Sunday, October 28, 2007
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.
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
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.
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.
Thursday, October 25, 2007
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
"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.
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
Monday, October 22, 2007
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?
Sunday, October 21, 2007
Saturday, October 20, 2007
Tuesday, October 16, 2007
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
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.
Friday, October 12, 2007
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
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?
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
Tuesday, October 09, 2007
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
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
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
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 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.