example seem to be an interesting way to link current events to historical ones for those who teach world history; and to provide another historical example for those teaching economics.

At the very least, it would seem to reinforce the old adage that if history doesn't always repeat itself, it sure rhymes.

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.

Tuesday, May 12, 2009

Place Utility? Time Utility? Conspicuous Consumption?

The quote below is from Phil Mushnick's sports column in The New York Post from a few days ago.

Reader Gary Cicio, NYC podiatrist, did the research, and asks us to choose one of the two options to see a Mariners-Yankees game this season, and from the very best seats:

Option 1: Two tickets to Tuesday night, June 30, Mariners at Yanks, cost for just the tickets, $5,000.

Option 2: Two round-trip airline tickets to Seattle, Friday, Aug. 14, return Sunday the 16th, rental car for three days, two-night double occupancy stay in four-star hotel, two top tickets to both the Saturday and Sunday Yanks-Mariners games, two best-restaurant-in-town dinners for two. Total cost, $2,800. Plus-frequent flyer miles.
The question for your students, “Why would anyone pay to see the Yankees play the Mariners in NY?”

One might be able to make a case that it is somehow more valuable to see the game on June 30 than to see it on August 14. That would involve time utility - the satisfaction gained from a good or service being available a time the consumer prefers. One could also argue the time involved in travelling to Seattle can be used better for another purpose. That also may be true, and it would also be an example of time utility.

This could also be a case of place utility. Place utility is the satisfaction gained from a good or service being in a place the consumer prefers. Clearly, some people are willing to pay a premium to see the game in NY. The number of people willing to do that, given the smaller size of the new Yankee Stadium, may crowd out other Yankee fans, but the choice is up to the individual consumer.

This also can serve as an possible case of conspicuous consumption.

That concept was first introduced by economist Thorstein Veblen in his book, The Theory of the Leisure Class. Veblen pointed to lavish spending as a method of displaying status. There is a certain amount of pleasure one receives from being able to tell others that one can afford Yankee tickets at this level.

What do your students think?

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.
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.

Friday, May 8, 2009

Home-Ownership as an Institution

Housing is a factor that is often cited as contributing to the current downturn. And because housing is not an isolated sector of the economy, there are a myriad of reasons given for the collapse of the housing sector, from monetary policy to unscrupulous brokers to misinformed investors and uninformed home-buyers.

There are numerous examples of how people in various roles made choices based on incentives they had to act. But how did the incentives get there? Some would have us believe it was a lack of oversight or regulation that allowed incentives to run amok. Others would have us believe that specific incentives put in place by various interested or well-intentioned parties created opportunities for misguided decisions.

But there has not been a lot written about the fundamental idea of home-ownership and how it has impacted choices. We know people respond to incentives. And we know the institutions developed within a system shape the incentives. But we often overlook the history of the institutions. And while the definitive history of home ownership in American society may yet be written, this article from City Journal (HT to Arts & Letters Daily) is a decent start.

The author delves into early 20th-century attempts by the government to increase home ownership and carries through that century to the current situation. For each example, the case is made that legislation reflected a desire to formalize an informal belief - that homeownership was a socially desirable outcome. The idea that homeownership is a desirable outcome is common within our teaching. We tell our students governments provide tax deductions for homeownership, either through mortgage interest or property tax deductions, because owners are "more involved" in their communities. That owners care for property differently than renters. And those owners do things to increase the value of the property, positively impacting the value of other property.

The last few pages get a bit too political for my taste. But this article, while longer than some normally suggested here, is worth your time - whether you are an economics or American History teacher. Either way, I think you will gain insights to share with your students.

I look forward to your comments.

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.
4. Economic systems influence choices.
and
5. Incentives produce “predictable” responses.

Inflation vs. Deflation

The new issue of The Economist has an interesting article debating the issue of inflation and deflation. This is relevant to the current economy because one of the possible effects of a prolonged recession is that prices begin falling on a broad scale - deflation. Deflation is a problem in a number of ways. Long-term debts have to be repaid with dollars of increasing value. Falling prices act as an incentive to postpone purchases - furthering the incentive to reduce prices. And wages are prices.

We see the other relevant aspect if we borrow a quote from Milton Friedman, "inflation is always and everywhere a monetary phenomenon." Essentially, large and sustained increases in the money supply are ultimately reflected in higher prices. The actions the Fed has taken to provide stability in the financial sector have had the coincident effect of increasing the money supply. The concern is that once the economy turns around (and some say it may be doing so as we write) and begins to gain speed, the increases will have to be withdrawn.

The article in the economist mentions this video (HT to Greg Mankiw which is a satirical debate on the same question.


The chorus of the song asks whether we will become Zimbabwe - the poster child for hyperinflation (see this photo, HT to Mark Perry) - or Japan - which went through a prolonged recession/depression in the 1990s. It would provide an interesting kick-off to a discussion about current economic policy and the longer term effects.

The author of the piece in The Economist seems to think that inflation is a more manageable and less immediate threat. I'm not sure I agree. What are 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.
4. Economic systems influence choices.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

Wednesday, May 6, 2009

Fishing with Fisher

I ran across an interesting item while perusing the comic strips today. And I love it when the comic strips get me thinking economically – even if I’m wrong. (Click on the strip to see the final panel.)

B.C.

(The image wasn't functioning the last time I checked. Here's a link. - 2/15/10)

My response is, “if one accepts the assumption that clams are money and then applies that assumption to the situation, I'd have to say no inflation in the short run."

Irving Fisher developed the equation M x V = Q x P (money times velocity equals the transactions times the price level). I've always found it helpful when thinking about the economy (see title of this blog).

I think the equation indicates no threat of inflation. If clams are M and worms are Q, there would seem to be no reason for P to change, barring a shock to the worm supply.

Although one could make an argument that new clams from the river constitute an exogenous monetary increase similar to finding a new supply of gold or silver in a specie-backed monetary system. The long-term impact might be inflationary, as long as the clams hold out. But what if "peak-worm" has been already been reached? If that's the case, inflationary pressures could develop sooner.

I welcome your thoughts.

This post relates to 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.

Tuesday, May 5, 2009

This Is What I Call Comprehensive

I realize it's getting down to the end of the year for those of you in the classroom. In fact, for those of you teaching AP Econ, the payoff is in less than ten days.

Nevertheless, I want to bring an excellent resource to your attention. (HT to Greg Mankiw.) Those of you who are regular readers of the on-line edition of The New York Times are probably already aware of it, but many of you may not be. Even if you don't use it this year, this will provide some excellent resources for next fall.

The site is a comprehensive overview of the credit crisis. There are links to well-written articles, video clips and a number of multi-media presentations on a variety of related topics. For those of you looking for deep background or even resources for student research projects, there are links to government reports, Federal Reserve publications, and coverage by other publications. This is comprehensive, and The New York Times is to be commended. I strongly recommend you spend some time mining this resource. I intend to.

Please share your thoughts both on the resource and how you might be using it.

This post relates to 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, May 4, 2009

College Graduates and Their Skill Set

I don't know how many of you are familiar with the video 2 Million Minutes. It compares students from high schools in the U.S., China and India. And while I agree with the fundamental idea - that U.S. students need to be more aware of and better equipped to participate in the global economy - I thought the methodology could have been better.

To the methodology, I found the comparison of a very large U.S. suburban public high school, a middling (by our standards) Chinese high school, and a small private school in India to be unfortunate. I won't go so far as to say it was comparing apples to oranges, but limes, oranges and grapefruit may be appropriate.

The video does point out that, in many technical aspects, students from the Chinese and Indian high schools were more proficient than their U.S. counterparts. And given the frequent reminders of how U.S. students compare to other students in math and science, I will concede the point. My experience, while certainly not damning of the U.S. system in any way, would indicate that we could do better. Regardless, the inference is that the students in China and India are better prepared for college and career than are the U.S. students. I'm not sure that's a fair assumption because much can happen in four or five years of undergraduate education, both good and bad.

Now we can get to the spark for this post. This morning's issue of The Washington Post contained this article.

And while it spoke about university-level graduates, the story was still intriguing. The short version is that, at least in India, some students are graduating from some universities without some fundamental skills. These include basic communicating, problem-solving and, I presume, other "soft skills." It seems "skills" is seen as déclassé.

After finishing the article I was reminded of something a colleague in Chicago once said. He told me that if all that was sought was technical proficiency, there were a multitude of candidates that could be hired out of any major university's graduating class. What was tough was finding one who could write clearly and simply, work well with others on problems, and speak to a wide variety of audiences and still be understood.

I wish there was a comparison to U.S. and Chinese university graduates to draw a proper comparison. And while not totally negating the 2mm video and allowing for differences between high school and college, the Post article implies that "hard skills" are not the total package.

I know this post rambled over a wide area, but what do you think? Are you familiar with the video? What do you think is the "comparative advantage" for U.S. students? How do U.S. students (particularly university students) stack up in the "soft skills" area?

Friday, May 1, 2009

Someone's Missing Something...Maybe It's Me

Today's issue of The Wall Street Journal had an article with this headline, "P&G, Colgate Hit by Consumer Thrift" (content free as of this writing).

The story indicated that two of the big consumer product conglomerates Procter & Gamble and Colgate-Palmolive have moved to raise prices in the face of falling sales to keep quarterly profits from deteriorating. Both companies indicated higher total sales on declining sales volume.

It appears both are depending on the consumer's product loyalty to keep shareholder's happy. (Just to be clear, my mutual funds hold shares of these companies the last time I checked.) Either someone hasn't explained a demand curve and/or the idea of prospering by looking out for the consumer –what some might refer to as the "invisible hand."

It will be interesting to see how the firms prosper as the current cycle unwinds. Your thoughts are welcome.

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.
and
7. Economic thinking is marginal thinking.

Understanding Data

Many news sources are touting the performance of the stock market over the past two months. According to one article (not available in its entirety), the Dow-Jones World Index is up 12%, the best two month performance since its inception back in 1991. Other measures have strong results, as well.

But for many of our students, there's a tendency to assume that a percentage point gained in the recovery will negate a percentage point lost in the recent fall. That's not true. This is an excellent opportunity to review some basic math and statistics with your students.

A one percent fall from a level of 10,000 is 100 points. A one percent gain from a level of 10,000 is also 100 points. Unfortunately, we're not starting the climb at the same level we started the fall.

At its height, the Dow-Jones was above 14,000. At its recent nadir, it was below 7,000. That means a one percent drop was 140 points at the top and a one percent gain at the bottom was less than 70 points.

The market has gained back some lost ground, but we're not out of the woods yet. As always, your comments are welcome.

This post relates to the following Keystone Economic Principles:
7. Economic thinking is marginal thinking.

***UPDATE***
Back on April 21, in a post with a similar theme - understanding data - I posted on President Obama's directive to cut $100 million from the federal budget. Now, I've run across an excellent video that also does a very good job of clarifying the scale of the problem. (HT to Division of Labor.)




I'd say it probably doesn't provide a direct answer to the question asked here, but it's effective.

Uncertainty vs. Risk: How Policies (and Institutions) Affect Choice

Almost a month ago, I ran across this interesting post on the RealClearMarkets blog.

While the post was a plea for policy-makers to quit tinkering and let the market get on with the business of sorting winners and losers and start to repair itself; there was another important takeaway.

The author did a good job explaining the difference between risk and uncertainty, and the role both have in our decision-making psychology. While each of us has varying tolerances for risk - some are comfortable with and will accept more, others prefer relative sure things and will accept less. This manifests itself in many of our choices - whether in our financial life or other aspects of our day-to-day activities.

However, most of us have trouble with uncertainty - not knowing what will happen next. With risk, we can assess probability and decide on a course of action - from a coin flip to a decision to change careers. But uncertainty is akin to putting on a blindfold and earplugs and walking in a random direction. Not too many of us would make that choice.

As I thought more and more about the post, I ran across a couple of other posts that clarified things further - both from the Becker-Posner blog.

Gary Becker's post addressed whether banks that received funds under the Troubled Asset Relief Program (TARP) - or in some cases were forced to take those funds - should be allowed to repay the funds. This repayment would, allegedly, remove them from certain government oversight and presumably reduce the public spotlight that comes with accepting public funds.

In the course of this discussion, the government expressed some reluctance about accepting early repayment. While the reason is similar to those given when funds were first distributed - if some banks return the funds, the weaker ones will be identified - there was a sense that another concern was a concern that the government might lose some leverage. All of this followed close on the heels of a scandal about bonus payments by certain financial firms that had accepted funds. When that happened, policy-makers had responded with threats and rules designed to "encourage" bonus recipients to return their payments.

I read Becker's post to infer that by forcing healthy banks to accept funds, and by refusing to accept repayment from those same banks, one could argue their uncertainty might actually be increased. Like changing tax laws to recover income from a select group of employees, this would change the institutions or rules under which we make choices. If we see rules changed for industries on an ad hoc basis, driven by public opinion or even justifiable outrage, we may fear that the rules that form our decision-making framework are less predictable. That removes risk in our decision-making and replaces it with uncertainty. That can result in a more conservative approach to many economic and financial choices.

Richard Posner's response would seem to reinforce this idea. In his concluding paragraph, he sees numerous benefits to repayment. He points to the desire of financial institutions to remove the spotlight from their operations.

One may easily argue that if policy-makers could manage to stop changing the formal institutional structure of the economy, we might see some benefits from increased borrowing, lending and risk-taking characteristic of a recovering economy.

As always, I look forward to your comments.

This post relates to the following Keystone Economic Principles:
3. All choices have consequences.
and
4. Economic systems influence choices.