Thursday, October 29, 2009

Almost Forgot....

On this date in 1929...

The crash was a series of bad days beginning on October 24 (Black Thursday) and proceeding until
October 29 (Black Tuesday), somehow Mondays always are worse. Doubtless this was the scariest Halloween season for the adults, particularly those in the market.

A Visit from Captain Renault

This story from today's edition of The Wall Street Journal (free content as of this writing) would undoubtedly shock Captain Renault. It seems that a politician, who previously was against the bailout of General Motors because, among other things, it would invite political interference, is now interfering. As I said...

Big Macs in Iceland...Not!

When teaching my course on the economics of globalization, McDonalds is frequently cited as an example of a global corporation. And one of the books the students use, The World is Flat, mentions even mentions McDonalds.

Earlier this week, it was reported that the golden arches would no longer be found in Iceland. Today's edition of The Wall Street Journal has a short opinion piece (free content as of this writing) on the event which can provide some explanation of foreign exchange values. It seems that when the global financial crisis sunk the krona (Iceland's currency), it made all kinds of imports more expensive. (To quote from the piece "beef to special sauce, lettuce, cheese, pickles, onions and, we assume, sesame seed buns.")

Feel free to comment.  I just thought it was interesting.

Wednesday, October 28, 2009

Audio and Visual

I've been busy the past couple days and haven't had time to get to the computer to blog. But I'll try to make up for it.

First, many of you regularly read Greg Mankiw's blog. That's where I found links to two sites that use rap music to explain economic concepts.  I have been aware of the first one for a while.

But the second one is new to me. It uses shorter pieces to cover a multitude of concepts.

And here is a history of the Federal Reserve (HT to ChartPorn). You can purchase a copy for your classroom, or download a very big pdf file. Either way, it offers some possibilities. I'll try to get another post up later today.

Sunday, October 25, 2009

On a Chart Jag

(I may be due for a graph intervention.) But I recently ran across a site that is full of charts, graphs, tables and other visual stimuli to assault our understanding, and just asking to be debated. I find the examples most useful as opportunities to ask "so what?"

The first is actually a whole series of bar graphs comparing the United States to Russia. It is is on (But HT to Chartporn.) The site also has similar comparisons with China and India at the bottom of the page.

The second has some real value for teaching personal finance. Specifically, if you teach about credit cards, this is a great illustration of all the steps involved in a credit transaction. (Note: I didn't say the sequence was correct. I would have made step 8 the first step and then proceeded. But we can debate another time.) Again, I found it on Chartporn.

While I don't endorse all the content on Chartporn, these examples are pretty good. Used judiciously by teachers who like want their students to dig a bit deeper, these charts can offer a good place to start.  What is your take on the site? I have temporarily added it to my link list. Should I keep it?

Friday, October 23, 2009

If Institutions Create Incentives...

where is the problem? There are a number of articles from various sources that pose an interesting question for your students.

First the question: "If institutions (the rules and regulations of an economic system) create incentives to guide decision-making, what incentives are being given to banks, and how do they align? Are they contradictory or reinforcing?"

Now, take a look at the articles. I will admit to being somewhat selective; but only to the extent that all of these came to my attention over the past few days.

First is this article (free at this writing) in today's edition of The Wall Street Journal. If, for some reason, it becomes subscriber content, search for the title "Fed Hits Banks with Pay Limits". Otherwise, I'm sure you can find other media coverage on the story. Of particular interest to me is the angle that the caps are being instituted to reduce the risky behavior of those targetted. 

Second is this article in City Journal (HT to Mark Perry). It raises a question about the role of legislation in promoting lending to certain borrowers. I wish it did a better job of answering the question. But it still raises some important points.

This brings us to a third article. This is research from the conservative Heritage Foundation. It does an adequate job of pointing out how programs and incentives put in place by administrations both Republican and Democratic, MAY have contributed to the crisis.

Our fourth item for consideration is this story from The Business Insider (HT to Mark Perry, again). It tells the story of a 20-year old with little income buying a home worth $155,000 with 3.5%. She also received an additional loan to help make improvements, boosting the total loan to $183,000. Consequently, she's underwater at the start. While you can make the case that this is anecdotal and anecdotes are not data; others can counter that the plural of anecdote is data.

Finally, we come to this opinion piece by Allan Meltzer. It comes from today's edition of The Wall Street Journal. Meltzer calls for a tighter monetary policy to reduce the risks of future inflation. But the monetary regime he sees currently is one in which banks (those same institutions that are under pay caps for reasons described in the first article) are borrowing at a zero interest rate and lending back to the Treasury.

As someone who is interested in the role the rules and regulations have in our choices, I find the whole thing very curious. I'd be interested in your thoughts and those of your students, as well.

Have a nice weekend.

Thursday, October 22, 2009

Spenders, Savers and the Global Financial Crisis

Today's edition of The Washington Post contains an article worth your notice. Fed Chairman Ben Bernanke spoke at a conference on Asian and the global financial crisis, sponsored by the Federal Reserve Bank of San Francisco.

Within the speech, he noted that the basic imbalances that led to the crisis were still in place. Specifically, he warned that the U.S. spends too much and save too little; while Asian nations save too much and spend too little. This creates a situation where Asian nations, amid the proverbial "savings glut", seek "safe" havens for their excess funds, driving down interest rates here. The U.S. uses these "cheap" funds to finance demand, rather than financing it through our own saving. (And, please note, he referred to personal and government borrowing.)

One of the basic ideas in economics is that people respond to incentives. He seems to suggest that it's time the U.S. encouraged saving and discouraged spending, on both the personal and governmental level. (This can apply to the corporate level, as well. Maybe there would be incentives to encourage investment out of retained earnings, but not through debt?)

These are just some thoughts to throw out to the students when you discuss "fiscal policy" during the semester.

Mass Production and Specialization

I know many of you know the basics of mass production and specialization. But if you're looking for a basic explanation to keep in the file and to share with the student who missed that day of class, here's a good one-pager, courtesy of The Economist. It should be useful, provided your students are at or near high school reading level.

Let me know if you think it's too hard.

Benefits from Globalization

This recent Wall Street Journal article, "Indian Firms Shift Focus to the Poor", was subscriber content when I last checked. (But use your browser to search the title, you might find the whole article somewhere.) However, what was not subscriber content was the interactive graphic. It highlights some of the technology that is working its way to the lower income groups. When we discuss the benefits of globalization, or the benefits of trade, these are the kinds of things that make for excellent examples. Why? Trade accelerates the spread of goods and services. Even if the products are made in India; one reason they are available is the increased profitability that comes from trading and sharing technology.

I look forward to your comments.

Wednesday, October 21, 2009

Globalization on Every Corner

Some of the most basic products we consume are linked to the global economy. Here are some excellent examples.

(HT to Alex Tabarrok at Marginal Revolution.)

Property Rights, Trademarks, Patents and Board Games

A friend of mine uses a popular board game, Monopoly, at various points in his AP Economics course. He uses it to fill up the period after the exams, but he also uses it to discuss the rules of markets. He even has numerous versions. As a result, when this article (free at this writing) appeared in yesterday's edition of The Wall Street Journal, I was drawn into it.

It chronicles the long struggle of an economist who came up with something called Anti-Monopoly. But its value for the economics and personal finance teacher is its repeated focus on property-rights: specifically copyrights (and patents). Those are specific enforcements of property rights (some even refer to them as temporary monopolies) meant to encourage innovation. But we can have very interesting discussions about the idea.  For the institution, designed to foster innovation, can also stifle innovation.  The idea can be extended to many areas including pharmaceuticals, and technology.

I won't ruin the story for you, but there is a lot of usable information in the story that relates the concepts to an experience that many of your students are sure to have shared. And that provides a point of departure for deeper and more complex discussion.

I look forward to your comments.

Tuesday, October 20, 2009

Exchange Rates, Trade and Value

Often one of the hardest concepts for students (and teachers) is exchange rates. The idea of paying money for money seems odd. But then it is compounded when we remember that the changing price (the exchange rate) can be affected by supply and/or demand. Once that hurdle is cleared, we then have to try to understand and explain how fluctuating rates impact producers and consumers on both ends of the transaction. It can be confusing, to say the least.

Yesterday's edition of The Wall Street Journal contained two articles that I believe may be helpful - if not for your students, at least for you. Currently, both are subscriber content, but if you use your browser to search for the title, you may be able to find them for free - I did. Although when I used the new links, the subscriber notice popped back up. You might have to poke around, but it's worth it.

The first article, "Value Is in Eye of the Holder," provides a sound explanation of exchange rates, using the recent rise in value of the Canadian dollar against its U.S. counterpart.

The second article, "Wallet Check: It's Pain or Gain," uses a tree farmer in Nova Scotia as the example to help understand how exchange rates can impact the producers and consumers of a seasonal item - Christmas trees.

What I found particularly helpful was the explanation of farmer's position when his revenues are priced in U.S. dollars, but his expenses are priced in Canadian dollars. It might even make for an interesting quiz or test question. You decide.

I hope you find the link. If you do, please share your thoughts on these articles.

Monday, October 19, 2009

Evolution of Our Healthcare System

While running a number of errands this weekend, I was listening to this well-done history of the evolution of the U.S. healthcare system on This American Life on National Public Radio. And while I haven't heard all of it, what I did hear was excellent. The evolution of our current healthcare system is a mix of entrepreneurial insights and development of an institutional structure (the rules and organizations) that create a system that provides many players with incentives to shift costs or seek incremental innovation, while depriving other participants of some basic information to help in decision-making. There are even examples of placing incentives to choose more expensive treatments under the guise of "it's free - someone else is paying for it."

I strongly recommend the program. What it made clear for me is the problem inherent in continuing any system that deprives the primary producers (doctors) and consumers (patients) of fundamental information (costs) to help them make choices. While we all want the "best," sometimes the "best" isn't what is needed.

I look forward to other comments on the episode.

I just received my email notification of this week's EconTalk episode.  It features a discussion of prices in the healthcare system between host, Russ Roberts of George Mason University, and frequent guest Mike Munger of Duke University.  While I don't always agree with either of them, their sessions on EconTalk are
consistently among the best, in my opinion.  Consequently, consider listening to this after you listen to the
show on This American Life. That's what I plan to do.

For those of you who tuned in earlier, my apologies.  I gave a link to the wrong episode of This American Life.  This is the episode I was referring to (although the other one is good, as well).

Cool, and at the Same Time, Disheartening

Mark Perry over at Carpe Diem has a link to this interactive graphic. It's fascinating and disheartening at the same time. What say you?

Friday, October 16, 2009

...and One More Resource

The Council on Foreign Relations has just posted this presentation by Alan Greenspan on the Global Financial Crisis.  Regardless of your opinions about the former Fed Chairman, this is a worthwhile event.  They have video, audio (streaming or download to your MP3), as well as written transcript.  If your weather is unseasonably cold this weekend, this might be something to curl up with and have a hot toddy.


Interviews of Note

I recently ran across some interviews on economic issues that you might enjoy, on a new source that I plan to add to my regular reading.

The first is an interview with the Harvard economist, Robert Barro. Barro is a critic of the current stimulus plan, but the interview is about some of his empirical work on the Great Depression, focusing on the multiplier. The interview is short and understandable and provides a great addition to anyone interested in learning more about the economic lessons of that period.

The second interview is with Robert Skidelsky, the historian and author of the excellent biography of John Maynard Keynes. Skidelsky is more of the Keynesian interventionist, and is at his best when explaining Keynes.

I hope you enjoy them.  They provide a look at how two intelligent, articulate individuals, from different professions offer insights into an important and relevant piece of economic history.

I look forward to your comments.

Economic Return of Children

When I first introduce economics to my students, I talk about using economic thinking to examine “non-economic” problems, frequently using some of the work of Gary Becker as an example.

Likewise, when we discuss economic development, a frequent observation is that richer countries tend toward lower birthrates. The hypothesis sometimes put forth is that as parents become less dependent on children for support in old age, the incentive to have more children falls.

But Brian Caplan at EconLog draws our attention to an old article originally published in the Journal of Economic Literature by Ted Bergstrom (link appears to be to a more recent version).

While the paper is long and contains some math that probably can't be used in your classroom, Caplan does highlight two interesting points. The economic (read financial) benefit of having children is minimal and may even be negative in some cases. So, if the hypothesis is true, why do we see people choosing to have children? Apparently there is still a benefit that accrues to the parent, a value received. Maybe it’s more than financial?

It’s just something interesting to think about. I'd welcome your insights.

Thursday, October 15, 2009

And Managing the Commons - Institutional Economics on TV

Those of you who watch Curb Your Enthusiasm undoubtedly saw this. But it’s an excellent example of the informal rules we place on ourselves to direct the choices we make. Think of the hors-doeuvres table as a commons. This is an application of what the Nobel Prize in Economics is recognizing this year.

HT to friend and regular reader, Mark Witte at Northwestern University.

Graphs Gone Wild

If your students complain about your excessive use of graphs, you might want to watch the following video. You, too, may be ripe for an intervention.

(HT to Mark Perry.)

Follow-up to Yesterday's Post

One of the topics for yesterday was the market for tickets for entertainment (sports, concerts, etc.) and one of the related concepts was elasticity. There’s an excellent post connecting the two on Economists Do It with Models. I encourage you to take a look.

No Such Thing as a Free Lunch?

Something free is not really free. Imagine that.

Wednesday, October 14, 2009

Resources for Middle School

For one reason or another, I've been reading a lot of books for children and young adults lately. As a result, I found several that I would recommend for those who teach middle school, and who are looking to integrate economics, history and literature. I was able to add two of them to my carousel near the top left of this blog. So if you think you're interested, I would appreciate it if you ordered them through that route, and help support this service.

The first recommendation (and the one I could not add to my carousel, is A Day No Pigs Would Die. It is the semi-autobiographical story of a boy, a Shaker, in the early 20th century northeastern U.S. The boy is given a pig as a reward for helping a neighbor's cow. And over the course of a year, the boy learns to treasure the pig, but also learns some important lessons about living. When his father, a butcher, shares fears that he may be dying; it becomes more important that the boy make some hard choices and face facts about being responsible.

The book contains a description of hog-butchering so may be intense for some students. But the decision-making and resource management make it an appropriate way to integrate some fundamental economics while adding color to discussion about early 20th century life in the U.S.

The second recommendation is Lyddie. You can find it on the carousel. This is a well-researched book about the mills in Lowell, Massachusetts in the mid-19th century. Lyddie, her mother and siblings have been abandoned by Lyddie's father. Although Lyddie and her brother try to keep the farm running, her mother decides to let out the land and to place the older children in positions to earn an income. Lyddie's first position is as domestic in a nearby inn. Lyddie is fired after she takes a day off (with her supervisor's permission) to go back and visit their home. She then decides to go work in the Lowell mills, having heard of them from other girls who have stayed at the inn. Again, the book has abundant examples of scarcity, choices, and managing resources to meet a goal. For Lyddie is determined to get the family farm back and to wait for her father.

The final piece of literature I'm recommending is Zlata's Diary (also on the carousel). This is the true story of an 11 year-old girl in Sarajevo in the early 1990s. Zlata is sometimes referred to as the "Anne Frank of Sarajevo." Her descriptions of life in the besieged city and the way the family dealt with scarce resources is moving and well-described. Again, integrating world studies, basic economics and literature is quite doable and should raise interest among the students.

Finally, I have one non-literary resource to recommend. This one is FREE. And while it is actually for grades K-12, I choose to mention it here because I think it can be particularly useful in the middle grades. It is the Nifty Fifty economic term cards available from the Federal Reserve Bank of Kansas City. It is actually a set of 100 cards - 50 economic terms and 50 definitions - accompanied by some suggested classroom applications. From memory games to "term a week", there are ideas here that could meet the needs of most, if not all social studies teachers.

I hope you share comments about the books or the cards. Everyone will benefit from further insights.

Tickets, Prices and Markets

I will admit, when I first saw this article from The Seattle Times on Mark Perry's blog yesterday, I failed to connect the dots. However, it has been in the back of my mind, and this morning I saw some connections.

The article is about a ticket reseller (scalper) who is suing the city of Seattle, the Mariners baseball team, and a couple of police officers. He feels his rights are being infringed. The argument of restricting voluntary trade between buyer and seller is an interesting one for economics. We often teach that voluntary exchange takes place because both parties benefit.  Because the exchange is voluntary, and because we assume that both parties are seeking to maximize their benefits, we say that both parties benefit because they each receive something they value more in exchange for something they value less.  I even point out to my students that, because of that point, an exchange in the market place is as much about disagreement - about relative values - as it is an agreement.

This story gains interest when we consider other actions against by ticket brokers against firms like Ticketmaster, as illustrated in this article from The Wall Street Journal earlier this month.

This issue can be used discussing things like consumer and producer surplus. Consumers willing to pay more than face value for a ticket would indicate there is some producer surplus to be captured. One can certainly see where that might be a cause for concern among the original producers of the service.

Another way to use this issue is with discussions of risk. Resellers (or scalpers, take your pick) often take significant risks - buying tickets only to find the demand does not materialize.

And when discussing demand, one can talk about elasticity for the item. A colleague of mine talks about time-sensitivity as a factor in demand elasticity. The more immediate their want, the less elastic is the demand.

I would think the topic of ticket reselling would provide an interesting discussion point for any of these concepts, and maybe even a few others (please share your thoughts).

If you decide to use this in the classroom, there are a couple of podcasts that also may be relevant. You might even pick up a couple of "quotes" to put at the front the room to spark reaction, or serve as the basis for your discussion. Both are from the EconTalk web site. And both are about an hour in length, so you may not want to use them in full in class. Whether you want to "assign" them, I leave to your judgment.

The first is an interview between EconTalk host and George Mason University professor, Russ Roberts and Duke University professor Mike Munger on ticket-scalping.  The second is a podcast featuring Roberts (an avid baseball fan, by the way) and an actual scalper. Both are quite entertaining and thought-provoking.

Submitted for Your Consideration

A couple of days ago, I posted a video interview with Joseph Stiglitz of Columbia University. Now, I thought you might want to read a rejoinder by one of his colleagues at Columbia, Jagdish Bhagwati. The Stiglitz interview and the Bhagwati piece (from World Affairs Journal) have possibilities for a classroom exercise or homework assignment. I need to look at them side-by-side. So this may not be the last post on this. I would welcome responses to this or the earlier post.

Tuesday, October 13, 2009

Tragedy of the Commons

When we teach property rights, we often spend time discussing "the tragedy of the commons" - the idea that everyone's property is nobody's property. And a significant number of us use the example of the English village first put forth by Garrett Hardin in his 1968 work.

Back in June, there was a very good article in The National Interest on the problem of the tragedy of the commons (HT to Arts and Letters Daily). In it, the author discussed a couple of ways to avert the problem. The one he favord was the establishment of an institutional structure that will foster incentives to take care of common areas.

Elinor Ostrom, one of the winners of this year's Nobel Prize for Economics has done some of the most significant research on this problem, including how groups create voluntary institutions that provide incentives. And in that, she was a leader in the field of institutional economics.

There are two articles from Forbes magazine that provide more background on the work of
Dr. Ostrom. This one by regular contributor Elisabeth Eves, and this one by Vernon Smith, also a winner of the Nobel Prize in Economics. I hope you find these resources enlightening. (I did.) And I think they provide some information and point toward other information that teachers can use when discussing property rights and paradox of "everyone's property is nobody's property."

I look forward to your comments.

Monday, October 12, 2009

On the Light Side

Here's a little humor to brighten your presentations

Frazz and Opportunity Cost
I especially like the observation of the young lady in the last panel. One thing I like to stress with my students is that choices help us understand values.

Dilbert and Expectations
I like this one because it emphasizes that our decision-making process, for good or for ill, takes the past into account. Expectations are founded, in part, on past experience.
I welcome your observations.

Heard This Before

Here's a gloomy op-ed from Robert Samuelson from today's edition of The Washington Post. First, lets forget the fact that he's addressing only one portion of the economy. There are numerous other factors that determine the quality of life beyond the health-care system. I hate to say it, but the "our children will have a lower standard of living than we do" is what people were saying in the late 1970s, early 1980s, early 1990s, and early 2000s. I suppose eventually it will be right, but recent history seems to be against it. What do you and your students think? Does everything ride on one sector?

Sunday, October 11, 2009

Blinder on Off-shorable Jobs

Princeton University professor and former Fed Vice-chairman Alan Blinder has an attention-grabbing piece on the Voxeu site. The article summarizes some research he's been doing on off-shoring of U.S. jobs. He sees a problem in previous research because the results have been disparate. These are explainable, he says, given the research methods used.

Blinder's research indicates that up to 25% of U.S. jobs are off-shorable. And while that may be startling, the conclusions are not. The article is worth your time, particularly as the topic has a way of working its way into discussions about trade and policy, both of which come up in the traditional economics course in the later part of the semester. And for the AP and IP economics courses, I would think Blinder's piece offers some good points for free-response questions.

I look forward to your comments.

Video Interview with Joseph Stiglitz

First of all, thanks to Jason Welker for the link.

Here's a very good video interview with the Nobel-prize winning economist and Columbia University professor Joseph Stiglitz. It's from the on-line edition of The New Yorker.

Stiglitz is an outspoken critic of globalization (an area of disagreement I have with him). He has a rather pessimistic view of the recovery. He does think we need more investment and less consumption. He seems to be of the mind that incentives are misaligned.  Are there some externalities here?  I think one can make the case. Judging from what he said, there are clearly costs/benefits that are accruing to parties that were not part of the original transactions. My question is "to what extent are these the result of prior regulatory structures that no longer serve there purpose, or may not have been appropriate to begin with?"

Stiglitz's approach of government-directed investment strikes me as somewhat Keynesian. At the same time, he advocates a balance between government and business. He is as concerned about government failure as business failure. His views on institutional aspects of the economy are interesting; as are his criticisms about government intervention providing the wrong incentives. Give it a look, if you are so inclined.

I welcome your thoughts on the video.

How Traffic Jams Help the Environment

There's a thought-provoking article (free at this writing) from the weekend edition of The Wall Street Journal. It makes a case that traffic jams actually help the environment.

Now, before you write the article off as the ravings of some anti-environmentalist, I suggest you take a look at it. The main idea is that more congested streets provide the proper incentive for people to move to public transportation, and other environment-friendly alternatives.

Specifically, the author states that ideas like congestion-pricing, where fees are paid to use highways and streets based on time of day and/or volume of traffic may actually cause more environmental problems, while "solving" congestion problems.

In the author's view, reduced (or better managed) traffic volume makes the commute more enjoyable, and may actually encourage people to stay in their cars - just shift times of travel where possible. Further, he does not say to get rid of congestion pricing, rather to find the right price. (For example, he finds it "absurd" that, in New York, "the East River bridges still don't charge tolls and that curbside parking in much of the city is free." On that last point, I'm not sure that much of that free parking is convenient to where people work, but there evidently are spots available.

You could use this as a discussion starter when talking about externalities or demand elasticity (the incentive of a substitute). It might be interesting to see where the discussion goes.

I look forward to your comments.

Friday, October 9, 2009

Price Is A Scissors

One of the ideas I always try to stress is that, while assymetric information exists in exchanges, it still takes supply AND demand to make a market. 

My favorite illustration for markets without demand was an old Calvin & Hobbes comic. Calvin had set up a booth and was selling "swift kick in the butt".  Business was terrible, and he told Hobbes he couldn't understand it.  "Everyone I know needs what I'm selling."  A clear case of supply but no demand. ***UPDATE*** (You can find it here. HT to Dr. Mark Witte at Northwestern University for the link.)

On the other side, I can think of no better example of demand without supply than this classic bit from Monty Python's Flying Circus.  Enjoy your weekend.

Thursday, October 8, 2009

One Way to Approach Unequal Income Distribution

An Interesting Graphic

I have nothing deep, profound or even challenging for this post. It’s just a link to an interesting graphic to use when introducing the concept of money in your personal finance or economics course. (HT to the Economic Way of Thinking site.)

I hope you find useful, or at least mildly interesting.

Wednesday, October 7, 2009

Credit Cards, Spending, Saving and the Larger Economy

A couple of articles caught my attention today. I think they have some applications for both the traditional economics and personal finance course. Let me provide the links and my thoughts and see if you agree or disagree.

The first article (free at this writing) was in today's edition of The Wall Street Journal. The focus of the story was the falling level of consumer credit. According to the story, consumer credit (includes credit cards and auto loans) has fallen for six months and some were expecting a seventh when the data was released today by the Federal Reserve. (They weren't disappointed.)

The data has some implications. And as is often the case in economics, a "one-armed economist" can't explain them. On the plus side, there are benefits to lower debt loads and cutting down on outstanding balances. On the negative side, trimmed credit spending leads into things like predictions of weak holiday sales, and increased pressure on many retailers at point when many were hoping to see a turnaround in the economy.

A confirming story was in The Washington Post. That article indicates that when we use cards, many of us are increasingly using debit instead of credit.

Anxiety about jobs and the general economic condition are making people more reluctant to "charge it". That means they have the means to pay for something or they do without. And items that exhibit high price elasticity, that can be a problem.

So far, so good. There is an opportunity to discuss how people react with their personal budgets when faced with economic hardship. A good case can be made for having an "emergency fund." And the argument for wise use of credit all the time is strengthened.

But these stories provide more opportunities. I think they provide a chance to discuss whether decreased use of credit cards necessarily translates into decreased spending. Over the long-run, I think the argument is certainly positive. But in the short-run, how does a recession affect the propensity to spend or save?

Certainly, a case can be made that consumers may not choose to reduce consumption when faced with adversity. If we look at recent recessions, one of the more interesting aspects was how consumers continued to spend (resilient was the term used frequently). According to many, that spending was supported by the wealth effect, the increased portfolio values many had as a result of investment in the 1990s. Granted the stock market stumbled, but other assets were not affected significantly, including real estate.

This brings us to the current situation. This recession is undoubtedly deeper than was the 2001 downturn. (And we may or may not even have seen the end of it, in which case it is longer than that event.) But this recession included a huge hit on the asset side of many personal balance sheets. The value of homes dropped. Sometimes they dropped to levels where outstanding mortgage balance was greater than the home's value. The owners were "upside down." That, combined with loss of jobs, or even just anxiety about the future, can provide an explanation for the action described in the articles in The Journal and The Post.

I welcome your thoughts.

Here's another article from the Thursday, October 8 edition of The Washington Post. It's basically a follow-up to the story from Wednesday's edition that's linked above.

Tuesday, October 6, 2009

Jeremy Bentham and David Hume on Health Care?

There's an interesting opinion piece in today edition of The New York Times. (HT to Greg Mankiw.)

Columnist David Brooks introduces us to two early thinkers in the realm of economics and philosophy: David Hume and Jeremy Bentham. His purpose in trying to give us an idea about these thinkers is to frame the health-care debate in what he sees as their terms. I can only presume that Mr. Brooks has read on both of these far more extensively than I have. What little I do know would question some of his characterization of Hume.

I do question his portraits, only because he seems to be taking liberties on how they both might have researched and arrived at their views. He aseems to presume that each was more representative of a given way of looking at a problem. He is certainly more comfortable in his portrayal than I would be, not having met either. I'm certain Mr. Bentham would do a thorough and detailed search of the issue. But I suspect Mr. Hume would not be as haphazard and prone to give up as Brooks portrays him. That seems counter to what I have learned about Hume.

As I said earlier, while I've not read extensively on either of these figures; I think I will try to learn more. I know Hume was a great influence on Adam Smith, and Bentham was a fried of David Ricardo and a mentor to John Stuart Mill. If you're interested in learning more, I can suggest two sites to use as starting points:

Concise Encyclopedia of Economics

Internet Encyclopedia of Philosophy

And, as always, I welcome any insights you may have.

Some History of Monetary Policy...When Disco Was Dying

Here's something for those of us who are economic history nerds. (HT to Bill Polley.)

Those of us who were around in the late 1970s can remember a day in October, 1979 when the Fed changed its approach to monetary policy and took a hard stand against inflation. The idea was to focus on monetary aggregates via bank reserves, instead of targeting interest rates. It was, in effect, a return to one of the ideas of Irving Fisher. His equation M*V = P*Q (or P*T), is an important identity linking money growth to prices. (And, obviously, it is the title of this blog.)

There are a couple of Federal Reserve Bank publications that examine that important decision. This first one from the Federal Reserve Bank of San Francisco is, by far, the more concise - amounting to a handful of pages. This second, from the Federal Reserve Bank of St. Louis, is more comprehensive and, at over 80 pages, may be preferred by the wonkiest among us - the same group that has been waiting patiently for the second volume (now scheduled for two separate books) of Allan Meltzer's History of the Federal Reserve.

Fisher's idea is still a handy classroom tool for explaining the connection. The equation state that the money supply (M) multiplied by the velocity (V) or number of times the money supply turns over equals prices or the price level (P) times the level of goods and services transactions (Q or T, depending on your preference). By use of some simple algebra, it becomes (M*V)/Q = P. And we see that money multiplied by its velocity, divided by the output gives us prices. And if we examine the change in MV relative to the change in Q, the result is change in P (inflation). If the change in money is greater than the change in output, there is upward pressure on prices. Change in output greater than the change in money results in downward pressure on prices.

It is the relationship illustrated by Fisher's equation that is causing a lot of concern about the result of current monetary policy, and has many pundits speculating about the Fed's exit strategy from the current accommodative (easy money) stance.

Regardless, if you would like to know more about the mechanics of monetary policy at the time of the last major bout of inflation, these publications may make a good place to start.

I look forward to your comments.

Monday, October 5, 2009

State of the Current Business Cycle

While some are ready to call an end to the recession, I'll wait for the official statement. (Although I sense a change.) 

Nevertheless, here are a couple of interesting items for your consideration. First is an article by Robert Samuelson in today's edition of The Washington Post. His opinion is that government helped the larger economy dodge the bullet. And while many will debate the effectiveness of the stimulus (both fiscal and monetary), the economy does seem to be turning, and "Great Depression: The Sequel" does appear to have been averted...for the moment. As Farmer states in his piece in Voxeu indicates, the Great Depression was actually two recessions, separated by more than three years. We have a ways to go to beat that.

The second item can be used in conjunction with the Samuelson piece. The Council on Foreign Relations released a chart book (click on the link in the right hand colum) on the current recession last month, comparing it to average downturns and The Great Depression. I would think it would be helpful for those of you studying business cycles and the current business cycle. And for any schools in The Fed Challenge or other economic competitions, this might provide some context for discussing the current state of the economy.

I hope you have a good week. I look forward to your comments.

Unintended Consequences

One of the more interesting aspects of economic policy is the "unintended consequences" aspect. An action is taken, a result is achieved (to degree lesser or greater than expected), but there follows an unintended consequence. Pundits like to take shots, saying that certain consequences should have been foreseeable and should have been taken into consideration when the policy was first formulated. I tend to agree that certain consequences are foreseeable (especially with a little economic thinking). But, if you'll forgive the cliché, only hindsight is 20/20.

That being said, here's an interesting story from The New York Times last month. (HT to Izzit). It seems that authorities, in effort to forestall the spread of swine-flu, ordered the killing of all pigs. I suspect that policy-makers in most countries would likely not have foreseen this outcome.

Regardless, it makes an excellent example when discussing those “unintended consequences.”

Thursday, October 1, 2009

Maybe I'm Too Suspicious, but...

Recently, a number of stories have broken that remind me of the old saw about history repeating itself. And while I've found versions of the stories in a number of places, I'm going to provide links to the versions in The Wall Street Journal, mainly because it's convenient and I don't have to start my search anew.

The first story that caught my attention was this one, which talks about the federal government providing $35 billion to the states to promote local housing. That was followed quickly by this blog post about rising delinquencies at Fannie and Freddie.

Now add in two pieces from today's edition. The first is a story (subscriber only at this writing - search for "Wall Street Wizardry Reworks Mortgages") about financial institutions repackaging their bad debt (much of it mortgages) into new financial instruments. The goal is to move the debt out by securing better credit ratings on some of it. And finally, there's this opinion piece about the rating agencies getting a pass in recent legislation.

Separately, the stories may not amount to much. Together, I think they raise the potential to rebuild many of the same institutions that got us here. And those institutions provide incentives. The question for our students: “If people respond to incentives, is it possible that these developments are creating similar incentives to those that existed before the crisis?”

But before you ask it, I offer this last opinion piece as a possible follow-up. It provides a look into an era when incentives aligned with ownership and risk on Wall Street. I think it provides an idea for the future.

I look forward to you thoughts.