How We Save Money

For those of you teaching personal finance, here is an engaging graphic from VisualEconomics that shows how Americans choose to save money. I think it lends itself, not only to discussions about saving, but about to risk/reward and opportunity cost.

What do you think?

Republic of Facebook

While I'm not a citizen of this entity, I'm sure many of you and many of your students are. Here is an engaging graphic from the folks at VisualEconomics that I suspect many of you will see uses for. All I ask is that you share your ideas with the rest of us.

Birthday Anniversary Frederic Bastiat

The American Economic Association's Economist Calendar, lists yesterday as the anniversary of Frederic Bastiat's birth. But the Bastiat Society indicates it is today. I will bow to the Bastiat Society on this one.

Bastiat was a French economist. And while there are no great theorems or laws associated with him, he is renowned for his ability to take economic ideas and make them understandable. His Petition of the Candlemakers is a wonderful example of satire mixed with economic understanding, and worth using in almost any classroom where economics is being taught. And you can find it in numerous places on the web.

If you are interested in learning more about this engaging thinker, look here and here. For a collection of some of his sayings, which are great for kicking off clasroom discussions, try here.

Positive Externalities and Wal-Mart

Finally, I know many people like to castigate Wal-Mart, but if you're looking for something new and current to use as counterpoint to the usual negatives, here's an interesting story about the positive externalities attendant to a new Wal-Mart. (HT to Carpe Diem.)

Canned Food and Shotguns

Well, the market is in a pessimistic mood. I’m not as pessimistic as the market, but I’ve been waiting for a down day like today to share this clip from Gremlins 2 that I ran across. It wasn't a great movie, but the clip makes me laugh every time I see it.



If you can’t see it above, here’s the link.

JEP on line

First of all, for those of you who like to take challenging material for your beach read, you’ll be glad to know that the American Economics Association has made the contents of the Journal of Economic Perspectives available online going back to 1999 (HT to Econlog). The JEP was one of my regular reads when I worked at the Fed. I’ve missed reading it regularly. I will enjoy getting caught up and revisiting some articles I’ve read previously. Who knows, I may even be moved to post on some of it.

Another Book to Consider

Today’s edition of The Wall Street Journal contains an interesting piece by Russ Roberts of George Mason University. (It's free content at this writing, but if you are blocked out, put "Why Friedrich Hayek Is Making a Comeback" and you should find an open version.) Some of you know Roberts as a regular contributor to the Café Hayek and the host of EconTalk podcasts.

But in today’s WSJ, Roberts explains the recent renewed interest in Hayek’s The Road to Serfdom. Much of the interest evidently is the result of Glenn Beck’s recent discussion of the work. But that should no more be an impetus to read it, than it is a reason to ignore it. Hayek's work is important because, as Roberts points out, it provides some explanations for the current state of the economy. There are points about individual choice, and the problems government faces when it tries to correctly intervene in the macro economy.

Quite frankly, anyone who saw the recent recession as a reason to revisit Keynes, shouldn’t overlook this opportunity to familiarize themselves with another of the 20th century’s great economists.

Economics of Fahrenheit 451

My good friends know I find economics in a wide variety of “unusual” places. I enjoy finding cartoons, movies, music, literature and historical narratives that can help illustrate economic concepts. Consequently, I am always pleased to other sources that do the same.

Marginal Revolution recently provided a link to this paper on the economics of Ray Bradbury’s Fahrenheit 451. Chances are pretty good that you read this novel at some point in your academic career or that you saw the movie. I did both…several times. But I never saw the connection.

The authors of the paper have now shown me why. It seems I was looking at the work through neo-classical eyes. What I should have done is used the lens of von Mises and John Stuart Mill. (I’m not as familiar with either of these, although I am trying to learn more.) Using Misian analysis, you can see the main character's choices as a quest for fulfillment.  Using Mill, we can see a utilitarian view as the same character strives for happiness.

If, like me, you like finding economics in “non-economic” situations, I suggest reading the paper and re-reading the book or seeing the film. Who knows? If your students are reading or have read Bradbury’s classic for another class, you might even be able to do a little interdisciplinary work.

Mankiw on the Crisis

Greg Mankiw has a longer, interesting piece in National Affairs. The article examines the recent recession and the problems inherent in measuring the effect of government policy as a corrective. It provides a couple of great items for you to consider integrating into your discussions of business cycles and aggregate demand.

The analogy of the economy as a sick patient, with unique symptoms is helpful. The inability to determine whether worsening condition means the diagnosis was wrong, or the prescribed treatment was ineffective or insufficient, would be thought-provoking for students, who sometimes approach economics as if it were a cut-and-dried science.

Also of interest were the discussions about fiscal policy, particularly the spending multiplier vs. the tax multiplier. Mankiw provides some specifics about the assumptions of the Obama administration and insights into research that question at least some of those assumptions.

As I said, it’s a longer article but it’s worth a quick read at least, and some deeper thought if you see uses in your classroom.

The Debt Problem(s)

The Economist is known for its excellent coverage of a wide variety of topics. The recent debt crisis is no exception. It just published a special report on the crisis, and it has a number of very good articles. I'm not going to review them all, but I will recommend three of them.

The first, Repent at Leisure, is an excellent overview of debt and explains how borrowing has been a mainstay of personal action and government policy for at least 25 years.

Part two is titled The Morning After, and focuses consumer debt. In some ways, the most telling aspect of the article may lie in its opening paragraph, when a British software developer realizes he has a problem with his credit card bills. His comment is "if they are going to give it to me," referring to the credit line, "I must be able to afford it." It reflects a level of responsibility and self-awareness that is disturbing. And many consumers are guilty of it, willing to shift the fault from to the credit granters. But as Shakespeare might have said of this situation, "The fault lies not in our banks, but in ourselves if we are in debt."

In a Hole is the third article I want to draw your attention to. This one examines the limited options facing nations with large debt overhang, ranging from inflation to slower growth. It does not present any attractive alternatives, and as such could lend itself to a classroom exercise examining choice at the policy level.

All of these articles, as well as the others in the section, link to an interactive graphic that examines debt levels across fourteen countries, showing not only aggregate debt as a percentage of GDP, but breaking down to household, government, financial and non-financial debt. The graphic alone is worth your time. Please share your thoughts.

The Euro and ECB

A couple days ago, The Washington Post had an piece by Ezra Klein on the ramifications of the European debt situation on the future of the European Central Bank (ECB). I found it particularly insightful on two counts.

The first was the institutional barriers that make the ECB so difficult to manage. Specifically, each of the member countries has different views towards inflation and unemployment, which means a single policy (which focuses on inflation), is going to be unpopular in many of the member countries, particularly if they are experiencing differing economic conditions. In that respect, it is not unlike the Federal Reserve, which must formulate policy across a geographically and economically diverse nation. The advantage the Fed has is that the U.S. view on those conditions has had more than two centuries to approach something like consensus. The ECB hasn't had that luxury, even for its oldest members.

The second insight was the ECB's reversion to buying debt. Like the Fed, it is basically restricted from buying debt in the primary market (direct from government). As a result, it resorted to buying debt in the secondary or open market (individuals and institutions that had already purchased government debt).

If you're interested in the functioning of central banks, I strongly recommend you read Klein's piece.

Interesting Proposal for Economic Development

I have been at a Summer Institute for most of this week. (It was very interesting and very informative. I promise to blog on it.) And when I wasn't there, I was wrapping up some teaching duties. But that's done and now I can get caught up.

First, here is an article from The Atlantic (HT to Arts & Letters Daily) that explores intriguing idea to foster economic development in in poorer countries. The idea comes from Paul Romer, one of the economists who, in the 1990s, helped to reshape our ideas about economic growth. It probably wouldn't be useful in class, but it should prove useful in providing you with some discussion priming when discussing economic development in your macro section. What do you think?

What Do You Think?

Would Jean-Baptiste Say recognize this cartoon as an example of supply creating its own demand?

I’d be interested in your thoughts.

Relative Labor Costs

This graphic (HT to Chartporn) is telling in a couple of ways. On the surface, it would seem to reinforce the idea that firms move to other countries to save on wages. (But as is sometimes said "if wage was the whole story, Bangladesh and Ethiopia would be the industrial capitals of the world.")

But the true value of the graphic is in the follow-up questions. If so many countries have a wage advantage, why does organized labor often support a higher minimum wage? And why do many firms stay in the U.S.?

The answers may lie in the concept of productivity and/or self-interest. I'd be interested in your thoughts.

Sporadic Blogging for the Next Few Days

You may or may not read much here in the next couple of days. I have end of term for my online course at Davenport University and end of school year for my AP Macro course at Thomas Jefferson High School here in Richmond. And when I'm not dealing with those, I will be attending this institute at the University of Richmond. I am very excited and very busy to say the least.

Book Excerpt

You may or may not know the name Anatole Kaletsky. He's an economics writer for The Times in the U.K. and his new book, Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis will hit the stores tomorrow. When I saw the title, my first reaction was "another book about how regulation will save us from repeating the past."  But that was before I read the excerpt (free content at this writing) in today's edition of The Wall Street Journal.

Kaletsky's book is about how economic crisis is often the prelude to a new era in economics. And that is something I strongly agree with, and it is one reason why I study the history of economic thought.  The major ideas of economics, those concepts and theories that we work hard to have our students understand, once represented the attempt of trained individuals to answer a question, to understand a problem.  After reading the excerpt, I'm adding it to my list of wants.  And, if after reading the excerpt, if you're thinking about buying it, click through on the link provided near the beginning of this post and help support this blog.

Why We Need Economic and Financial Literacy

Hopefully, our children outgrow this view. But I've met a few grown-ups that have made me wonder.

Birthday of Franco Modigliani

Modigliani may not be someone you're familiar with. But he won the 1985 Nobel Prize for Economics, along with Merton Miller. He was a co developer of what would come to be called the Modigliani-Miller theorem of corporate finance which states that under some circumstances, the debt-to-equity ratio of a firm (the amount of borrowed money vs. owner equity used to finance the firm) does not really matter.

While that may not be high on your list, this next item for which he was recognized is. If you teach personal finance or economics, you undoubtedly have heard of the life-cycle hypothesis. This states that because most people want their consumption level to be relatively smooth, they tend to save in high income years and to spend (dissave) in low income years (like retirement). That's something you probably use.  And if you don't you might want to consider using it.

If you're interested in learning more about Modigliani, I would suggest here and here.

Opportunity Cost Identified

I would think this is an example of opportunity cost that most students can identify with.

Follow-up to Central Banking

Yesterday, I posted some resources on central banking. Here is one more in the form of a podcast from the VoxEu web site.

It's an interview with Sir Howard Davies, a director of the London School of Economics. And while it focuses on the European Central Bank for the most part, there are a lot of general lessons for consideration. Instead of a beach read, consider it "beach running" material for your mp3 player.

I'm Not Sure This Is the Answer to the Resource Curse

A couple of days ago, I wrote about "the resource curse", referencing an article in the Planet Money web site. As a follow up, here's another story on NPR's Planet Money about a proposal by some economists to distribute the proceeds and break the resource curse.

I don't think it would solve the problem of the curse. It removes the incentive for the people to develop anything new. They have a steady stream of income (at a level that may well be above what they have now), and it comes in without any real effort on their part. It may remove the government as the funnel for the funds, but it doesn't create any incentive to diversify.

I Know I'm "Shocked"

to find out this is going on. I bet Captain Reneault is, as well.

Birthday Wishes

First, we take a moment to wish a happy birthday to George Akerlof. Akerlof won the Nobel Prize for Economics in 2001. Whether you know it or not, you use his work when you talk about information asymmetries in markets - or as it is more commonly called the market for lemons. In this case a lemon refers to used cars.

The basic idea is that the seller has superior knowledge of the car, and is therefore in a better bargaining position. The buyer, having inferior knowledge, is in a poorer position. Thus a correct market price, which depends in part on "perfect information", is unlikely.

If you want to read Akerlof's Nobel biography, go here. If you would like to read his Nobel acceptance speech, go here.

Either way, celebrate with a glass of lemonade.

Follow Up to Haitian Rice Farmers

A few days ago, I posted on the unintended consequences of aid to Haiti and the impact it was having on that nation's rice farmers.  Here's a follow-up from National Public Radio's Planet Money.

Too Big To Fail

Here's another perspective on the whole "too big to fail" issue.

Central Bank Reading

And finally, here are a couple of interesting readings about central banking. The first comes from the Federal Reserve Bank of San Francisco and discusses the Fed's exit strategy for the most recent recession. Specifically, it looks at how the Fed might withdraw from the monetary easing and other actions that were put in place as the economy was slowing. It's a quick read and may prove valuable as the situation progresses. You can always refer to it when discussing the process with your students.

The second is from a speech from one of the senior members of the Bank of England (HT to Marginal Revolution). It deals with central bank independence and what characteristics are most important for a properly functioning central bank. It's a bit longer, but it is still interesting reading.

Economics of the World Cup

While I know most of you are out of school, you may still be looking for interesting graphics to use during the forthcoming school year.

If you have soccer players, coach soccer, or like soccer, here is a very good graphic courtesy of The Mint. It shows some of the economics of the World Cup. This could be especially useful when discussing the economics of big events or sports facilities.  One could even dig further by researching the economics of previous World Cups or Olympics.  (One of my students said he had heard a story that the Athens Olympics was one reason Greece was in the condition it is in. We had a good, short discussion on whether or not that might be true.) 

***UPDATE***
Here is a link (free access at this writing) to a story in today's (6/17/10) edition of The Wall Street Journal that seems to confirm my student's comment.

Afghanistan and the Resource Curse

When discussing economic development, the folks at National Public Radio have an interesting story to use with students in a discussion of "the resource curse." Most often we use that concept to refer to economies that are blessed with abundant natural resources but fail to diversify. Those economies frequently see the natural resources as a way to improve the lives of the people, but it only works if other resources are developed, as well.

You can also use this in discussions about the production function. One can put the equation (Y = A f (L, K, H, N)) on the board and begin by asking what the story means for Afghanistan. You can then extend by asking about the other factors and how they can be provided. And wrap up by asking about what happens if the only resource that is developed is N?

Decisions, Decisions

And the assignment for those of you familiar with the PACED model of decision making is "List some suggested criteria."

Economist Humor

I enjoy economist jokes. One of the first I heard was "An economist is someone who liked to work with numbers but doesn't have enough charisma to be an accountant." (I've heard it the other way, as well.)

Anyway, there is a funny post at Economists Do It With Models. You might be an economist if...

Please feel free to add to the list.

Personal Finance & Youth

The folks at VisualEconomics have put together an interesting graphic on the "Financial Habits of American Youth." I could see this being a good class starter for almost any personal finance class when school resumes in the fall.

It doesn't offer a lot of starting points for traditional topics, but it does get a sense of how students view their finances and where they get their information. I envision a "pre-test" or "survey" format to allow you to see your students' responses and then compare to the results on the graphic.

Please offer other suggestions.

Standard of Living

One of my favorite exercises is explaining real income and improving per capita gdp. The Federal Reserve Bank of Dallas had some great tables in their annual reports in the 1990s. They showed how the real cost of many common items fell as a result of improving productivity and how standard of living related to labor costs.

Now, there's another resource you can use. Check out this post by David Henderson on EconLib. It links to Radio Shack catalogs from 1939 to 2005. It's a little more up-to-date. And while it is limited to electronic gadgets, it still makes the point.

I'd be interested in your thoughts.

More Greece (No, I'm not Talking about Cooking)

First, a double HT to Chartporn for these links.
First from The New York Times, comes this simple and easy to understand graphic which focuses on the main players in this financial disturbance.

Next from Flickr, we see this more original and visually appealing take on the European debt crisis. And it's downloadable in a variety of sizes. I especially like the "Debt Trip" and "Debt Trap" visualization in the upper right hand corner. I think that has general application for use with students.

I would welcome you to share your thoughts on these charts as well as your possible uses for the classroom.

Unintended Consequences (of Subsidies and Aid)

There is a very interesting and deceptively intricate story on NPR’s Planet Money about the impact of foreign aid on Haiti’s rice farmers. It seems that well-intentioned aid for those caught in the devastating earthquakes in Haiti, is having a negative effect on the rice farmers of that country who live far outside the damage zone.  Free rice for the victims is depressing the price of Haitian rice.

When we choose to help others, those actions have effects far beyond the immediate. This is because, in any society or economy, actions impact those initially involved. But this changes conditions and changes the resource mix and other choices that have to be made. These are secondary effects. They are costs imposed on others outside the initial action. By my way of thinking, you might want to use this story to illustrate a number of concepts: unintended consequences, secondary effects, externalities, interdependence.

I also found myself wandering down a different mental road. Would the rice farmers be in the same situation if U.S. rice production wasn't subsidized? Wouldn't it be preferable if various aid agencies in the U.S. and elsewhere, bought local rice first to help the quake victims? Wouldn't that minimize the effect on the local market?  Why should subsidized U.S. rice be used if it is negatively impacting the Haitian producers? Evidently, the practice is prompting questions elsewhere.

Thinking Keynesian?

For those of you interested in economists and the history of economic thought, there is an excellent review by Jonathan Kirshner in the Boston Review of three books about John Maynard Keynes.

The books are The Keynes Solution: The Path to Global Economic Prosperity by Paul Davidson; Keynes: The Rise, Fall and Return of the 20th Century's Most Influential Economist by Peter Clarke; and Keynes: The Return of the Master by Robert Skidelsky.

There are some significant misperceptions about Keynes. But these books could help put many of them to rest. Kirshner’s review provides an invitation to examine the life of this great economist that is hard to resist. And, while it is clear that Kirshner has preferences among these three works, he finds something of value in each. I know I will have to add these to my pile "to be read".

Institutions, Choices and Structure: An Interview with Richard Florida

There is a very interesting interview at BigThink featuring Richard Florida.

Florida is Director of the Martin Prosperity Institute at the University of Toronto and is a widely-respected author. And while I have not yet had time to watch the entire interview, his section on The End of Home Ownership was interesting and raised a few questions for me.

To what extent is the structure of the U.S. economy the result of institutional choices to promote home ownership? I think one could make a strong case that the urban/suburban structure that dominates many parts of the U.S. is a result of our belief in the value of property (not just monetary value) and the formalization of that belief in ways that we tax real estate (what's deductible, exempt, etc.).

I even find Florida's view of urban centers and why people choose to live in them reminiscent of the work of Jane Jacobs, who I've blogged on before.  I'd be interested the thoughts of others. To what extent do you think the institutions shape our choices and, by implication, shape our perceived opportunity cost? I'm especially interested in the question posed by one of Florida's students - "what is the American Dream? Economic opportunity or home ownership? Are they exclusive? Or do they overlap?

I'm not sure how I would use this in class, but it is a stimulating idea for discussion.

Wal-Mart

For some reason, Wal-Mart has the ability to spark heated discussions. I know that many see it as a threat to the "small business", and others see it as an example of markets and competition. Here are a few interesting resources to use in discussing the issue, whether it's in economics, government, or when discussing community issues. I am personally neutral.  I shop at Wal-Mart and I shop at other stores (large and small), as well.  It depends on the product and/or service and the utility I get from my exchange.

The first resource was in today's edition of The Wall Street Journal (free content at this writing, but if that changes, try putting the headline in your browser). It was also the impetus for this post, as it made me look for a few more items that I had read about or heard. The article reminds me of a quote from Adam Smith,

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

In this case, it may not be a contrivance to raise prices. But it appears to be an aversion to lowering them.

The second resource is a podcast on EconTalk. Host Russ Roberts did an interview with Charles Platt who wrote an interesting piece for The New York Post. It includes links to some other related resources.

This last one is a brief piece on some research done by an economist at the University of Illinois at Chicago. This research was done in the city of Chicago and would seem to support the contention that Wal-Mart has a detrimental effect on small neighborhood businesses. However, I question the data. The timing is largely coincidental with the current recession. Therefore, I would question whether the closings were solely attributable to Wal-Mart.

Feel free to comment.

***UPDATE***
Here is another blogger who has trouble with the UIC research piece.  And he does a much better job of raising objections than I did.

Some Would Call It "Specialization"

You just have to find someone willing to exchange (pay) for it.

It's a Red Letter Day...

Adam Smith and John Maynard Keynes were both born on June 5.  Go wild!

Revolving Doors and Lobbies

According to this story in The Washington Post, there is a connection between Wall Street and Capitol Hill.  Who would have guessed?

Captain Renault for one is shocked.

Exchange Rates

One of the lessons in teaching exchange rates to students rests on the fundamental economic issue of "compared to what?" A currency is "stronger" or "weaker" compared to what? Is that strength or weakness a reflection of one country, the other country or the countries compared to each other? Consequently, this little limerick by Dr. Goose speaks volumes.

End of School Year "Housekeeping"

If you don't want to come back to a stuffed email box in August or September, yet still want to receive updates for this blog, just hit reply and tell me which email address to remove and provide your home email as a substitute.  I'd appreciate it.

Thanks.

Can Markets Fail?

Thanks to one of my regular readers in Indy for this tip.

Healthy, Wealthy & Economics?

When introducing the measurement of national income in the AP Macroeconomics course, there is also an opportunity to discuss the relationship between national income and the standard of living. The implied relationship is a positive correlation. TGreater the national income (particularly when measured as GDP per capita) is linked to better the standard of living (measured by a number of different statistics). Here are a couple of sites you might want to book mark for next year.

The first is from Mark Perry at the Carpe Diem blog. It compares U.S. life expectancy to GDP over time.

The second is world comparison of life expectancy vs. GDP courtesy of Gapminder. (HT to the folks at Chartporn for the pointer.) (By the way, if you haven't played around on the Gapminder site, you really should.) I hope you find these links useful.

What Do You Think?

Is this an accurate depiction?

Just an idea for those last few days of class.

Entertainment Spending

It’s a bit late in the year for this, but you could think of it as an early start on next year.

Those who teach a personal finance unit usually do a lesson that has the student put together a budget. As we know, teenagers (and even adults) generally include some things as necessaries that are really luxuries – entertainment for example. That’s not to say all entertainment should be banned. All work and no play makes….you know the rest. But what is a proper amount to budget for entertainment?

Well, it may or may not be an indicator of the “proper” amount, but it will give you regional averages from around the U.S. Thanks to the folks at Visualeconomics for this one.

Menu Costs

“Sticky prices” is something we usually discuss in macroeconomics. It tends to come up when discussing business cycles and the inability of businesses (and individuals) to instantly change prices to reflect market conditions. One of the reasons given for sticky prices is "menu costs." And while the image of a restaurant is frequently called on, it applies to any business. It takes time and resources to constantly change prices, which ends up being reflected in the costs.

Anyway, here's a cartoon that illustrates the problem quite well - even if it does use a restaurant motif.

Why India's Poor Are Poor?

I ran across this story on National Public Radio's Planet Money blog.

It is an interesting and compelling short human-interest piece. And it makes a good prima facie case that there is a role for manufacturing in developing economies. I don't disagree that there is. But what I found more interesting were the links to other stories at the end. What popped into my head was, "maybe there are also strong institutional reasons that the poor remain poor." If bribery is necessary for progress in an economy, how can the poor progress without the means to pay the bribes? I suspect that if bribery is so widespread, it would take a bribe to land a better-paying job in the manufacturing sector. I'm just saying....

One More Argument in Favor of Economic and Financial Literacy

You have a better chance to understand the issues.  Perhaps even better than those who make the issues.