Sunday, October 28, 2007

Jay Allender

My mom is super impressed with the doctor that lives across the street from her. "Last week, Jay took his family to Disneyland for the whole week," my mom said over a telephone conversation today. "That must of cost a small fortune. This will be something that will last a lifetime."

I'm putting words into her mouth, but the Disney trip is like a Master Card purchase--it's priceless.

I tend to disagree with my mom. I not so sure that the vacation was priceless. Could it be that Jay has discounted the future heavily? Also, Jay's utility function could match the Friedman-Savage Utility Function. Is it possible that the expected utility was less that the marginal cost of the vacation?

There are some topics that are beyond economics and crash into psychology. Perhaps this is one of them. I welcome your comments.

Intentional Walks in World Series

Last night, the Colorado Rockies intentionally walked a Red Sox batter. In a sport where the best hitters have a .300 batting average, why would the strategy be to walk a batter? I checked The Home of the Baseball Economist for an answer. Although I didn't find an answer, some excellent comments are made here including one by Brad DeLong. It's interesting to me that I wondered about walking a batter when "Big Papi" Ortiz was up to bat--the same batter mentioned in Chapter 2 of JC Bradbury's book.

The author, J C Bradbury, devotes Chapter 2 to protection. Alex Weaver, ISU, says that baseball is the only sport where the defense can't score. Baseball is a sport I don't understand and will welcome comments instructing my on why an intentional walk is a good strategy.

Friday, October 26, 2007

Wages and Prices

Today's cartoon implies that the economy is doing well and wages haven't kept up with prices. The Economist reports that consumer prices rose 2.8% in September. Wages rose 1%. Oliver Blanchard reports that the price setting relation is given by P=(1+u)W where u is the markup. So as wages increase so do prices. Milton Friedman says that workers form adaptive expections about inflation. Have workers come to expect a 2% inflation rate? I think so.

Tyranny of the Market

A colleague was reading the Muscatine Journal over morning coffee Monday. He quickly turned the pages as if he was speed reading. "There," he said. "I just spent three minutes reading the Journal. There's nothing in it for me." My colleague lookd at the front page. "This is all AP news that I read in the Register. There's not much local news." My friend shoved the paper away like the paper had the MRSA virus.

Could my friend's reaction be related to the Tyranny of the Market, Joel Waldfogel's new book?

From the back of the dust cover Austan Goolsbee writes, "This is a book for all the people out there who sit down and flip through hundreds of channels but never seem to find something they like. In it Joel Waldfogel, one of America's most interesting economists, shows exactly how many people in the marketplace end up stranded, unable to get what they want. It's a provocative statement on why free markets don't necessarily make everyone better off."

Joel aruges that high fixed costs and the majority rule fail to deliver the right quantity of goods to the minority preferences. In my friend's case, the news that he wanted to read was the minority prefernce.

Phillips Curve

The October 20, 2007, Economist has an excellent article on the Phillips Curve on page 12 of the special report on the world economy. The definition from about the Phillips Curve follows:

"The Phillips curve is a historical inverse relation and tradeoff between the rate of unemployment and the rate of inflation in an economy. Stated simply, the lower the unemployment in an economy, the higher the rate of change in wages paid to labour in that economy."

The Economist states that the Phillips Curve has become flatter because monetary policy is effective. An interesting point brought up was the downward pressure on prices due to globalization. Alan Greenspan is quoted as believing that in the future factor mobility will be an inflationary force.

Thursday, October 25, 2007

Iowa Employment and Trade

Iowa Workforce Development released positive employment data for September. With 66,100 unemployed workers, Iowa's unemployment rate was 3.9%. The data shows 4,100 more jobs were added with the state's labor force boosted to 1,673,500 jobs. Most of the gains were in government jobs with 1,500. Manufacturing lost 600 jobs.

The loss of manufacturing jobs is simply the result of technology gains and is a world-wide problem. In other words, outsoucing wasn't the cause of the job destruction in manufacturing.

Scott Ingstad, CEO of First National Bank of Muscatine, commented that the loss of manufacturing jobs is a sore point since the United States is making less and less "real" goods at home. A recent email from Ken Norman showed that 90% of a Toyota was assembled in the United States whereas, 65% of a Ford was made in the USA. Surely, the loss of blue-collar jobs hurt those in those industries, but the gains from trade outweigh the losses on a macroeconomic level.

Wednesday, October 24, 2007

Trade Deficit

Tim Schilling points out an excellent post at Cafe Hayek.

"Incessantly repeating that "U.S. growth... has been weighed down by soaring deficits with China" does nothing to render true this false bit of conventional wisdom ("China won't adjust currency," Page 1, Saturday). Indeed, it is false on too many levels to list here.
Most fundamentally, the flip side of a rising U.S. trade deficit is a rising U.S. capital-account surplus — meaning a hefty inflow of capital into America. More capital means lower real rates of interest. Lower real rates of interest mean more investment. More investment raises worker productivity. Rising worker productivity raises real wages. And rising real wages enable Americans to enjoy higher and higher standards of living."

A salute to Tim for the tip. Tim, I miss your Fed Challenge updates.

What About Social Security

Tyler Hagy asked if Social Security can be self-sustaining. Brad DeLong has written an 11-page primer on the subject. Mr. DeLong cites that Social Security might be a straw man for the Bush administration and that an increase in national savings might raise interest rates and hurt productivity. Brad writes at Grasphing Reality With Two Hands.

Many economists believe that by 2034, the trust fund will be able to fund only 75% of retirees. These economists believe that payroll taxes will need to rise by 23% in order to provide benefits.

Robert H. Frank comments on the low private savings rate in his op-ed article. In summary, parents want the best schooling for their children and choose to save less now and give up a comfortable retirement.

For all of the best editorial cartoons on Social Security see Daryl Cagle.

My econ 101 take is that the economy will create more jobs than it destroys and more workers will be employed to contribute to the social insurance fund.

Tuesday, October 23, 2007

Halloween Treats

The national debt is the accumulation of budget deficits. The size of the national debt is scary. What are the long-term consequences of the national debt?
The national debt clock can be found here. The national debt increases by $1.4 billion a day. This site has calculated the portion of the debt to each U. S. citizen to be roughly be $29,000.
When the government runs a deficit, national saving decreases (Y-C-G) which means lower investment. Greg Mankiw explains the relationship between savings, investment, and the trade deficit by using the national income accounting equation: S - I = NX. So lower saving implies higher consumption, C, and a larger trade deficit. In the long-run, a country that runs a persistent trade deficit will accumulate smaller capital stock and not grow fast enough to meet the economy's needs. Eventually the debt will have to be paid off. Usually, the assumption of the debt is placed on future generations.
Some economists like Robert Solow, argue that future higher taxes to finance the debt will be offset by increased savings now.
Many will attack the government's wasteful spending such as the Iraq war. Still, the debate on the national debt is enough to make one's hair stand up.

Monday, October 22, 2007

Income Inequality

I'm not sure I understand this cartoon. Is the cartoon saying that private rent-seeking business interests are ruining the benefits of free trade? Recently, many have been calling for protectionism. Is the protestor a scapegoat? The cartoon shows European and U. S. farmers holding the torches. Free trade puts downward pressure on ag products so is the toon saying that it's really special interest groups that are ruining trade?

Tyranny of the Market

My nephew, Adam Mills, has a idea that will make shopping easier for handicapped individuals. After he described it to me, I told him the high fixed costs or start up costs would make this invention unfeasible. More about how the market only distributes goods and services to the majority can be found in Joel Waldfogel's new book, The Tyranny of the Market.

Sunday, October 21, 2007


While reading my macroeconomics book by Gregory Mankiw at the Community Y, Cara Rada stopped to talk to me about her first year at Wartburg College. Cara and I were discussing research when Cara said that her instructors would not allow Wikipedia citations in her papers since the facts could be false. Cara's experiences mirror many students who say that their teachers will not allow Wikipedia references.

While I was writing my two year research paper on Oligopoly Behavior and the Pricing of Compact Discs, I used Wikipedia extensively. I found the online source to be accurate, well-written, and entertaining. If you use Wikipedia, you can find the whole matter discussed on the Wikipedia site here.
Tyler Cowen wrote a brilliant blog about how our minds are not hardwired for probability and statistics. His comments and some of the smartest comments I've read are here.
Finally, I think old school teachers feel that obtaining true knowledge involves psychic costs like checking out books at the library and due diligence. These teachers don't like the fact that the marginal cost of obtaining information is so low.

Teenage Employment

Barry Major is a law student in my class who worked at Sylvia's Mexican Restaurant until we decided to take a class field trip. Barry's employer told him that if he went on the school sponsored activity to the District Courthouse to watch a trial that Barry would be fired. I told Barry that I was always taught that there's no relationship between earnings among those who start working in high school and those who wait until they graduate from college. In other words, job skills developed while working at McDonald's don't translate into future earnings.

Tyler Cowen writes in Discover Your Inner Economist that having a job is a signal of adulthood and independence. I won't argue the point, but I will argue that a teenager learns few transferable skills that can be used in adulthood to enhance employment skills.

In an economic paper authored by Shirley L. Porterfield and Anne E. Winkler, "Teen employment provides benefits such as building good work habits. Further, such employment many ease strained family finances. On the other hand, such employment my reduce the quality or amount of human capital acquired to the extent that employment displaces time or attention devoted to schooling. While research evidence is somewhat mixed, it seems to indicate that teens benefit from holding paid employment, but also suggests that working too many hours (greater than 20 hours per week) appears to have detrimental consequences." You can read the whole paper here.

Good Housekeeping, September 2007, Eve Tahmincioglu, writes that in her interviews with over 50 CEOs most said that they'd held jobs as teenagers and that the work had lasting impact.

My econ 101 answer is that a teenager has more information about how the job will benefit them more than potential employers. So when Barry Majors decides whether to quit, get fired, or go on the law field trip, he should weight discounted future benefits with current costs and make a choice. In Barry's case, he quit thinking that his future career in law enforcement would benefit more from watching a criminal DUI case than making a burrito at Slyvia's.

Saturday, October 20, 2007

Credit Crunch

As the housing market goes, so does the economy. Many jobs are tied to the housing market like the building and materials trades, and banking.
There's a lot to be said about living below your means as the cartoon suggests. Should lenders be held accountable in a civil court for their sub-prime loans? It seems negligent to me that making a loan to an unqualified applicant could have been seen as negligent to a reasonable person.
Adverse selection exists when a party on one side of the market who has information not known to others, self-select in a way that adversely affects a party on the other side of the market. Clearly, bankers had credit history information and acted in a manner that ignored the costs imposed on mortgage applicants. Sometimes, a debtor has to be protected from himself. Sometimes the debtor has to be protected from others.

Tuesday, October 16, 2007

Utilitarianism and Income

"Mrs. O'Callahan instructed the artist painting her portrait to add to it a gold braclet on each of her wrists, a strand of pearls around her neck, ruby earrings, and a diamond tiara.

The artist pointed out that would be tantamount to lying.

Said Mrs. O'Callahan, "Look, my husband's running around with a young blonde. After I die, I want her to go crazy looking for the jewelry."

This joke is taken from Plato and a Platypus walk into a bar, by Thomas Cathcart and Daniel Klein. You can buy the book here. The joke is used to show Utilitarianism, the cornerstone of neoclassical microeconomics that asserts that all human behavior is directed toward maximizing utility.

Jeremy Benthan is largely credited for his work how consumers rationally make choices on how to use their scare resources based on the utility they gain. In other words, people act in a way that seeks pleasure and avoids pain. In this theory consumers weigh the benefits and costs of each action based on the consequences of their actions. An action isn't considered "good" or "bad" only by how much utility is gained by the action. For a complete discussion of this philosophy click here.

Dr. Hammeresh at econthought makes a clear point that more income doesn't mean more utility. People also have preferences that increase pleasure. When I go to work every day, I know I could make more money working another job, but no other job increases my utility more than teaching. I am like a kid going to a playground.

Sunday, October 14, 2007

Toilet Paper

A normal good is one that the demand increases as income goes up. Say, for example, that you demand more designer jeans after you get a big fat raise. Then designer jeans is a normal good. But what about toilet paper? Does a person's demand for toilet paper increase as their income goes up?

I suppose demand could increase if food is a normal good. I'm off on a tangent here, but then toilet paper would be a "Gross Domestic Product." The econ 101 answer is that demand for toilet paper does goes up so it's a normal good, but the coefficient isn't greater than 1 so toilet paper is income inelastic. A salute goes to the College Board AP Macroeconomics discussion board and the QC Times article in today's paper by Chuck Jaffe.

Free Trade

(The River Cities’ Reader is an entertainment guide to the Quad-Cities around Davenport, Iowa, and Rock Island, Illinois. Usually, the Reader is 30 newspapers pages long and contains one article on economics. Today, I want to reply to Mark W. Hendrickson's article on free trade. Dr. Hendrickson is on faculty at Grove City College and supports free trade for all of the usual economics reasons such as lower prices, creative job destruction, more choice, competition, and such.)

Suppose that Jing and Kathy are neighbors. Kathy likes to work in her yard and is good at it. Her yard is the kind of yard that people say, "Where does she find the time to manicure her yard like a golf course?" Say that Jing Hao is a chef who works for Tao Bistro. Jing is the kind of chef that people say, "I wish I could make a Mandrian Duck like that. She makes it look so easy to make even while throwing flaming knives in the air." Wouldn't it make sense if Jing hired Kathy to cut her yard and Kathy hired Jing to make her Mandrian Duck? Both are doing what they do best so they could trade. They both would be better off.This is the principle of comparative advantage that economists advance to support free trade between countries like the United States and China.

Like most economists, I believe in comparative advantage or I wouldn't buy my books at Borders, eat lunch at McDonald's, and buy my clothes at K and D Clothiers in Muscatine. In other words, I would not write all the books I want to read, make all of my meals and clothes. I'd let those people make the goods I want then trade with them the money I earned teaching their children. When Jing trades with Kathy lawn care for food, both are trading real goods. What happens when they use money? This is where the analysis becomes more involved.Say I buy an imported Chinese action figure for $10. I trade $10 for the toy. I now own a toy and the Chinese now own $10 of the United States in the form of currency. If the Chinese buy a $10 good from the U. S. then the trade is equal or what economists would say, exports equals imports. But what if the Chinese holds the dollar?If the Chinese holds the dollar, they now have a claim of $10 against U. S. assets. Since money doesn't earn interest, the Chinese government buys US Treasury Bills.

At the current time, the US has a trade balance of approximately -750 billion. This means that countries that we trade with own approximately 750 billion of US assets.As long as foreign countries believe in our ability to repay with interest our trade balance, the United States will continue to grow. If our trading partners lose faith in our ability, then we have traded our future away for the present.

Right Brain Test

Tyler Cowen sends a cool test to see if you use your right brain or left brain. You can find it here
I actually wrote this to see if I could create a link that says, click here, but goes to the link.

Friday, October 12, 2007

Are Traffic Fines Regressive?

On Wednesday, October 11, my law class visited the county courthouse to watch a criminal trial. Parking is scarce. Recently, Muscatine County enacted an ordinance that reduced the time a parking space can be rented and increased fines by 67%. After jury selection several of my students went outside to move their cars and found several parking tickets on their vehicles. Taylor Williams had $30 and Danny Chick had fines of $20. Most students had fines of $5. I noticed that to some students a $5 dollar fine was a huge blow and to others the fine meant nothing. Are parking fines regressive?

A regressive tax is a tax that decreases in percentage terms as income goes up. Since some of my students (or their parents) earn more income (only the Fed can "make" money) it seems to me that the proportion of the fine is regressive. To those earning relatively high incomes, the fines meant nothing. This begs the question. Do high income earners violate parking ordinances more than low?

Thursday, October 11, 2007

Consumer's Surplus

Please check out Dr. Hameresh's blog. A link to his econthought is found on the right. His blogs show everyday applications of econ 101 subjects. An example I pasted is below.

I went to buy a glorious Montecristo cigar at the local liquor store. The price on the label was $9.99, and I was happy to purchase it at that price. The cashier rings it up, though, at $5.99. I tell him that the sticker said $9.99, and he says, “Well, given how honest you were, I’m charging you only $8.99.” Fine with me. Especially fine because I was willing to buy it at $9.99, so I must be getting some consumer surplus even at that high price. My honesty, and the cashier’s concession, means that he is giving me an extra $1 of consumer surplus—and that the producer surplus is $1 less. His loss exactly equals my gain; but presumably he still gets some producer surplus, or he wouldn’t be offering the cigar to me at $8.99.

Although Dr. Hameresh received a boost in his consumer's surplus, I think he experienced an income effect and maximization of utility. What other micro concept?

Demand For Gas

If you're paying more for gas, gas prices might reflect your buying decisions.

Suppose Joe "Buckskin" Baker buys a huge Hummer. Does his actions impose a cost on others? It's hard to see around him when you want to pass. The Hummer takes up more space on the road and emits more pollutants. The Hummer uses more gas. Do you think that the Hummer has the unintended consequence of being a negative externality?

Wednesday, October 10, 2007

Left Shoe Right Shoe

Is labor a substitute for capital or a complement? Complementary inputs go together like an artist needs a pencil or a mason needs a trowel. A substitute input might be when a robot replaces the fry cook at McDonalds or the Welder at HNI.
Are immigrants a substitute or a complement for US employers?
The economic advisors to Mexican President Calderon believe that workers are complements. "[Calderon] mentioned complaints by U.S. farmers that the crackdown on migrants meant they did not have enough workers to harvest their crops, and said "capital and labor are like right shoe and left shoe."
Labor economist, George Borjas, disagrees. "Ok. I've heard of capital-skill complementarity. In other words, capital and skilled workers are like right shoe and left shoe. Correct me if I'm wrong, but I thought that capital and low-skill labor were more substitutable. In other words, they are more like right shoe and right shoe. In the absence of the low-skill migrant labor, many U.S. farmers would have invested in labor-saving capital equipment."
I believe that there's a dual-labor market. There's labor market for skilled and unskilled labor. As technology advances the demand for skilled labor increases increasing the wages in that market. The opposite happens for the unskilled labor market. The supply of unskilled labor increases and wages decrease. Eventually wages will equate in both countries in the unskilled market.

Tuesday, October 09, 2007

The Auditorium as a Common Good

Every Monday afternoon, teachers at Muscatine High School attend meetings for two hours. Yesterday's meeting was in the audiorium and the teachers were treated to Halloween treats while listening to the literacy team detail reading strategies. The audiorium is used by study halls, classes, and the drama department. By the end of the teachers' meeting, there were styrofoam coffee cups, candy corn, and empty water bottles left on the floor. Our custodian, Judy Heil, spent an hour cleaning up the mess. How come the teachers left such a mess?

The econ 101 answer is that the auditorium is a common good. A common good is nonexcludable in consumption but rivalrous in consumption. That is, anyone can use the auditorium but when anyone uses the auditorium they don't care about the costs they impose of others. Say Joe eats a candy wrapper and throws the wrapper on the floor. Joe receives all of the benefits of consuming the candy bar in the auditorium, but shares none of the cost of cleaning up. Plus, his wrapper might bother Pete who has an adversion to candy wrappers. Econ 101 predicts that a common good will be consumed to the point where the marginal benefit is zero. Last night, Judy brought out a 29-gallon garbage bag from the teachers's meeting. It's fair to say that the the audiorium is overused and the costs of cleanup fall on the custodial staff.

Teachers, in other words, act as economics predict.

Monday, October 08, 2007

ninety eight pound weakiling

The dollar keeps getting weaker relative to the Euro. That means that a dollar buys less European goods than it before. Of course, Germans and other users of the Euro can now buy more US goods which should be good for American exporters. Econ 101 uses the formula Y = C + Ig + G + Xn to explain that the GDP (Y) is a function of spending. Xn = Exports - Imports. If imports are increasing, the equation shows that you are adding a negative so Y goes down. But Y is what is produced at home. In order for United States citizens to import more, C or consumption must have increased. How could C increase and Y or income go down? US citizens had to borrow or sell American assets. Americans could have saved less too. As American buys more goods abroad, the dollar will become weaker. Let's hope that American goods gain popularity.

Sunday, October 07, 2007

What is Economics?

In introductory economics, economists make simplfying assumptions to show how people make decisions. In my class I teach that resources are scarce and people have to make choices how to use the land, labor, and capital. When a choice is made, opportunity cost is incurred. The cartoon to the right shows the opportunity cost that President Bush incurred when he chose to finance the Iraq war. The opportunity cost is the health of children housed in state children's hospitals. (click to enlarge cartoon)

Monday, October 01, 2007

Appreciating Yuan

This blog found at makes an interesting point. That point is, an appreciating Yuan would allow China to buy more goods that are preassembled and effectively lower production costs. Thus, currency manipulation by Chinese officials would do little to eliminate the current account deficit of $793 billion.

Dear Editor:As you report, Uncle Sam "blames Beijing's currency practices for contributing to the United States' bloated trade deficit with China" ("IMF Chief: Global Economy Threats Easing," Jan. 16). But as my colleague Tyler Cowen explained in his New York Times column, a higher valued Chinese yuan would have little, if any, effect on the size of this trade deficit.The reason is that Chinese manufacturers specialize in assembly: they buy component parts from other Asian countries and then assemble these parts into finished products for export.By lowering Chinese producers' costs of acquiring key inputs, a higher-valued yuan would reduce their costs of production - and thus do little to raise the prices that American consumers pay for goods made in China.Sincerely,Donald J. BoudreauxChairman, Department of EconomicsGeorge Mason University

I'm not sure I agree.

The Third Law of Demand

Thanks to Tyler Cowen, marginal revolution, for this link. I cut and paste from Wikipedia this discussion that Tyler used to explain ad-supported cell phones.

The Alchian-Allen Theorem was developed in 1964 by Armen Alchian and William R. Allen in the book University Economics (now called Exchange and Production). It states that when the prices of two substitute goods, such as high and low grades of the same product, are both increased by a fixed per-unit amount such as a transportation cost or a lump-sum tax, consumption will shift toward the higher-grade product. This is true because the added per-unit amount decreases the relative price of the higher-grade product.
Suppose, for example, that high-grade coffee beans are $3/pound and low-grade beans $1.50/pound. Then high-grade beans cost twice as much as low-grade. But now add on a per-pound international shipping cost of $1. Now the effective prices are $4 and $2.50, so that high-grade beans cost only 1.6 times as much as low-grade. This difference will induce distant coffee-buyers (like Americans) to choose a higher ratio of high-to-low grade beans than local coffee-buyers. (Prices are illustrative only).
Another example, provided by Financial Times, is that the theorem, briefly, implies that Australians drink higher-quality Californian wine than Californians, and vice-versa, because it is only worth the transportation costs for the most expensive wine.
Another example written by Tyler Cowen related this theorem to long-distance relationships.
Colloquially, the Alchian-Allen theorem is also known as the “shipping the good apples out” theorem (Thomas Borcherding) or as the “third law of demand.”

This is an example of related goods where one good becomes relatively cheaper. Eric Dodge in his AP prep book, 5 Ways to a 5, shows the same relationship with bagels and fritters.