Friday, February 29, 2008

Thoughts from the Summit on Economic and Financial Literacy

I’ve been out of the office the past couple days. Yesterday I was at a professional development program, but the day before I was in Washington, D.C. attending the Third National Summit on Economic and Financial Literacy. The program focused on the results of the Economic Report Card from the National Assessment of Educational Progress released this past summer. The Summit itself was a meeting of concerned organizations (public and private, for profit and charitable) that are concerned with the state of economic and financial literacy in the United States.

There were a wide variety of speakers, and although they were preaching to the choir; many of them left the audience with audience with a lot to speak about, even when speaking what should be obvious. They gave me a lot of material for this blog. I’m not yet sure I’ll use it all, but here are some of the thoughts I walked away with.

The welcoming remarks were by Robert Duvall (not the actor), President and CEO of the National Council on Economic Education. He was followed by Andrew Plepler, President of the Bank of America Charitable Foundation. In his opening remarks, Plepler spoke about current economic conditions and the relation to economic and financial illiteracy. He spoke about the fact that a great many people made a great many errors – in taking out loans, in making loans, and in overseeing the lenders and loan originators. But it was a following comment that spoke the loudest. He said something to the effect of “This is not government’s problem to fix.”

I thought about this, and listened to the rest of his remarks. The meaning I took from his comment was that the decisions that had been made, and the resources that had been loaned, and promised for repayment, were in the realm of voluntary private transactions. Many of them were ill-advised, to be sure. But it was from the same private sector that the best remedy could come. Financial institutions needed to work with borrowers to reschedule, refinance, and refigure how best to keep people in their homes, and keep the loans active. Borrowers needed to look at the loan from the perspective of saving their homes. Neither party should be looking at the situation from a purely balance sheet perspective of asset value vs. liability.

It would be by working together to resolve the problem that all parties would learn the most from it. Expecting an outside agency to rescue both borrower and lender does not teach us anything other than someone will bail out mistakes. Rather, as educators, businesspeople, and bureaucrats concerned with economic and financial literacy, we need to improve economic and financial education so that people in similar situations in the future do not make the same mistakes.

If I understood him correctly, I would have to agree. And I would add one more thing. Economic and financial literacy should include an understanding of the institutions and laws that guide our participation in the marketplace. Too often, those institutions, which include trust, property rights, and redress, are not given enough visibility when we teach. Like many other people, I am impressed by the amount (both numbers and dollars) of transactions that take place on trust in this economy. Events like those of the past few months have the potential to shake that trust. Those who deliberately used deception when they entered the market should face a price above any losses they may be facing. For trust is an institution that we can't afford to lose.

I look forward to your thoughts.

Tuesday, February 26, 2008

What I'm Reading

I just finished a book that, despite some cosmetic issues, is a good resource for any economics or personal finance teacher to have on the shelf. And for those of you teaching a course on the global economy or current events, you might want to use it as an optional or auxiliary text. The book, Globalization, is by Don Boudreaux, Chairman of the Economics Department at George Mason University. If you read the Cafe Hayek blog, you're already familiar with his writing style; and if you follow the "Letters to the Editor" section of any of a number of major newspapers, you're familiar with his name.

Boudreaux does a very good job of taking what is a highly emotional subject for many, and dissecting it in a very entertaining and informative manner. The fact that the book is only eight chapters and 162 pages long (including glossary and index), and you have a simple, enjoyable book on a topic of high current interest.

My only complaints with the book have to do with the editing. In chapter two, there are a couple of bubble charts that could have been better rendered in color (if the idea was to be able to differentiate regions or countries), or had some other ways of providing detail. The charts should have provided "information at a glance." But in my case, they were of little help. And two figures in Chapter 7 appear to have the titles reversed. It was easy enough to figure out which needed to be which, but this should have been caught before going to press.

Nevertheless those errors do not detract from the overall value of the book. I would hope you would consider checking it out of a library at the very least, or buying it for your own use. I don't think you'll regret it.

I look forward to your comments about the book.

Movies and Economics

A few days ago, an item on the Real Time Economics blog caught my eye. The Federal Reserve Bank of Dallas runs has an annual essay contest for high school students in the 11th District. This year they're asking students to identify economic concepts in the movies. Read through the comments to this post. Some of them insightful, some of them revealing (a few have nothing to do with the topic and are anti-Federal Reserve rants).

Then, I ran across an interesting graphic in the interactive edition of The New York Times. It presented movie revenues in an innovative and interesting way. But that and the fact that the Academy Awards were this past weekend, reminded me of another economics lesson.

A former colleague of mine, who was an outstanding AP Economics teacher in the south suburbs of Chicago, had some students who applied the lessons of price inflation to movie box office. This was back in 2001 so the information has changed. But they went on-line, found the top 50 grossing movies (not gross movies) of all time and then applied a GDP (Gross Domestic Product) deflator (link no longer operative) to account for inflation and see which movie really was the top when measured in constant dollars. (Please note, official data only goes back to 1947 so years prior to that were estimated.)

I have the file given to me in 2001. If anyone's interested, I will gladly provide it. If anyone is interested in updating and sharing here, please...

share your comments.

Friday, February 22, 2008

An Interesting Insight

I have to thank fellow blogger Bill Polley for this link. Joseph Sternberg of The Asian Wall Street Journal wrote an interesting column for the De Gustibus section of The Wall Street Journal. He shared his tendency to avoid carrying change and how, in Hong Kong, he found himself with a sizeable pile of coinage. Not having access to the change counting machines found in many U.S. grocery stores, he took his change to his bank. They were perplexed at first, but rose to the occasion. After counting the coins they deposited the proceeds to his account and returned him one U.S. cent.

The piece brought back memories for me. When I was at my former position with the Federal Reserve Bank of Chicago, I was told by someone that the Seventh District was the largest user of coin in the Federal Reserve System. I don't know if this is still the case, but I would often share this trivia with teachers and tour groups, giving them an opportunity to speculate on the reason.

People from the greater Chicago metro area often cited toll roads. I would then remind them that Chicago was not representative of the rest of the district - and had a lot more toll roads than other parts of the five-state area. Other reasons were related to the transit system and casinos. I then told them that I was told one reason was the penchant of Midwesterners to hoard coins rather than circulate them. And while I'm sure other folks in other parts of the country (and the world, apparently) share this same habit, Midwesterners do it as well as any and maybe better.

I often recounted the tale of the penny shortage in the late 1990s. There was a news story about a gentleman in Indianapolis who bought a brand-new, all-the-options pickup truck. Paid cash -- all pennies. The news story reported the cost of the truck was in excess of $25,000. You do the math. Now that's keeping the change. (The opportunity cost in lost interest must have been significant. And maybe liquidity preference is a factor.)

Anyone else have good stories to share about change hoarding?

Thursday, February 21, 2008

The Credit Crunch and the Business Cycle

The current credit crunch has brought renewed interest in the business cycle for economics and personal finance classes - at least I hope it has. And although the political candidates are going out of their way to let us know how they will remedy the business cycle, few are willing to explain how the business cycle impacts credit.

This brings me to an interesting article (subscriber content) on the front page of today's edition of The Wall Street Journal. The article is titled "Lending Squeeze Hits Ailing Firms." The article mentions that a number of firms, some of which are already under bankruptcy protection, are finding it harder and harder to borrow funds. This can mean that interest rates are inordinately high, or that credit is not available at all. And to understand this, we need to examine the components of an interest rate.

Interest rates are, of course, the price of money. But that price incorporates a number of risks for the lender. First of all, lenders seek a return on the funds to offset the opportunity cost of lending (they could have been spending the funds elsewhere but chose to postpone consumption). There are several risks at work here. First, is maturity risk - how long will it take for repayment. Generally, a loan with longer maturity represents higher risk, and will generate a higher interest rate. Inflation expectations usually figure in here, as well. Second is liquidity risk, how easy will it be to convert the loan to cash. Some items, like homes and businesses are not very liquid, as we've seen. Therefore they may entail a higher risk and a higher rate. And finally, there is default risk. What is the likelihood that this loan may not be repaid. A firm that is in questionable financial shape to begin with may not be able to pay off additional loans. In that case, the default risk is considered high and again, carrying a higher interest rate on a loan.

Many of the firms in the story are already in financial trouble. The current business cycle will make it more difficult for these firms to generate revenues to pay off debt. Consequently, the interest rates are high when credit is even available. This brings us to the business cycle.

One of the basic aspects of any downturn in business is that less efficient, less productive, less profitable firms are shaken out. This frees up resources, in this case capital resources, to be shifted to other areas of economic activity that are more efficient, more productive, and more profitable as determined by consumer demand. Does this mean that the process is painless? No. Does it mean it should be avoided? No. And an economic downturn provides information to all players as to which areas need to be adjusted.

Have you been using the current situation to discuss the business cycle and the related credit crunch? If so, please share your thoughts and your students' comments. If not, please share why you feel it may not fit into your curriculum.

Wednesday, February 20, 2008

More on Distribution

The ongoing discussion about income/wealth/spending disparity has been the subject of several recent posts to this blog. But that conversation exists largely because of a debate about the nature of the "middle-class" in the U.S. Some hold that's shrinking, others contend that it's not shrinking but dynamic because people are constantly moving in and out of it. And who moves and which direction frequently boils down to whether you're measuring income, wealth or spending. (I won't go into the logic of how moving everyone up only shifts the middle without eliminating the bottom.)

But it begs a more fundamental question, "What is middle class?" And while I wouldn't pretend to have the answer to that, it's still interesting.

An article in a recent issue of The Economist magazine focused on The In-Betweeners (premium content) - the middle class in emerging economies. The idea is particularly interesting because, if we really want to eliminate poverty, what we are aiming for is moving more of the people in the lowest economic group into a higher group. The article highlights a paper by two MIT economists that provides some interesting insights. It examines common and disparate characteristics of the middle class in various economies around the world. And it is perhaps as interesting in defining the view of what constitutes "middle class" in this country as it is about defining that term for other parts of the developing world.

While I've only read the article, I have skimmed the paper. I intend to read it all because it was very readable and very interesting. I recommend it if only to help provide students in economics and personal finance courses a sense of relativity and an understanding of how we differ as well as how we're the same. After all, according to Globalization, "This process has effects on the environment, on culture, on political systems, on economic development and prosperity, and on human physical well-being in societies around the world." It seems to me the better we understand each other, the more we have to gain, economically and culturally, from the process.

I look forward to your comments.

Tuesday, February 19, 2008

Stimulus and Wealth/Income/Consumption Gap

In a recent meeting, a colleague commented on the recent information about the differences in income and consumption among those at the top of the distribution and those at the bottom. The specific observation was that it seemed to indicate that "trickle down doesn't work" or something to that effect. While I didn't respond directly to that comment, I did say something about what isn't spent is usually invested; but not wanting to get into a political discussion, I didn't pursue it. (I generally avoid political discussions because I don't trust politicians of any persuasion. The cynic in me believes that their interest in the position automatically makes them suspect. But that's a subject for another post.)

However, the comment did cause me to continue thinking. As I look at the information, I'm having a hard time seeing where the "trickle down doesn't work" is coming from. From the data, those in the highest income segment spend more than those who don't. What was probably meant was that those at the high end don't spend as great a part of each dollar as those who at the low end. I would agree with that. But I would also point out that because Y = C + S (or income equals consumption plus saving), the funds are still put to use, just differently.

It seems logical that those in higher incomes don't spend all their money on consumption. But it's also fair to believe they don't hide it in a box in the back yard, a mattress, or other non-return generating places. Money is a tool to be used. What is not consumed is usually invested, which provides capital for further production, which one hopes is consumed eventually. The question then becomes "does direct consumption or capital investment have a larger impact in the economy through improved output and productivity, and over how long a period of time?"

This then relates to the marginal propensity to consume of individuals or groups. In other words, do we know or can we predict what any group (I'll avoid individuals) will do with an additional dollar of income. That's where I think the debate inevitably bogs down because factions will promote their view of this marginal propensity: stating or misstating it to their advantage.

One group that feels any stimulus should be directed towards those at the bottom of the income distribution will hold that dollars spent here will have a greater likelihood of being spent on new consumption. This may or may not be true depending upon their existing debt situation and their perceived need to improve that.

Yet another group feels that stimulus should be directed towards those at the upper end of the income distribution because that group already pays the largest share of taxes, and that group will be able to use the funds for new spending. But the upper income group may also choose to reduce their debt position or may choose to invest the windfall, which will not have the immediate effect of consumption. Some of that will depend on how large the stimulus is, I suspect.

While the package has already passed, did you use the stimulus package to discuss marginal propensity to consume, and are you using the recent information on wealth/income/spending gaps to augment the discussion?

I look forward to your comments.

Monday, February 18, 2008

What I'm Reading

I just finished reading Amity Shlaes book, The Forgotten Man. And I was very impressed. It is a revisionist view of the Great Depression, with a focus on the administration of President Franklin Roosevelt, but that largely because his administration spanned most of the period.

Shlaes offers some new insights into the backgrounds of many of the brain-trusters, as well as providing motives and goals for many of the experiments, failed and successful, of FDR's time in office. Of particular interest to me was how Hoover suggested cooperation with the newly elected but not yet inaugurated FDR to get some relief efforts started. Roosevelt, it appears, did not relish the idea of sharing any of the credit, and so put off these activities until such time as the recognition would not be shared.

Also of interest was how Shlaes followed the career of an executive in the utilities industry, Wendell Willkie, who wanted to be a true believer in President Roosevelt's efforts, but slowly found disillusionment, and later enough outright opposition to become a political opponent in the 1940 election.

For history teachers, there is value in learning an alternative view of the period. Too much of what we teach of period has not changed. The approaches have varied, but the content remains driven by a mindset shaped by The Grapes of Wrath. (I deliberately chose the video rather than the book because I suspect more people - students and adults - are familiar with the film and not the book.) That view, while valuable, is one view. There are other views. Shlaes offers some of them.

For the economics teacher, this book provides insight to address concepts related to fiscal policy, monetary policy, the role of government, and the development of economic institutions. It is likely that this period brought about more change in these areas than any other in U.S. history before or since, with the exception of the founding of the nation. And understanding what was accomplished and what was meant to be accomplished provides us with information on the possibilities and limitations of those concepts.

And as always, there are lessons in history to apply to the present. One of the points Shlaes makes late in the book has to do with the impediment to private investment that resulted from higher taxes in last years of the 1930s. Shlaes quotes William Gladstone, "credit is suspicion asleep."

When I read that I did not see a direct link between taxation and investment. Rather, I thought how it could be applied to the recent sub-prime mortgage issue. one could certainly argue that credit was more available because parties that normally would have been or should have been more suspicious about such things as credit history, income streams, risk, and the evaluation of all of these factors. Suspicion was, indeed, asleep.

To conclude, I recommend this book as good read for teachers of economics and history, as well as those who would just like to learn more about the period.

I look forward to your comments.

Friday, February 15, 2008

Supply & Demand - Cause & Effect - Understanding Interdependence

One of the concepts that can easily be integrated in both economics and personal finance is interdependence. The fact that people depend on each other and that interaction in the marketplace affects others is fundamental to understanding both one's personal financial situation as well as the larger global economy.

Earlier this week, a very short piece on Public Radio's Marketplace caught my attention. The title, Wheat is the New Corn may not mean much to urban dwellers, but it should. It alludes to the fact that increased demand for corn for conversion to ethanol is having a spillover effect on other grains -- particularly wheat -- as they are used as substitutes elsewhere in the food chain.

Then today's issue of The Wall Street Journal brought this article about how grain demand is boosting the economy of America's heartland. Combine it with this article from USA Today about how global demand is lifting grain prices, and this piece (link no longer operative) from the Times-Transcript in Canada and I think you may have what you need for a lesson plan on interdependence and how changes in one market impact others. (You might have to assure some students that what is happening to Canadian food prices is also happening here. It may even be more pronounced here given the purchasing power of the Canadian dollar vs. the U.S. dollar on world markets.)

What do you think? Are there other articles you prefer or would add to this mix?

Thursday, February 14, 2008

Utility and the Substitution Principle

While checking out other blogs today, I ran across an interesting link provided by Alex Tabarrok on Marginal Revolution. I don't think it would work with my wife, either. Although it offers an interesting way to discuss both substitutes, and form utility as they pertain to value of goods. (Heck, scarcity might even fit in there someplace.) And that would provide a segue into the diamonds vs. water paradox on value and price.

Anyone have any thoughts out there? I would think two pieces of cardboard with "season tickets to (insert favorite team here)" might be an appropriate counter.

Wednesday, February 13, 2008

Income/Spending/Wealth Distribution

If you spend much time reading blogs, particularly economics blogs, one of the topics you're sure to have noticed this week relates to income distribution. Now the concept and the topic both have particular relevance now that the political campaigns (also known as "the silly season") are upon us. What with politicians and pundits bandying the "r" word around with self-serving abandon, it's hard to not think about "how who gets how much". Even I touched on the topic last week.

But the real discussion began with an op-ed piece in The New York Times. (HT to Greg Mankiw.) Authored by a couple of economists at the Federal Reserve Bank of Dallas (one of whom, Michael Cox, was featured in the video I recommended last week), the piece suggested that while many are concerned about the widening income gap, it is the spending gap that may be a better measure of how well off we are, relatively speaking. And that gap is considerably narrower than the income gap, indicating things are not as bad as some would have us believe.

This was followed by comments and other posts pointing to a paper by two economists at the University of Chicago that was also published by the National Bureau of Economic Research (NBER). (HT to Arnold Kling on Econlog.) And there are other posts of interest on the blog site for The Economist.

This brings us to one last post and the focus of my blog. An entry on Consider the Evidence by Lane Kenworthy sums up the issue very well. It's the data. What is being measured and compared - income, wealth, or spending? They are all different. And comparing one to the other or misusing terms makes it difficult for people to understand the picture. That goes for the personal picture as well as the big picture.

Students need to learn to dissect information they receive and to have the tools that allow them to do so. Back in the early days of this blog, I asked How Do You Teach Rich? The question related to teaching students how to differentiate between income, wealth, and spending. And the debate that has swirled around the blogosphere this week basically boils down to that question. Because knowing how we slice and dice the data is crucial to understanding this debate. Policy-makers, politicians and pundits use the different data to tell different stories. And the story does differ according to the data that's used. It is very possible that a person can be in the lowest income segment, and still be living comfortably off of savings (wealth). Indeed, when we teach the importance of saving and investing in a personal finance course, we are preparing students for just that. There will come a time in life when our students will need to draw on wealth to augment reduced income. Yet, the topic comes up on the national stage and many of us act as if we're talking about a different issue.

The original op-ed piece does not misrepresent anything, but it is a way of looking at economic facts that is different from the view some would have us embrace. It's not better. It's not worse. It is different. And it is valuable. Just like our student's grasping the idea that income is different than wealth is different from spending is valuable. And I think it's worth the time and effort.

I look forward to your comments.

Home Ownership, Saving & Incentives

I think many people will agree that the current financial situation was largely brought on by concerns about sub-prime mortgages. The concerns are varied: unscrupulous brokers pushing complex financing on uninformed buyers; unscrupulous buyers taking advantage of rising home prices and ridiculously priced financing in an effort swap property; confused regulatory agencies that all thought someone else was watching this; and even financial middlemen charged with assessing risk on packaged mortgages before selling them to third parties.

It has also raised concerns about how or whether we view our homes as an investment. Political candidates have even raised concern. According to some candidates, people who looked upon home ownership as a way to save now face a poorer future as their dreams disappear because of an inability to pay the mortgage.

All of this ran through my mind when I looked at an article by Johnathan Clements explaining "Why Your Nest Is Not Your Nest Egg." And while I may disagree with his verb usage (I would suggest "Should Not Be" instead of "Is Not"), the points he makes are all valid. And they are relevant for use in either personal finance or economics classes.

To the personal finance course first: Clements speaks to the fundamental differences between investing directly in real estate and other financial mechanisms, such as savings accounts, stocks, etc. The liquidity aspects related to price and profit realization are substantial. And the expenses involved in buying, holding a selling are an aspect that many overlook. Granted, many of the expenses are related to the fact that the house is not just an investment; it is usually an active home. But that doesn't make the expenses less real. These generally are not concerns when examining other saving vehicles. And then there's the leverage issue that takes us back to original crisis.

For the economics teacher, there are also lessons. One can certainly use housing as a fundamental example of decision-making (buy or rent), examining opportunity costs of both, etc. Additionally, one can look at how the real estate market differs from other financial markets (liquidity, term, risk). There are even topics to relate to fiscal policy, the role of government, and economic institutions. What is the tax break on housing and why is it there? Should government promote home ownership as a social goal? How should it be regulated? Should it be regulated? And how do the rules (formal and informal) and organizations (commercial, political, social) we establish shape our views and direct our choices? These last questions are important, because they again take us back to the original financial crisis. The situation was one of our own making. Emphasize our as the large social collective that is our nation. We have certain thought and beliefs about economic good. We encourage private sector innovation to help promote that good (albeit with a profit motive). And as individuals, we take advantage of the mechanisms in place for our own profit - emotional, physical and financial.

There's a lot to pull out of the topic. And the article is sound, fundamental personal financial education. I strongly encourage you read the article. I look forward to your comments.

Tuesday, February 12, 2008

Globalization - Economics in/and History

My undergraduate training was in history, and I came to economics "through" the back door of a business minor. A course I needed to graduate was taught by a visiting professor who was very good at putting the concepts in to a relatable context. I had a "road to Damascus" moment, and I've been interested in economics and the relationship to history ever since.

This explains how I ran across this review on the History News Network web site. The book, titled Power and Plenty, asks whether globalization is an unstoppable train, or whether it can be slowed down or even derailed. After istening to much of the political rhetoric and punditry during this "winter of our discontent," one would certainly accept the possibility of the latter.

And while I've not yet read the book, I will probably pick it up for a couple reasons. First, I've long felt that Thomas Friedman's labeling of globalization waves - he calls them globalization 1.0, 2.0, and 3.0 - were too limited. After all, he cites 1.0 as the period many of us refer to as "The Age of Discovery." But there are numerous periods prior to that when trade helps to build empires in what is then the "known world," and even drives further exploration. For many of these earlier civilizations, trade encompassed the world as they knew it. For them, it was globalization. And it did much of what advocates of the current incarnation of globalization find valuable.

Second, the book seems to focus on the economic institutions that are in place that both promote and hinder the expansion of trade. Whether it is a mind-set, laws, or a naval force committed to protecting commerce, these rules and organizations set the tone for a world view. If nothing else, it reminds us as economic educators that our role is to help our students understand the plusses and minuses of economic engagement with the rest of the world.

I'll try to review the book once I've read it to see if I'm right.

Whether you're a history teacher or economics teacher, if you're familiar with the book, I encourage your comments. And even if you've not read the book, feel free to share your thoughts.

Wednesday, February 6, 2008

A "Real" and Interesting Perspective

How much time do you spend developing the idea of real income? Do you discuss the difference between real and nominal income when you talk about standard of living? Is it a topic in personal finance courses as well as economics courses? Or is it more likely to pop up in only one of these, and if so which one? I introduce the idea early on in my course and revisit it several times. I think it has merit when discussing how competition works, or if you're developing the idea of consumer surplus, among other things.

After looking at this video, featuring Drew Carey, I think it may also fit in when discussing income distribution. The piece spends quite a bit of time with Dallas Fed economist, Michael Cox. Back in 1997, Cox did an annual report article for the Federal Reserve Bank of Dallas. It offers an interesting way to examine standard of living, using "time worked to earn" approach that can be another way of looking at real income. Additionally, it has a lot of data relating real prices (time equivalents) in the early 20th century to similar items in 1997.

There are also a number of items that have no early-20th century equivalents. For these he still traces the evolution of price, providing some interesting food for thought and discussion.

For those teaching economics or personal finance, the article and the video provide students with an alternative way of looking at income, both on a national scale and a personal scale. It also provides a framework for discussing topics of inflation and whether certain measures accurately reflect cost of living, given qualitative improvements related to nominal price. Finally, the video does a good job of asking to what extent perception becomes reality when we discuss income distribution.

What are your thoughts?

And if you like numbers, charts and graphs, here's something else to add to the discussion.

Tuesday, February 5, 2008

Talkin' or Walkin'

One of the more interesting aspects of our culture in the U.S. is that we sometimes are much better at "talkin' the talk" than "walkin' the walk." Specifically, we generally are quite good at promoting the benefits of free trade as a remedy for helping the world's poor -- unless it means it will affect us negatively. I was reminded of this as I read an excellent piece in the Jan 24th (I know, I'm behind) issue of The Economist titled Somewhere over the Rainbow (subscriber content).

I picked up the story because I teach a course on the global economy for high school students at the University of Richmond. I'm always looking for articles that provide some food for thought as we discuss the ups and downs of an increasingly interdependent world economy.

The story tries to provide a counter to all the negative world news that we've been subjected to recently. And it provides some objective data that indicates thing may not be as bad as we think. And things certainly don't warrant economic disengagement from the rest of the world.

There are three main points made in the article. The first is that social conditions are improving on a large scale. Second, that there is progress against extreme poverty. And third, the incidence of violence and war appears to be subsiding. And much of this is in the last 25 years or so.

Let me assure you, that the article does not say that there are no problems, or that where progress has been made that it is ideal. But the evidence shows that things are getting better; that the improvement is tied, in part, to economic growth; and economic growth is better where trade is encouraged and allowed.

Now how does this tie back to my opening? Many would contend and there is data to support the contention that the U.S. is in the midst of economic slowdown. (Some would even state things are worse. I think that position is somewhat harder to support.) And along with that slowdown, there is increasing sentiment regarding a pullback from international economic activity. Fears about off-shoring, outsourcing, decoupling, and trade related volatility are making many in our nation question whether we should focus on our own problems, and let the rest fend for themselves.

But in an increasingly interdependent world, the last thing we should do is cut ourselves off. For we not only put other nations at risk economically, in the longer run we put ourselves at risk.

I am too much the student of political economy to not realize that many will at this point cite Keynes and state, "In the long run, we're all dead." But from what I've studied of Keynes, he was not advocating a live in the near-term philosophy. Yes, he did feel that problems had to be dealt with -- not ignored. But he also realized that many of our choices and decisions have implications that will outlive us. And while we may not have to live with the results, others will.

I look forward to your comments.

Friday, February 1, 2008

Scottsdale and the Super Bowl: Some Not So Obvious Economic Lessons

Just in case you had any doubts, Scottsdale is the place to be this week. Notice I said this week, not necessarily on Sunday. Today's issue of The Wall Street Journal has an interesting article. It points out that many movers, shakers and wannabes are spending time (and money) in Scottsdale in the run-up to the Super Bowl. But it also mentions that many of these same folks will leave before kick-off, having accomplished their personal missions. What is the value these people receive from participating in the pre-game reverie, while punting the game? (Sorry, had to get that in.)

If we look at the economic concept of utility, we might get some insights. Utility is the measure of usefulness a product, service (or event) brings to a consumer. Traditionally, we talk about form, place and time utility. That indicates that the item consumed has a form that satisfies a want for the consumer; is available in a place that satisfies a want; and/or is at a time that satisfies a want. While I've never been to Scottsdale, I'm sure it is a lovely town, and that it has its own form/place/time utility. However, for those who like to see and be seen, this town at this time has additional place and time utility that it normally doesn't possess. And you could even make a case that it has a form that normally is not present.

The people who come and leave early gain more value from being in Scottsdale this week than from actually attending the game. Which brings us to another concept for consideration: marginal cost/benefit. Given who these party-goers are and who they are likely to rub elbows with, they must see the benefits as outweighing the costs. It is in their best interest to be there. And it certainly is in the best interest of the hotels, restaurants and catering businesses of Scottsdale.

What do you think?

People Respond to Incentives - Even Students

One of the basic tools for teaching economics in the lower grades is a token economy. Students are "paid" with classroom currency (often designed by the students) for completion of tasks, jobs in the classroom, even grades. The money is then available for them to use in various ways - free time, library visits. Some teachers even make it a necessary part for participation in enhancement programs. One teacher told me that if his students wanted to take part in a stock market simulation he ran each year, the students had to buy in by saving a certain number of classroom dollars.

Token economies are sometimes also used as a classroom management tool. Here's an interesting post on one such experiment. (HT to Arnold Kling at EconLog.) I encourage you to read the comments, as well. And share your thoughts with the rest of us.