Utility Maximization in the Face of Scarcity

For those of you who don't start school until after Labor Day....

For those of us who have already started, just rewind a week or two.

Immigration Effects on the U.S. Economy

I just received a very interesting issue of the FRBSF Economic Letter. The topic is The Effect of Immigrants on U.S. Employment and Productivity. I will state up front, it does nothing to provide a sound economic argument for those looking to restrict immigraion on the grounds of protecting American jobs.  And quite frankly, I didn't think it would. If anything, it provides further support for an view put forth several years ago in this issue of the Federal Reserve Bank of St. Louis's The Regional Economist.

I would recommend either or both of these articles for use with your students provided they are reading at grade level. I would think they would make a good discussion starter for labor markets, factors of production, and production function and GDP, just to suggest a few.  If you wouldn't mind, read them over and share your suggestions or thoughts.

GDP Components in a "Bad" Report

For any one teaching macro, Mark Perry's analysis of the most recent GDP report, while optimistic, still offers some insights into why it's important to dig into the numbers and not just focus on the total.One could even make the case that stronger imports, while a negative on the total, are a positive indicator - showing some signs of returning consumer optimism.

I welcome your views.

Hayek vs. Keynes

When the most recent downturn was a few month old, and it was not going to be followed by a quick rebound, interest in the theories of John Maynard Keynes and the role of stimulus started to rise.

But as the recovery has drawn out, and some would even say begin to falter; people are looking for other explanations. Among the names mentioned of late, Friederich Hayek is gaining popularity. And leading the wave is George Mason economist Dr. Peter Boettke.

There is a good introduction to Dr. Boettke and simplistic explanation of the Austrian School in yesterday's edition of The Wall Street Journal. (Subscriber content, but put the headline in your browser, I'm willing to bet you find something.)

You'll find it an interesting expose of an economist and ideas worth knowing more about. Please share your thoughts.

Unemployment

I know many of you won't "officially" get to this issue until second semester when you address macro, but others will get to it sooner. Some might be teaching macro first, others may be teaching a survey course and get a chance to address unemployment as part of the survey. Regardless, here's an article from The Economist that you will want have available.

The article addresses the unemployment problem in the U.S., and why it doesn't seem to be responding to traditional Keynesian stimulus. The short answer is “this isn't just about weak demand.”

As the article points out, there are issues of structural change (the role of manufacturing and construction in the economy), institutional issues (dual income families are harder to move), and incentives (the impact of extended unemployment benefits). I would suggest uncertainty over future government policy may also be a factor.

There's a related article here.

What are your thoughts?

Another Milestone

Just two weeks ago, I noted this blog's 1,000th post.  Sometime last night it rolled over its 100,000th visitor (at least since I instituted the counter in November 2007).

I want to thank all of you who visit - especially the regular and frequent visitors for helping to hit that number.  It means a lot to know there are excellent educators who find value in this blog.  (I just wish you all would share your ideas more often.)

Thanks again.

Pricing Mysteries (with video)

Today's edition of The Wall Street Journal has an article (free content at this writing) that just begs to be used in economics class. It's about airline ticket prices. And it includes a very good video.

Airline ticket pricing has long been a mystery. Two people sitting in the same row in the same relative position (both in aisle seats or window seats) can pay significantly different prices. As we know, some of that is how soon before the flight did you buy the ticket, how long are you staying at the destination, etc.

But what about the basic cost and pricing structure of the flight. Why does it sometimes cost more to fly short distances than longer ones. Or why do two trips, of the same distance seem to have different price structures? Shouldn't marginal cost and marginal revenue fit in somewhere? This article tackles some of that. And if you're about to launch into pricing this could be helpful.

As we know, cost can be a determining factor. But it's not the whole story. Friedrich von Weiser provided some insights. His idea of alternative cost (later opportunity cost) gave more power to the consumer based on how they value the good or service, as opposed to the cost basis.

So the popularity of the destination will be a factor, as will the income of the consumer. But even those factors don't provide the whole answer. The number and type of competitors also play in. I recommend this article. Give it a read and see what you can do with it. I'd also welcome additional thoughts on its use to share with the readers.

Incentive Systems

People respond to incentives...even very young people. At least that's the lesson we take away from this entry on NPR's Planet Money. And they can be very ingenious when it comes to working them to their advantage.

Reserves Don't Necessarily Lead to Loans

One of the analogies we often use when teaching monetary policy is "pushing on a string". The idea behind the analogy is that banks are imperfect transmission mechanism. The Fed can loosen policy in an effort to stimulate the economy, but just because the Fed loosens doesn't mean the economy will respond quickly - other parties (banks and borrowers) have to respond to the conditions and take up the slack.

Here is a good, short piece from the Federal Reserve Bank of St. Louis's Monetary Trends that should help explain that a bit more thoroughly, using the current economy as an example.

Read it through and share your thoughts. Would this help your students better understand the transmission mechanism and how it can limit the effectiveness of policy? Would you use it directly with your students, or just as your own background?  And if you wouldn't use it, what is missing?

P&G & Competition

For those of you getting ready to teach micro, there is a good article in yesterday's edition of The Wall Street Journal. The piece outlines how Proctor and Gamble (P&G) is competing with its rivals in a period of consumer reluctance. In the past, P&G depended heavily on marketing in selling its products to the upper end of the market. But times have changed. P&G is looking to increase market share and that means cutting prices to compete with other products. And lower prices mean smaller profits.

There are all kinds of things you can do with this article, from manipulating price to show changes in supply and demand to examining consumer and producer surplus. I'm trying to consider exactly where to use this article because it fits into so many places so well. What would you do with the article? Please share your thoughts.

Regulatory Capture

If you are looking for a good illustration to explain regulatory capture, you might want to consider this Dilbert comic strip.

Follow-up on Monopoly with Economists

A little more than a week ago, I posted on an NPR broadcast about a game of Monopoly being played by two economists.

Cafe Hayek has this follow-up with one of the players. Russ Roberts discusses the game, how the addition of taxes might affect people's perception, and some of the discussion the original story has since generated. Do any of you use "taxes" when you play?

Interviews about Black Swans

National Public Radio's Planet Money blog yesterday released a short podcast interview with Nassim Taleb. A couple years ago, Taleb wrote Black Swans. He explained that "Black Swans" are rare, extreme events that can drive the economy. Taleb believes that economic models can provide helpful forecasts much of the time; but that certain events that can't be foreseen or forecast, end up driving and changing markets.

The NPR interview is interesting. I recommend it. But I also recommend the interview Russ Roberts did with Taleb on Econtalk in 2007, in 2009, and earlier this year. They run from just under an hour to more than an hour and a quarter. But they are worthwhile.

Junk Bonds

I ran across this comic...

the day after reading this article in The Wall Street Journal. I like to think there is a connection and a possible lesson. You may disagree. But I welcome your comments.

Harvard Journal of Law and Public Policy

I meant to post this some time ago. I suspect many of you already know this, but just in case you haven’t, there’s no time like the present...

For those of you (us) who don't have enough to read, the Harvard Journal of Law and Public Policy now offers electronic access to its archive of articles going back to 1990. (HT to Econlog.)

Institutions and Choices

If you read this blog regularly, you know one of my areas of interest is institutions. The rules and organizations that are put in place, either formally or informally, have a significant impact on our decisions. Whether they arise from legislation, commercial agreement or voluntary action, once they are accepted and become part of a regular mindset, they influence our choices. The incentives may be financial, temporal, or even imaginary. Nevertheless, they shape our decisions.

A couple weeks ago, Richard Posner and Gary Becker had an informative discussion in their blog about the role of institutions in the current U.S. economy. Specifically, they discussed the impact of unions. (You can read Posner's post here and Becker's post here.) Both agreed that the institutions were shaping both policy choices and business choices, and both felt there was an impact on the current economy, in some cases negative.

In an article in today's edition of The Washington Post, we get another view of institutions and the role they play in shaping choices. But unlike the institutions of discussed in the Posner-Becker discussion, these are much older. These institutions date back to Han Dynasty of China, some 2,000 years ago. And the institutions are largely geographical in nature. Yet they have an impact on the choices available to many citizens - providing positive and negative incentives for activities and opportunities.

I found all of these informative. And they can be used a number of ways. They could be used to augment discussion the role of institutions in shaping an economy in macro, or the role of government regulation in the marketplace in micro. In either case, students can discuss both the intent of the institution and its result or consequence. I would think the article from The Post could even be used in a world history class when discussing Ancient China.

I welcome your thoughts.

Debt and Growth

Is there a relationship between debt and growth? If so, what is it? If not, why worry about the level of debt that we or any other countries are accumulating?

To get an answer, we need to look at the impact of both external and internal debt on U.S. growth. And here are a couple of items that address those issues to varying extents.

In the first one, economists at the Federal Reserve Bank of St. Louis, while not looking directly at foreign debt, do look at the correlation of growth rates of major trading partners to the U.S. It shows that our rate of growth has varying correlations with that of some of our trading partners. That means that to varying degrees, their growth affects ours. But is there anything that indicates debt affects growth?

That question takes us to the second item. In a more complex piece on the VoxEU website, economists Carmen Reinhart and Kenneth Rogoff looked at growth rates and debt levels in a number of countries. Their results show that there may be reasons for concern if debt levels get too high. Essentially, very high levels of debt may slow growth. Given the interdependence of a globalized economy, this may explain why many economists are thinking that paring government debt may be helpful in the long run.

I don't think these articles are directly useful for the classroom, but I do think they can provide you with insights to integrate into your discussions and lectures. I welcome your thoughts.

Milestone and Trade as an Employment Booster

First of all, this is my 1,000th post. Who would have guessed? Now down to business.

There was a very good article on the Voxeu website. Two economists from the U.S. International Trade Commission suggest trade as a way to build jobs, particularly in the manufacturing sector. What I found particularly interesting was the description of upstream and downstream jobs - these are actually services that are related to manufacturing. The upstream jobs are considered part of the productin process in manufacturing. Now on the heels of that item comes two more to help provide context.

The Commerce Department just released trade figures and the trade deficit has widened. But the overall level of trade (which includes jobs in the import sector as well as the export sector) is the highest it has been in 20 months.

One thing to get your students to understand is to look beyond the gap, and to consider the total of imports plus exports. For two different spins on the same data, consider this post on Carpe Diem by Mark Perry, and this post on Planet Money, the NPR economics and personal finance blog.

I'd welcome your thoughts.

Venn Diagrams and Personal Finance

Those of you who like to use Venn diagrams to illustrate concepts and who teach personal finance need to take a look at this graphic courtes of The New York Times (HT to Chartporn).

I think these show a lot of potential, especially when you click on them.

A Promising Resource

I just found a source of videos that could prove valuable. It’s from the University of North Carolina at Greensboro. While I’ve not had time to look at all the offerings all the way through, the first few have been good. Just scroll down the right-hand side until you see Econ201. I’ve been enjoying the videos on “Costs of Production.”

I know some of you won't be able to show "Youtube" through your school firewalls, but you might consider downloading them to your portable drive and showing them from there.

Please share your reactions.

An Interesting, Albeit Sobering, Graphic

There is an interactive on the Associated Press web site (HT to Chartporn) that you can use in your macro sections. But it might also be useful in micro as a kickoff to the year. You can zero in on your state, and even your county to get a statistical reading. Then you can discuss whether it "feels" better or worse. You can also discuss the change rates.

Do you think you can use this in class? Please share any additional ideas.

Productivity and Growth

Harvard professor Kenneth Rogoff has an informative piece on the Project Syndicate web site (HT to Planet Money).

He addresses the concern that Europe and the U.S. may be heading for a period of stagnation similar to that faced by Japan in the 1990s, a "lost decade". And while there are some similarities, he points out there are also important differences, the main one being productivity.

As we know, long-run economic growth is determined by productivity. Japan had some significant productivity problems, according to Rogoff. The U.S. doesn't have the same issue. But as he points out that in the latter part of the article; that could change depending on the policies put in place. Policies that improve productivity have the ability to improve long-run growth.

I would add that those policies also presage continued structural change with the need for more skilled workers. The supply of skilled workers may come from better preparation (call for education) or retraining (call for different types of policies for the unemployed).

I would like to hear your thoughts.

Basic Markets: Supply and Demand

Here's a story and a chart from The Economist (HT Chartporn) that should give you a starting point for the new semester.

If you’re not following the story, you’re missing a great resource. Just in the past few days alone there have been two stories in The Wall Street Journal on wheat prices and their impact. "Decision Time Looms for Wheat Farmers" (Subscriber content at this writing but put the headline in your browser. You might find it as free content.) and "Russian Export Ban Raises Global Food Fears" (Free content at this writing).

And remember - it's the most important meal of the day.

Economic Lessons from Monopoly

Regular reader and good friend Dr. Mark sent a link to this story from National Public Radio.

The short story explains how Monopoly can be a mechanism for discussing all kinds of economic concepts and theories. Featuring a game between fellow-blogger Russ Roberts of George Mason University and Dan Hammermesh of University of Texas at Austin, the story ranges from choice theory to the formation of derivatives.

I have a colleague and friend who uses Monopoly in his AP classroom, including a no rules version. What better way to discover the value of institutions in an economic system?

Please share your thoughts and ideas. (And thanks again, Dr. Mark.)

New Resource for Teachers

I want to draw your attention to a new link on my link list.  It's Ed Dolan Economics Blog. I just found out about it yesterday. But I've visited a few times.  The author provides free powerpoint slides to accompany his posts. I hope this proves useful for you.

Luxury Goods

A short piece from a recent edition of The New York Times, is titled "Is Environmentalism a Luxury Good?"  The piece points to a paper out of the National Bureau of Economic Research that seems to indicate that when times are tough, many of us put issues like the environment behind things like paying the bills.

This really shouldn't be surprising. People make choices on how to use scarce resources. Their immediate short-term wants tend to take time preference over longer-term wants. I've often told students that issues like the environment, arts and culture, and social justice have a better chance of being addressed when the economy is humming along than when we are afraid for our livelihood. Thus to connect to my other post…the sooner the economy gets back on track, the more likely we’ll start worrying about things other than the economy.

I'd welcome your thoughts.

Business Cycle Measurement

When we teach macro, we spend time on business cycles. One of the issues that comes up is the definition of the various components, and who gets to "make the call" on the turning points. Hopefully you're successful in dismissing the "two consecutive quarters of negative GDP growth" rule of thumb.

But the Federal Reserve Bank of St. Louis has just published an informative article on business cycle measurement in its Economic Synopsis publication. It examines a couple of alternative measures that are interesting. Truthfully, both of the measures discussed seem to indicate that things turned around in late 2008. And this topic may only be of esoteric interest. Nevertheless, it can help students understand that calling the turn is not as simples as "two consecutive quarters...".

Explaining Tax Cuts

A few days ago, Bryan Caplan at the Library of Economics and Liberty offered a logical explanation for providing cash to consumers as a method of fiscal stimulus.

The standard argument is you can't depend on consumers to spend it. (That's also often a reason that "government" can do it better.) But Bryan's analysis is worth looking at. Even if you think stimulating demand has problems (so does he); his idea of a cushion or comfort zone that needs to be rebuilt before effective demand kicks in is an interesting one.

More on Fiscal Policy

John Taylor has a good post on a recent study by Alan Blinder and Mark Zandi on the effectiveness of fiscal and financial intervention. Dr. Taylor found some faults with the paper. And other reputable blogs have joined the discussion.(HT to Russ Roberts at Cafe Hayek).

There was also a TV debate between Dr. Taylor and Dr. Zandi on PBS.


The debate was informative and showed some areas of agreement as well as disagreement - as most debates are likely to do. Here’s the link if you can’t get the video above.

All of the reading and watching are worthwhile for that unit on fiscal policy. After all, one of the questions you're likely to hear is "does/did it work?"

The Globalization of an American Export

In my opinion, one of the best definitions of globalization is found in the first paragraph of this page of the Globalization 101 web site.

When I was teaching a course on Globalization for the Powell Center for Economic Literacy, I would start off the course with that paragraph. I would ask the students about the various parts of the paragraph and what they thought was meant by each part, or if they could give me an example.

The Wall Street Journal had an excellent example of how globalization drives cultural and economic decision-making recently. The story is about how movies are pitched, written and produced in the U.S. as a result of the global marketplace. The short explanation is that proposals for Hollywood films need to be translatable (and I'm not talking about language) to foreign audiences. To truly understand what I mean, check out the graphics that are part of the article.

And please share your thoughts.

Belated Birthday Recognition

Yesterday, July 31, was the anniversary of the birth of economist Milton Friedman. He won the 1976 Nobel Prize for Economics for his work on monetary theory among other things. He was also the author of the book Free to Choose and the TV series by the same name.

When I first started teaching economics, it was among the first supplemental resources I used that seemed to engage the students and generate a lot of discussion. The students actually looked forward to their sessions with "Uncle Milton", as they referred to him. I got to know more about him (secondhand) when I worked at the Fed with an economist who had him as his graduate advisor at the University of Chicago.

If you want to know more about him, check here and here. Regardless, I thank you "Uncle Milton."