Friday, August 29, 2008

Food for Thought on a Holiday Weekend

As we prepare for the traditional end-of-summer/beginning-of-school holiday, highlighted by cookouts, tailgates and other opportunities for gustatory indulgence, it might benefit to recall an old saying about "knowing where your next meal is coming from." And in this case, that statement should be taken literally.

There was an interesting post on The Fly Bottle blog, yesterday. Will Wilkinson wrote on the idea of "buying/eating local". One of the highlights was a link to some research done at Carnegie-Mellon University on the Climate Impact of Food Choices in the United States. (The article was previously referenced at the Environmental Science and Technology site.)

The main point was that if the objective of buying/eating locally grown food is to cut down on green-house gas emissions, changing eating habits is probably as effective and may be more. The research indicates that most of the greenhouse gases generated in the food chain come from production and not from transportation. (It seems that shipping trainloads or shiploads of something is actually quite efficient.)

Wilkinson does a good job of bringing the idea of comparative advantage and specialization into the argument, and one commenter actually brings up the problem of "buying local" if you happen to live someplace like Phoenix.

And for those of you who like to worry about international issues (I'm not sure why global environment wouldn't qualify, but I need a transition here), there's this piece which discusses the impact of buying/eating local could have on agricultural producers elsewhere. You're not naive enough to believe that buying corporate branded fruit from another part of the world means all the proceeds go to some poor farmer. But I also suspect you're not one to believe that buying less of the fruit doesn't have an impact on the producers in these poor countries.

It's just one more thing to mentally chew on during the cookout. I look forward to your thoughts. Have a good weekend.

Monday, August 25, 2008

A Mini-Treatise on Price

Those who teach economics know that there's more to it than just supply and demand. It's a place to start, but it frequently is not the whole story.

This article from the Economist does a pretty thorough job of explaining the ins and outs of pricing in the current economic environment. Basic theory says "demand is dropping, so drop prices." But how far can they be dropped? We can look at marginal cost as limiting factor. (But there's always that old joke about selling for less than cost and making it up on volume.) But one should also consider elasticity of demand. How much will consumers react to a change in price?

And what if input costs are rising? That may mean a price increase would be more appropriate. But is that inflationary? And how do consumer expectations fit into the problem? If consumers are used to prices holding or dropping, they may not be willing to pay more, particularly if demand for the good or service is elastic.

The article talks about the problems facing many firms and different ways they are approaching those issues. It's an overall good example of how many aspects of economic understanding come together in a very real way when approaching what many consider to be a simple part of economic activity. (HT to regular commenter Julia for the idea.)

I look forward to your comments. (Yours too, Julia.)

Thursday, August 21, 2008

Which One Is Different from the Others?

Given concerns about resources and prices, I found this chart interesting. Only one country seems to react as markets would predict. But once again, the data is superficial and incomplete. How did the markets change in size? Does per capita tell a different story? What about relative prices?

What questions would you raise with your students?

Tuesday, August 19, 2008

Productive Use of Resources

Most people are "green" to the extent that they feel resources should be used wisely. Unfortunately, it is at that point that things become subjective. My definition of wise use of resources may differ from yours. It can depend on differences in our time preference (over what period of time); it can relate to our differing prioritization of wants ("want" vs. "need"); and it can depend on our perceived opportunity cost (what do we each give up) compounded by externalities (do we bear all the cost and/or receive all the benefits).

This piece in The Economist was interesting because, while it discussed the use of resources that many of us would feel are unproductive, it pointed out that there are benefits to (re)using the resources, as well as costs. I think it offers a good conversation starter or capper when discussing resource use and the constraints people face when applying resources to wants.

I look forward to your comments.

Monday, August 18, 2008

Marginal Thinking in the Olympics

Many of you have been watching the Olympics. I know we've seen quite a bit at our house. I saw one of the events over the weekend as offering a different perspective on the idea of marginal thinking in economics.

The event was a track event. At one point in one event, there was a false start. The commentators (referred to in my house as "regular spuds") stated that the first false start was charged to the entire field. A second false start would mean an automatic disqualification for the runner committing the false start. I asked my wife about the practice because she's really into the track and field events. She informed me this helped reduce the number of false starts because, assuming a field of eight runners, people would start being eliminated on the second instance. Presumably this would mean a maximum of eight false starts before someone would win by the rest of the runners defaulting.

I countered that, while it seemed logical and efficient, it also seemed unfair to the field. I could see false starts occurring because of tension or just trying to "jump the gun" and get a fraction of a second advantage. But I would also think the tendency to "jump the gun" might also be overstated. Given the tension and the psychological focus needed to compete at this level, I would think that repeated false starts would have a negative effect on performance, and that would be its own inhibitor. Granted keeping the possible maximum number of false starts to seven instead of a possible 15 is efficient; but I'm not sure the process is necessary.

And while it is, admittedly a minor issue, it still offers possibilities for understanding the idea of marginal analysis. What is the potential benefit vs. potential cost for "jumping the gun?"

On a final note, my boss pointed out that swimming uses a different system for controlling the false starts. One false start and you're out. Different incentives, different marginal analysis?

I look forward to your thoughts.

Friday, August 15, 2008

Rent-seeking and Electioneering

I know it's getting close to the opening of school and you probably already have lessons planned for the coming semester, but those of you considering using the upcoming campaign season as a method to illustrate economic concepts should consider adding something.

Back in 2006, Russ Roberts who does the podcast interviews on Econtalk did an interesting and informative interview with Mike Munger, an economist at Duke University, on rent-seeking, politics and government. It has an advantage of being less than a half-hour long. Consequently you or your students can listen to it easily. However, even if your students don't have mp3 players (there must be some out there), they can go to the web site and listen to the podcast on their computer at home or in a library. The disadvantage is that, unlike some of the later Econtalk podcasts, there's no text summary to help those who want to quickly scan and pick up the main points.

It also has some related readings listed. While it's not a comprehensive list, it does provide some solid background.

For those of us who have trouble explaining why good politics often is bad economics (or why good economics often is bad politics) this is a good intro.

I look forward to your thoughts.

Tuesday, August 12, 2008

Tragedy of the Commons

This summer, the Powell Center for Economic Literacy, along with the Longwood University Center for Economic Education and other organizations, hosted a teacher workshop on "Saving Our Rivers and Bays". One of the materials used and distributed to the teachers was the book Common Ground. The book stresses the importance of wise use of our natural resources. The first few pages introduce the tragedy of the commons - the idea that land held in common and used by everyone, frequently is not used well as there is little individual incentive to protect it while there is a large incentive to use/abuse it. The book is clearly aimed at the middle elementary grades with its relatively sparse language and lush illustrations. It tells a powerful story, although I thought at the time, it needed something more.

Recently, there have been a couple of good articles that I will recommend for educators. They provide that something more. The articles describe the limits to the concept, as well as a tendency to overstate possible benefits of private property vs. common property.

The first article was in last week's issue of The Economist. It does a good job of explaining how common goods share certain characteristics with both public goods and private goods. Because of this, one cannot and probably should not, attempt to manage common goods the same way as one would manage either public or private goods. Indeed, not all common goods are managable using the same methods. One problem is properly defining and identifying common goods. But once that's done, there are innovative ways to manage the goods, as is demonstrated in the article.

The second article comes courtesy of The New Yorker (HT to Arts & Letters Daily). In the article, titled the "Permission Problem", the problem of cooperation for a common goal when all property is held or protected as private is addressed. One of the key points refers to research which demonstrated revealed one party in a multi-party project may hold their resource back, asking a price for use that makes the whole project unfeasible. I did find myself wondering how the problem was framed, as I suspect that behavior is more likely when the party knows their resource is key or unique to the success of the whole. I suspect that, if framed in a general context, marginal thinking may enter in more frequently, i.e. am I receiving more for the resource in this use than I am in its current use or non-use? But I am not familiar with the research. Regardless, article suggests that mechanisms for coordination can overcome the problem. Sometimes the mechanisms are government instituted, and some are voluntary within the marketplace.

Finally, for those of you interested in a high school level classroom exercise on the tragedy of the common, I would suggest this activity. It should provide some substance for discussion, and could lead into a dialogue on how abuse of a common resource can be limited, providing opportunity for you to integrate ideas from the articles.

I look forward to your comments.

Monday, August 11, 2008

Critical Reading of Economics

I've run across an interesting piece that is worth sharing with you. Whether it's worth sharing with your students, I'll leave to your judgment. You're the one in your classroom.

Let me start by saying the source of the article, City Journal, is the product of a conservative think-tank. Consequently, it has a very definite slant. I haven't read City Journal before today, but the article has some uses in the classroom in terms of teaching students to be critical thinkers.

Economics Does Not Lie is an interesting title for an article, whatever you might think about the subject and its application. My main interest in the article (HT to Arts & Letters Daily) was the list of 10 propositions in economics it contains. It is fascinating to see what others feel are the important "truths" in any field. This blog has visited the topic before, and the article gave one more view. I won't bother you by listing the propositions, you can read them yourselves, but I will make a couple comments and then a suggestion for use with your students.

Early in the article, the author, Guy Sorman, speaks about "precise (though not infallible) mathematical models." While I'm sure he said what he meant, my feeling is that many would argue whether the models would be more helpful if they were accurate, as opposed to being precise. There's little value in being precisely wrong. (In fact there's an old joke about decimals being invented so economists demonstrate their sense of humor.)

In the first proposition, he also states that the market economy is the most efficient of all economic systems. While true, I think many people become more concerned with equity than efficiency. Of course, the fact that there are multiple definitions of equity may be part of the issue.

Research in decision-making plays an important part in the explanation of the third statement. Sorman refers to recent research that indicates our short-term choices are made in a different part of the brain than long-term choices. He also points out that short-run decisions are often the most prone to mistakes. Given the tendency for many non-economists to fall back on Keynes' statement about our condition in the long-run when discussing economic policy, I find this interesting.

The seventh statement deals with labor costs and unemployment. It does not mention technology. But labor costs are related to technology through productivity. It is the ability of labor to access and use technology that makes labor more productive. On the one hand technology can reduce costs, but it often comes with higher wages for more skilled workers.

The ninth statement addresses complex financial markets and economic progress. This is risky given the current environment. Yet, I think it is a valid and important point. If U.S. financial markets were concentrated and isolated, without the ability to spread risk, I suspect the current slowdown could have been much worse. Now, that doesn't make those institutions and individuals from other countries happy that they got stuck holding questionable securities. But again, take the cost and concentrate it, and the U.S. economic picture looks worse yet. And with other nations trade so dependent on the U.S., a worse slowdown here could still have international repurcussions.

So how is this used to promote critical thinking? Let me first direct you to two definitions from The Economist. Positive economics is based on what is. Normative economics is based on what we would like to see. I think an article like this would be great to have your students read, looking for positive vs. normative statements. I think research would support many (not all) of the propositions as positive. I think the support of these statements frequently depends on normative statements. This exercise can be very relevant in a period where we are asked to make choices that can affect our economic future.

What are your thoughts?

I'm Back

After a much-needed week with my family, it's back to the office. We had a wonderful time in and around Boston: walking the Freedom Trail, visiting the home of John Adams (which gave me some time meet with a good friend and former Fed colleague), whale-watching in Gloucester and seeing the bridge at Concord. Much was related to my junior high student's upcoming social studies focus, but we enjoyed everything, although I'm not sure he saw it that way. He agreed it was interesting and "cool."

To start off on the right foot, I'm linking to three sites that you can put to use in your classroom. The first site is an in-depth piece from The Financial Times on the current credit squeeze. There are several interactives that do a very good job explaining how the mortgage market ended up hitting the larger financial system so hard.

The second site is a debate being hosted at The Economist on global food prices. The question is whether or not there's an upside to rising global food prices. The discussion is lively and interesting. Definitely worth your time if you think your students will be asking about the topic in your classroom.

The third and final site is actually a political cartoon from The Economist. I think it speaks to the irony surrounding the recent collapse of the Doha round of trade talks. While numerous players balked for their own interests, ultimately countries need each other. So, I'm sure the talks will be resurrected in some form once everyone realizes they're better off cooperating than they are building barriers. I think you could use this directly with your students, seeing what they think the real message is.

As before, I look forward to your comments.

Friday, August 1, 2008

The Price Mechanism and Demand

Julia is a regular commenter and lives in the shadow of the Golden Dome. She sent me a note about this op-ed piece in The New York Times by Dan Ariely, which she first caught thanks to Greg Mankiw.

Ariely wonders why get more agitated about rising gasoline prices as opposed to rising other prices. In the article he talks about the fact that the way we buy gasoline may have something to do with it. We stand there, watching the price dials spin faster and the volume spin more slowly (although the past week or so that trend is reversing, somewhat). This gives us time to reminisce about "the good old days." I try to wash the windows specifically in order to avoid that agitation.

Ariely also mentions that with food prices, we don't watch the prices spin up, and he also submits that we don't purchase multiple units. I suspect this is because of standardized packaging on most food goods. (Safely issues aside, imagine if you could only buy gasoline in 2.5 gallon containers - or whatever.)

Likewise, to borrow Ariely's examples, what if we bought bread by the slice or yogurt by the ounce in variable size packages, as we needed? Furthermore, I submit that many of us may purchase gasoline more frequently than we purchase groceries. And I'm willing to bet that the same definitely goes for the frequency of paying the electricity, natural gas, water or other bills.

If we confront price changes less frequently, and we pay for "single packaging", does the price mechanism become less effective? We can post the "per ounce" or "per unit" costs on the grocery store shelf or break out the cost on a utility bill, but it remains true that you confront the price less frequently and in different form. In turn, this may make it harder/easier to change behavior.

When confronted with an abnormally high electric bill we might call a family conference and encourage everyone try to cut back. The next month, if the previous entreaties have failed, we may institute family "fines" - that usually works until the bill payer gets caught.

Julie suggested that she would use the article in the coming school year to lead into the course and discuss opportunity cost. I think using this article for opportunity cost has some real possibilities. The feedback from the gas pump is immediate, and it's easy to visualize "what is my next best alternative."

I would suggest that this discussion of the price mechanism may also be used to explain aspects of price elasticity. One would think that the more frequently we confront prices; the easier it would be to change behavior, and change the elasticity of the good. But what is the reality? Is it easier or harder to cut back on certain groceries, utilities, entertainment or transportation? Why? Recent
data seems to indicate we're driving less; and that we're trading in some (not all) larger vehicles in favor of more fuel-efficient models. But how long did it take? Why wasn't it immediate?

This can also be related to how we consume - and how non-essentials are soon seen to be essential or even vital. And I think you'll find other interesting ways to use this article.

This will be my last post for a while. I'm taking a short break with the family before school reconvenes. I'll see you in ten days or so.