Thursday, November 29, 2007

Information Good and Artificial Scarcity

Last weekend, I heard Andy Landers play a jazzy blues rendition of a BB King song, "Because He lives." Andy had the crowd clapping, smiling, and stomping their feet. Andy's band, the Andy Landers Project, frequently plays at the Redstone Room in Davenport and has four CDs to his credit. Andy informs me that BB King only plays the song live and will not record the song. This way, he keeps the song artificially scare and King can maximize profits by charging a price greater than P = MC. I will argue that a song on a CD has a MC of zero and any price King can charge greater than zero adds to his profits. Society demands a lower cost for the song, but King optimizes his profits by charging point 1. Do you think the "King" would approve?

Wednesday, November 28, 2007

Net Export curve

Greg Mankiw has a great post on the nominal exchange rate. As econ 101 predicts, a depreciating dollar will make our goods cheaper and boost exports. The Boston Globe has a story. A thanks goes to Adam Mills for the tip.

My question is about the net export curve. In his textbook, the net export curve shows the real exchange rate plotted on the Y-axis and equal to r = (eP)/P* yet the story is clearly about nominal rates. Nominal rate is the rate that one currency can be exchanged for another whereas real is the amount of goods that are exchanged. Which one is it?

Tuesday, November 27, 2007

Where's the Crowding?

AP economics theory predicts that an increase in government spending will crowd out domestic investment assuming that GDP remains constant. According to a post on Daryl Cagle's cartoons and commentary blog, Iraq Money Down the Rat Hole by Robert Scheer, the US government has spent 1.7 trillion on the Iraq and Afghanistan wars. Spending this much should increase the demand for loanable funds, raise the real interest rates, and crowd out domestic investment. My graph shows domestic investment has increased. (Source: At the last FOMC meeting the Fed lowered nominal interest rates. Don't real rates adjust according to the Fisher Effect? Either classical theory has failed or, pardon the rub, Keynes was right.
For a cartoon on the Iraq war and government spending click here.

Monday, November 26, 2007

Tragedy of the Commons

What does Thanksgiving have to do with economics? John Strossel talks about the tragedy of the commons here.

Russ Roberts has a nice podcast here.

One of the most important issues facing the world today is property rights. An example would be who owns the polar ice caps as oil shortages and global warming becomes a daily portend.

Saturday, November 24, 2007

USA Today Economic Forecast

The USA Today reports that Real GDP growth will fall to 1.8 to 2.5% from 3.9%. The unemployment rate will approximate 4.9% and Personal Consumption Expenditures will see a 2.1% growth in prices. In other words, GDP will decline, unemployment and prices will increase.
Is this stagflation?

Friday, November 23, 2007

The Second Law of Life

Economic growth has consequences. John E. J. Schmitz argues in Chapter 5 of The Second Law of Life that this growth causes air pollution, global warming, and depletion of the Ozone. The consequences of economic growth is the impact on the environment. The book discusses how entropy, or the second law of thermodynamics redefines efficiency.Harry Potter

Economic models assume a cyclical use of resources that are renewable. But we know better. After burning coal, the pollution cannot be reused even though the same amount of energy is still available after we burn coal. Thus, entropy increases and this increase in irreversible and irrevocable. In other words, we're doomed. The author posits that 2100 will be the year all of our resources are deleted.

Long-Run Inflationary Expectations

Do investors form inflationary expectations differently in the United States than investors in the Euro area? That's the conclusion that three economists, Meredith J. Beechey, Benjamin K. Johannsen, and Andrew Levin have reached. The paper can be found at the Center for Economic Policy Research or by clicking here. Mr. Johannsen is a graduate of Muscatine High School and Grinnell College in Iowa.

The authors conclude that long-run inflation expectations are not as firmly entrenched in the US as in the Euro area. The paper as econ 101 implications for the Phillips Curve, Fed Reaction Function, nominal interest rates and the Fisher Effect.

A salute goes to Mike Johannsen for the paper. Muscatine grads wanting to contract Ben can email:

Monday, November 19, 2007

Social Security

For a discussion about social security click here. Read the comments too. According to Robert Frank and Ben Bernanke, United States citizens typically have a low savings rate because social security, medicade, and medicare are so generous. In addition, housing prices are relatively low in the US making life-cycle saving a low priority. Economists like to discuss capital accumulation as a source for future growth. I believe that delaying the decision to consume now will result in more consumption later or a higher bequest.

Sunday, November 18, 2007

Okun's Law

I've been reading N. Gregory Mankiw's intermediate textbook for fun. It's hard to believe that this is an intermediate text. My sales rep, Richard Rosenlof, Worth Publishing, gave me an examination copy a month ago. I have read this text every chance I could. In the chapter on Economic Fluctuations, he shows a scatter graph of the change in GDP related to the change in unemployment. This relationship is known as Okun's Law. This law observes that a 1% change in the unemployment will change GDP by 2%. The graph (click to enlarge) is from the US Department of Commerce and makes the point.

Saturday, November 17, 2007

Trade Deficit

The trade deficit is a national income accounts identity. Y = C + I + G + NX. So if you subtract C and G from the right side of the equation you have Y - C - G = I + NX. This equation says, savings, or S = I + NX. Now subtract I and you have S - I = NX. If NX is negative, then Investment must exceed S. How can I exceed S? If foreigners loan us capital to buy their imports. So The trade deficit equals the amount of capital loaned to us by foreign countries. I think it's interesting that this "loan" helps us to fuel productivity, grow, and repay our loans with interest. The graph to the right (click to enlarge) shows how GDP (Y) has increased as a result of trade. As our trade deficit has increased, so has our GDP. Note: Yellow lines show rececssions.

Tuesday, November 13, 2007

Money Math

Liz Pulliam Weston offers money tricks today on MSN. Here's one she calls the rule of 70.

"The rule of 70Inflation erodes the buying power of a dollar, so that eventually it will buy only half of what it used to.
Want to know how quickly your money will lose half its buying power? Divide 70 by the expected inflation rate. If it's 3.5%, your dollar will be worth 50 cents in 20 years (70 divided by 3.5 equals 20). If inflation soars to 10%, your money's value is halved in seven years."

Money earns an interest rate of -expected inflation rate. In addition, you could have invested the money else earning a real return, R. My AP economics book instructs us to teach that the real interest rate equals nominal interest rate minus the expected rate of inflation. Rearranging this equation gives: Nominal interest rate = Real - expected inflation. If holding money earns negative expected inflation then Nominal = Real - - expected inflation which is the Fisher Effect. If inflation is increasing, look for nominal rates to increase by the same amount.

To read what Wikipedia has to say about Irving Fisher, click here.

Monday, November 12, 2007


Bert Green asked me for some thoughts on globalization so I thought I would share a few.

When I was a child, we were taught that the world was round. Now we are taught that the world is flat. Thomas Friedman is a pundit who wrote a brilliant book about how technology has made the world flat as information flows have leveled the playing field. Some opponents of globalization like Lou Dobbs have written books saying that we are exporting jobs and call for protection. It's easy to see the world from our egocentric viewpoint, but as the following graph shows, all nations have suffered a loss in manufacturing jobs. (Click to enlarge) Source: Karsten Jeske, Federal Reserve Bank of Atlanta, September 2007.
Why has manufacturing jobs declined? The real bandit is productivity. As the above graph shows, one must be careful generalizing anecdotal observations in the absence of data.

Sunday, November 11, 2007

Cool Econ Concept of the Day

Does more money make you more happy? According to the Easterlin Paradox, it does not. This economic theory postulated in 1974 concludes that once the basic needs are meet, an increase in wealth doesn't increase happiness. As always, the brilliant Tyler Cowen, Marginal deserves the credit for the word. My theory is that I prefer money money to less because money is opportunity.

Saturday, November 10, 2007

Urgent Care

Last night I attended the ribbon cutting openning of Muscatine Urgent Care. My thoughts are slim but the first thought I have is that Muscatine Urgent Care will flatten the monopoly curve for Unity Hospital. The Muscatine Journal repeats and reports that the new urgent care is not a substitute for the emergency room at Unity Hospital, but I can't help but wonder if those patients upset with Unity's service will visit Muscatine Urgent Care. The second thought I had has to do with market share. Economics predicts that the new urgent care should have opened across the street to capitalize on customer selection by location. Finally, for those who desparately need urgent care and heavily discount the future might choose to visit the new urgent care instead of waiting at the emergency room.

To see a video of Dr. Janarthanan talking to Dr. Mather, watch the video below.


Writer's Strike

Television writers are striking for higher wages. Many cartoons can be found here. As an Muscatine Education Association union member for 30 years, I'd like to comment on the economics of a strike.

The purpose of the strike is to convince employers that they are factor price takers. In other words, no one will work for less than wage $W, in the graph.

I don't believe that the strike will be successful for a couple of reasons. Note that at the higher wage, $W, less writers are hired that at equilibrium. This leads me to ask about the goals of this union. Does the union want to hire less and improve the wages for a few? I also believe that the Internet will allow those writers with the lowest marginal cost to work. The green line shows that 200 writers will work at wage $W. So an undiscovered talent in India will be able to submit a script for Jay Leno electronically. In addition, the shortage of writers will leave many questioning the rational of the strike. From my graph, unemployment of 400 writers will result so 200 writers can work for a higher wage. Not good.

Sometimes the goal of a strike is to influence the elasticity of the demand for labor curve. The union might say there are no substitutes or that the marginal product (quality?) is less for a substitute. I think the writer's union will find that there are many substitutes for their work including people willing to read a book and the the strike will end like a batter striking out.

Tyler Cowen disagrees. George Borjas gives his opinion.

Sunday, November 04, 2007

Why You Just Can't Buy the Bravo Channel

Marginal Revolution asks the title and answers it here and here. My answer uses a price ceiling to show that goods that are tied together actually sell for a higher amount that the seller can charge you more than she could if the product was sold individually. I've used rent control as an example. Say the rental price is $16 to rent a lawn mower for the day and the rental price is $8 to rent a rear bagger for the lawn mower. But you'd be willing to rent the lawn mower for $24. How can I get you to rent the lawn mower at $24 when the legal price is $16?

I tell you that you can only rent the lawn mower with the bagger.

If I am a cable company, I could price discriminate and sell you each cable channel separately. But the companies are actually doing you a favor by bundling the products together and selling the the package at the lower cost.

The brilliant Arnold Kling writes, "What George Stigler showed is that ordinary intuition about bundling is wrong. Your intuition is that the reason that the seller engages in bundling is to force you to buy something that you do not want. However, as Stigler pointed out, if that were the case, it would be cheaper for the seller to leave out the unwanted good and just charge you for what you want. That is why grocery stores do not bundle milk with broccoli -- it's cheaper for them just to sell you the milk. " You can find his notes here.

I wonder. Since cable and cell phones are an information good if the government could regulate the industry with marginal cost pricing where P = MC.

Saturday, November 03, 2007

Econ Concept of the Day

Marginal Revolution has a post on domestic violence with a link to a paper on inconsistent time preferences. Wikipedia defines dynamic preferences as preferences that change over time.

For example, "Government policy makers also suffer from dynamic inconsistency, as they are best off promising that there will be lower inflation tomorrow. But once tomorrow comes lowering inflation may have negative effects, such as increasing unemployment, so they do not make much effort to lower it. This is why independent central banks are believed to be advantageous for a country: some believe they worry about making decisions for the greater good, not to keep government policy makers popular."

Basically, if you change your mind you have dynamic time preferences. I think is like discounting the future.