Causation, Correlation or Coincidence

And we were only talking about subsidies and their effects on markets the other day in my class. I wish I had this at that time. (HT to Division of Labour).

What Are You Willing to Give Up?

What if you had the chance to sit in on a course by a Nobel Prize winning economist?  What if it was "free"? Well, “free” in the sense that there's not a monetary payment necessary. As we all know, there's an opportunity cost. This may take about 25 hours or so of your time. You probably won't get a lot that you can use directly with your students, but I suspect you'll gain a lot more understanding of an important topic that your students will benefit from.

Follow this link and you will have the chance to sit in on Gary Becker's lectures on human capital at the University of Chicago (HT to Marginal Revolution). I know I'm going to enjoy them.

Follow-up on Haiti

One of my ongoing themes this year appears to be Haiti. (I won't bother you with a bunch of links. It's easier if you just put Haiti in the search at the upper left corner of the blog.)

Here is a follow-up courtesy of the folks from Planet Money at National Public Radio. It seems that entrepreneurial spirit can accomplish wonderful things - even overcoming bureaucratic barriers of all kinds.

Immigration Effects on the U.S. Economy

I just received a very interesting issue of the FRBSF Economic Letter. The topic is The Effect of Immigrants on U.S. Employment and Productivity. I will state up front, it does nothing to provide a sound economic argument for those looking to restrict immigraion on the grounds of protecting American jobs.  And quite frankly, I didn't think it would. If anything, it provides further support for an view put forth several years ago in this issue of the Federal Reserve Bank of St. Louis's The Regional Economist.

I would recommend either or both of these articles for use with your students provided they are reading at grade level. I would think they would make a good discussion starter for labor markets, factors of production, and production function and GDP, just to suggest a few.  If you wouldn't mind, read them over and share your suggestions or thoughts.

Conditional Cash Transfers

The new edition of The Economist contains a pair of articles that are worth your time. (You can find them here and here.) They're short and they address issues of incentives, income distribution, productive resources and economic development.

The focus of the articles is a relatively new idea in economic development programs, conditional cash transfers (or CCTs). The idea is that the poor are paid for certain activities: getting their children vaccinated or making sure their children are in school. It appears to be successful in many areas, although it is more successful in rural areas than in urban areas.

While I'm not sure to what extent you address economic development (that's an "end-of-the-course" topic that too frequently gets left out, either for lack of time, lack of interest, or lack of understanding); I do suspect you discuss incentives, and possibly income distribution or productive resources. I would be interested in your assessment of these articles.

Education, Skill Sets and Recovery

The Federal Reserve Bank of Cleveland has an interesting article in the recent issue of Economic Trends (see page 14). The author asks whether a mismatch between worker skills and job skills may be a factor in the slow job creation growth.

On the surface, this is a logical question. Recessions are often seen as a time for factors of production to be reallocated. This applies to labor. Certainly, as companies retrench they will look to increase productivity among existing workers before bringing on new ones. Indeed, one lesson we teach is that rising prices increase supply, partially because higher prices allow less productive resources to come into the process. Workers with weaker skill sets may, indeed, face a period where their skills don't match demand.

But I'm not sure I agree with one aspect of the article's conclusion. The author talks about lower productivity and higher unemployment. I would think that the retrenchment would lead to higher productivity. To that point I would point at the long-term trend, as illustrated here by Mark Perry on Carpe Diem. Mark's data is longer-term. And granted, the past does not guarantee the future, but I think it would be logical to expect increased productivity from the existing workforce, at least in the near-term. If there is a skills mismatch, growth will have to come from higher productivity. And that increase in productivity may change the larger economic landscape, establishing a higher premium for certain skills, while those with lesser skills could face an uncertain job market. Recent productivity data would be helpful in this respect.

This brings me to a post by Greg Mankiw. Greg asks whether the current average duration of unemployment may indicate the Non-Accelerating Inflation Rate of Unemployment (referred to as NAIRU or "the natural rate of unemployment" by some) may be increasing. If the economic structure has fundamentally changed, say by requiring more skilled and more productive workers, one could see how this would be possible. However, as has been pointed out here and in other places, the duration of unemployment could be a result, in part, of extended unemployment benefits providing a skewed incentive. I'm not sure I totally buy that explanation, but I do understand it. I think Greg is right in saying we may not have the answer to the question for some time.

To summarize this post, I don't know whether we are undergoing a major structural reorganization of the economy. A skill mismatch would certainly contribute to that, and changing productivity would certainly be expected in such a circumstance. If these issues are tied together, it would indicate a need for a different approach to economic policy than what is being tried. But I find all three links interesting and worth your time. I certainly welcome comments.

Economics of the World Cup

While I know most of you are out of school, you may still be looking for interesting graphics to use during the forthcoming school year.

If you have soccer players, coach soccer, or like soccer, here is a very good graphic courtesy of The Mint. It shows some of the economics of the World Cup. This could be especially useful when discussing the economics of big events or sports facilities.  One could even dig further by researching the economics of previous World Cups or Olympics.  (One of my students said he had heard a story that the Athens Olympics was one reason Greece was in the condition it is in. We had a good, short discussion on whether or not that might be true.) 

***UPDATE***
Here is a link (free access at this writing) to a story in today's (6/17/10) edition of The Wall Street Journal that seems to confirm my student's comment.

Afghanistan and the Resource Curse

When discussing economic development, the folks at National Public Radio have an interesting story to use with students in a discussion of "the resource curse." Most often we use that concept to refer to economies that are blessed with abundant natural resources but fail to diversify. Those economies frequently see the natural resources as a way to improve the lives of the people, but it only works if other resources are developed, as well.

You can also use this in discussions about the production function. One can put the equation (Y = A f (L, K, H, N)) on the board and begin by asking what the story means for Afghanistan. You can then extend by asking about the other factors and how they can be provided. And wrap up by asking about what happens if the only resource that is developed is N?

Unemployment

In many AP Macroeconomics courses, there is an opportunity to look at unemployment. And one of the discussions revolves around the level of unemployment benefits and the duration of benefits. There is a very good article in yesterday’s (Friday, May 28, 2010) edition of The Wall Street Journal (free at this writing). (If it changes, try putting the article title in your browser.)

The article is about the United Kingdom’s budget problems, and how various support benefits, including unemployment, may be part of the solution. I recommend it.

Do Volunteers Steal Jobs?

"Low wage workers steal jobs." This argument is one we have all heard. It gets applied to issues such as immigrant labor, off-shoring, even unionization. The prima facie argument is compelling. Someone willing to work for a lower wage replaces the individual working at a higher wage. It isn't fair, etc., etc.  That's what made this post on Econlog so very interesting. The author of the article referred to in the post, indicates that there was suspicion about the motives and effect of volunteers in the aftermath of the Haiti earthquake. Locals thought the workers were "stealing their jobs" by agreeing to work for less than the local wage. When informed that they were doing it for free, a common response was that the workers must be getting paid elsewhere.

The type of thinking exhibited by the villagers may be questionable, but is it a logical extension of the arguments we hear related to immigrants, off-shoring, etc.? If it is true, shouldn’t anyone from the outside who is involved in the cleanup after a catastrophe be looked upon with suspicion? The motives of numerous charities should be questioned because the workers are doing things that locals could be doing themselves and possibly getting paid for.

Would it also apply to help extended during catastrophes? If "outsiders" come to help fight forest fires or build levies against flood waters, aren't they taking work from those in the community whose job it is (or could be) to perform those services?

I'd be interested in reading your reactions. If you've read your Adam Smith (both The Wealth of Nations and The Theory of Moral Sentiments), how do you think he would respond?

Does Military Conflict Boost the Economy?

Is it possible that when people talk about the ability of military conflict to "stimulate" the economy, this is what they have in mind?

I think that, like the broken window fallacy, people forget about the loss and how resources could have been otherwise used.

NFL Draft

For those of you into pro football, tonight may be as much fun as the Super Bowl, but without the expensive commercials. Yes, it's the opening round of this year's NFL draft.

Today's issue of The Wall Street Journal has two engaging articles. This first one is about how the NFL draft drives economists crazy. Talk about a pricing system that really doesn't work... And there's a graphic that lays out an alternative auction system. As the article indicates, it incorporates a little game theory. It's fun.

The second article is actually just a chart with an explanation. It compares salaries of 10 first round picks with the salaries of major corporate executives. I find it interesting that people get upset with the salaries paid to people in corporate America, but don't seem to mind the fact that rookie players, many of whom don't make it past their first year, get paid more.

I think it goes back to what we choose to value. To what extent do salaries reflect what we truly value? I'll leave the question with you.

GDP Debate

One of the early chapters in the AP Macroeconomics course, and a key part of any study of macroeconomics, deals with economic growth and its measurement. It leans heavily on understanding what gross domestic product (GDP) is; as well as the various components (consumer spending, investment spending, government spending, and net trade). This is an important idea because time is also spent examining the importance of capital and policy, among other things, in impacting GDP.

Another aspect of the study is the shortcomings of GDP as a measure of economic progress. Because it doesn't quantify items like leisure time, cultural amenities, etc., many feel it is not an adequate measure.

To explore the idea of GDP and its adequacies/inadequacies you might want to visit The Economist this week, where there is a debate: "This house believes that GDP growth is a poor measure of improving living standards."

You and your students can examine the statements, vote on the motion, and examine some background reading. This may be an interesting way to review that section of the course, especially if you are getting ready for the AP and/or IB exams.

Please share your thoughts about the site.

Creative Destruction and Structural Unemployment at the Movies

Here is a cut from an almost 20-year old movie, Other People's Money, which starred Danny DeVito and Gregory Peck, among others. (HT to Marginal Revolution, by the way.)



The cut is from a speech made by DeVito's character, Larry the "Liquidator", who stereotyped the merger and acquisition barons of the 1980s. These were financiers who bought companies, and sold them off in parts, destroying the firm and the usually the lives of employees in the process. The role is similar to the Gordon Gecko character from Wall Street.

But in this speech, at least in the first three minutes of it, DeVito's character gives a very good explanation of the idea of creative destruction - the process that ultimately accompanies growth and progress. The remaining portion of the clip, while entertaining and an indictment of the mindset of "I got mine and to h_ _ _ with the rest", is not as valuable as the first three.

I'm going to have to pick up the movie and view it again.  It's been a while since I watched it.  Take a look and let me know what you think.

Markets for the Unusual...or Not

Yesterday's issue of The Wall Street Journal had a somewhat amusing story (free content at this writing) about mortgages and "unusual housing." Specifically it talked about how bankers are balking at lending for houses built of unusual materials or using unusual construction methods. Since there is little to compare against to get a measure of value; and since bankers were burned with mortgages at some time in the not too distant past; the result is no mortgage.

One of the ideas that the article triggered in my head was the debate about value - does it arise from supplier's cost or from demander's intended use? Or does it come from an understanding of the market? And how big does the market have to be to provide sufficient information to avoid significant asymmetries?

I look forward to your comments.

GDP and School Kids

National Public Radio's Money Blog has this podcast on the correlation between gross domestic product and kids, particularly schooling. It appears to be part of a longer series, so there may be more on GDP. I would think it can also be used when discussing coincidence, correlation and causation.

The podcast in this link is about 25 minutes long, so I'm not sure I would play it in class. However, some of you may be able to assign it or download it and put it on your class webpage as an ancillary resource for use next semester or next year when you discuss GDP and its importance.

If you have a chance, please share your reactions.

Today in the History of Economics

Today is the anniversary of the birth of Thomas Malthus. Many people hesitate to recognize Malthus, dismissing his essay on population as faulty. For those of you unfamiliar with his essay posited that unchecked population growth always exceeds the growth of the means of subsistence. The problem with his hypothesis was it failed to take changing levels of capital into account. Since he wrote at the beginning of the Industrial Revolution, he was soon proved wrong.

But he also wrote on rent and Say's Law. Regarding rent, Malthus argued against the idea of rent being a cost of production, rather believing that it was a deduction from surplus. Regarding Say's Law, Malthus felt that general gluts were possible, thus negating the "supply creates its own demand" idea that felt those periods of overproduction weren't possible. You find some good bios on Malthus here, here and here.

Today's Birthdays

Today we recognize the birthdays of two economists: Francis Edgeworth and Joseph Schumpeter. Edgeworth was a mathematician, as well as an economist. You can get a fairly full background by checking out sites here and here.

However, the "Edgeworth Box" may be what he is best known for. It is a graphical representation of the benefits of trade. I found this explanation to be helpful. Those of you teaching AP, IB or college principles courses may find this downloadable demonstration of some use.

Joseph Schumpeter was, in my mind, one of the greatest economists of the 20th century. His recognition of the nature of growing economies (creative destruction) was a keen insight. And his view of the role of the entrepreneur (and the acts of entrepreneurship) also earns him accolades. Good short biographies of Schumpeter can be found here and here. However, I also recommend Prophet of Innovation, and for the very ambitious, his History of Economic Analysis. I’ve added both to my carousel, at left. I welcome your comments.

Just in Time for the Super Bowl: Economic Lessons from the NFL

In today's issue of The Wall Street Journal, the page 1 story for the Personal Journal section is about what it takes to win the Super Bowl. If you're into football (and even if you're not), it's a fascinating piece and it offers several interesting opportunities for applying economic thinking.

Concepts that leapt to mind as I was reading included productivity (time spent per foot of offense), marginal thinking (value of additional hour of prep time), psychic income (return on effort because they love the game), marginal thinking (benefit of an additional hour studying film), and even a little labor economics (hints at the expiration of the current contract with the players' union).

While I haven't dissected it to the point of developing any lessons, it might make a good follow-on discussion on Monday when some of the class is discussing the game. We’re having our annual "family Super Bowl party" with the cuisine determined by which teams made the game. And some of us like The Who, so we'll make it half-time. Enjoy the weekend, and share your thoughts.

Labor as a Production Factor & Unemployment

For those of you in AP Macro who are in or near the chapters dealing with unemployment and factors of production, here are a couple of articles that may be of use. Even if you don't apply them directly in class, the conclusions are worth your consideration. Both of them come via the Federal Reserve System.

The first deals with "It's Jobs not Discouraged Workers" and is on Macroblog, courtesy of the Federal Reserve Bank of Atlanta. The article examines the recent concern about discouraged workers reentering the job force and slowing the reduction in the unemployment rate. Authors Hotchkiss and Graefe seem to be of the opinion that the worry is misplaced. After looking at this article, I would have to agree. But I will look for more on the topic.

The second is "A Historical Look at Labor Markets During Recessions" and comes from the Economic Letter of the Federal Reserve Bank of Dallas. Much has been done comparing this recession to the Great Depression and to other post-World War II recessions. And while Martinez-Garcia and Koech show that this recession is not on the same magnitude as the Depression, it is, in many measures, worse than other post-War recessions. They graph the unemployment rate, civilian labor force growth, and non-farm payroll losses (both pre and post 1970) among other measures. At the very least, they provide some solid up-to-date data for use in your classroom discussions.

I encourage you to take a look and to share your comments.