Saturday, December 29, 2007

Cool Econ Concept of the Day

Paul Krugman in the NY Times commented on trade. Tyler Cowen whipped out the Stolper-Samuelson Price-Factor Equalization Theorem on him. This theorem states that an increased in the price of a good will cause an increase in the the price paid to the factor that produces the good. Tyler is referring to the the middle class wages under the stress of international trade. The blog can be found here. Middle class wages will fall as returns to capital increase.

I once heard a brilliant speech by Lester Thurow on price-factor equalization. As I interpret Mr. Cowen's blog, factors are free to move and will move until the wages equalize. So if I'm a waitress at Happy Joes and China Garden pays a higher wage for the same job, I'll quit Happy Joes, increase the supply of labor at China Garden and the wages will equate until there's no factor mobility.

Krugman's article can be found here.

I dearly love Krugman's two econ 101 textbooks and plan to use them in my AP classes as soon as I can adopt a new book. It's hard to believe that Mr. Krugman is coming out against trade.

Friday, December 28, 2007

Old Ladies

Here's a couple of jokes about aging.

Eventually you will reach a point when you stop lying about your age and start bragging about it.

The older we get, the fewer things seem worth waiting in line for.

Here's a couple of truths about aging.

My mom thinks that long distance phone calls should only be used for something important like a child birth or a death. Old ladies think that gas should still be $.30.

My econ 101 response is that the opportunity cost of waiting in line has increased and older people fail to fully understand the effects of technology on prices.

When I was in high school, Bill George, used to pimp me because I liked the Chicago song, "Old Days". Yesterday, he sent me several pictures to help me remember when. One is pictured in this blog. Remember the ice cube trays with a lever? I remember green stamps, 45 RPM spindles, and penny candy.

Yesterday, I bent over to tie my shoes and wondered what else I could do when I was down there. I know I'm getting old. It's hard to keep up with technology. Do you think we'll all get older sooner as technology overleaps technology?

Thursday, December 27, 2007

Price Discriminating Buying Signals

When I teach how a monopoly is able to price discriminate, I use the example of a yard sale. The sale has 5 Elvis dolls. The sellers are able to distinquish how much each buyer is willing to pay by how they touch the dolls, what the customer says, and how long they hover over the doll. The Consumerist has a better presentation on buying signals. If you want some highly entertaining and informative reading, bookmark this web site or click on the link on my blog.

More McDonalds

I have always said to my classes that if you wanted to be a millionaire, open a McDonalds. George F. Will has an excellent article today in the Washington Post.

Wednesday, December 26, 2007

Wii Bit Cautious

The WSJ questioned the pricing strategy of Nintendo Corporation's Wii. The article implies that Nintendo limited the supply in order to have greater cash flow management. Since demand was greater than supply a shortage of Wii gaming consoles drove buyers to secondary markets like Ebay where they paid a higher price. My nephew, Adam Mills, politely questioned the strategy.

I think Nintendo produced the profit maximizing output of games given their fixed productive inputs. The family owned business just couldn't meet demand in the short run. Nintendo probably had long-term contracts with suppliers as well. My belief is that the consumers of Wii games and consoles are mostly those in the age bracket whose income is unstable. Extending credit to these buyers in order to boost the price is risky so Nintendo simply chooses to have the sale today at a discounted future value. It is possible that Nintendo didn't believe that the increase in demand was permanent. Perhaps Nintendo missed calculated the demand curve and errored conservatively. But production in the short run in fixed and inelastic. It'll take time to increase the plant and facility.

In the graph, Nintendo thinks the market-clearing price is point 1. However, the real demand curve at the price given by the yellow line, is point 2. Since productive resources are fixed, a shortage occurs. Buyers satisfy their demand by using a secondary market and paying point 3.

Monday, December 24, 2007

Happy Holiday

Wishing you the best this holiday. May the Christmas star guide you throughout the year. Love, Flad

Recession Fears

Here is Greg Mankiw's take on the recesson. Greg's intermediate macroeconomics textbook has been one of the highlights of my reading this year. With the help of Roger Kauffman's fine workbook, I've learned more in three months than in the last seven years.

Sunday, December 23, 2007

Cool Economic Concept of the Day

Marginal Revolution had a post discussing why any proposition on the real interest was wrong and mentioned the Mundell-Tobin effect. This hypotsis suggests that the Fisher Effect doesn't explain why nominal interest rates don't follow the inflation rate 1:1. The Fisher Effect is written algebraically as: i = r + e*, where i = nominal interest rate, r = real interest rate, and e* is the expected rate of inflation. One can rewrite the equation as r = i - e*. Say e* increases by more than i increases, then r decreases. Why?

My take is that as inflation increases, people want to hold more money in the form of bonds so people increase the demand for bonds. An increase the demand for bonds raises the price of bonds, but decreases the interest rate.

Paul Krugman

Here's a talk given by NY Times columnist, Paul Krugman, on YouTube. He is also the author of several economic books including his new book, Conscious of a Liberal. The talk takes over an hour. Click here.

Here's Tyler Cowen on Krugman's book. The link also links to David Kennedy's review in the NY Times.

Saturday, December 22, 2007

Andy Landers Project

The talented Andy Landers has a new CD out. He's selling the CD for $10 which is equal to the price that iTunes sells their CDs. Given the fact that Andy should have some pricing power, he's a price taker. This suggests to me that he is considering the opportunity costs of alternate choices in his pricing model. Andy's home page is here. There's also a video, song lyrics, and sample tracks.

Friday, December 21, 2007

Twelve Days of Christmas and Inflation

For a graph detailing inflation-indexed presents bought in the Twelve Days of Christmas, go here. The author cites an increase in the minimum wage as cost-push inflation and core prices. I think the index needs to be weighted to reflect the actual impact of minimum-wage workers. According to Harvard Great, N. Gregory Mankiw, there are approximately 500,000 workers in this category--a relatively small amount of workers. Perhaps this index points out the how data is reported is the main point.


video on sweatshops here.

This is in response to Andrew Korfhage, the editor for Co-op America calling for tough laws on products made in sweatshops. The usual defense is that working wages in these factories are higher than the competing alternatives for the workers. Mr. Korfhage argues that the factories violate human rights and national rights by paying less than the minimum wage in that country and workers often work longer than 14 hours at a time.

Harry Potter and Sub Prime

The Financial Times has an article relating Harry Potter to our credit mess. A salute goes to Austin HarveyMathematics & Economics Teacher at Fountain Valley School of Colorado.

Thursday, December 20, 2007

National Budget Simulation

From my AP listserv, is a link to a budget simulation. The simulation helps you understand the policy trade offs. The link is here.

Christmas Tree Cartel

The Ottawa Citizen reported that a Danish cartel has managed to rise prices by 25% over the past four years. I like the title, "Danes chop down tree cartel".

Wednesday, December 19, 2007

Tuesday, December 18, 2007

Dumb Water

Is drinking bottled water "Dumb"? Will people buy anything? Here's a cool video at Kids Prefer Cheese.

In 2004, the US market supported 26 billion litres or 1 8 ounce bottle per person per day. Sales are expected to grow by 7% to 10% per day and sales in dollars are estimated between $50 and $100 billion. During the standardized testing time, our administrative team distributed bottled water to improve test results. My thought was, "If bottled water improves learning why not distribute water all of the time?" I also wonder why students can't just drink out of the water fountain and get the same results. Drinking bottled water is dumb, but smart for the Pepsi and Coke. The annual report for Pepsi is found here.

Sunday, December 16, 2007

Moral Hazard

Daryl Cagle cartoons are the best source of economics and cartoons. Today, M. e. Cohen posted an excellent cartoon on market failure. Adverse selection exists when the parties on one side of the market behave in a way that adversely affects parties on the other side.

Aggregate Demand Fundamentals

Saturday, the Muscatine Journal printed "Experts Predict an Ugly Year" in the financial section. The AP release lists all these reasons. (1) Inventories are accumulating (2) Downturn of the housing market is a leading indicator of a recession (2) Consumers are saving more (3) New residential construction is curbed (4) Less investment (5) Consumer confidence is down

Consumption makes up about 2/3 of aggregate demand and investment is volitile. The depreciating dollar will help as our goods will cheaper relative to the world. The article hints that consumers might form deflationary expectations. This isn't marginal thinking. Changes in these markets will induce more market participants. I'm predicting that 2008 will be a good year.

Saturday, December 15, 2007

Deflationary Expectations and KD Clothiers

After 40 years of doing business as K & D Clothiers, Dennis Cockshoot is calling it quits. Dennis sells fine mens clothing. Many of my best suits were bought at K & D and tailored to fit. Now, I watch as prices in the store sink downward weekly. Instead of going in the store and buying a new shirt or suit, I think, "Hey! If I wait another week, the prices will go down." If everyone thought like this, then output and prices would go down as well as employment. That's what's wrong with deflationary pressure.

Dennis lives for prom and Christmas. During the most wonderful time of the year with snow falling gently on the street, Dennis will be closing his doors to the cold. I wish you all of the happiness that retirement brings. I will miss you, Dennis.

Optimal Amount of Jurors

My law class just finished watching 12 Angry Men, 1957 in black and white. I was wondering if "12" is the optimal number of jury members...Since voting is used to determine guilt or innocence, doesn't the reasonable doubt burden tend to move toward the mean voter? This to me implies that the "beyond the reasonable doubt" burden which would be on the extremes of the median is defeated.

Steven Landsburg in his price theory book, gives an example of two ice cream vendors selling ice cream on a beach. Both vendors find their optimal marketing strategy is to move to the middle or lose market share. This captures the median voter model idea. Candidates on the left and the right have an incentive to converge toward the middle to capture more votes. Jury members have the same incentive to move toward a consensus. As the give and take of lobbying for a verdict so jurors can go home proceeds, the extremes meet in the middle. In my opinion, there will always be reasonable doubt to capture the middle juror.

Tyler Cowen, the world's best blogger writes in an email, " I think 12 is too many for most cases, see Tullock's book *Trial on Trial*and of course also Calculus of Consent..."

My law idol, Jerome Facher, insists that truth isn't found in a court of law. Our Bill of Rights protects the accused against a host of unreasonable searches, questioning, and punishments. Even in the jury room, the defendant gets every break. As every law student knows, you never know how a jury will decide a case.

Friday, December 14, 2007

Tim Harford

The Undercover Economist rocked the pop econ world when it was released in 2006. The English author combines wit with intellect to expose why the rich are rich and the poor are poor and why you can never buy a decent car. Tim Harford has a new book, The Logic of Life, that should be of interest to readers of this blog.

Thursday, December 13, 2007

Iowa Youth Conference

Keith Poggemiller volunteered to take several minority students to the Iowa Youth Conference last week. One of the topics that arose was why there is not more minority teachers in Iowa. A laundry list was produced.

*Neighboring states pay higher wages and attract minority talent away from Iowa
*Many minorities don't want to teach
*Not enough incentives offered---such as offering future teaching employment to minority students if they return to the district , scholarship incentives, bonuses, etc.
*Some candidates are not confident in their English speaking skills
*Iowa has a much lower percentage of minority students than many other states

Katie Brown, our journalism and newspaper teacher, offers that many minorities have to start working right away instead of attending college because their families need the income. Also, Katie adds, many minorities don't see the value of a college education.

Dr. Tom Williams, my superintendent, offers that many minorites want a culture that is more culturally diverse than Iowa. He adds, that a warmer climate draws many qualified applicants away from Iowa.

Wes Fowler, our Human Resource Director, affirms that a low minority base and higher pay in other states draws from our pool of applicants. Iowa currently ranks 25th in pay after a generous increase in teacher pay by Governor Chet Culver.

Please add more reasons to this list.

Another Dotcom Bubble Burst

Newsweek in its Soundbytes on page 29, Decemeber 17, 2007, has a funny blurb on The Richter Scales spoof on a Billy Joel song. The video which is approximate 3 minutes, can be found here.

The artists say, "Blog, blog, blog it all blog it if it's big or small." In the song they ask that I blog this song. Here is the acappella version on the group's homepage.

Wednesday, December 12, 2007

Housing Mess

On a tip from Gregory Mankiw, here's a quote from Alan Greenspan on the housing problem:

"The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business. "

The entire article can be found at WSJ.COM for a very short time. Gone is the Greenspeak.

Tuesday, December 11, 2007

Invisible Hand

Dan Husmann, while speaking at the 4th Annual HS Summitt for Model Schools, provided a wondeful example of the hidden side of economics. While discussing data collection and interpretation, Dan provided the following example in the form of a Robert H. Frank Economic Naturalist question.
Why is the maintenance higher at the Jefferson Memorial? The answer comes in a series of answers to "why?" The Jefferson Memorial is crumbling. Why? Because the JM is washed more. Why? The JM has more bird dung. Why? The JM has more spiders. Why? The JM has more flies. Why does the JM have more flies. Because the lights are turned on earlier. So the maintenace staff started to turn on the lights later and costs went down. This story is just like economics. Economics is what you don't see until you start asking "Why?"

A salute goes to Dan and the Anamosa High School staff for their presentation on collaborative leadership. Dan recommend "Using data to discover Root Cause Analysis" by Paul G. Preuss.

Manufacturing Jobs

During opening remarks at the Iowa HS Summitt, Director of Education, Jeffery, lamented on the loss of manufacturing jobs. She told the 1500 attendees that the National Association of Manufacturers report that there's an 80% loss in qualified workers in manufacturing. The implication in my mind was that we are not preparing our students for the workforce. As the attached graph shows, manufacturing is down around the world (source: the Atlanta Federal Reserve Bank. Click to enlarge.)

Director Jeffery is right about the loss of manufacturing jobs. She is wrong about the reason. The United States, like all industrialized nations has experienced a shift from a manufacturing economy to a service. The decrease in jobs is the result of simple supply and demand. There's just simply less demand for manufacturing workers. I forgive her for this as economics is invisible. Maybe we should teach economics as a core curriculum in addition to math, reading, and science.

Occupational Crowding and I Have a Dream

I recently returned home from the 4th Annual Model Schools summit in Des Moines, Iowa. Model schools are those schools reinventing schools for the 21st century. I proud of the reforms that Muscatine has made in the process, but I was concerned about one reform that apparently has not been made in ALL of Iowa. Of the 1500 high school teachers attending the summit, I observed only white teachers. The NAACP website reports that "42% of the nation's schools have no minority teachers at all". There were no men or women of color attending the summit. While I was being served lunch, I observed that most of the servers were men and women of color. This is upsetting to me since NCLB data suggests that children of color are being left behind as measured by the achievement gap.

I can still hear, Martin Luther King proclaim in his I Have a Dream speech, "I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character." When will teachers be hired by their ability to teach by the content of their character? The summit was about building rigor, relevance, and relationships. How can a black student routinely build a relationship with a white teacher? A black student wants to have a black teacher as well as white. Like I told Quayshaun Moore after a football game in which he didn't play for discipline reasons, "White people only want compliance and status quo." Our schools must hire more men and women of color.

Occupational crowding results when people with definite tastes and preferences are pushed into an occupation. Maybe Susie like to help people, so teachers push her into nursing. This increases the supply of nurses and decreases the wage paid to nurses ceterius paribus. When I look around the high school summit, I see mostly black workers serving ALL white teachers. Black workers are being pushed in to labor positions at lower wages.

It might be a stretch to write that the wage inequity results in higher inequity among the races that accentuates the achievement gap. Dr. King gave his life so the man or women of color could be free. It is my opinion that the black man isn't free as long as he is pushed into traditional occupations like that of a server at the model school summit.

Monday, December 10, 2007

Punting on Fourth Down

Should NFL teams punt less or more on fourth down? A paper has the answer.

I'm an 8th grade football coach, and I have by defense blitz all of the time because I believe the expected benefits are greater than the expected losses. I am also risk adverse. I love strategic interation. The paper cited about makes those same assumptions, but derives a different conclusion.

Sunday, December 09, 2007

Fair Trade Coffee

Russ Roberts at has a brilliant podcast about fair trade coffee. It's what you'd expect about a marketing scheme that seeks to subsidize the poor.

Winds of Change

David Mayer has an excellent video on wind power in west Texas. David is an AP teacher who has an excellent web site for both students and teachers. The video takes about 7 minutes and is professionally shot and edited. According to the video, each windmill can power about 500 homes with renewable energy. Not all are happy about having a windmill taller than the Statue of Liberty in their back yard. Some wonder if the boom will be short lived. On David's site, you can also talk to him in real time.

Saturday, December 08, 2007

Noncompete Agreements and Factor Mobility

Factor movements increase technological change according to the anecdotal findings in an Internet blog. When labor is allowed to move freely ideas lead to technological innovation. In corporations that have their employees sign employment contracts not to compete, monopoly power restrains innovation. In econ 101 economic models, a monopoly produces less and charges more. The blog compares Silicon Valley to Boston's Route 128 as evidence for his conclusion.

In the movie, Civil Action, defense attorney, Jerome Facher tells Jan Schlichtmann "...if you are looking for truth in a court room, you won't find it." The legal system sometimes interferes with the price mechanism.

The Raft of Chienoiserie

Mariam Graff won the Children's Choice Award from Augustana College, Illinois, for her gorgeous painting, The Raft of Chienoiserie. Several economic principles are portrayed in her painting now on display at Art Space in the Pearl Plaza in Muscatine. According to the flyer:

The Raft of Chien-oiserie is an epic still-life fantasay painted by Mariam Graff. The painting is an interpretation of our current global economy as well as a tribute to the history of East-West trade.

The painting depicts a storm tossed raft, perhaps a piece of wreckage from an East India Trading company vessel, upon which various objects are scattered. The origin of the merchandise is as varied as the objects themselves, Chinese, Japanese, Korean, Malaysian, as well as "Chinoiserie", a French term for a style of decoration reflecting Chinese influence. Graff changed the spelling to "Chien" which is French for "dog," to add yet another layer of meaning to the piece as the dogs seen on the raft are breeds who orininated in the Far East that were packed in among the cargo to journey West.

Quantity and variety as well as confusion as to the origin of such goods resonates heavily with today's global trade economy and are part of a current series of paintings by Graff in which she examines the movement of goods from East to West--concentrating heavily on China. 'I am intrigued that the West has imported goods from the East for hundreds of years yet we can remain largely unaffected and uninformed about the cultures we trade with. I also am examining subjects such as Chinoiserie and Orientalism which contain elements of of the romatic 'Imagined East' or the Western mind."

The painting is awe inspiring to me. I reflected on the painting at the holiday stroll for 15 minutes last night. Why do people trade? Because both will be better off. The utility from trading is greater than the utility from not trading.

Gas Prices

Greg Mankiw has an interesting post on gas prices as a per cent of net worth. It is my understanding from the graph that gas prices are cheaper.

Tis the Season

On a cold Iowa night, Tess Weaver and Amanda Safely were ringing bells for the Salvation Army. The temperature was 16 degrees with an artic wind blowing in ice and snow from the north at 20 mph. Both of the girls were volunteering their time.

Tess also has volunteered over 500 hours of her time to help with hunger drives and blood drives. Tess recently played a part in the Calvary production of "Joseph and the Technicolor Dreamcoat". She was Muscatine High School's homecoming queen. She has volunteered countless hours to help elementary students learn to read and works at her church endlessly as a youth leader. Tess doesn't get paid for this so why does she volunteer so much?

An upward sloping supply curve shows that one is willing to supply more labor if the wage increases. I submit that Tess' supply curve has imbedded nonpecuinary aspects such as the benefit of the gain to her reputation. Tim Harford, The Logic of Life, writes in his column about the hidden motivations of volunteering here.

Tyler Cowen will have a blog started in January discussing Tim Harford's new book that will be rich with economic insight.

Commitment Device

Sheri Swailes teaches special education with me at Muscatine High School. She's also the SADD chair. Sheri has constructed a commitment device to help weight watches stay true to their diet resolutions this holiday season.

Sheri has a Biggest Loser contest in which participants pool their money and weigh in every week for 14 weeks. The one who loses the most weight as a percentage of their body weight wins $300. She has a lot in common with Han Xin according to Freakonomics gurus Steven Levitt and Steven Dubner. With Sheri's contest, participants have the monetary incentive not to deviate from their weight-loss goals. I think the contest most closely matches the private goals of the weight watcher with the stated goals and reveals weight preferences. I believe on the whole, that the benefits of this contest outweigh the costs. For example, people who feel good about themselves produce more. However, time will be spent at work aside from producing to participate in the contest, but the long-run benefits will be greater the long-run costs.

Friday, December 07, 2007

Casual Friday

Tyler Cowen has a wonderful post about clothing here.

My boss believes that you dress for success and that clothes are a signal of a professional. He'd like to see me wearing a tie every day and a $300 suit. I aruge that the clothes don't make the man. If you look at the executives at Enron, those men wore Aramani suits but stole millions for innocent investors. I concede that clothes can be a signal of a professional but the actions of the worker reveal his or her character. I should capitulate and just wear better clothes, but I don't want to incur the transaction costs of dry cleaning. I also believe that the longer you interact with students the less they notice your clothes and the more they notice the man or woman in the clothes.

Currency Converter

Today, Stone Philpott sold me an 500 Afghanistan Afghani for $10. Stone is a sharp record keeping student so I took him on his word that that's how much the currency was worth. I found a currency converter and indeed 1 1 Afghanistan Afghani = 0.02015 US Dollar. I checked the exchange rate after thinking about the political unrest in the country expecting to find a rapidly depreciating currency. Stone made out like a bandit on the trade since he was given the Afghani as a gift from a returning US soldier. Way to go Stone.
More about Afghanistan and pictures of the currency can be found at Wikipedia by clicking here. Last summer, while studying the purchasing power parity, Robert H. Frank showed in his book, a slick way to convert foreign currency into USD.
Mr. Frank is the author of several books including the Economic Naturalist showed: 1USD = 50 afghanis then you divide each side of the equation by 50. Thus, 1/50 = 1/1 or .02 = 1. Dr. Frank's introductory macro textbook coauthored with Ben Bernanke, is the only intro text to show the algebra of aggregate demand. This appendix on AD is worth the price alone.

Tuesday, December 04, 2007

Calvin on Utility

I think people will seek the pain of learning if the future pleasure outweights the present pain. This toon also shows that people don't always do what's in their best interests. If Calvin remains ignorant and those around him do not, then Calvin will be a competitive disadvantage in the work arena and will settle for a less than adequate mate. A thanks to Kristine Colon a teacher who made a difference.

(Click to enlarge.)

Sunday, December 02, 2007

Why Does the Dollar Store Have Cash Registers?

Today, I went to the Dollar Tree to buy $1 calculators for my record keeping classes. There were big signs all over the store advertising the store's policy that every thing in the store was a dollar. I bought some wrapping paper that reminded me of one Christmas long long ago. I bought Kathy a Lil Lulu CD to remind her of her dad. There were no calculators. While I was waiting in line to check out, I noticed that the cashier dutifully scanned each item and the cash register rang up a $1. Why does the Dollar Tree have cash registers?

One answer is inventory control. The computers can electronically calcuate when a popular item needs to be reordered. The cash register is handy for calculating sales tax. The customer might now believe that EVERY THING a dollar. Maybe customers are just used to hearing the beep and wouldn't trust a simple count of the items and multiplying by 1.07. Perhaps the cash registers do a lot of the mundane bean counting work that managers used to do so they are free to work with customers. Whatever the reason, cash registers at the dollar store seem redundant.

Thinking at the Margin

Tyler Cowen made a brilliant post on when to say "I love You." His conclusion was a puzzle. It doesn't cost much to say those three words so the words should be said all of the time. But the fact that the words aren't spoken much infers a suboptimal equilibrium. Make sure you read the comments.

Today, I was buying an iTunes card and noticed that the lowest gift card I could buy was $15. Econ 101 predicts that the lower the cost, the more will be consumed. I feel like the cost should be as low as $5. At that price, the marginal buyers would be induced into the market. Given the low cost of producing the gift cards, one would expect a spectrum of values to capture the marginal customer and maximize profits. Like saying I Love You, I am unclear why this pricing strategy exists.

This Christmas

Last Christmas I gave my sister a book on how to forecast the weather. She leafed through the book in a couple of seconds, and then set it down. “Thanks,” she said. I could tell by the way she looked at the book that I valued the gift more than she did. Since I paid $50 for it, I felt that most of my money was wasted on the gift. I had a similar experience with the scarf I bought for my mom at Bloomington’s and the diamond earrings I bought my fiancĂ©e. I just don’t know what to buy family and friends for Christmas so I decided this year I’m going to give gift cards.

If I give a gift card, then the recipient gets the full use of the money plus they get to decide what they want. Last year, TowerGroup, a financial services group, estimates that $80 billion spent on gift cards last year, $8 billion was never redeemed. Almost 20% of those receiving a gift card never use it according to the research. In 2007, Best Buy earned $16 million in gift card “breakage”, which is the accountant’s term for a card that was never redeemed.

About two-thirds of gift givers plan to give a gift card. There’s some chance that the card won’t be used or lost. So is giving a gift card really that good of an idea?

I think it depends. Tess Weaver says, “A gift card might be okay to give to some people, but not those close to you like a boyfriend.” An economist might describe a gift as a signaling mechanism that tells another person that you’re thinking about him or her or care about them. I think most people want to give a gift that has value as well.

Wharton Business School economist, Joel Waldfogel, found that the gift receiver values the gift about 20% less than the gift giver. In other words, if I spend $10 on you, you think the gift is only worth $8. Economics is all about symmetrical information and matching costs with benefits. So a gift card costs me $20 and you only benefit $8. Economists would say this is inefficient.

Personally, I would want a gift card because I think I know more about what I want than others. But, is this always true? Is it true that people will choose what’s best for them? I have seen students skip class, not do assignments, and eat poorly. I myself drink way too much Mt. Dew. So if my mom gives me a hand knit sweater that I put in my drawer and only use once that would be better than a gift card from Blaine’s Farm and Fleet that I never use or cash that I blow on wine and cigarettes. But on the whole, I believe that people are better choosing what they want for Christmas than I am. For example, I would buy Danny Chick a catcher’s mitt, Barry Major a Snoop Dog CD, Chris Rickels a NFL jacket, but I’d probably be way off. I believe that giving a gift card most closely matches the value of the gift I want to give to the value of what the recipient wants and prefers.
Sometimes a person I’m buying a gift for is too frugal to spend money on something outrageous. For example, I know that my brother-in-law wants an Anime DVD, but if I gave in the cash to buy it, he would buy groceries instead. For those people, I will buy a gift that they would not buy themselves. But to maximize the utility of my gift-giving dollar, I’m going to give gift cards. For many people on my Christmas list this year, they will be able to guess what they are receiving because they will pick it out themselves. (I relied on information from The Gift-Card Economy, Stephen Dubner and Steven Levitt, and the "Sovereign vs. the Idiot, by Joel Waldfogel, in preparing this blog.)

CIALIS®, Utility, and Rational Decisions

CIALIS® is a prescription erectile dysfunction drug. There's a burgeoning market to help older men stay sexually active. Viagra comes to mind. Sexual intercourse obviously increases the utility for both partners so it's no wonder there's a market to enhance performance. But what interests me is the fact that men become dysfunctional at all. I believe that the male fertilizes the female to send a copy of his DNA to his partner and populate the spicies. If a man loses that ability, isn't mother nature signaling to this man that no more copies of his DNA are wanted?

Perhaps, mother nature is telling the man and woman that he's too old to raise a child. Whatever the reason, econ 101 perdicts that market participants seek to maximize their utility. I wonder if the decision maker always chooses what's in his best interest when shallowing the pill.