Wednesday, August 29, 2007

Economics and Financial Literacy

One of my favorite financial writers is Jonathan Clements. He's a regular contributor to the "Personal Journal" section of The Wall Street Journal. He has a very good; not only giving sound advice, but providing a clear, cohere nt explanation of why. That is my main reason for advocating the teaching of economics along with financial literacy (or the other way around if you're and economics supporter).

In today's column (free), Clements speaks about four ways that small savings can be used to provide the basis for retirement wealth. They are financial account fees (whether bank or brokerage, it doesn't matter), credit card charges, borrowing costs, and insurance premiums. All of these are sources of savings that can be, in turn, put toward retirement. Now, much of the current issue in financial literacy is related to helping people provide for their retirement. And while it is frequently difficult to get school-age children to think about saving for retirement ("do people really live to be that old?"), they may be able to relate to purchasing cars or homes, both items that Clements talks about in the article.

More importantly, Clements' clear explanations of why we should do the things he talks about, get into economic concepts without labeling them as such. You can use his explanations, add a simple statement relating to opportunity cost, capital resources/investment, money and credit, and you've made an economic lesson and a personal finance lesson.

Look at the article and let me know what you think.

Tuesday, August 28, 2007

Monetary Policy and Financial Turbulence

The past couple of weeks have certainly been interesting/exciting (choose one) for just about everyone. But I would think this was especially so for economics and finance teachers. I know that when I was teaching in the late 1970s and early 1980s, nothing made the class more interesting for me as well as for the students as a sense of immediacy. The knowledge that what was happening was relevant to just about everything in the classroom made the subject seem more valuable. In fact, some folks involved in the Fed Challenge competition have wondered what it would have been like if this had happened four months ago or eight months in the future.

But, concurrent with the turbulence has been the prodigious output of fellow-bloggers. For the teacher who wants to use the recent financial roller-coaster as an opportunity to reach students, there has been a wealth of information that is understandable and good. And that's not something that can always be said.

The first post I would call to your attention is on the Vox site by Stephen Cecchetti, currently at Brandeis University and formerly Director of Research at the Federal Reserve Bank of New York. His post is in a "Q&A" format and gives a solid explanation of why the Fed lowered the primary lending rate (read discount rate for those of us "old schoolers") instead of Fed Funds. While it might be a bit dense for some high school classes, many should be able to get through this with a bit of help. And for those of you might want to brush up on the basics before attacking this with your students, I can recommend the Fed Reserve System's education site.

For those of you looking for a discussion on whether or not the Fed should have intervened, I will direct you to the Becker-Posner blog. Dr. Becker is a Nobel Prize-winning economist at the University of Chicago. Judge Posner is U.S. Circuit Court of Appeals judge and lecturer at the University of Chicago. They have one of the more informative and interesting web sites when it comes to jointly discussing issues of the day. Their views on the current unease can be found here for Dr. Becker and here for Judge Posner. Both of them generally oppose anything that resembles a bailout; maintaining that the Fed's primary role is macroeconomic unless a situation threatens the larger macro economy.

Finally, there are two posts on the Aplia Blog site, which offers information and discussion questions designed especially for the classroom. The post on August 15, Central Banks to the Rescue explains how central banks around the world moved to prevent a liquidity crisis. The post on August 22, Lender of Last Resort focused on the role of the Federal Reserve. In my opinion, both tie in well with Cecchetti's post.

I hope you have time to check these out. I think you will be amply rewarded in terms of information and ideas for your classroom discussion. Please comment on your experiences with this information or this topic.

Monday, August 27, 2007

Welcome to My New Home

It's been a busy couple of weeks since I last posted on my old blog. I'm now in my new office at the Powell Center for Economic Literacy and ready to renew blogging. If you're wondering about the blog's title MV=PQ, it is so named because Irving Fisher's equation of exchange That equation provided a valuable framework for understanding much of economic history in my early years. And it's still something I frequently go back to when explaining business cycles and other macroeconomic phenomena. It speaks to the relationship between money, the real economy and prices. And it is particularly helpful when one works for the Federal Reserve, as I did.

As in my previous blog, I will try to post on issues related to economics and the classroom, but won't be restricted to that. I believe economic literacy and financial literacy must be firmly linked, and I still read a lot - finding economic ideas in a variety of unlikely places. I hope you will leave comments. If nothing else, this blog aims to promote discussion of topics, problems, and concepts relevent to the classroom.

Wednesday, August 8, 2007

What I'm Reading

I just finished Diane Coyle's The Soulful Science: What Economists Really Do and Why It Matters. For those of us getting ready for the new school year, this is a great end-of-summer book. It's light enough to take to the beach or back yard and enjoy. And it's serious enough to get the brain cells re-engaged and generate some ideas for the new year.

Coyle is a former economics editor for The Independent newspaper in Great Britain, and author of Sex, Drugs and Economics (which I have not read -- but that may change now).

Coyle's objective is to persuade us that economics gets bad press at the very time that it is entering an exciting period. She addresses some of the common complaints that economics is too focused on money, too data driven, mired in some questionable assumptions, and generally unconcerned with problems that affect our everyday life. The new research on growth economics, poverty, and research into what affects our decisions and how we make decisions; all make this an interesting read for any teacher of a basic economics survey course. If you're not sure you want to add this to your personal library, check it out of your public or school library. I suspect you'll want it around as the school year begins and the young inquiring minds start asking you why economics is relevant, important, or even interesting.

Posted by TSchilling at August 8, 2007 9:15 AM

Sex, Drugs, and Economics is what I had hoped Freakonomics would be--and predates it by a couple of years. That the author is a British woman who enjoys sex may have limited its sales here, but it's well worth the

Posted by: Ken Houghton at August 8, 2007 11:51 AM

Monday, August 6, 2007

Mathematics and High School Economics, Part II

Back on March 20, 2007, I blogged about the back cover of the Journal of Political Economy. Once again, they provide a good source from literature to help your students develop more critical thinking skills.

The most recent issue featured an excerpt from War and Peace by Leo Tolstoy. In the quoted piece, the character speaks about correlation and causality. This is a subject last visited in this blog on October 17, 2006.

The character notices that when looking at his watch at given time, the church bells ring. Does this mean that the watch hands (non-digital, obviously) cause the bells to ring? He also notes that a cold spring wind blows at the time the oak buds are opening. He again asks whether he should infer that the opening oak buds cause the cold spring winds.

I would think this would help students understand the difference between correlation and causality. Your thoughts are welcome, as always.

Posted by TSchilling at August 6, 2007 10:37 AM

Friday, August 3, 2007

The Most Important Concepts

It started with a post by Greg Mankiw. Then Arnold Kling weighed in. This was followed by another post from Dr. Mankiw. (By the way, the comments following each post are also quite interesting.)

Now, given the main object of this blog, I feel a need to weigh in. I believe the most important concepts (or groups of concepts, if that’s more appropriate) are as follows:

1. Choice and opportunity cost: economics is about decision-making. What do we choose and what do we sacrifice. This can be helpful not only for other aspects of economics (margin, etc.) and financial literacy (budgets, etc.).
2. Supply/demand and market price: Explaining how markets provide goods and services and mechanism for consumer choice. Also understanding that, in a market system, price is a rationing system.
3. Money and the equation of exchange: Understanding that money is tool to facilitate exchange, and that “money matters.”
4. Comparative advantage, specialization and gains from trade: Important to demonstrate interdependence and the impact on real income that comes from “do what you do best and trade for the rest.”
5. Economic systems: The impact and results of how decisions are made. Whether tradition, command or market, this is important to understand. Also a good place to discuss the role of institutions in our decision-making process.

What are your thoughts, and why?

Posted by TSchilling at August 3, 2007 11:18 AM

The equation of exchange and its value was brought to light for me when you recommended The Wall Street Journal opinion. I wonder why we spend so much time on the aggregate expenditures model when more time should be devoted to this concept.

Posted by: mike fladlien at August 3, 2007 12:06 PM

Tim this is a great question as many of us are taking a good look at our economics courses and revising for the coming school year. The blog comments are interesting and several provacative.We could have a great discussion.
Here is my list
1) Scarcity and opportunity cost; thinking at the margin
2) Incentives matter
3) Market Prices as signals; supply and demand
4) Comparative advantage/trade
5) Fed and Monetary Policy

Posted by: Julie Chismar at August 5, 2007 9:20 AM

Price is a rationing system in a market mechanism. I find that this statement is a profound one! What are the benefits and costs of such a system? In one hand it provides an efficient way of allocating resources but it also can have some inadequacies: i am thinking about a situation of lackage of water. Increasing the price of water (in such a way that its demand equals the available supply) would prevent low income households to have access to it. Do you know any paper discussing this matter? Thanks for your attention.

Posted by: Fábio List at August 6, 2007 10:03 AM