People Respond to Incentives....

...but which incentives?

In economics class, we teach that people respond to incentives. Then we frequently add that sometimes incentives don't work. The truth is when an incentive (negative or positive) doesn't work it usually means it was the "wrong" incentive to motivate a particular individual. Sometimes it's not about money. It can be other "non-economic" - or more correctly "non-monetary" - factors that provide incentive. I often use the term "psychic income" to explain some of these factors. But I have been looking for something that could provide a better explanation.

Barry Ritholz at The Big Picture posted this very interesting video animation on this topic, which can help. The video has taken a presentation by Dan Pink, the author of Drive, (which I have added to my carousel, at left) and edited and illustrated it. It's short. It's interesting. And while not complete, it provides a good platform. (If you're interested in a longer version of the talk - 41 minutes - without the animation, you can find it here.)

On Barry's blog, many of the comments were insightful and/or useful. (That's where I found the link to the longer version.) The animated version doesn't address negative incentives. Nor does it include other positive incentives such as recognition and status - both of which can be powerful positive incentives.

I recommend both the short version (for possible classroom use) and the long version (for self-edification). I would be interested in your thoughts, as well.

Credit on the Personal and Macro Level

A couple of items caught my eye this morning. Both dealt with forms of credit and how these forms relate to the current state of the economy. The first was this article in The Washington Post. The story provides a brief insight into the history of the credit card, as most of us are familiar with it. It goes back to 1981 when the state of South Dakota allowed banks to charge whatever interest rate they wanted on credit cards. This changed the availability and use of credit cards from its previous, more restricted, role.

But the article also examines how credit card losses in the most recent recession have impacted issuing banks; and how new legislation may impact banks' choices on who gets cards. The article makes a convincing argument that credit was too easy, and that this ease led to misuse. And the misuse put many individuals into circumstances that could not withstand an economic downturn and an interruption in income. I understand the logic, but I'm not sure the entire history of the role of credit in this downturn is ready to be written.

And that's because of another interesting piece of the puzzle is brought up in this post on the Voxeu web site. The author is an economist at the Federal Reserve Bank of Boston. And his research is in the role of housing equity in the credit market. Specifically, he looked at how homeowners were using equity in their homes in the period prior to the housing collapse. I have often heard arguments that individuals used escalating home values as collateral for home equity loans and lines of credit, using that credit as if it were an ATM to fund rising standards of living - essentially a mechanism for extracting the wealth from the wealth effect.

The author says his research doesn't support that explanation. Indications are that people were not treating their homes as ATMs to finance current consumption - at least not at the levels previously thought. Rather, his evidence shows that what was extracted may have been used to finance residential and household investment to a greater extent than was previously thought.

All of this made me think of an old but interesting book that I have recommended before and will recommend again: Money of the Mind by James Grant. It more than 15 years old and is in need of a new edition. But the history of credit in the United States from the early 19th to the late 20th century is an interesting one. And there is much in the book that provides a set-up to the current situation. I'll put it on my carousel at left in case anyone is interested. I found it an interesting read and if you like weightier subject-matter, I would even call it a "beach read."

Paul Krugman Blues

Loudon Wainwright III had a brief hit in my college days with a novelty song about a "Dead Skunk." He's been singing and acting since then. But I just happened to run across this video (HT to Openculture) which I just had to share...



It's nice to know that someone is helping the profession maintain its reputation as the Dismal Science.

Unemployment

In many AP Macroeconomics courses, there is an opportunity to look at unemployment. And one of the discussions revolves around the level of unemployment benefits and the duration of benefits. There is a very good article in yesterday’s (Friday, May 28, 2010) edition of The Wall Street Journal (free at this writing). (If it changes, try putting the article title in your browser.)

The article is about the United Kingdom’s budget problems, and how various support benefits, including unemployment, may be part of the solution. I recommend it.

Neat but Incomplete

I ran across this interactive from the Brookings Institute on the global economic recovery (HT to the folks at Chartporn). While it is incomplete (most economies that I would consider developing are not included - and a number of economies that are grabbing headlines are missing as well); for those that are included, there are charts and data that could be used for reports or project or end-of-year discussions.  It's even fun just to poke around.  It's worth a look, in my opinion.

Online Savings Accounts

For those of you teaching personal finance, here is a good visual from the Visualeconomics site. It shows the various characteristics to be considered when looking for online savings accounts, and then does some comparisons. I would think you could use the same matrix for examining savings accounts in general and/or alternatives for saving.

This Is Funny...and a Bit Unnerving

We teach that deficit spending is appropriate in times of trouble.  So where did things go wrong?

Some Fed Articles on Inflation

Here are three interesting and readable short pieces from the Federal Reserve System. They all deal, in one way or another, with inflation, and they all provide good background for teachers and students alike.

The first is from the Federal Reserve Bank of Cleveland's Economic Trends and is by far the timeliest. By that I mean it really is of the moment and probably needs to be used or read in the near term to have the most value.

The remaining two are courtesy of the Federal Reserve Bank of St. Louis. This one is from their Economic Synopses publication and deals with a practical definition of monetizing the debt. You know, it’s the answer you have to give when students ask "why doesn't the government just print more money and pay off the debt?" In this case, the definition depends upon intent. And the article provides some good historical context.

The next article is a brief essay from the recent issue of Monetary Trends. It asks "Why Do People Dislike Inflation?" And it provides a good answer. If your students sometimes speak like inflation might be a good thing (wages rise, debts are easier to pay off, etc.), this could be helpful.

I look forward to your thoughts on these articles.

A Matter of Time Preference?

I have read or heard a number of stories about hoarding, lately. This issue seems to have caught the attention of the media. I concur it can be a debilitating problem. My family will also accuse me of hoarding on some level, as I get rid of very few books, and I keep a lot of my old papers (it's the undergraduate history major in me, I'm afraid.) I also sense an opportunity to illustrate an economic concept: time preference.

Time preference is about how we view consumption. People with relatively high time preference prefer to consume in the present. People with relatively low time preference will postpone some amount of consumption in exchange for consuming in the future. Thus, the individual's time preference is somehow related to their propensity to save/consume - which sets us up for this cartoon.

I Wonder Who He Is Writing To?

Median CPI Drawing Board

The Federal Reserve Bank of Cleveland has posted the latest installment of The Drawing Board. This one deals with Median CPI.


(HT to CarpeDiem.)

Wage

Here's a cartoon to help students remember that wage is not just the monetary portion of their compensation.

Specialization, Absolute or Comparative Advantage

This is an interesting map.  Granted, I'm not sure some of these #1s are things to be proud of or things that you can "trade".  But you never know.

(HT to Chartporn.)

John Stuart Mill's Birthday

I won't say much today as I had a fairly extensive post just a couple months ago.  Suffice it to say that if you want to learn more about this great economist and great thinker, you can find an excellent biography on my carousel at left.

Do Volunteers Steal Jobs?

"Low wage workers steal jobs." This argument is one we have all heard. It gets applied to issues such as immigrant labor, off-shoring, even unionization. The prima facie argument is compelling. Someone willing to work for a lower wage replaces the individual working at a higher wage. It isn't fair, etc., etc.  That's what made this post on Econlog so very interesting. The author of the article referred to in the post, indicates that there was suspicion about the motives and effect of volunteers in the aftermath of the Haiti earthquake. Locals thought the workers were "stealing their jobs" by agreeing to work for less than the local wage. When informed that they were doing it for free, a common response was that the workers must be getting paid elsewhere.

The type of thinking exhibited by the villagers may be questionable, but is it a logical extension of the arguments we hear related to immigrants, off-shoring, etc.? If it is true, shouldn’t anyone from the outside who is involved in the cleanup after a catastrophe be looked upon with suspicion? The motives of numerous charities should be questioned because the workers are doing things that locals could be doing themselves and possibly getting paid for.

Would it also apply to help extended during catastrophes? If "outsiders" come to help fight forest fires or build levies against flood waters, aren't they taking work from those in the community whose job it is (or could be) to perform those services?

I'd be interested in reading your reactions. If you've read your Adam Smith (both The Wealth of Nations and The Theory of Moral Sentiments), how do you think he would respond?

Household Debt

Here are some interesting graphics about the level of U.S. household debt over time. (HT to Chartporn for the link.)

How would you use them? I see some immediate application for personal finance courses. But would the information also be helpful in a regular economics course when discussing levels of debt in an economy, or the topic of loanable funds?

Game Theory and Prisoner's Dilemma

Calvin of Calvin and Hobbes worried that another student might snitch on him when confronted with consequences. Could you/would you use this illustrate an aspect of game theory - specifically the prisoner's dilemma?

Something on the Great Depression

For those of you interested in The Great Depression, you might want to check out this site for a very interesting podcast. (HT to Econlog.) It is a libertarian site, but the podcast should prove interesting.

I've read Scott Sumner before. (In fact, if you read his blog, The Money Illusion, you have too.) In my opinion, he is always interesting.  I may not always agree with him, but he is interesting.

Belated Birthday

I deserve several lashes with an inelastic demand curve.  I missed Paul Samuelson's birthday on May 15.  Samuelson was the first American to win the Nobel Prize in economics. He was one of the leading proponents of the mathematization of the discipline. And his textbook was the best-selling textbook of all time, and was responsible for many of you learning your principles.  I say "many of you" because I must be one of the few people who didn't use Samuelson in my principles course.  You can learn more about Paul Samuelson at this site.

Happiness & Economics

First let me apologize for my absence.  Things have been a bit hectic around here.  I will try to be more consistent.

As many of you know, I strongly believe that much of what we do can be explained using the economic way of thinking. That's why I find this post by Greg Mankiw so interesting. All cost and benefit is not restricted to monetary measurement.

We're Not the Worst....

when it comes to debt, but we're still contenders. See this. (HT to Chartporn.)

Positive Externality or Unintended Consequence?

Finally, a post AP Test question that your students should be able to answer.

Non-Price Determinants of Demand

While not exactly a "transaction."  Do you think this an example of "tastes and preferences" or "expectations."  The king indicates it's not his taste, but it is possible he expects some trickery.

Friedrich Hayek (May 8)

One of the eminent economists of the 20th century, he is known for his disagreements with Keynes, believing that to keep unemployment low would call for growing inflation. We teach this as the Phillips Curve. He was also a member of the Austrian School - the only major member of that school who was actually born and raised in Austria (according to this source).

You can learn more about him here. And if you haven't seen it, you can "watch" him debate Keynes in "Fear the Boom and Bust."

Anniversary of David Hume's Birth (May 7)

You may not know the name, but you know his impact. David Hume was one of the great philosophers in Western history. Interesting in his own right, he was a significant economist, being an early opponent of mercantilism, and early articulator of the quantity theory of money.

He had a significant impact on Adam Smith. He even helped develop the divide between normative and positive economics, having once noted "you cannot deduce ought from is." Value judgments cannot be made purely on the basis of facts. For more about Hume, try here and here.

More on Greece

The German periodical Der Spiegel has this very good article with some very handy graphics (HT A&L Daily). You can use them in conjunction with the ones mentioned in my post from a couple days ago. What I (and others) like about these is they show that the money is not owed to other nations (implying governments) but to banks and financial institutions. This makes the role of private financial markets clearer, and should bring home the potential for a possible banking crisis.

Happy Birthday Karl Marx

First, I apologize for the short posts today. I’m pinched for time and there’s a lot of good material. (Does this mean that scarcity is a real concept?)

Today is the anniversary of the birth of Karl Marx. And while some would dismiss him more of a social theorist than an economist, this site shows that he was first and foremost an economic thinker. And it would be a major oversight to omit him from the pantheon of influential economists.

Short Presentation by Esther Duflo

 For those of you who haven't had the time to find out more about Esther
Duflo, the recent winner of the Clark Medal, here is a video from the TED web site (HT TO Greg Mankiw). She is discussing her work using randomized trials to assess the impact of aid programs.

CDs

For those of you looking for a graphic to help your personal finance students understand CDs (not compact discs, that's so 90s - Certificates of Deposit), check out this item at Visualeconomics.com.

Graphics on Greek Debt Crisis and Larger Implications

I don't know how many of you have students asking about the Greek debt crisis. I know I was pleased when one of my students asked me to explain why it was relevant. But I ran across a few graphics (HT to the folks at Chartporn once again) that can help your students understand the ties that bind.

This first one is from The Guardian in the U.K. It uses a domino metaphor to show how Greek default would ultimately affect Britain.

This second one is from The New York Times. It's labeled "interactive." Frankly, I don't see it. But it does include all of the countries with major debt problems (Greece, Ireland, Italy, Portugal and Spain). It does remind me of a graphic one of my undergraduate history professors distributed showing the web of alliances in Europe prior to World War I. You should note that Europe's Big Three (Britain, France and Germany) are the most exposed as it is.

The third, also from The New York Times, is interactive and illustrates the debt levels of various European countries a number of ways. 

These can be used to illustrate concepts like fiscal policy, role of government, globalization and interdependence quite well.

Money as a Medium of Exchange

Whether you are teaching personal finance, traditional economics or AP or IB economics, I suspect you're all through with the "Money" chapter. You know the one where they introduce the functions and forms of money.

Anyway, here's a cartoon (HT to Comics.com) that illustrates the "medium of exchange" function.

You could also use it to discuss real income.

Today's Post

I've been away on family business the past couple of days. But I'm back and we'll ease back into the routine.

First, today we recognize the birthday of economist Jacob Viner. Viner is known as an outstanding historian of economic thought and an excellent international trade economist. He is sometimes mentioned along with Frank Knight and the Chicago School, although he frequently disagreed on some of the most fundamental aspects of that group. More importantly, he is known for his work that the long-run matters. According to one source, it his work that Keynes' was referring to when making the famous "in the long-run we're all dead" remark. You can read more about Jacob Viner here and here.

For those of you looking for something more personal finance oriented, here  is a look at the finances of the basic American family, courtesy of the folks at VisualEconomics. I don't see the source of the data on the graphic. Regardless, it should be a good discussion starter.

Please feel free to leave comments.