Wednesday, December 31, 2008

Globalization and Food Prices

There were some very good articles in yesterday's edition of The Wall Street Journal that connect agricultural prices to other markets, domestically and in the global economy.

The first piece explains the up-and-down of agricultural prices and how the roller coaster market for commodities (specifically corn and soy beans) makes for a volatile environment for one Iowa farming family. It also accesses some photos, as well as videos and an interactive graphic that is connected to the second piece.

In the second piece, we see how increased globalization is affecting commodity prices with good and not-so-good outcomes. In the comparison piece, a Chinese family prospers while an Ethiopian family struggles on the edge of starvation.

Both of these articles are worth the time and could be the foundation for discussion that connects microeconomics (markets and prices) to macroeconomics (international trade).

Please share any ideas you have on using these articles.

Tuesday, December 30, 2008

Some Recent Economic History

Over the past weekend, The Wall Street Journal did an excellent piece on the events of mid-September, 2008. Thanks to the folks at The Cleveland Plain Dealer, you can now read about The Weekend Wall Street Died.

It is compelling reading, if you're into the current recession or financial or economic history in general. And it has some important truths in it. One that struck home to me is quote from the head of Goldman on Sunday, September 14. One of his aides, referring to the stress of recent days said "I don't think I can take another day of this." The Goldman chief responded, "You're getting out of a Mercedes to go to the New York Federal Reserve -- you're not getting out of a Higgins boat on Omaha Beach. So keep things in perspective."

Good advice - for all of us.

Friday, December 26, 2008

More Holiday Inspired Economics

I know it's the day after Christmas, but you might find this amusing...and sobering. (HT to Greg Mankiw.)

Wednesday, December 24, 2008

What Is Economics?

This may seem like an odd question to pose in this blog. Suffice it to say, it's a way to draw your attention to a couple of interesting articles.

Back when I first taught economics, one of my objectives was to familiarize my students with some of the major names from economics that had or could have an impact on their lives. Thus, they were introduced to Smith, Malthus, Ricardo, Marx, Marshall, Keynes, Friedman and others.

However, a key point I made was that the all the theories were attempts to explain behavior. And this was to either solve a problem or answer a pressing question. The major theoretical shifts seem to happen at times of great change or crisis. And that sets the stage for the two articles mentioned earlier.

The first article was in Sunday's edition of The Boston Globe. The author, Drake Bennett, speaks to the idea that most economists missed the current downturn, but all are now scrambling to explain it. Yes, there were a few who, at the time were seen as "doom-and-gloom", but are now reaping good fortune as a result of their pessimism. But the profession is still trying to sort out all the events that led to this point in time, both to explain it and to try to formulate a way out. For that reason, I suspect the next "great economist" is out there. It may be a seasoned academic with years of research and publishing under his or her belt, combined with an exemplary ability to speak simply. It may also be a young, freshly-minted PhD with a new sense of how all the myriad pieces fit together. Either way, times such as this seem to regularly produce sea-changes in economic understanding.

This brings us to the second article, from the January 2009 issue of Prospect magazine. Robert Skidelsky wrote an excellent biography of John Maynard Keynes a number of years ago. And I would be hard-pressed to identify anyone who understands Keynes better. There may be some who can quote The General Theory and other works chapter and verse. But Skidelsky speaks to the person as well as the economist that was Keynes.

In his piece for Prospect, Skidelsky is calling for a new Keynes. Some may read the piece and say it's a call for a new Keynesianism. They may be right. But as I read it, he is looking for the next great economist. The idea is that there needs to be major shift in theory - perhaps more closely aligned with what Keynes said - but certainly internalizing the recent wave of globalization and what it can do, as well as what it possibly can't. Skidelsky would have us remember Keynes was not just an economist but a moralist. His view of the world was one that didn't put a dollar sign (or more correctly, a pound sign) in front of everything.

I would add that Keynes was, perhaps in a better position to moralize than many, being financially comfortable and ensconced at one of the world's great universities. However, I mention that only because someone else will. It should not detract from the message.

The articles are both good and both thought-provoking. And perhaps there are thoughts you can provoke among your students in the next semester. I look forward to your thoughts. Happy holidays.

Tuesday, December 23, 2008

If You're Checking in During the Holidays...

Here's a great piece of newsreel film from the 1930s (HT to Mark at Northwestern). As was pointed out to me, it's very Keynesian for a work that seems to predate The General Theory by three years.

The quick message? Inflation is our friend.

Have a happy holiday.

Friday, December 19, 2008

A Busy Week + The Holidays = Lotsa Stuff

I know your week has been busy, and if you're not already on break, chances are pretty good that this is your last day before break. Mine has been hectic as well, which partially explains the lack of posting. Consequently, I want to get this out before you leave - but even then you may not check blogs.

It may seem pointless to give you lesson plans and ideas when you're just having trouble keeping the students in their seats or in the room. I can appreciate that view. I spend and have spent enough time in classrooms to know the environment - especially during the last few days before break. Nevertheless, there are some ideas here that you may want to use later in the semester - or put them in your file for next year at this time.

The first link is holiday-related. For their last lesson before their break, the web site IZZIT put together an activity based on O. Henry's The Gift of the Magi. The story contains some basic economics - decision-making, etc; but it also shows that economic thinking is not necessarily miserly-thinking. It's about making choices based on what you value and coming out ahead - in this case feeling good about giving to others. I recommend the site and the activity.

Second, I must link to the classic essay, I, Pencil. This is the 50th anniversary of the essay. (I can't even do a proper HT to all the other bloggers who picked this up yesterday, but thanks to all of them.) For those of you unfamiliar with the essay, it's a great way to introduce the ideas of trade and interdependence. The basic premise is that no one person in the world can produce one of the cheapest and simplest tools - a pencil. It takes the resources and cooperation of many people around the world to produce this basic item that we all find in our classroom.

The third resource is the last serious one. (HT to Arts & Letter Daily here.) There is an interesting article in The Atlantic which summarizes an interview with Gao Ziqing, president of the China Investment Corporation which manages about $200 b of that nation's foreign assets. The article predates the election in the U.S., but is still timely for the insight offered about how other parts of the world are viewing the U.S. economy. I particularly appreciated his imaginative way of describing the derivative market that has been such significant part of the financial unwinding we are experiencing. I expect you could use his example in the classroom with few problems and the students would get the picture fairly quickly.

Now we can start drifting into the less serious. This cartoon (HT to Greg Mankiw) goes back to the fundamental concept of opportunity costs. We all face trade-offs, as Greg's headline says. But here at the Powell Center, our take on the concept provides a better fit for the cartoon - TANSTAFFL - There Ain't No Such Thing As A Free Lunch.

And finally, a bit of humor. The first ones come from the comic strip Arlo & Janis and are here and here. The third is from The Washington Post editorial cartoonist, Tom Toles. I think they all speak to the confusion some of us face when trying to explain the choice between saving and spending at times like this (there's that opportunity cost, again). I think you'll enjoy them and you should be able to use these in a variety of situations in the New Year.

I hope to blogging sporadically over the next couple of weeks. I hope you keep checking in, but if you don't I hope you'll pick us up again in the New Year. Happy Holidays.

As always, I look forward to your comments

And for those of you looking for new games to play over the holidays, you might want to check out the Credit Crunch board game, courtesy of The Economist magazine. You will need to download the board, the pieces, etc. but it looks like it could be good for a giggle. Enjoy.

Wednesday, December 17, 2008

Something for American History (and Economics) Teachers

There is a very good discussion here featuring some outstanding academics discussing the economics of The New Deal. What I especially like is that it's a Canadian program and offers a bit of an outside view.

It runs about 35 minutes and offers views that are a bit outside what we see in many high school textbooks.

By the way, HT to Bryan Caplan at EconLog.

Please share your views of the program.

Friday, December 12, 2008

Economics & A Christmas Carol

Charles Dickens’s Holiday Classic as a Study in Choice and Incentives

There are a number of holiday traditions at our house. Some of them showed up when I married and acquired a family, but some are older. One of the longer personal traditions is watching A Christmas Carol. My favorite version features George C. Scott as Scrooge and was originally aired in early 1980s, sponsored by IBM. (I also admit a certain fondness for the versions that featured Mr. Magoo, the Muppets and Patrick Stewart, but for vastly different reasons.) I have always been drawn to story of Scrooge’s redemption; and Scott’s excitement and happiness when he awakes on Christmas morning is impressive given his age at the time and his penchant for gruff characters.

However, the current state of the economy has me thinking about different aspects of many things. And I suspect it was the reason I began thinking about the economic aspects of my favorite holiday video. Given the extensive reach of the slowdown, many people seem to be economizing (although the data on “Black Friday” was better than expected – up 3% over last year). This may foreshadow a more inward focus for many us as we approach the holiday season. However, Scrooge’s single-minded attention to the financial and commercial success is too easy a target for a post on economics and A Christmas Carol. To focus exclusively on that as the economics in the story is to miss a larger opportunity. As I see it, it is the appreciation for values other than monetary as incentive that makes the story a classic. Nevertheless, using economic thinking helps us understand the choices that Scrooge and other characters make and the incentives that motivate their choices. And those insights can help us understand ourselves. And that, in my mind, is one of the hallmarks of good literature.

As hinted above, Scrooge’s incentives are clearly seen early on. He is concerned with material things. Garments, the cost of coal, and the price of corn are his concern. He begrudges every outlay and looks for ways to make money at every turn. The fact that others are adversely affected is not part of his view, except to the extent that he pays taxes to support others – something in his view that should exempt him from further concern or involvement. He has a superficial incentive – to make more – but that is the extent of his interest.

But Scrooge is not the way he is because of a lack of opportunity; nor do other characters lack incentives that may engage him. His nephew, Fred, invites him to dine on Christmas, but Scrooge decries the holiday as commercial and a waste of time and money. He even measures Fred’s wife, whom he’s never met, in terms of money – a girl who “brought very little to the marriage.” But when challenged by his uncle, Fred speaks of Christmas as a good and charitable time that makes him better and makes him feel better.

Bob Cratchit also speaks to feelings as a motivator when he asks for the day off, while Scrooge talks of having his pocket picked – a way of decrying a paid holiday. The views are different, reflecting different motivations.

Scrooge also has interactions on a number of levels at the exchange. He increases the asking price from a previous corn deal as compensation for the delay in making a deal; and he refuses to contribute to a charity to provide food for the poor. His defense is that he pays taxes for prisons and workhouses to provide for the poor. These insights into Scrooge’s incentive system are easy and almost cartoonish.

To dig deeper, we need to start with Marley’s visit to Scrooge’s bedchamber. Marley explains that his penance is due to his money-oriented incentives for life. The consequence of his material short-sightedness is that he is now required to make up for a lifetime of avarice. He has no choice and incentives no longer matter in his state. But he does offer hope to his friend, Ebenezer. If Scrooge can but realize that mankind is his business, he may avoid the fate of an endlessly-wandering soul. There is incentive – but with it a true empathy for others needs to develop. And we find out this is not an impossible task.

With the ghost of Christmas past, we see that young Scrooge once had a different incentive as a youth. His desire for Belle, to be worthy of her and to deserve her, helped direct his early career. But his success in the world of commerce shifts his attention – from Belle to bounty. This is in contrast with the life of his master, Old Fezziwig, who taught him the ins and outs of commerce, and sought to teach him more. But he was unable to impress a more important lesson on the young apprentice – the lesson of what constitutes a full life. For Fezziwig, family and friends sharing food, drink, dance and good times constituted real wealth. And while Scrooge seems to appreciate the lesson in retrospect, his behavior indicates the lesson was not truly learned. He started out with an emotional goal, but his drive make a secure life for Belle would eventually replace her.

The next step in Scrooge’s reclamation is at the hands of the Ghost of Christmas Present. And in Scott’s portrayal, we begin to see some indication that the miser’s values may be shifting. As I recall from reading Dickens, there are some hints that Scrooge may be rethinking his views, but they are not strong and clear cut.

With the visit of the second Ghost of Christmas, we are invited to see three Christmas celebrations of the time. We see Christmas at the Cratchit home; Christmas with Scrooge’s nephew, Fred; and the Christmas of a destitute family somewhere in England. The common theme for each of these is the importance of family. The incentive is to keep family and friends close; and to celebrate – or in the case of the final family, to value – being together. Initially Scrooge, as portrayed by Scott, is impressed by the sheer volume of market transactions on Christmas morning as he and the spirit make their way to the first visit. As he spends time at each visitation, he seems to begin to grasp the importance of family, friends, and goodwill to others. He sees his dead sister in his nephew. He voices concern about Tiny Tim. And he appears shocked that people are destitute rather than in the institutions he is taxed to support. One senses he is beginning to realize there is something else, something more than money and finance. Slowly his incentive is shifting. He sees the value in charity and in sharing good fortune.

The final spirit provides some negative incentive for Scrooge. He is shown that if he continues his materialistic view, he will die alone. We see that he loses his things, and his business contacts will only attend his funeral if they will be fed – an ironic and materialistic view - although Scrooge does not fully accept that the events are about his passing. He is also shown that others will die. But unlike Scrooge, Tiny Tim’s passing is mourned and his life valued. Essentially the second and third spirits have played “good cop/bad cop” with Ebenezer. He has been shown the some positive consequences of his current decisions, and some negative consequences. This provides the final change in his incentives. He asks the third spirit whether a change in behavior will change the future. And while he receives no definite answer, his actions upon awakening Christmas morning indicate that he is a changed man. He has different priorities owing to a change in incentives. He realizes he wants to care and be cared about; and he does not want to pass on with the only incentive to others being what they can get out of the dead man – whether it be his things or a “free lunch.” And these incentives alter his behavior - the choices he makes about using his resources.

In retrospect, there are a couple points that I find relevant. The first is our incentives say much about us, and in turn about how we view and treat others. When our focus is just on the material, we run the risk of emulating the old Scrooge. And given the current state of the economy, that view may actually be detrimental. This brings me my second point. We can care about others and in doing so we ultimately enrich our own lives. That is emulating the new Scrooge. We need to consider the incentives that should be on our minds during this season and this time. This is no call to be foolish about our resources – it would seem we’ve done that. But we need to remember others. For it is through others that we gain the most valuable part of our lives – our humanity.

Final thought: There was a great piece on the site last week.

Everyone can benefit from our resources. Let us try to use our resources to benefit everyone. The sooner we participate in the economy, the sooner the economy will allow others to participate. Whether it’s international, national, or local; whether it’s the Powell Center for Economic Literacy (a 501(c)3 charitable organization) or your local food bank; we all need to try to help others.

Institutional Aspects of a Bailing Out Santa

One of yesterday's posts on this blog referred to a humorous piece about bailing out Santa. But the piece got me thinking about some interesting segues to discuss some the role of institutions (rules) in economic decision-making. And, to be fair, I was further spurred by this morning's news about the failure of the auto bailout. The Santa Bailout is an opening to discuss at least three things that relate to institutions and bailouts.

Moral Hazard: The idea here is that we make different choices if our losses are covered - specifically we take more risk if we know our downside is limited or eliminated. The moral hazard argument against bailout is that firms that have their losses covered do not learn the harsh lessons of the market. However, restructuring is a big risk with no guarantee of success. When backs are against the wall, maybe it's time to take a risk.

Precedent: This concept refers to the fact that something that was done before provides a reason to do it again. While the idea is not generally considered part of the economic lexicon as I know it; it is an idea that is firmly entrenched in American society. Our legal system (rules?) has strong foundations in precedent. And it is not just in the formal rules, but it is a strong informal belief. Our students and we often fall back on precedent when making a case for a decision. "Last time it was done...," or "That's not the way we've handled this before..."The argument that raises precedent against bailouts is that if you bail out this industry, you may need to consider bailing out other industries because the precedent is set. The precedent argument for bailouts is...well, the precedent was already set - see banks (earlier this year), Chrysler & Boeing (for those of us with longer memories).

Expectations: Expectations does have a place in the economic lexicon. It usually refers to how our decisions about future action are shaped, based on past experience. We talk about inflationary expectations, as well as deflationary expectation leading to price spirals. It is the damping of expectations (one way or another) that is often cited as the role of monetary policy in maintaining price stability. But expectations can have other institutional effects. When referring to bailouts, one group sees another group receiving aid and then may make choices based on an expectation that they may be next in line. The anti-bailout argument based on expectations is similar to the precedent argument. Group A received a benefit; my group should get one, too. There have been reports (anecdotes are not data, I know) about people wondering whether to go into default on their mortgages based on stories about programs for delinquent homeowners. The pro-bailout argument is that positive expectations may restore some level of confidence to borrowers/consumers, and to the financial system.

I do not think any of these arguments are definitive. The situation is complex. But as a method to help students understand the complexity of developing institutions, the Santa bailout piece could be valuable.

I look forward to your comments.

Thursday, December 11, 2008

Follow-Up to "Some Holiday Economics"

Back on December 2, I posted on one of my favorite holiday economic resources, the PNC Bank Christmas Price Index. Now it seems they are going to be doing a Live Chat for teachers on the Index. This is exciting. Jim Dunigan from PNC Wealth Management will be talking about the index.

The Live Chat will take place on Tuesday, December 16 at 10:30 a.m. (EST I'm presuming). You can register here, and more information will be sent to you. From the looks of the registration, you can even register your entire class if that is convenient.

I'm registered. I hope some of you can participate.

Christmas Bailout! Is Santa "Too Big to Fail"?

While I'm not sure I'd share this with younger students, I always appreciate humor that is both seasonal and topical. This article from today's edition of The Wall Street Journal is both. And you should definitely click on the video tab.

I look forward to your comments.

Wednesday, December 10, 2008

Nobel Prize Economist in Your Classroom

For those of you about to enter the portion of your textbook on international trade, there's a way to get Paul Krugman, the winner of this year's Nobel Prize in economics in your classroom. Go to the Nobel web site to access two video presentations, as well as the slides used in the lecture.

And as an additional bonus, there's an educational game on trade (not based on Krugman's work) you can have your students play.

I look forward to your comments. Also, if you're taking part in the "book" club on the Marginal Revolution blog, don't forget to check it out tomorrow for chapters 3 & 4 of Keynes' The General Theory.

Monday, December 8, 2008

The General Theory

Last week I mentioned that Tyler Cowen over at Marginal Revolution was doing one of his "book clubs" on The General Theory of Employment, Interest and Money by John Maynard Keynes. I suspect the reason he's doing this book is because so many people are comparing the current economy to the Great Depression (GD); and it's hard to discuss the economics of that time without mentioning the GD. He has his post on Chapters 1 & 2 up. Chapters 3 & 4 will come on Thursday.

I had forgotten much of the first two chapters. I was actually embarrassed at how much. But there were two things I took out of these chapters. One was Keynes’s discussion of real and nominal wages. I think he describes the problem of the "money illusion" quite well in this early chapter. The idea of workers being reluctant to reduce money wages when real wages are rising is important. It could have been even more difficult when most people were not aware of the connection of the true impact of changes in price level. And they were probably also less aware of price behavior outside their local community. Certainly those in larger cities may have better understood the extent of price changes, but those in less populated areas could have seen it as a less pervasive phenomenon. I expect that would affect their expectations.

For me, the second thing was the sense that this was more a general theory about special circumstances.

What did you get from the first two chapters? Feel free to respond here as well as at MR. (The comments on Tyler's book clubs are often as interesting as the posts.

And here's an interesting op-ed about deflation that appeared in Forbes magazine. It mentions Keynes prominently and discusses his views.

Two from The Post about Institutions

When we teach about economic institutions, we stress that rules influence the choices individuals make - that's the purpose of the rules. Usually we also provide simple examples of rules and how they impact our decisions. We can talk about minimum standards, property rights, even blue laws. However, at that point it's not uncommon for us to drop the discussion and move on. We may not even use the term institutions when we discuss fiscal policy, monetary policy or international trade. Or we may use it differently, causing some confusion for our students or providing an unwitting incentive to forget the concept altogether. In defense of that behavior, it may be because we don't have good examples.

This past Sunday's edition of The Washington Post provided a couple of them. The first article, by Dan Morgan, explains how conflicting policies can create problems. Specifically, he looks at how agricultural subsidies (a formal rule) are in conflict with voluntary and commercial efforts to maintain prairie in the Western United States. The efforts to maintain the virgin prairie are examples of private beliefs (informal rule) about conservation of resources. This is particularly interesting given the desire to maintain the natural habitat without having it declared a national park or preserve.

The second piece, by Paul Blustein, talks about the potential for rising protectionism to extend the economic downturn by isolating national economies from world trade, similar to what happened in the 1930s after the passage of Smoot-Hawley. Blustein also calls for a resumption of the Doha Round of World Trade Organization (WTO) talks that ended abruptly this past summer. Treaties can provide the framework for laws and legislation (formal rules) that encourage or discourage certain decisions - decisions about international trade in this case.

You might find both of these articles good discussion starters as you enter the last week of the semester. I look forward to your comments.

Saturday, December 6, 2008

Forward Thinking

An interesting article on provides an interesting example of forward-thinking. China is upping its fuel taxes substantially - at a time when the economy is slowing down. Why? China is taking advantage of falling fuel prices to offset the increase that the tax would represent, making it easier for consumers to adjust both now and later should fuel prices rebound. (Everyone who thinks fuel prices won't rebound within the next twelve to twenty-four months, raise your hand.) And rather than depend on falling fuel prices to mitigate the tax bump, China is dropping some transportation fees.

According to the article, the goal is to encourage conservation and assist in restructuring (of the fuel market and energy use, one presumes).

This is an excellent example of how different governments can use fiscal policy to influence behavior for the long-run. It also shows how world market conditions offer opportunities to price commodities in such a way as to begin the move toward substitutes and alternative energy, and hopefully reduce waste - to "internalize the externalities" as one of my old professors used to say.

I look forward to your comments.

Friday, December 5, 2008

Economics in Financial Literacy (and Geography)

I've run across several interesting resources over the past couple of days. And I expect they could be used in a number of different settings. However, I'll go with the most obvious.

First, Neal Templin is a regular contributor to The Wall Street Journal, writing a regular column under the byline "Cheapskate." This week he did an interesting piece that lends itself nicely to the personal economics category. He related how the financial responsibilities have evolved since he and his wife got married. They appear to have had different views about money management, and this led to a couple of "surprises." Things have worked themselves out but the lesson is clear - We make better decisions when we have complete information. In short, communication is important for families when it comes to financial management. The resources are scarce (no matter how much you make) and money that gets used in one category is not available for another (opportunity cost is operable, it seems).

There's also been an interesting series of articles in the online edition of The Economist. The series is about an economist who is doing volunteer work providing financial literacy training to young mothers. I was drawn to the series because I believe the economic way of thinking (understanding) is important to teaching basic financial skills. This series only served to strengthen that belief. And while the author didn't appear to spend time developing liquidity preference and other aspects of money management - it is clear that her understanding of the financial world was a benefit in explaining that world to the young mothers who showed up in her class. But the basic advice she gave out was particularly valuable - not just for her specific audience, but for all young people starting out. It's worth a look.

My third and fourth resources were on the blog of National Public Radio (NPR).

The third source popped up because NPR is doing a series on how the economic crisis is affecting different parts of the country. The first installment dates back to July. And the insight of the place and the time is engaging, all the more so because the economy has changed so drastically. For those of us interested in getting our students to understand how economic circumstances can differ across distance and time - or for those trying to give students an understanding of different parts of the U.S. economy, this is gold.

The fourth resource offers a chance for you and your students to be on the radio. NPR is soliciting personal stories about how the current economy is affecting choices and decisions. They are putting together a podcast and they want people to send them an email describing what's going on in their economic lives. My guess is those that NPR finds interesting have a chance of being included in the podcast. Even if you don't get chosen, you might want to consider doing a podcast about different folks in your town and how the economy is affecting their decision-making.

I hope these sites are useful.

Thursday, December 4, 2008

Books for Economics in the Elementary Grades: The Tale of Despereaux

Those of you with children in upper elementary school and those of you who teach at that level are probably aware of the Newberry Award winning book, The Tale of Despereaux, by Kate DiCamillo. My hunch is you are probably also aware that the book has been made into a movie and that The Tale of Despereaux movie will premier later this month.

While I have no privileged information regarding the film, I can now report that there are now three lessons tied to the book on the web site of the Powell Center for Economic Literacy. The three lessons examine the concepts of choices, Institutions, and Wants & Resources in the book, and can be used to help students gain a different and valuable appreciation for the book, as well as how the basic idea of economics - decision-making - is all around us; and how we use the various resources at our disposal to satisfy wants of all kinds.

I hope you'll look at these lessons, and please share your thoughts and experiences with us.

Wednesday, December 3, 2008

A Little Macro

Greg Mankiw poses a question about aggregate supply (AS) and aggregate demand (AD) on his blog today. He is responding to a note (he links to it) by Paul Krugman on New Deal wage policies. (The note is very well done and should be useful in the classroom - for personal benefit if not for direct student use.)

Mankiw's counter is that while policies implemented in extraordinary circumstances may have different (positive) effects on AD than they would have in "normal times." The changes in rules (tax policy, etc.) changes expectations and may actually have a negative impact on investment, which is a more volatile part of AD.

I have to admit it's an interesting argument that appears to have some merit.

What do you think? Can/Do policy changes have significant impact on expectations and change that important investment portion of AD?

I look forward to your comments.

Tuesday, December 2, 2008

Some Holiday Economics

The annual PNC Christmas Price Index was released yesterday. For those of you unfamiliar with this "important" statistic, it tracks the cost of the gifts mentioned in the holiday song, The Twelve Days of Christmas. As such, it is an important inflation indicator - just kidding. And despite the recession (yes, it's official now so I'll start referring to it as a recession) that started last December, the cost is up. And while you may think you know what caused the index to rise, you may be surprised.

The site also includes an interactive graphic as well as suggested ways to tie the index into the classroom, including a webinar that was hosted by PNC Bank and The Stock Market Game. Math teachers can use the index to help students interpret graphs and charts. History teachers can use the index to discuss wages for skilled and unskilled workers.

I hope you and your students enjoy this annual offering. I will be post at least once more linking economics to the holiday season.

I look forward to your comments and I welcome suggestions.

Monday, December 1, 2008

Learning about Keynesian Economics at the Source

Tyler Cowen is starting a new "book club" on the Marginal Revolution blog. He's going to discuss John Maynard Keynes' General Theory of Employment, Interest and Money one chapter at a time, beginning next Monday, December 8.

Given the renewed interest in Keynesian policies, as well as the overworked comparisons to the Great Depression, this is an opportune time to learn and understand one of the most important and frequently misunderstood works in economics. I'm going to break out my old copy and try to keep up with him. You can find copies in public libraries (I hope), and according to Tyler, the Kindle version is only about $4.00. If you can't or don't want to follow along, (time is a resource and scarcity is an operative concept) I would recommend you consider reading the blog and posts as he proceeds through the book.

(HT to the Arnold Kling.)

Here's a link to a free version of The General Theory.

Tuesday, November 25, 2008

Anecdotes Are Not Data, But...

Back in May when fuel prices were rising and every firm and their competitors were adding "surcharges" to products to offset transportation costs, I wondered how long it would take for falling fuel prices to result in a removal of those surcharges.

This story from yesterday's edition of the local newspaper, The Richmond Times-Dispatch seems to indicate it is happening, at least in this area. Anyone else have stories to share that have otherwise been missed? This makes great discussion about how markets work, but especially about the idea of "downwardly sticky." This is usually applied to wages. (We're less willing to accept pay cuts than raises - go figure.) But it is frequently applied to prices, although in more competitive markets I'm not sure the effect is as pronounced.

What are your thoughts? Does anyone have stories to share?

I no sooner get this posted and get a chance to open today's newspaper and look at what I find in The Wall Street Journal. It's an interesting article on what it costs airlines to fly your luggage. Maybe hoping that some surcharges would be disappearing was too much expect. As it says at the top of the post, anecdotes are not data.

Monday, November 24, 2008

For the American History Teacher

For those of you who teach about the Great Depression, there's always the contention that Roosevelt's New Deal and the spending for WW II was an example of Keynesian economic policy. This piece by economic historian Price Fishback that appeared on the Freakonomics site (HT to Don Boudreaux for the pointer) makes a compelling argument that the New Deal and WW II, despite whatever else they may have been, were not an example of Keynesian policy - the deficits in the Depression were too small. (And that criticism came from no less than John Maynard Keynes.) And it seems WW II was a special case. Anyway, the post makes an interesting read.

I look forward to your thoughts.

What I've Been Reading

It's been a while since I posted a review. That's because I've been splitting my reading time between elementary level books for programs here at Collegiate, a little sci-fi to break things up, and a very interesting and thought-provoking book in economics. (It's the last one I'm reviewing. Don't go thinking I've abandoned the genre.)

The book, Understanding the Process of Economic Change, was written by Douglass C. North. North was the co-winner of the 1993 Sveriges Riksbank Prize in Economic Science in Memory of Alfred Nobel - also referred to as the Nobel Prize in Economics. I enjoy reading his work because it always challenges me and yet maintains my level of interest without being overly theoretical.

The focus of this work, indeed on much of North's work, is the importance of economic institutions (the rules that guide choices) to growth. If you visit this blog regularly, you know I find institutional aspects of economics compelling. The idea that rules impact our choices is a logical one. The case that poorly designed and implemented rules can lead to faulty decisions is very convincing. And considering how our previous laws and beliefs may not keep pace with a dynamic economy could provide one explanation for the current situation.

Society designs institutions to reduce uncertainty, i.e. to make choice easier and less risky; but also to achieve preferred outcomes. Early in the book, North states

"Economic change is a process, and in this book I shall describe the nature of that process. In contrast to Darwinian evolutionary theory, the key to human evolutionary change is the intentionality of the players...human evolution is guided by the perceptions of the players; choices - decisions - are made in the light of those perceptions with the intent of producing outcomes downstream that will reduce uncertainty of the organization - political, economic, and social - in pursuit of their goals. Economic change, therefore, is for the most part a deliberate process shaped by the perceptions of the actors about the consequences of their actions. The perceptions come from the beliefs of the players - the theories they have about the consequences of their actions - beliefs that are typically blended with their preferences."

And it is those beliefs and the institutions that result that shape economic growth.

North goes on to discuss the role of early institutional structures (myths, superstitions, religions) in establishing order (and reducing uncertainty) in societies. He also talks about the stake of established organizations in maintaining an institutional structure. However, given the current context, I found the following one of the most interesting,

"The decision rules determined by the society will play the critical role in shaping whose choices matter and how they matter. The way humans structure the decision-making process determines whose beliefs matter. In terms of formal institutions this is the subject of political economy and although the literature is voluminous and immense progress has been made in our scholarly understanding of various aspects of the subject, we still have little understanding of dynamic aspects."

The significance of that statement, for me, is that the choices of the next months or years are important for the future path of our economy and economic system. Others may see that differently. And certainly, this book was written three years ago. Nevertheless, the value of good economics is its timeliness as well as its timelessness.

There is much to discuss in North's book - much that is relevant and much that is interesting. But it is a book to read and think over. Despite an unimposing size (it's only 208 pages); the thoughtful reader will read and ponder, reread and rethink. In my experience, it's the trademark of North's work and a reason why I enjoy his work. For the teacher who doesn't mind working to find gold, this is an excellent investment of time.

I look forward to your thoughts and comments.

Friday, November 21, 2008

More on the Bailout

I'm originally from Michigan and it hurts to seem my home state going through the problems it faces. At the same time, as an economics teacher and as someone who has watched from afar as policy-makers try to ignore fundamental principles, it isn't surprising.

Consequently, part of me is impressed and part of me is depressed to point you to this post by Jason Welker on his blog. I met Jason face-to-face for the first time at the recent AP Economics Conference here in Richmond, and I enjoyed talking with him. It just confirmed what I knew from his blog - he knows his stuff and communicates it well. This post is worth your time, whether you teach AP, IB, or a basic survey course in economics.

I look forward to your comments.

Thursday, November 20, 2008

Keeping Things in Perspective

Given the state of the stock market, and the pervasive sense of pessimism, I thought some humor might be in order. This video (HT to Mark Perry) from Late Night with Conan O'brien might help us keep things in perspective as we approach Thanksgiving.


What Is a Bond?

I ran across a short video (HT to NPR's Money Planet blog) for explaining different types of bonds. It was produced by the people at and uses a Schoolhouse Rock format. I think it could be useful for anyone explaining stocks vs. bonds in a basic economics or personal finance course.

Let me know your students reaction. Or students viewing this, please share your thoughts.

Our Own Edification

While I understand time is a scarce commodity, one of the things I like to do is keep up on my subject. I know the same goes for regular visitors of this blog because you tell me so. So, given that we both understand that scarcity is an operative concept, let me point you at a couple of resources that made me think about how I approach economics.

The first is a series by Arnold Kling at the Library of Economics and Liberty blog. He mentions in the first post that these entries represent how he thinks macro should be taught. And while I'm not sure I'm ready to reconstruct my syllabus from the ground up, I did get a number of ideas about how to approach certain topics. Post one is at the link above. Posts two through six are here(#2), here(#3), here(#4), here(#5) and here(#6).

I have to state up front, that I've not done more than peruse the second resource. But I intend to go through the whole series, either watching the on-line videos or reading the transcripts. This is A Short Course on Behavioral Economics, produced by Behavioral economics represents the intersection of economics and psychology and attempts to explain why we sometimes act differently then logical assumptions in economics would predict - or as I like to put it, the personal rationale behind apparently irrational decisions.

Let me know how these work for you.

Wednesday, November 19, 2008

Two Quick Recommendations

The first recommendation is from the U.K. newspaper, The Telegraph (HT to Carpe Diem) and is about everyone's favorite inflation story, Zimbabwe. (The country is looking at rates in the billions per cent per month.) There are a number of lessons from this story. The easiest is the link between money and prices as epitomized in the equation of exchange M x V = Q x P or (M x V)/Q = P which makes a quick explanation of how a money supply that has no connection to real output only results in price fluctuations.

But the other lesson is that money is defined by function. When it loses its ability to function - medium of exchange, store of value, measure of value - it no longer serves a role in the economy. That would explain why consumers in Zimbabwe are resulting to other currencies or to barter.

The second story is from yesterday's issue of The Wall Street Journal and explains how chain restaurants are attacking their costs in order to deal with higher commodity and labor prices and faltering demand. Some of the examples (IHOP and Applebees) seem to be easy approaches, like consolidating vendors to achieve discounts. Others deal with reducing portions or making decisions about how other resources are used (Church's).

Lessons that can be used here go back to competitive pressures on producers. Producers can change the price and/or change the product in a competitive market. Changes in product can be quantitative or qualitative. Changes in the suppliers (from who supplies to how often) may affect both quantity and quality. The question you can put to your students is "Do you think this type of change in production represents an example of entrepreneurial innovation, or something else?"

I look forward to hearing from you.

Tuesday, November 18, 2008

Prices and Marginal Productivity

We all know and teach that price sends signals to consumers. And we all know and teach that price sends signals to producers. To the latter group, we often talk about price signaling "what to produce," "how to produce," and "for whom to produce."

The second signal is the focus of this post. Changing prices tell producers not only what products to produce, but also what resources to use. A low price signals that those resources with low opportunity cost or a high marginal benefit/low marginal cost should be used - the concept of marginal productivity.

I used to tell my students to visualize three parcels of land. The first is very productive and very fertile. The ground seems to have a natural resistance to weeds and pests. And when the seed is sown, it naturally falls into rows and the harvest falls in nice, neat piles of its own accord. This land is productive with minimal effort and provides a decent return even when crop prices are low.

The second plot of land requires some work, some additional labor and capital resource inputs. Because of this, a return is possible, but only if prices are higher. The third plot land is a swamp, complete with alligators. Prices have to be pretty high to "drain the swamp" and still provide a return.

An article (complete with video and slide show) in today's issue of The Wall Street Journal illustrates this concept very well. The article explains how rising grain prices drew farmers in Cambodia to expand production by using less productive resources - land that had to be cleared, land that had little access to transportation or lacked irrigation. Now that prices are falling, farmers are getting the signal about "how to produce".

I think the article can also be used to discuss related issues such as role of government in providing infrastructure as a way promoting economic development; and the importance of institutions (laws and property rights) in protecting individuals and promoting growth. There are other concepts that can be developed, as well.

The idea of marginal productivity can also be extended to energy. At $4.00 a gallon for gasoline, bringing certain oil fields into production makes sense. That changes when the price of gasoline falls below $2.00 a gallon. And when we apply the idea to alternative energy sources, we can tie in the substitution effect.

I look forward to your comments.

Tuesday, November 11, 2008

A View from a Room (My Office)

Over the past couple of months, I've tried to point out some resources that you can use to explain the current economy to your students. An item here, an item there, all of it good in my opinion, but not really aggregated.

But at a recent meeting, one of the middle school teachers here at Collegiate (Hi Mike), asked if the Powell Center could put together a presentation that could be used with his students to explain the current state of the economy and how we got here. It is an interesting proposal, and one I'm working on. But the first step was to pull together some of the best resources explaining the current state of affairs.

I went back to some previous blogs. I also dug a bit deeper, taking recommendations from numerous colleagues. There are a lot of resources that explain the situation, all excellent. But they all involve time and time is a scarce resource - especially in the classroom. So, while I'm still working on short, usable program suitable for middle school students, I thought I would share what I've found, so far. Hopefully it's useful to you, and maybe you'll share some ideas with the rest of us.

The first is an excellent presentation by Julie Stackhouse, a senior vice-president at the Federal Reserve Bank of St. Louis (HT to FRB-New York). While the presentation is a bit text-heavy for use with middle school and probably even high school students, it clearly explains the sub-prime mortgage component of the problem on an adult level. For your background, this is a good place to start.

A second resource connects the sub-prime crisis to the international financial markets. It's a one-hour broadcast of the National Public Radio program, This American Life, titled The Global Pool of Money. In its basic form, it's too much and too long for your students. But for the teacher, it's a good second-step. It connects the domestic mortgage market to the global flow of funds that results from U.S. trade. The dollars accumulated by our trading partners flowed back to the U.S. seeking returns and provided the base for new mortgages at time when the housing market was booming and interest rates were falling. In a global economy, everything gets connected.

Now comes something that may be usable in your classroom. Paul Solman, the business reporter for Public Broadcasting System's Newshour provides a clear and even entertaining explanation of the sub-prime market using game pieces to illustrate what happened. I would think if you looked through Julie Stackhouse's presentation, and listened to "The Global Pool of Money," you could show the video and explain the fundamentals - at least that's what I hope to do. I know there are some clever illustrations that will be valuable.

This brings us to an innovative and fun video that can illustrate how the previous pieces changed the housing market. Before showing this, remind students that people respond to incentives, and prices are incentives. As more money came into the mortgage market and as other incentives (tax breaks and interest rates) provided additional incentives, the result was increasing demand for homes and, logically, higher home prices. With that information, students can see how the real estate roller-coaster resulted.

This brings us to number five on our list of resources. It is a sequel to the "Global Pool of Money" broadcast on This American Life titled Another Frightening Show about the Economy. Again, it runs about an hour and is probably too much and too long for the classroom. Additionally, since it was done a few weeks ago when we were experiencing the worst of the situation - so far - the conclusion may be too pessimistic. But overall it is still very helpful; providing some key information to make the bigger picture complete.

At number six, there's another video from Paul Solman on Newshour that illustrates the bigger picture. Again, Solman uses a lot of things around the house to illustrate the situation. It really helps clarify what he's talking about. (Many of us, me included, could actually learn from his example.)

Finally, The Financial Times has an in-depth explanation of the global financial crisis. The information is top-notch. The graphics are good and useable. There's just a lot of it. Again, I'm thinking I will do what we teachers do best - slice and dice, pick and choose without losing the sense that our economic decisions have impact beyond ourselves, and a global economy magnifies that. Hopefully, the result is a presentation that is clear, simple and usable with our students.

If you have any further suggestions, I'd welcome them.

I look forward to your comments and suggestions.

Friday, November 7, 2008

Keynes on Investing

I was reviewing in my journal this evening and I found a quote from John Maynard Keynes about investing in troubled markets. I think it's particularly relevant in the current circumstances.

"I feel no shame at being found still owning a share when the bottom of the market comes…I would go much further than that. I should say that it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself. Any other policy is anti-social, destructive of confidence, and incompatible with the working of the economic system. An investor…should be aiming primarily at long-period results, and should be solely judged by these."

While many people think they know Keynes' ideas on the role of government in the economy; not enough know about him as an investor. This speaks volumes, I think. And I think it can be used as a class-starter when studying financial markets.

Have a nice weekend.

Markets and Interdependence

Here's a link that is currently (3:25 p.m. EST, on 11/10/08) open. I hope you can use it.

The article link was to a free version. But it has now become "subscription required". Hopefully WSJ moves it back to free content soon. In the interim, I apologize for your frustration. If you can find a copy of the Journal, it's on page 1 of section A, below the fold.

One of the more interesting aspects of growing up is that we begin to see and understand that our decisions affect other people - that it's not all about us.

Some of our students seem to get this sooner than others. And, let's face it, occasionally we have student who gives us reason to wonder whether they'll ever figure it out.

A valuable aspect of economic thinking is that is allows us to demonstrate that. Today's issue of The Wall Street Journal contains one of the better articles I've read when it comes to demonstrating how one part of the economy connects to another.

The articleis about a firm that makes snow blowers and lawnmowers. But it talks about parts suppliers, Home Depot, workers, auto parts, and manages to integrate aspects of cost analysis, entrepreneurship, productivity, capital investment, commodities, credit and structural change. Quite frankly, you could use this article on a number of levels, over a number of days and still have concepts to explore. It is an excellent case study to use with your students. In each case, you can discuss how the market is transmitting information to the producer about the basic questions of economics: "What to produce? How to produce? and For whom to produce?"

Give it a read and let me know what you think.

Thursday, November 6, 2008

Fundamentals of Price

There are two articles in today's issue of The Wall Street Journal that can provide some insight into consumer behavior and price theory.

The first article reports that the incentive to switch to a hybrid vehicle is diminishing, first due to expiring tax credits, and second due to falling fuel prices. Both of these will essentially make it more expensive to "go green." With some of the information provided in the article, you could ask students how long it takes to recoup the "hybrid premium", the extra amount paid for buying a hybrid vs. a comparable traditional engine vehicle. Without the tax credit and with falling prices reducing the cost of driving, the payback time is stretching out. Questions for the students: Does this affect your decision-making when buying a car? Would taking a long-term view about energy prices in general change your decision?

The second article reports on the fact that the economic slowdown is causing a shift in consumer behavior in the supermarket. In an effort to stretch their incomes, people are abandoning brand loyalty and going with cheaper brands or store brands. Questions for the students: Can we graph this behavior to get a better sense of what's going on? Are we seeing shifts in the demand curve or movement along the curve?

What do you think? Are there other ways to use these articles?

Wednesday, November 5, 2008

"Underwater" or "Upside-down"

As this financial situation has unfolded, many of us have become more familiar with some new terms that really are old ideas - specifically the terms "underwater" and "upside-down." The terms, as I understand it refer to having a loan that is larger than the value of the securing asset. In the current market, it is being used frequently to describe home-buyers whose outstanding principle is larger than the current market value of the home. The thinking is that people in this position are likely to walk away and the property is likely to end up in foreclosure. However, not everyone agrees with this.

An excellent explanation of why underwater does not necessarily equate to foreclosure is in today's issue of The Wall Street Journal. Karen Blumenthal points to some interesting research that shows the number of people who walked away during selected downturns in the past, is smaller than we might think. And the logic of the past may apply to the current situation.

Many people don't evaluate the current situation in terms of debt vs. asset in the present. Rather, they are looking at the value of the home over time (hopefully increasing) vs. the balance of the mortgage over time (hopefully decreasing). They also may be looking at the value of the home as a home rather than just an asset. If the home provides the utility you seek as a homeowner, and it is worth a given number of dollars for that utility, then being "underwater" may not be a significant problem at present.

There are a lot of possible ways to use this article when discussing decision-making in economics or personal finance. What would you suggest? I look forward to your comments.

Friday, October 31, 2008

Economics, U.S. History and the Current Economy

I suspect those of you who are teaching U.S. History use the current economy as an illustration in class. Most people are busy drawing parallels to the Great Depression, but if you want to dig deeper, I've provided links below to some interesting articles that you can use to draw parallels to various events in the 19th century, rather than restrict yourself to the 20th.

And while I'm sure you can find issues to debate in each article (I did); they give the students a sense of the value of studying history - and how economic understanding can offer another view.

Have a good weekend.

Does This Happen Often? by John Steele Gordon

Panics and Politics also by John Steele Gordon

A Short Banking History of the United States also by John Steele Gordon

The Real Great Depression by Scott Reynolds Nelson

Thursday, October 30, 2008

Factors Affecting Demand

When we discuss markets with students, we like to talk about the factors that affect the components - essentially, what can move the curve to the right or to the left. We do this because our students tend to see price as the main factor. But we often have to remind them that changes in price move us up or down an existing curve. The question we then repeat is "what shifts the curve?"

When we explore further, we often get to the main determinants. Income, prices of related goods (substitutes & complements), tastes, expectations, and changes in the size of the market (number of buyers).

The current state of the economy is having an impact on prices in a number of areas. But one of the more relevant to your students may be college. Changing incomes and the continuing high price of education is changing the choices people make from where to go to school to what to study. This article from today's issue of The Wall Street Journal provides excellent examples of how price affects choices, and how income and expectations can affect the demand component of price. I think it would provide an excellent place to start a discussion reviewing demand and shifting demand.

What do you think? Can you think of or recommend other pieces to go along with this one?

Tuesday, October 28, 2008

Aphorisms for the Current Situation

Irwin Kellner, one of the economists and columnists on Marketwatch, revived a column from last year. It's one I actually remember reading, and it uses some old saws to explain why there's plenty of blame to go around when it comes to analyzing the current financial situation.

How do you use it in class? I'd do what Dr. Kellner did. List the aphorisms. But instead of providing the analysis, ask the students how each one might apply to the current situation. It will provide some interesting opportunities:

First: have they even heard some of these? I am tempted to place folk wisdom and aphorisms under the category of institutions - the rules that help shape our decision-making. If the students are not familiar with the sayings, the idea behind the saying may not be playing any significant part in their decision-making.

Second: (and more important) can they make they see the connection? Can they apply the folk wisdom to the current issue?

Third: Are there any consistent gaps in their view/analysis? Are any of the players seen as not culpable or participating in the formation of the mess? That provides you with a teachable moment.

Please share how your students do with Dr. Kellner's list.

Friday, October 24, 2008

A Couple Thoughts on "Buy Local"

First, there's an interesting interview with Russ Roberts, host of Econtalk and a presenter at the forthcoming AP Economics Conference co hosted by the Powell Center for Economic Literacy and the Federal Reserve Bank of Richmond.

Russ is going to debate with Bill McKibben, author of Deep Economy, next week on the topic of "Buy Local"

The reason I point you to Russ's interview is his comment about choices about buying local need to be individual. I agree that we all need to understand the issue and choose according to our own levels of "satisfaction" and our ability to make use of our own scarce resources. This brings me to my second recommendation.

This cartoon does an excellent job of showing the opportunity cost of choosing to buy local. One way is that the purchaser is gaining satisfaction by doing his part to "buy local." That should be worth something. At the same time, someone on a limited income may choose differently. By my calculations for every four gallons purchased "locally," one could afford almost five gallons purchased from a conglomerate. It depends on how one chooses to use scarce resources. Like Russ, I think the individual should be allowed to make the choice.

Do these resources offer any possibilities for your classroom?

Of Monetary Policy and the Fed

Here are two resources worth your attention, particularly if you do the Fed Challenge. (HT to Greg Mankiw on both of these, by the way.)

The first is a post on Dr. Mankiw's blog showing charts from the St. Louis Fed. I expect (and fervently hope) that these spikes disappear in the not too distant future. But they are representative of what the Fed does in a financial crisis. You might want to have students also look at reserve positions at banks and fed funds lending activity.

The second is for when you and the team have been working hard and need a break and a laugh. (This should be particularly meaningful to those who were in the Seventh District Fed Challenge when I was still in Chicago.)

Are there negatives to using the video? I look forward to your thoughts.

Wednesday, October 22, 2008

It's A Wonderful Life...Or Is It?

For the past 10 days, I've been reading and rereading this piece that appeared in the October 12 edition of The Washington Post. It caught my eye because it featured a large image from the Capra film It's a Wonderful Life. The photo had Jimmy Stewart's George Bailey lecturing Lionel Barrymore's Mr. Potter.

As economic and financial educators, we know and often use a different scene from that movie that features a run on Bailey's savings & loan, and his subsequent explanation of how a bank works. It's a sound, basic description of the process of changing short-term liabilities (deposits) into long-term assets (loans), and the potential problem with the mismatch.

The article in The Post attempts to lay the current financial problem
at the door of George Bailey's establishment. Easy credit for less deserving borrowers trying to grab hold of the American dream. Put that way, you may be tempted to cede the point. I've made it myself. However, one thing is missing in this analogy - a bit of institutional history.

The rule book now is different than the rule book facing Mr. Bailey and Mr. Potter. At the time Capra's film was made, both types of financial institution were tightly regulated as to rates they could pay depositors, types of loans they could make, and who held the loans. And as has been pointed out in numerous places, the establishment of agencies to subsidize and/or guarantee mortgages established different incentives for numerous parties up and down the financial line. But the tightly regulated market of the 1940s is different than the market of today. A post on this blog from last week listed a number of laws that helped change the rulebook for financial institutions. And those laws further changed the incentives and changed the market.

I agree with Ross Douthat that providing incentives for loans to riskier borrowers was a contributing factor to the current situation. But there are other parties who played a role. In each case, we need to remember a basic axiom in conomics: "People respond predictably to incentives." If a system is established that rewards risk-taking, either by borrower, lender, investor, regulator or politician; we shouldn't be surprised when the risk is taken. But we also need to remember that risk has an upside and a downside. And to that end, we may need to let things fail as well as succeed.

In conclusion, let me get back to the idea of using It's a Wonderful
in the classroom. While many of us use the "run" scene in class, it may be worth our time to use the clip of George Bailey confronting Mr. Potter and some other businessmen about home ownership, "Doesn't it make them better citizens? Doesn't it make them better customers?" I think there are still people out there; trying to meet their obligations on loans they took out just before the top. The fact that they are trying to make those loans work and keep their homes would seem to answer "yes."

I look forward to your comments.

Monday, October 20, 2008

Economics in the Musical "Big River"

Last fall when the students of the Upper School at Collegiate (home to the Powell Center for Economic Literacy) did The Music Man for their fall musical, I spent some time on the economics in that play, and managed to pull one economics lesson per day for a week. This year, the students are presenting "Big River", the musical based on Mark Twain's Adventures of Huckleberry Finn. This time, I thought I would try to focus on one concept or idea and try to point different examples of it in the play. This didn't prove to be less challenging or less entertaining. And despite the fact that a warning appears in the opening scene, "Persons attempting to find a motive in this narrative will be prosecuted; persons attempting to find a moral in it will be banished; persons attempting to find a plot in it will be shot. By order of the author. Mark Twain." I pressed on.

The concept that seemed to offer the most interesting opportunity was "productive resources." We know from Powell's Keystone Principles that productive resources are important. There are four types of productive resources: "natural resources" that occur in nature and include things like animals, plants and minerals; "human resources" which include all human effort, whether physical or mental and include all of the skills that humans possess; "capital resources" which includes money, tools or other products held back from consumption for purposes of producing later; and entrepreneurship" which includes the ability to mix and the other resources in new and innovative ways, and taking the risk on providing a good or service.

There are a number of instances where the concept of productive resources is well-illustrated in this musical. Here's how I see them. Please feel free to disagree or add to.

There are a couple hints at productive resources in the number, "Do You Want to Go to Heaven?" The first is the general encouragement to learn to read. Reading is presented as a skill (human resource) that yields benefits - not the least of which is being able to help one get to heaven. But there's also a mention of Judge Thatcher investing money for Huck and Tom Sawyer that yields them "a dollar a day." That’s a good example of capital resources in a productive enterprise.

Huck prepares dinner while his father is railing against the Guv'ment. He rolls fish (natural resources) in cornmeal (natural or capital resources) to cook them.

This scene is opened with the song, "Hand for the Hog". And by the end of the song, we're convinced that the hog is one of the grandest of natural resources regardless of your undertaking. From providing food to being a good pet, you have to give a "hand for the hog." As it turns out, the hog is an important resource to Huck as he tries to fake his own murder so he can run away from his father. Later in Scene V, Huck and Jim pull an old catfish out of the river for dinner. And the catfish (a natural resource) proves to be the source of capital resources (a gold coin), that gets put to use as they provision a raft and set out down the river.

Jim talks about his dream to get his wife and children out of slavery. He envisions trading his labor (human resources) for cash (capital resources) until he has enough to buy their freedom.

This scene sees Huck and Jim have been joined by a couple of other fellows, who go by the names of Duke and King. They're conmen and actors and proceed to develop a plan (entrepreneurship) to get some money from people in a small town by putting on a show. They use their talents (broadly speaking) and cunning to develop a way to trick some of the inhabitants into paying for the show, but then to bring others with money into the show to see the NONESUCH.

Here we find our small quartet heading past Arkansas and developing another plan to take advantage of their human resources to trick a grieving family out of their inheritance. Through a combination of acting and solid listening, King and Duke pick up enough information to perpetrate the fraud, only to be caught by the untimely arrival of one of the people they are impersonating.

We're almost near the end, and this brings Tom Sawyer into the story. Huck has been passing himself off as Tom for a while since getting rid of King and Duke. However, he's stuck at Tom's uncle's home (who evidently hasn't seen Tom in a while), and he needs to get Jim free. Jim was captured as a runaway and is stuck in the uncle's shed. As it turns out, the real Tom shows up. Tom Sawyer has a penchant for elaborate and risky plans (entrepreneurship) for getting what he wants. His intellect is a human resource. However, it seems that all of his plans are more elaborate than they need to be, calling for all kinds of capital resources (spoons and pie) and even some natural resources (spiders).

The show ends shortly thereafter, with Huck planning to head out to the Western Territories. There may be other examples of productive resources in the play, but just this handful shows how an "economic way of thinking" can provide a new view of a classic and fun piece of theater, and provide a new level of appreciation.

I look forward to your comments.

Do the Right Thing...?

There was an interesting piece in the Weekend Edition of The Wall Street Journal on Saturday. It was an interview with Anna Schwartz of the National Bureau of Economic Research (NBER). If the name is unfamiliar to you, she was the co-author with Milton Friedman of A Monetary History of the United States, published in 1963. She is 92 years old and is considered one of the preeminent monetary economists.

The most interesting part of the interview was near the end. She believes that Mr. Bernanke is fighting the last war, i.e. treating the current situation as if it were the same as The Great Depression. According to Dr. Schwartz, the issue back then was one of liquidity. In the period immediately following the Stock Market Crash, liquidity dried up. The Fed compounded the problem back then by tightening up on liquidity – starving the financial system of what was needed to keep running.

But Dr. Schwartz feels that this is not a liquidity crisis, rather a crisis of confidence. If that is true, the Fed can pump as much liquidity into the system as it wants, but until lenders feel confident that they’ll be repaid, little is going to happen. She also feels that Secretary Paulson’s original proposal to purchase the bad debt may have been more effective than the current Fed attempts.

This can make for an interesting discussion in classes discussing current events and monetary policy. It may also be the basis for some lively debates, either in class or on-line if you have a class chat room, blog or wiki. I would submit that another of her comments may also provide some fodder for discussion. About half-way through the piece, Schwartz says “Everything works much better when wrong decisions are punished and good decisions make you rich.” She continues, “It’s very easy when you’re a market participant to claim that you shouldn’t shut down a firm that’s in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew as pretty rocky, that’s their responsibility. And if they have to be denied repayment of their loans, well they wished it on themselves.”

This brings me to my question on this blog. How many of you use classroom blogs/wikis/chats to extend classroom discussion? If you don’t, is it a decision you made or one that is imposed by your school or district? I’m curious as it might help us at the Powell Center decide what we can do further take advantage of this medium.

I look forward to your comments.

Thursday, October 16, 2008

I Had to Chuckle....

I read this headline and thought to myself, "anyone who read Schumpeter."

But then I realized, "Who read Schumpeter?"

Conspicuous Consumption, Economics and Personal Finance

"Keeping up with the Joneses." It's a phrase most of us have run across at one time or another. Generally, we know what it means: if the neighbors get x, we need to get x (or if possible x-plus). We'd like to convince ourselves that "we were thinking about getting one anyway," or "once I saw the actual item, that was the last bit of information I needed." But the concept actually goes a bit deeper and has roots in economics and sociology.

In economics, the idea is called conspicuous consumption. And it is usually attributed to a 19th century economist named Thorsten Veblen. Veblen wrote about the upper classes of his time, and their desire for displays of wealth. He attributed this activity to the desire for status-seeking. Purchasing larger homes, "better" food and clothes, etc. was a way of displaying a real or imagined socio-economic pecking order. It was status-seeking.

This concept started moving around in my mind recently when one of my students asked a question about "name brands." We were discussing the idea of utility and I had mentioned that consumers seek utility in the goods and services they purchase. I mentioned the three types of utility: form, place, and time - and the student asked what form of utility was present in "branded" clothing. My response was that the brand differentiated a product - say a pair of jeans or shoes - from other like products, even if only by label. In my opinion, that was an example of form utility.

But the aspect of status-seeking and conspicuous consumption was also brought into the discussion. I asked whether status was actually improved by such things. It may be a matter of perception (ours) as opposed to reality (other people may not actually care). Conversely, do we receive psychic income if we feel better and if so, what is that worth? That was a couple weeks ago, but then the topic surfaced again as I read Greg Easterbrook's book, The Progress Paradox: How Life Gets Better While People Feel Worse.

First, let me say I enjoyed the book. His examples of broad economic progress were convincing. And the idea that wealth is not synonymous with happiness is not new. To that point, I think many of us need to examine the big picture before bemoaning our station in life. To make things seem worse than they are may be, as Easterbrook supposes, partially genetic. But it is also played up for self-serving reasons by individuals and groups that have a stake in our feeling bad.

That being said, Easterbrook uses a term in his book that, in my mind, clarifies what Veblen was writing about. Easterbrook uses a different term to describe the "having and exhibiting of that which is not needed." That description would easily explain conspicuous consumption. And while Easterbrook points out that the idea has always existed among the rich, he maintains that it has trickled down toward the middle class. He gives a few examples of items that fit his definition. You or I may disagree with some of them. But one of the beauties of the market is my wants/needs don't have to coincide with yours. However, I think the question which determines whether something falls into Easterbrook’s and Veblen’s concepts may be "what is it used for?" If the purpose is to impress or signal status, perhaps their terms aren't that far off.

As a classroom application, Veblen’s (or Easterbrook's) idea has value. It provides another way of examining the concepts of value, consumption, and utility. And in the personal finance setting, these topics can come into play when we ask students to prioritize their wants in setting goals or making budgets. Everyone needs to continually ask, "Am I buying this because it meets basic utility, or am I buying to signal?" Either way, we need to be aware of what we expect our purchase to do for us in order to make smart choices. After all, if you're willing to accept the opportunity cost...

What are your thoughts?

Wednesday, October 15, 2008

A Brief Institutional History

There are a lot of things I hope to post on in the next few days, but this one begged to be first

In today's (10/15/08) issue of The Wall Street Journal, Peter Wallison of the American Enterprise makes what I consider to be a significant misstatement in his opinion piece. Early in the essay, he states that "While there has been significant deregulation in the U.S. economy during the last 30 years, none of it has occurred in the financial sector."

I would contest that claim, whatever it's based on. To go back 30 years is to start the clock in 1978. By my count, there have been at least five acts. (In fairness, Wallison does cite two of them later in his essay, but to dismiss any of these as "not significant" to the financial sector is, in my opinion, questionable.

The first act I would count as significant is the Depository Institution Deregulation and Monetary Control Act (DIDMCA) of 1980. The short explanation is that this act is allowed banks and savings and loans into each other's "businesses". In turn, this allowed S&Ls to hold assets other than mortgages; and gave access to the Fed's discount window to depository institutions that were not banks, while extending the Fed's reserve requirement to those same institutions.

The second piece of legislation that I think should be viewed as significant is the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989. It consolidated two federal S&L regulators into one and placed the combined entity within the Department of Treasury. It also established the Resolution Trust Corporation to clean up hundreds of insolvent thrifts, and expanded Fannie's and Freddie's responsibility to support mortgages for low- and moderate- income families.

The third law and the first piece of legislation mentioned by Mr. Wallison is the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991. It strengthened the FDIC by allowing it to borrow directly from the U.S. Treasury, and to resolve failed banks by using the least-costly method available, while authorizing the FDIC to assess deposit insurance premiums according to risk undertaken by banks. (I suspect this may have provided some, if not a lot of incentive for banks to securitize risky loans. But I'm just speculating on that.)

The Riegle-Neal Interstate Banking Act (RNIBA) of 1994 is the fourth piece of legislation. It allowed banks to begin branching across state lines. If I'm not mistaken, it also allowed bank-holding companies to consolidate charters from different states into national charters. This provided impetus for some consolidation of banking in the U.S.

The final piece in my list, and the second piece of legislation cited by Mr. Wallison, is the Gramm-Leach-Bliley Financial Services Modernization (GLBA) Act of 1999. It repealed part of the Glass-Steagall Act of 1933 and allowed competition between banks, securities firms and insurance companies by allowing them to combine into single entities.

While it seems that Mr. Wallison backtracks by allowing that FDICIA and GLBA may have been significant, I would contend that the other pieces of legislation also had significant impact on the financial sector in the past 30 years. All of these changed the rules and the structure of that sector in significant ways. And by changing the rules and structure, the incentives were changed. And the new incentives rippled through the financial system, causing changes in behavior - by firms, by consumers, and by government entities.

I welcome your thoughts.

Monday, October 13, 2008

Globalization, Interdpendence and the Financial Crisis

The current situation has managed to focus our attention on domestic economics and financial markets. There have even been occasional references to developments outside the U.S., although many of the people I talk to, including students don't seem to understand the connection between U.S. and financial markets. It's almost as if the idea of interdependence, particularly interdependence in a global economy, was foreign (excuse the pun).

There are a couple of resources that you can use with your students to help them understand the global import as well as the global impact of current events.

The first resource is from last Friday's (10/10/08) edition of The Washington Post. The article is about the impact the U.S. financial crisis is having on some of India's poor. Many American corporations and not-for-profits have been active in India. Grants to organization like Habitat for Humanity have helped provide better homes for many people around the world who previously lived in poor conditions.

The second resource is from today's (10/13/o8) of The Wall Street Journal. This piece is short, but the interactive feature has the most potential. It allows students to roll their cursor over a world map and learn about the impact of the financial crisis on various countries.

If you're trying to integrate economics into geography or geography into economics or to connect current events to either or both of these areas, the articles are worth your time.

Please feel free to share how you're using the information in your class, and how your students react to it.

Tuesday, October 7, 2008

Supply Meets Demand: Market Clears

For those of us still interested in microeconomics, there's an interesting story in today's issue of The Wall Street Journal.

The story is about the challenge facing Home Depot CEO Frank Blake shortly after he took the reins in 2007. While visiting a store in Arizona, he found they had a surplus of lawnmowers. And while visiting another store on the west coast, he noticed they were short on popular power tools. The problem was all stores carried the same inventory, almost regardless of what sold in the specific location.

The solution for Home Depot, as it has been for other large retailers mentioned in the story, has been to localize the selection of merchandise while still taking advantage of the volume-based pricing available to large chains. Essentially, HD used data to determine which items in a large centralized inventory, will do best at each store. Match supply to demand.

With fewer unsold items, overall costs drop and prices can be lowered while still maintaining profitability. It's a good story and a good example.

I look forward to your comments.

Friday, October 3, 2008

A Couple Resources and One Hypothetical

I'll point you to the resources, first. In today's issue of The Wall Street Journal, George Mason University economics professor, Russell Roberts, has an excellent opinion piece on the role of government in providing the foundation for the current situation. If we take as a given that "people respond predictably to incentives", then the rules (institutions) of the market that collapsed were written some time ago by political leaders who were, themselves, responding to incentives - reelection being the most obvious. If you're into economic history with an institutional bent, this is a good piece to use to start a discussion.

Another interesting resource, particularly for those of you teaching American History, is in the forthcoming issue of The Chronicle of Higher Education. Scott Reynolds Nelson, a history professor at the College of William and Mary, writes that a good analogy for current times is not the Great Depression. Rather, he suggests the Panic of 1873. I especially enjoyed all the global parallels he sees.

Finally, here is an unrelated question for you. I've been thinking about the "buy local" movement and trying to imagine a debate between that idea and an old quote about the market. The quote states that through the miracle of the market, "every morning New York gets fed." (I think the original quote is by Frederick Bastiat and refers to Paris – but I may well be wrong on that.)

As I think about New York, I wonder how one could promote "buy local" and still feed the city. One would have to cast a wide net to do so – and by the time the net was cast widely enough – we’re still talking about traditional trade. How would you argue either side or both sides of this discussion with your classes?

I look forward to your comments. Have a good weekend.