Thursday, October 25, 2007

Wages, Data and Perception

Let me start out by saying that when Tyler Cowen, Arnold Kling (the first article listed), and Greg Mankiw all mention an article, that should be a clue that it deserves attention. So, here's a HT to all three.

The article, "Has Middle America Stagnated?" by Minneapolis Fed economist Terry J. Fitzgerald, is the first in a series examining the economic progress of middle America since 1975. In this first article, Fitzgerald looks at the dichotomy in various microeconomic measures of well-being, two of which show stagnant wages over the period. In explaining the disparate measures, he talks about measurement. He not only explains difference in what is measured, but points out that the data are adjusted for inflation using different measures. By applying a different, (and in my opinion, a broader and more accurate) measure he gets very different results. He also addresses the difference when using mean and median measures.

Fitzgerald also includes a brief section regarding benefits and their impact as a component of wage. This is part of the value received for labor that, unless it is illustrated, many people forget - especially students. This article is useful for economics (and other) teachers for a number of reasons. It not only provides a way of reconciling different views on the economy. It also helps teachers and students understand how economic performance is measured, along with reminding them about the use of statistics.

This will be an interesting series. I hope you find it interesting, as well. Your comments are welcome and appreciated.

Proper and Improper Uses of Opportunity Cost

Don Boudreaux has an excellent post at Cafe Hayek. And the comments are even worth reading. In it, he discusses a comment by California Senator Barbara Boxer in which she blames the war in Iraq for hindering the ability to fight the wildfires in southern California. Regardless of how one feels about the war, her comment represents a very likely misapplication of the concept of opportunity cost.

Like Boudreaux and some of his commenters, I'm glad the esteemed Senatar understands that resources used for one decision are not available for another. But the definition of opportunity cost is your next best alternative when making a choice. That means when you choose one thing, your next choice. That is the opportunity cost. Opportunity cost is not all the other things you could have done - just your next best choice. And that's where the likely error lies. Unless the actual decision in committee at the Federal level actually came down to "if we put x dollars in Iraq, that means we will have that much less for fighting fires" then the opportunity cost of Iraq was not fighting fires - not any more than putting money into education, health programs, border fences, or bridges to somewhere.

The budgetary process is complex. It can be complex on the household level as well as at the government level. But I sincerely doubt that the final choice on funding was whittled down to Iraq or firefighting. To use the choice to score points is disingenuous, at best. And to borrow from one of Boudreaux's commenters, one can only hope that Senator Boxer (and ALL legislators) would put that much concern into all the programs funded at the Federal level.

Your comments are welcome.

Tuesday, October 23, 2007

More Resources: More Food for Thought

Here are a few resources you should be aware of, if you don't already have them bookmarked.

First Brad DeLong, a professor at UC-Berkeley, has an excellent page with many audio and audio/video podcasts on a variety of topics in economics and economic history.

Second, a site that features a classic bit of video from Milton Friedman's Free to Choose series. Friedman does an excellent job explaining interdependence, specialization, and the benefits of trade all with the help of a simple pencil. (HT to Don Boudreaux at Cafe Hayek.)

And finally, for those of you interested in global/international economics, Simon Johnson, the Research Director at the International Monetary Fund, has a blog (link no longer available). I 've looked at it a number of times and it is very interesting - worth a look.

I hope you find these of value.

Economics and Pop Culture: The Music Man, #6

This post deals with the concept of economic institutions. When people think about this concept, there is a tendency for many to think of formal organizations or firms housed in buildings of various sizes. But economic institutions also include the rules (formal and informal) established by society that help shape and form our choices and decisions.

The concept of economic institutions is brought out rather late in the play. We see it when one Charlie Cowell (he of "ya got to know the territory" fame in the first scene) shows up in River City. He is quickly trying to find someone of authority so he can blow up Professor Harold Hill's plans. He talks about doing this for the sake of salesmen everywhere, and how Hill ruins markets (and other things) for other members of his profession. Now, given the timeframe of this movie, one doubts whether there was Better Business Bureau or even a formal "salesman code of ethics;" but there were informal "rules" about right and wrong and how to treat people in a business transaction.

Now you may also bring up that Charlie is only enforcing these rules to his own advantage. Yet, that is how many of the institutions (especially formal ones) are enforced. Indeed, it is often the reason for their existence. Individuals choose to protect a form of behavior that is beneficial to them, and hopefully to society (or the economy) at large.

Well, the Collegiate School musical opens tonight. Consequently, this will be my last post on economic concepts in THE MUSIC MAN. I hope you've enjoyed these. They've been fun for me, as well. If you have additional concepts that you can point to, please share them. I look forward to your comments.

Monday, October 22, 2007

Economics and Pop Culture: The Music Man, #5

Today's entry focuses on one of the lesser known songs in the play: The Wells Fargo Wagon. This song addresses how companies add value to a good or service, thereby creating utility. It also addresses the idea of consumer surplus.

Wells Fargo was, as I'm sure many of you know and others can ascertain, a transportation company. In many parts of the West, Wells Fargo represented the main transportation link between small towns and railroad stations in larger towns. If you purchased something from a catalog, or if someone in another town sent you something, Wells Fargo often represented the last segment in transit from giver or seller. In addition to freight, Wells Fargo also shipped people, at least originally. Just think of the overland stagecoaches that play a prominent role in most Western movies and vintage television shows.

Now here's the economics lesson. Producers of goods and services (and Wells Fargo produced a service in this case,) have to add value to the product in order to justify charging a fee. If the value does not equal what the consumer is willing to pay, the consumer won't purchase. And when we speak of value, we go back to the concept of utility and its three types: form, place, and time. A firm like Wells Fargo, by delivering the products to the small towns, added place utility. That means it made a good available in a place that it was of value to the consumer.

Now, anything in a catalog really was of no use if it first couldn't be delivered to the customer. The item had its own utility or value. Maybe it was of a style that appealed to the customer (form utility), maybe it was a labor-saving tool that would make a job easier, safer, or quicker (form and time utility). Regardless, it had to be present to have place utility.

One could hitch up a wagon and go and pick the product up, but that meant using productive time of one's own. That was usually too high an opportunity cost to someone in a small town. If one could have the product delivered, it represented a value to the customer, a value they were willing to pay for. The fact that it had additional value, and that consumers still were willing to pay an additional fee to receive the product (essentially raising the price,) is a measure of the consumer's value or the idea of consumer surplus.

The fall play starts tomorrow. I'll probably be doing one more post. Please share your thoughts with me and the other readers of this blog.

Friday, October 19, 2007

Economics and Pop Culture: The Music Man, #4

Here's an example that doesn't hang on one of the play's musical numbers. It does follow hard on the heels of the song in yesterday's post, however. In the aftermath of shifting the demand curve to the right, a couple events (and concepts) come to our attention.

First, the mayor decides that Professor Hill is a smooth-talking salesperson, determines that he needs to see Hill's credentials. Chalk this up to the economic idea of the role of government in the economy. While we usually think about fiscal and monetary policy first, one of the roles of government in many economic systems is to protect consumers. This is frequently done by providing information to the marketplace in order to help make the markets more efficient. By deciding to ask for Hill's credentials, the mayor is seeking information to help determine whether the professor is what he seems to be, or whether he is a fraud. (And let's not forget that Hill has been disparaging the pool table - owned by Mayor Shinn.)

The second concept is the role of the entrepreneur. This comes not once, but twice later in the same scene. First, Hill gets young Tommy off the hook by focusing the young man's attention on the problem of a music holder for marching piccolo players. Hill recognizes Tommy's mechanical bent from earlier in the scene and redirects it to a more "useful" goal. Tommy begins to think about the problem and the resources necessary to create the product that will solve the problem. Second, when confronted with members of the town council, sent to retrieve his credentials, Hill examines the resources and promptly establishes a barber-shop quartet. Now, in both cases, you can argue that if Hill is an entrepreneur, he's not seeing any profit from his enterprise. I would counter that in the case of Tommy, his profit is the development of a partner and source of information on the inside. And that information can help with selling the idea of the band, and the accompanying profits. In the case of the council, Hill manages to get more time in order to bring his main enterprise to light. While the profits are not monetary in either case, not all profits are monetary.

I look forward to your comments.

Thursday, October 18, 2007

Economics and Pop Culture: The Music Man, #3

This one is a little less obvious, but I think you will see where I'm going. Professor Harold Hill's "Seventy-six Trombones" is his attempt to shift the demand curve.

In basic economics, there a number of important, basic ideas. The law of supply states that there is a direct relationship between the price of a good or service, and the quantity or amount of the good or service that will be offered. Essentially, the higher the price, the more producers will bring to the market. The lower the price, the less producers will bring to the market.

A important corollary is the law of demand. This states that there is an inverse (declining) relationship between the price of a good or service, and the quantity of that product that is demanded. Again, the essential point is that as price rises consumers demand less, and as price falls, consumers will demand more.

We also learn that the market price is the point where a supply curve intersects a demand curve. This price represents the point where the quantity demanded balances the quantity supplied. However, we also learn that both supply and demand can change. This means the curve must move to the right on the graph.

In the Music Man, the market is in River City, the supply is supposedly brought by Professor Hill. The demand is the town's desire to have a Boy's Band. (Please note this has a somewhat different meaning from "Boy Band" in current usage.)

From what has happened up to this point in the musical, one can presume that the demand for a band in River City, and for the equipment and frills that accompany the band, has been fairly low. But Professor Hill (the supplier), needs to change that in order to establish a market with a price to his liking. He goes about changing the demand (shifting the demand curve to the right) by painting a truly awe-inspiring picture of a parade, led by a band that would do any Division Icollege football program proud. In doing so, the resultant market price is higher than the original market price - which we get the impression may have been close to zero.

One could even make the case that he was not only creating greater demand; he was trying to change the elasticity of demand. Price elasticity refers to the amount of change in the quantity that is the result of a change in price. Generally, an item that sees a large fall in the quantity supplied or demanded with a small change in price is deemed to be elastic, and would be represented by a curve with a fairly shallow slope. (One might infer-although we have no real evidence-that demand for a band in River City has been relatively elastic until the moment of this song.) An item that sees no change or a relatively small change in the quantity supplied or demanded even when there is a large change in price is said to be inelastic. Items that have inelastic demand, have demand curves with steeper slopes. Items with inelastic demand are also generally things that we deem as necessities. (Gasoline in the United States is frequently used as an example of an item with inelastic demand.)

Hill not only manages to create demand where there was little or no demand before; he sets about convincing the good people of River City that a band is not only a good thing, but something they absolutely must have. He not only shifts the demand curve to the right, he manages to make it steeper.

Please share your thoughts.

Wednesday, October 17, 2007

Economics and Pop Culture: The Music Man, #2

"Oh we've got trouble, right here in River City." So intone the townspeople, led by Professor Hill, as he enumerates the problems that arise out of the presence of a pool table. I think this song can be a great example of externalities. Externalities are costs and/or benefits that accrue to parties outside of a transaction.

In this specific case, the owner of the local billiard parlor (who also happens to be the Mayor) purchased a pool table. The original parties are the billiard parlor and the firm that supplied the pool table. We presume that the parlor will charge a fee to individuals to play on the new table. Parties to those transactions, while varied on the one side, are pretty easy to define.

But we are interested in the externalities, particularly the negative externalities, listed by Professor Hill as he sets up his plan for the town. In this song, Hill lists a multitude of negatives: sloth, the progression from medicinal wine to "beer from a bottle," horse-race gamblin', and fritterin'. There's even a sound economic argument to this last one, as the boys will be ignoring their chores, thus reducing the productivity of the family enterprise. From empty cisterns to "dancing at the arm'ry," Hill paints a picture of depravity and degradation, all effects brought down on people who were not party to the initial transaction, and many of whom will not be party to the subsequent transactions.

More tomorrow. Please share your thoughts.

Tuesday, October 16, 2007

Economics and Pop Culture: The Music Man, #1

For those who aren't sure, my new "home" is at the Powell Center for Economic Literacy, which resides at the Collegiate School in Richmond, Virginia. Collegiate is an independent, K-12 school. At the Upper School (high school) level, they are like many other high schools in the country. Academics, sports, extra-curriculars, etc. One of the extra aspects is the presence of the Powell Center. We work to help identify, integrate and support economic education in a wide variety of school activities, with the idea that we will take what works to a broader audience.

Now that the introduction is out of the way, Collegiate's fall musical this year is "The Music Man" by Meredith Willson, and will be performed next week. I was thinking that there should be a multitude of economic concepts, ideas and topics to pull out of this quintessential piece of American theater. I'm going to be blogging on them between now and next week. I hope you'll enjoy this piece of free association between the arts and economics (I am, after all a graduate of the College of Arts and Letters at Michigan State University). Feel free to contribute your thoughts after each installment. Let's see where this goes.

Things start early. In the opening scene, we have a number of traveling salesmen riding on a train. They are discussing (musically, of course) the state of their profession as they head into Iowa. They talk at length about how their job has gotten harder. Increased consumer mobility through the Model-T, packaged food (U-Needa Biscuits), are contributing to the demise of the small town general store and, in turn, the life blood of these drummers. The first economic idea that rises to the surface is that of economic growth. Economist Joseph Schumpeter coined the phrase "creative destruction" to describe how growth changed economies. Old ways of production (and distribution) are destroyed as new methods are created. The new adds improvements, but the old frequently disappear or are discarded. (Anyone still have 8-track or, older yet, real-to-real tapes AND a functioning player?)

Underlying this change is the concept of utility or "usefulness" if you prefer. When we purchase a good or service, we are purchasing its utility. There are three kinds of utility - form, place, and time. Form utility means the product is in a form that is useful to the consumer. Place utility means the product is available when the consumer desires. And time utility indicates it is available when the consumer needs it. Often the same product can have different amounts of the same utility. Think about it: we frequently pay more for a gallon of milk or some other foodstuff at a convenience store than we would pay at a larger grocery store or discount establishment? Why? It's the same product (form utility). But we pay more because the convenience store is ... well... more convenient (time and/or place utility). In this opening scene, the Model-T has a form utility that allows the consumer to take advantage of place utility that previously had too high a cost. The U-Needa Biscuits, in the "air-tight sanitary package made the cracker barrel obsolete" as one of the salesmen tells us. This is primarily form utility, but one could argue that it made it possible to take home a supply that would not go stale - adding place and time utility to the consumer scrounging for a midnight snack.

Finally, salesman Charlie Cowell reminds us that, to be successful "ya gotta know the territory," although Professor Harold Hill will do his best to disprove it. This speaks to the idea in economics that markets work best when there is knowledge available to producer (salesman) and consumer (small store or individual). The character reminds us that an abiding knowledge of the consumer's needs, wants, resources, etc., can help the seller to provide the appropriate products at a fair price. But as Cowell points out, there are those who thrive by taking advantage of "imperfect knowledge." And in doing so, they cause markets to malfunction, at least in the short-run. This is attested to by the fact that salesman following in the wake of Professor Henry Hill are "tarred and feathered and rode out to the city limits on a rail."

Those are my views on the opening. Please share your thoughts.

Friday, October 12, 2007

Brevity Is the Sole of...Economic Thinking?

You might want to take a look at today's Brevity comic strip in your local newspaper. If you don't get this strip, here's a link (link no longer operational) to the appropriate installment.

Upon seeing this cartoon, I could see some possibilities for discussion in economics or even personal finance. Most obviously, this lends itself to a discussion of value. What is the cartoon saying about what society values? Is this truly representative of how society chooses?

Digging deeper, we can address whether we are moved more by short-term gratification or long-term. One can easily state that feeding the homeless has more long-term positive benefit. Does a choice like this employ analysis of marginal cost vs. marginal benefit? What about the idea of psychic income? Would this involve making a choice based on emotion over logic?

And would a choice open insights into how we choose to manage our scarce resources (budgeting)? I think this has some potential. What are your thoughts?

Thursday, October 11, 2007

Atlas Shrugged (and So Did Some Readers, Apparently)

In yesterday's The Wall Street Journal, David Kelly wrote an interesting piece commemorating the 50th anniversary of Ayn Rand's novel, Atlas Shrugged. I saw Kelly's piece as a strong endorsement of Rand's view of the businessman/entrepreneur as an economic hero. Other blogs have commented on Kelly's thoughts. Some saw the characters in Atlas Shrugged as two-dimensional and the overall storyline as contrived. I will admit I preferred Rand's other major novel, The Fountainhead to Atlas Shrugged. But there were some interesting quotes that presented a philosophical viewpoint that can provide for interesting discussion when discussing economic systems or economic institutions in the classroom. Allow me to suggest a few.

"A truly selfish man cannot be affected by the approval of others. He doesn't need it." (Great to bring up when discussing Adam Smith - especially if you incorporate the "impartial observer" from The Theory of Moral Sentiments.)

"Self-sacrifice, we drool, is the ultimate virtue. Let's stop and think for a moment. Is sacrifice a virtue? Can a man sacrifice his integrity? His honor? His freedom? His ideal? His convictions? The honesty of his feeling? The independence of his thought? But these are a man's supreme possessions. Anything he gives up for them is not a sacrifice but an easy bargain. They, however, are above sacrificing to any cause or consideration whatsoever. Should we not, then, stop preaching dangerous and vicious nonsense? Self-sacrifice? But it is precisely the self that cannot and must not be sacrificed. It is the unsacrificed self that we must respect in man above all." (I think this asks, "At what point does self-sacrifice cross the line to selling out?")

"Men have been taught that the highest virtue is not to achieve, but to give. Yet one cannot give that which has not been created. Creation comes before distribution -- or there will be nothing to distribute. The need of the creator comes before the need of any possible beneficiary. Yet we are taught to admire the second-hander who dispenses gifts he has not produced above the man who made the gifts possible. We praise an act of charity. We shrug at an act of achievement." (A little supply-side oriented, but a good starter.)

"Men exchange their work by free, mutual consent to mutual advantage when their personal interests agree and they both desire the exchange. If they do not desire it, they are not forced to deal with each other. They seek further. This is the only possible form of relationship between equals. Anything else is a relation of slave to master, or victim to executioner." (The fundamentals of voluntary trade are here.)

If you've read the book and have passages that you think would add interest to a class, share them. Or share your comments on these.

Medicare Fraud: A Wealth of Concepts and Issues

There was an interesting story on Medicare fraud on NPR's Morning Edition this morning. It focused on several issues deriving from the particularly high rate of fraud in south Florida.

Two aspects really caught my attention. The first was that a significant number of former drug traffickers have given up that trade in exchange for setting up phony medical equipment businesses. They "sell" the equipment, ranging from canes to wheelchairs (and beyond, I expect), bill Medicare, and then don't deliver. Similar scams exist in providing intravenous drugs for elderly and AIDS patients, with the scammers either failing to deliver, or delivering saline solution in place of the more expensive drugs.

On this first issue, the economics that caught my eye was that many former drug dealers were doing some interesting marginal analysis: weight costs and benefits, risks and rewards. As this story points out, there's clearly less likelihood of getting shot in a drive-by. And if caught, they're treated as a white-collar criminal instead of a drug dealer (think minimum vs. maximum security prison here). Interesting thinking and it's rational from an economic standpoint, at least on the surface. It would appear that they are responding to an incentive structure that would encourage the behavior - at least as far as criminal behavior goes.

The second attention-grabber was how little the government puts into fraud detection, apprehension and prosecution as a percent of the total budget. According to the story, almost 10% of Medicare's expenditures are going to fraudulent billings. Something close to 1% of that is in South Florida; although that's based on reported cases. (Estimates are up to 10 times higher.) Yet Medicare spends 3/100ths of 1% in total on insuring the integrity of the program. (Apparently, money has been given to the F.B.I. to beef up a task force investigating the problem.)

My point for your (and your student's) consideration is related to my post of February 21, 2007. I mentioned that there's a connection between how one spends money, whose money it is, and for whose benefit it is spent. The fact that while there seems to be concern, relatively little resources are spend protecting the program speaks to what was my fourth point in the post, "You spend someone else's money on yet another person. You don't care about value or price."

Check out the NPR story and let me know how you view it.

Wednesday, October 10, 2007

People Respond to Incentives, Apparently (Part II)

Perhaps I'm a cynic, but after reading this article in The Wall Street Journal - Weekend Edition, I can only say I'm reminded of the scene in Casablanca, where Captain Renault is informed there is gambling in Casablanca.

Tuesday, October 9, 2007

Why Economics Should Be Taught in High School (HT to Dr. Mankiw)

Greg Mankiw has a post that speaks to any economic educator. I found this particularly relevant after coming back from the annual meeting of the National Council on Economic Education (NCEE)/National Association of Economic Educators (NAEE)/Global Association of Teachers of Economics (GATE) in Denver, Colorado last week.

If economics were required of all high school students, I firmly believe we would still get the government we deserve, but we might find we deserve better. As always, I welcome your thoughts.