Monday, June 30, 2008

Mike and Amy Finders Band

At a bluegrass festival in Aledo, Illinois, I heard Mike sing a song about Muscatine. On a crystal clear evening, Mike sings about the dirty old river, always changing course, watching it fill up with rain, "Did I come to this old river or did it come to me?"

A quote from The Volokh Conspiracy on the floods that have caused billions of dollars of damage in Iowa follows.

Flooding. Recent Iowa floods. In the event of floods should we feel sorry for those who are flooded? those who are nearby but not flooded? If you expect floods in the flood plain, you expect the value of property to be suppressed. The price differential should approximate the difference in losses when floods come. If the differential is too low people will continue to buy the hillside houses. If you have a flood that is not as serious as expected, the people in the flood plain got a benefit and those on the hillside paid too much. So, who you feel sorry for depends on what was anticipated. Suppose we start taxing the people on the hillside and use it to relieve those in the flood plain. Depreciates value of hillside property, more people will want to live in flood plain and will build bigger houses there and stocking them with better furniture; likely to have more newsworthy floods. Often people know that a flood is coming; if they know their damages will be covered by those on the hillside they have less incentive to pack up their belongings. John Stossel reports on buying a house on NJ coast and puzzled to be covered against hurricanes by Federal subsidy even though hurricanes are known to come around. Law of unintended consequences. Benefits of these programs get capitalized and end up helping nobody. Can end up with no gains to the property owners. Anticipated flow of benefits of $20,000 by government would get captured in the value of the properties.
This flood was the worst in recorded history. How could anyone reasonably anticipate the scope of the damage.

Dependent and Independent Variables

Economics graphs just about everything. They graph the total utility, then they graph the slope of the total utility. A student in my enriched economics class last year said, "If I had only one day left to live, I would live it in my econ class: it would seem so much longer."

Math students often get frustrated in econ because economists reverse the independent and dependent variables. Economists put the independent variable on the y-axis. So an economist might plot price on the y-axis and quantity on the x-axis. An economist might ask, "What happens to quantity when the price changes?" A mathematician would have reversed the price and quantity.

A neighborly economist went over to meet his new neighbor. The economist found his new neighbor painting his house. After they exchanged introductions, the mathematician said, "You must be a mathematician?"

"Why that's right. How did you know?"

"You've got your ladder backward," said the economist.

Sunday, June 29, 2008

Purchasing Power Parody

The Law of One Price predicts that a good will sell for the same price all over the world. In not, arbitrage opportunities would exist. The Economist publishes the Big Mac Index as a way of teaching this concept. The Economist does it light heartily. Since the Big Mac is sold in over 100 countries world wide, the burger should sell for the same price in London as New York. If there were price differentials, one could buy a Big Mac in London and sell it in New York for a profit. The Purchasing Power Parity, PPP, predicts that the nations currency will converge to eliminate the arbitrage opportunities.

The PPP has some critics who argue that the demand and supply for a nation's currency depends on more than just the relative cost of goods. Critics also contend that transaction costs prohibit buying a Big Mac in London and selling it in New York. In my class, I teach that the income, price level, and interest rates move the nominal exchange rates.

The Economist, could electronically be sent to subscribers world wide without transaction costs and is a homogeneous good like the Big Mac. So how come The Economist does not follow the Law of One Price?

The Economist cover lists the price of the June 21st-27th, 2008, edition as 3.90 pounds. In the US the price is $5.99. The exchange rate is $2 for 1 pound. The PPP exchange rate should be $1 = .65 pound (3.90/$5.99). The actual exchange rate right now is .51 which means that an American buying The Economist in the UK would cost 7.80 pounds. A UK citizen could buy an issue in the US for $5.99 * .5 = 2.995 pounds.

What UK readers should do is buy The Economist in the US and save .90 pounds. Do you think the editors would allow UK citizens to subscribe and pay the US price?

Consumer Prices

The Economist reports that inflation in America increased to 4.2% over the course of the year. In Britain, the CPI index rose from 3% to 3.3%. CPI metrics aside, higher energy prices are kicking consumer prices. Every where I look, I see higher prices. Higher prices are all the fad lately. I guess that's why economists call it inflation.

Many criticize the CPI for excluding food and energy from the market basket. They contend that the PCE, Personal Consumption Expenditures, is a better measurement. I argue that the CPI is older and consumers form rational expectations more accurately with the old, trusty economic barometer. Plus, it takes less time to learn what the CPI means since so many pundits write about it. The CPI might not be perfect, but at least it's consistent.

As one of my idols, John Maynard Keynes, said, "I'd rather be vaguely right than precisely wrong."

As George Box said, "All models are wrong, but some are useful."

Saturday, June 28, 2008

Why Blonds Have More Fun

While watching the morning television programs, I was struck by the number of talk show hosts that are blonde. Does the public just prefer blond hair women?

With tongnue in cheek, I aruge that blonds are just more abundant so the price of blonds are lower than that of other hair colors. But, since gentlemen prefer blonds, preferences are convex to the origin. As the diagram shows, at first the public is willing to substitute 7.5 other hair colors for one more blond. As the public moves to point F, they become less willing to make this substitution. I think the morning television shows are facing trade offs some where around point C.


One of the most eagerly awaited news on the economy is the employment report but the Bureau of Labor Statistics. This report tells politicians and business whether new jobs are being created faster than jobs are being destroyed.

The unemployment rate is calculated by taking the number unemployed divided by the civilian labor force. The Economist reports this to be 5.5%. This is a movement from 5.0% and an increased of 851,000 more added to the unemployment rolls. The total number unemployed is nearly 8.5 million of the 10 million in the labor force. Unemployment among African-Americans and teenagers were higher than the general population. Some of the data was not seasonally adjusted. To be counted as unemployed, you must be actively seeking work. Those temporarily layed off are counted in the unemployment rate.

According to the latest statistics, there are eight and half million Americans who aren't working. And there are plenty more if you count the ones with jobs.

Did you hear about the economist who dove into his swimming pool and broke his neck? He forgot to seasonally adjust his pool.

Q. How many Keynesian economists does it take to change a light bulb?

A. All. Then you will generate employment, increase consumption, move aggregate demand to the right....

"No one would call me a quitter," said the man at the bar. "I always get fired."

Friday, June 27, 2008

Ceteris Paribus

Econ 101 assumes marginal changes in a variable. Say an economist wants to measure the effect of a change in income on the quantity demanded to see if the good is a normal good. The model would change income and leave everything else constant. A constant variable might be the relative prices of all other goods. The economist in this case might build an Engel Curve.

The rate of change along the curve is the marginal amount. In calculus this is the derivative. If you want to find the rate of change for one variable while leaving the other variables constant, you use a partial derivative.

Would an economist have a bumper sticker that reads, "How's my deriving?"

Thursday, June 26, 2008

Flood and Malthus

The flood waters are receding leaving a stench that reminds me of hog manure. Fifteen percent of Iowa's corn corp is gone. Many are predicting higher food and energy prices. Do you see the disasters in China, the civil wars in Africa, and world hunger as a portend of things to come? Isn't this just exactly what Thomas Malthus felt?


John Maynard Keynes defined macroeconomics. He believed that fiscal policy would help an economy out of a recession through government spending. Many, like Milton Friedman disagreed. The College Board has removed most of his innovative theory from our instruction. One concept that always brings discussion is government spending. Keynes postulated that GDP would increase by dG/(1-MPC). Many economists argued that you can't spend your way to being rich.

John Maynard Keynes runs into Milton Friedman at the sushi bar and says, "Last night I had a dream where the government spent millions of dollars that created jobs and income for everyone. What do you think it means?"

Freidman says, "It means you were asleep."

When Keynes was in college, he worked as a waiter in an upscale restaurant. One day an angry customer yells at him, "What's a fly doing in my soup." To which Keynes says, "It looks like he's swimming the Keynesian Cross."

Wednesday, June 25, 2008

Normal Goods and Abnormal Behavior

Suppose that Jill gets a job at a bank right out of high school. She fits in well with the clientele and is promoted. If she increases her savings, then savings is a normal good.

Suppose that Jack goes to college right after high school, earns his bachelors degree in education and gets a job at Buffaloes Breath High School. In order for Jack to get a pay raise, Jack must earn more graduate hours. So Jack goes back to school and demands more education. If Jack's income goes up, education for Jack is a normal good. For a counselor to say that more education means more income, might be committing the post hoc fallacy.

One day, John McCain walks into Jill's bank and asks her to check his balance, so Jill pushes him. "I always knew you leaned too far to the right," Jill says.

One day Hillary Clinton walks into Jill's bank with a check from her husband. Jill tells tells her that the check has to be endorsed, so she writes on the back, "I fully endorse Barack Obama for president."

Tuesday, June 24, 2008

Oakville, FEMA, and One Excellent Comment

In Oakville, Iowa, even the Methodist Church could not save the tiny town from the flood waters. The Mississippi, Cedar, and Iowa rivers tore through Iowa like a locomotive causing damages in the billions. FEMA was on the spot immediately promising relief. Will the government deliver on their promise? David Heigham, posting a comment on, Lessons from Katrina for Iowa, writes the following:

" It is said of that most virtuous of Emperors Asoka that one day when he was riding through his lands he was appalled to see a tiger in the distance about to spring upon an old woman. To his amazement the woman was saved by a young man with a stick confronting and driving off the tiger. He called the young man before him, and soon found that the young man was wise and intelligent beyond all expectation despite his lack of years and of learning. Asoka promised the young man a rich and eminent future in his court. He would send for the young man before the next monsoon.
Asoka charged his third vizier to attend to the matter as soon as the court returned to the palace. The third vizier charged his second clerk to prepare the necessary letter of authority when the court had returned to the palace. The second clerk wrote a note to the junior archivist asking him to look out the appropriate model of letter from the records.
Years later, when Asoka was old, the Emperor's exasperation with his advisers made him remember the brave and wise young man. He demanded that the young man be produced to give his advice.
A week later a trembling village headman was brought before the Emperor. He said "O Light of this world, I am not the brave young man who faced the tiger; he was my brother. He died in misery two years ago. When he heard your august words of favour, he put aside all other thoughts but service in your court. He gave his small patch of land to me, and set out to live by the charity of others whilst he went about finding out what the needs of the people really are, and forming thoughts on how your august benevolence could best help them. For two monsoons he lived well, because many were aware of your words to him. After the second monsoon and still without word from the palace, I begged him to take back his land and to live the life of a villager until the call came. He refused. He could not be a common villager and at the same time a man with the Imperial promise of an official career. We offered to make him village headman. Of us all he was clearly best fitted for the post. Still he refused; he must wait on the Imperial will. After the third monsoon, men lost patience with him, and he began to starve. When a little money came to him, he spent it on drugs and on wine to enable him to bear the wait. All that was bright about him began to fade. The remnant of a man who died had lost all his wisdom and even his courage."
When the headman looked up, he saw that the good Asoka was weeping, and had torn his embroidered robe."
The devastating results of waiting for very well intentioned and entirely believable official munificence to be delivered have figured in folklore about as long as such promises have been made. The trouble about these promises is their very generosity. It always appears rational to wait another day for the prize rather than do something worthwhile but relatively picayune today.

I have heard from residents in the Wapello area that only 28 of the flood victims are going to qualify for relief. Many of these people dropped their flood insurance when public officials told them their town was safe after building a new levy.

As the flood recedes, the stench from roiled silt attracts flies and mosquitoes and a silent reminder of a flood and empty promises.

Monday, June 23, 2008

The Dismal Science

The first day of Econ 101, he sets is books down and listens to the heavy feet stomping into the classroom. He opens his notebook to prepare for the first day. How am I going to survive this class, he thinks. He stands up and says, "Good morning class."

Economics is often called the dismal science because of its dire predictions. Thomas Malthus predicted that population growth would overcome the food supply for example. People just don't like to be told that they can't have everything, and they must make choices based on the opportunity cost.

How would famous comic characters react to the dismal science?

Steven Wright comes into his instructor's office. "I can't figure out this economics problem. The solution is there. I just can't see it."

The professor says, "Whenever that happens to me, I go home and make love to my wife. Afterwards, the solution comes to me. You ought to try that."

The next day, the professor bumps into Wright and asks, "Did you try what I suggested?"

"Yes," Wright says, "It worked. And, by the way, you have a nice house."

Charlie Brown would say, "Good Grief. The dismal SIGHence."

Woody Allen, "I can't have everything I want--world peace, no child hunger. Why live?"

"I get no respect," says Rodney Dangerfield. "The econ teachers told me that if I worked hard, I'd get what was coming to me. So far I've gotten an IRS Audit, higher taxes, and nothing to show for it."

Sunday, June 22, 2008

The OCD Economist

This post is mostly for self-comprehension. It is blunt, esoteric, and obtuse. If you have better ways to spend your time, please consider the opportunity cost of reading this.

On a spring day in May, I wanted to fill an hour of my erudite time by studying, See The Math, on the McConnell-Brue website. I opened the dialog on the income and substitution effect. I have now spent gobs of time understanding the equation. I think I have a partial answer today.

First, a caveat. One of my favorite songs is sung by Willie Nelson, the Pilgrim. The Pilgrim takes every wrong direction on his way home. This always describes my learning--a process of eliminating mistakes before acquiring new behavior. Now, to the topic.

One must believe that there are two demand curves for a product--a market demand curve, Dm, and a compensated demand curve, Dc. Dc measures only the substitution effect by compensating a consumer for price changes so that the consumer can stay on her utility curve. The utility curve is convex to the origin and tangent to the budget constrain at -Px/Py. The compensated demand curve is the slope of the utility curve. The market demand curve is the movement from utility maximizing points as prices move. In the diagram, I have drawn Dm and DC then used the equation from See The Math to show that the formula works assuming one believes in a compensated demand curve. (Click to enlarge.)

Saturday, June 21, 2008

Comparative Advantage

David Ricardo postulated that countries will specialize in the production of goods in which they have the lowest opportunity cost. Then these countries will trade. Take Tiger Woods, the greatest golfer of all time. He could cut his own lawn or he could concentrate on his golf. Tiger would be better off concentrating on golf and paying someone to cut his lawn. Both would gain.

Lou Dobbs is a critic of international trade. He argues that trade takes away jobs from U. S. citizens and exports our national security. Thomas Friedman, The World is Flat, maintains that countries that have a McDonalds will not go to war with each other since they are interdependent. Whatever your viewpoint, you are affected by globalization.

We shouldn’t make fun of rap music. They are one of the few things still made in the United States.

Critics of trade argue that the gains are not evenly distributed and one side gains more. These critics point to China’s trade surplus and the stock pile of U. S. dollars. On the other hand, trading with China was voluntary.

Mom to daughter: Did you share the candy with your brother?
Daughter: Yes. I ate the candy and gave my brother the wrappers.

Husband comes home to see his wife and mom sharing a joke. The wife says, “I just learned that the joke is on me.”

People who lose sleep over globalization are lucky. I lost my job.

Friday, June 20, 2008

Premium Gas Prices

A colleague predicts that the price of premium gas will go down as consumers demand less of the high octane fuel Another scenerio is that foreign consumption of premium gas will increase to offset the demand. Scripps ran a story here. He could be right.

Q. How many economists does it take to screw in a lightbulb?

A. A hundred. One to screw in the lightbulb and the other 99 to hold everything else constant.

Q:Why did God create economists ?
A:In order to make weather forecasters look good.

Finally, I asked an economist for her phone number....and she gave me an estimate.

Economic Modeling

Charles Goodhart, a distinguished LSE Professor, famously noted: "Any observed statistical regularity will tend to collapse once pressure is placed on it for control purposes".
This informative text is from Wikipedia. One important application of the critique is its implication that the historical negative correlation between inflation and unemployment, known as the Phillips Curve, could break down if the monetary authorities attempted to exploit it. Permanently raising inflation in hopes that this would permanently lower unemployment would eventually cause firms' inflation forecasts to rise, altering their employment decisions.For an especially simple example, note that Fort Knox has never been robbed. However, this does not mean the guards can safely be eliminated, since the incentive not to rob Fort Knox depends on the presence of the guards.In other words, with the heavy security that exists at the fort today, criminals are unlikely to attempt a robbery because they know they are unlikely to succeed. But a change in security policy, like eliminating the guards for example, would lead criminals to reappraise the costs and benefits of robbing the fort. So just because there are no robberies under the current policy does not mean this should be expected to continue under all possible policies. Likewise, just because high inflation was associated with low unemployment under early-twentieth-century monetary policy does not mean we should expect high inflation to lead to low unemployment under all alternative monetary policy regimes. Although Goodhart's law has been expressed in a variety of formulations, the essence of the law is that once a social or economic indicator or other surrogate measure is made a target for the purpose of conducting social or economic policy, then it will lose the information content that would qualify it to play such a role.
As I stand near the banks of the flooded Mississippi River, I hear the waves lapping at the banks like a dog lapping water. Gawkers come to the river eyeing the unknown muddy waters. They stare for 5 or 10 minutes then sag their shoulders and walk away. I have loosely construed Goodhart's Law to the flood. Any attempt to control the ecosystem will result in failure.

Thursday, June 19, 2008

Income Effect

Adrian purchases wipes and household cleanser in equal quantities because that maximizes his utility. On his original budget constraint, Adrian buys 5 wipes and 5 bottles of Monkey Grease for a total utility of 25 Utils. All of his $10 income, Y, is spent at this point as can be seen in equation (1).

If the price of Monkey Grease decreases to 50 cents, then Monk feels wealthier even though he is not. Monk would only need $7.50 to buy the same amount of cleanser as before. The amount he would buy because he feels wealthier is the income effect.

Only economists could theorize that in order to add more to your income you’d have to subtract.

Wednesday, June 18, 2008

Substitution Effect

Adrian Monk is an OCD detective who spends all of his income on Monkey Grease, a powerful all-purpose cleaner, and hand wipes. What will happen to the amount Adrian will buy if the price of Monkey Grease increases? Adrian will buy less of the detergent.

When the price is P1, Adrian purchases Q1 and receives a marginal benefit equal to point 1. If the price increases to P2, Adrian will NOT consume Q1 because the marginal cost is greater than the marginal benefit. Adrian will equal benefits with costs at point 2 and reduce is consumption from Q1 to Q2.

Moving to this new equilibrium is what economics predicts. That is, a consumer will seek to maximize his pleasure and avoid pain. This point occurs at point 2 where MB = MC.

In microeconomics, the questions that economists ponder change, but the answer is always “where marginal benefit equals marginal cost.”

Microeconomics is like a donkey because He-Haw, He-Haw, He always equates where marginal benefit equals marginal cost.

Tuesday, June 17, 2008

Rationing of a Scarce Good

Raging Cedar flood waters have turned Wapello into an island. Oakville, population 950, will be a wiped from the face of the map when the murky waters recede. What will be left are family photographs, foul smelling wood homes, and trash from fast food restaurants. In the high Iowa heat, the trash will dry out and blow away--the new tumbleweeds of the 21st century.

In Cedar Rapids, residents are rationing water. The Des Moines Register tells residents to use bathtub water to flush toilets. In a disaster, temporary shortages should be endured and shared by all equally. Gulfport is now being evacuated.

Suppose that consumers maximize their utility by consuming point 1, QX, and QY. If water is rationed to point QX', the consumers will be on a lower indifference curve. Consumers will try to reach the highest point on their new utility curve, point 2. It is likely, because of the slope of the budget constraint curve, that high income earners will be most drastically effected as is the case in Oakville.

Point B is not a stable equilibrium and a black market will develop. Incentives will develop for consumers to move from point 2 to point 1 even if they must pay exorbitant prices for water.

In my humble view, equal does not mean equitable. Rationing doesn't always allocate goods in the best utility maximizing way. During the flood, people should be allowed to sell their bottled water since this would lead to a Pareto efficiency. MSN has more.

Economics and Behavior

Microeconomics predicts how people will behave. The Neoclassical economists believed that consumers acted in a way that maximized their pleasure while avoiding pain. To maximize utility, consumers would engage in mutually beneficial trade. For example, Juan will trade $10 for a Snoop Dog CD because the utility Juan gains from the CD is greater than the utility he gains from holding on to the $10. And the seller of the CD would gladly trade because the utility she gains from the $10 is greater than the utility she gains from holding the CD. In Snoop Dog's words, she would drop it like it's hot. This trade would be voluntary and both economic actors act in a way that maximizes their utility.

Tony Soprano was hesitant about selling one of his buildings to a dentist because he might need it someday. The dentist persisted in negotiations by raising his offer price until one day Tony said to Luigi, "Let him have it."

After Luigi shoots the dentist, Luigi begins to think. Do you think when da boss said 'Let him have it' he meant to let the dentist buy the building?

Ross Perot's Charts and Resources on DVD

This was sent via ap list serve. Ross Perot
Ross graphs the macroeconomy.
Eight hours of videos on economics can be found here.

Sunday, June 15, 2008

Flood Facts

Iowa is now a disaster area. The following facts were forwarded by state representative Nathan Reichert. More than 2,500 Iowa Army National Guard· 200 Iowa State Patrol· 1,000 plus Iowa DOT· More than 150 Iowa DNR· Sandbags: more than 4.8 million· Pumps: 114

Remember that it is illegal to walk in flood water unless you are evacuating.

Reuben Collins was a physicist I knew in college who made me learn the second law of thermodynamics--the law of entropy. Every system left to itself will change in such a way as to approach equilibrium. This means that there are more randomness, not less.

Natural disasters should not be interpreted as God's will since floods do not have a moral consciousness.

It's easy to blame the city planners for not building a better levy since that relieves some of the guilt that the flooding is deserved. I think at the time the levys were built, intelligent cost/benefit analysis was employed to determine how high the walls should be built.

Tonight, the flood waters are creeping closer to me. Every minute more and more sightseers come to take pictures and give thanks that the flood is happening to someone else. I have feelings of empathy for those in Wapello who are being evacuated and those in Cedar Rapids who are now without water for the second day.

Inescapable Mathematics of Finite Resources

At the Math-CTE conference I attended last week, Kelly* talked on her phone through speakers, presentations, and meals. Mark* never once answered his phone. If I were to sum the total calls received as a plus and the total calls made as a negative by everyone in the US, they would sum to zero. This is because resources are finite. It's true that someone can more calls and someone can make less, but in the aggregate the sum is zero. This is the concept of double-entry accounting. In economics, this is the concept of the balance of payments and the concept of efficiency. An efficient economy has maximized the utility of its resources to the point where a change in the consumption bundle comes at a cost--someone's gain will be someone's loss.

This mathematical fact came to me while buying gas in Gulfport, Illinois, at a price close to $6 a gallon. Historical flooding across the state has forced commuters to seek alternate routes at a loss of time and money. These losses have been a gain to those gas stations in small towns along these alternate routes and externalities spillover.

Along highway 35, Des Moines, winds over 65 mph stripped leaves from young Oak trees. Flood waters have drowned the trees with nothing but fingers protruding from the dirty water. Last night, hail, lightening, and rain pounded the area again. In Iowa, water sports involve finding routes home and adequate drinking water.

Saturday, June 14, 2008

Welcome and a Thanks

Recently, I attended a Math and Career and Technical conference in Des Moines. The Math-CTE was filled with challenges and opportunities. I was fortunate enough to meet and work with some outstanding educators across the state. I would like to welcome Scott Litter and Kelly Jarad of Manchester West Deleware to my blog. Both Scott and Kelly presented a lesson plan on rapid depreciation that was a highlight of the conference. Scott has coached two state championship wrestling teams in Iowa and Kelly is active in FBLA.

A special thanks goes to Tim Schilling whose email was warmly welcomed during our storms.

Tornado or a Flood

At lunch Wednesday, a statement was made by a man who had lived through a tornado that he'd rather have a tornado strike his home than a flood? As I drove home from Des Moines, a distance of 122 miles, I drove next to boiling flood water than lingered on the side of I-35 and I-280 in Milan, Illinois. Would you rather lose everything to a tornado or clean up after a flood?

More R. Kelly

A sequestered jury found rapper R. Kelly innocent of the child pornography charges. Bad evidence makes bad law.

Tuesday, June 10, 2008

R. Kelly Trial

Rapper, R. Kelly, is on trial at the Cook County Courthouse for an alleged sexual act with a minor. The agitating evidence is a video tape. The Chicago Tribune follows the case Gavel to Gavel . When can video tape be used in court?

A legal source close to me writes, "A videotape can come in if/when: 1) relevant 2) it's probative value is outweighed by prejudice to the other side and if in lieu of live testimony, there needs to be some indicia of it being trustworthy... A tape of the DEFENDANT (or any party) is almost always admissible/relevant because it is perceived as some kind of admission."

With the tape already been shown to the jury, the jury must now decide how much weight to give the evidence. The defense has shown how easy it is to change the tape and has repeatedly shown that R. Kelly does not have the birthmark mole that is shown on the tape. In addition, the tape was lost for over a year before it surfaced in the hands of a Tribune reporter.

The burden of proof is heavy in a criminal court. I look for the jury to acquit.

Monday, June 09, 2008

Questions n, n+1, n+2, .......

I'm in Des Moines, Iowa, this week for a math conference. On Sunday, Des Moines received 4 inches of rain. Tornadoes, winds reaching 60 mph, flooding, mudslides, and constant rain is what most of Iowa has seen the last week. When the severe thunderstorms strike, the sky is as black as night and the rain sweeps in horizontal. I have seen miles of farm land under water so deep that you could canoe through the corn fields. Economists like to say that bad weather is good for farmers. With Indiana, Minnesota, Illinois, Kansas, and Nebraska having the same kind of weather as Iowa, how can bad weather be good for farm commodity prices?

Are womens restrooms always or almost always to the right of mens?

When I observe joggers on the street, one is jogging 4 or 5 yards ahead of the other but the gap between the two doesn't change? Why do joggers run together when one wants to lead?

In Muscatine, we have 8 consignment shops who sell their merchandise at a higher price than consumers could buy new at Wal-Mart? Why do people value their second-hand clothes higher than new?

At the end of this school year, 22 teachers left for other positions and 1 retired. Why is teacher turnover so high? After weighing the costs and benefits of the moves, I don't see how many of these teachers gain. I think many mistake activity for achievement.

Many of my students work 20 to 30 hours a week at fast-food restaurants. The money is all disposable income to them. I wonder if there is any other benefit that students gain from this working experience. It's an old joke to tell a student who isn't studying to say, "Would you like fries with that?" meaning that they will only work at McDonalds. So how is it that there's any thing to gain from working at these jobs?

Friday, June 06, 2008

Income Effect

Assume that there's only one good produced and your income is a constant $10. When the price of the good is $1, you can buy 10. When the price of the good is $2, you can only buy 5. When the price is $10, you can only buy 1. Thus, the quantity of the good you can buy is constrained by the price and your income. Since there are no other goods to purchase, there's no substitution effect. Income is constant.
The McGraw-Hill website, "See The Math" calculates the income effect with: (dQd/dI)(dI/dP) where I is income, P is price, and Qd is quantity demanded. I say this is wrong since income does not change but is held constant. I cannot, however, figure out what the correct formula should be even using indifference curves.
Will someone supply the correct algebra?

Elasticity of Cigarettes

A column on reports that as the price of cigarettes increase by a Pigouvian tax, sales have dropped. I crudely calculate the elasticity at 1.16 or elastic. The tax shrinks both the consumers and producers surplus to correct an externality. As Lord Keynes said, "Practical men are usually the slaves of some defunct economist."

Sundays at the Y

The Community Y is a multi-purpose gym where members can swim, lift weights, run, play court games. Milo has worked the front desk check-in for almost 30 years claims that the Y has a membership over 10,000. This is about 1/3 of Muscatine, Iowa. As you can imagine, checking into the Y results in bottlenecks and wait times that adds to the cost of membership. I often hear members complaining that more personnel are needed at check-in to speed things up. I'm not sure.

When people populate the Y, they check-in, workout, shower/change, and check-out. There's only one exit/entrance point. Let's assume that the workout and shower/change are independent variables that don't effect the time it takes to enter or exit the building. This problem reminds me of debits and credits in accounting. The two have to equal. So it makes sense that the people coming in have to equal the people coming out.

What bothers me is that there's always a bottleneck checking in even when the Y doubles the personnel that checks in members. Why?

Thursday, June 05, 2008

Inflationary Expectations

Former Muscatine High School graduate, Ben Johannsen, along with Meredith J. Beechey and Andrew T. Levin, were mentioned in the Wall Street Journal last month. The link is here.

Milton Friedman

Nobel Laureate, Milton Friedman, made many contributions to economics. Most notably, was his work on inflation and the money supply. His famous quote, "Inflation is always and everywhere a monetary phenomenon"—Milton Friedman is quoted more often in introductory economics books as dogma. It's rumored that Mr. Friedman was obsessed with the money supply prompting Robert Solow to quip, "Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers."

Here's a story I found at JokEC about Mr. Friedman's OCD. "A friend of mine was taking a class by Milton Friedman at the U of Chicago, and after a late night studying fell asleep in class. This sent Friedman into a little tizzy and he came over and pounded on the table, demanding an answer to a question he had just posed to the class, my friend, shaken but now awake said " 'I'm sorry Professor, I missed the question but the answer is increase the money supply.'"

What happens when Mr. Friedman comes home from work? Does he feel spent? Deflated? "FED" up? Naturally unemployed? Does he feel his interest rate waning? Does he form rational expectations about the evening? Does he smell the Roses? Does he change from Monetarism to "monitorism" by doing research on his computer?

Dr. Friedman paved a new path for macroeconomics. His work remains some of my favorite.

Wednesday, June 04, 2008

caveat emptor

While shopping last night at Hy-Vee, I noticed that a case (24-pack) of Diet Mountain Dew cost more than two 12-packs. One reader noted that the sizes of products have become smaller so that retailers can hold their prices constant. The Economist found that peanut butter jars are now wider so that consumers can get more out of every container. How does economics describe these behaviors?

Is it possible that the Diet Mountain Dew is a Giffen Good? Or, more realistically, does the case take up more space and his harder to handle at the checkout and is priced higher to reflect those costs? I think the answer is that consumers rarely consider the relative costs when shopping.

Another fundamental assumption of economics is that income is constrained. The prices of food are efficiently priced. That means, that in order to get more of one good another has to be given up. I think grocers are sensitive to that trade-off and have responded by changing the size of their containers.

In law, the phrase "caveat emptor" means let the buyer beware. I think the public can be fooled in the short-run, but information travels fast to competitors. As buyers become more elastic in their grocery shopping, markets will fairly value the goods so retailers can not exploit market asymmetries.

Those Rebates

A colleague just received his "rebate" check. The Federal Government would like him to spend it. My colleague simply saved it. I am going to do the same. I believe that government spending now means higher taxes later.

I was wondering if my behavior was consistent with Milton Friedman's Permanent Income Hypothesis.

Classical Economics

The classical economists believed that the economy would heal itself if left alone. No government intervention. Whenever the government enters the market, interest rates change and crowding out occurs.

“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”--Thomas Sowell

Tuesday, June 03, 2008

British Humor

A portly Englishman comes home from work with potato chip crumbs on his vest. His wife immediately scolds him for his weight. "You need to lose a few pounds," his petite wife says. So the Englishman, an economist, removes his wallet and throws a couple of bills in the trash. "There! You happy now." The Englishman sits down to watch the evening news a few pounds lighter.

Monday, June 02, 2008


An economist and a lawyer were waiting in line at the electronics store Circuit City with the economist lecturing the lawyer about sunk costs. The line is moving slowly so the economist explains the Coase Theorem. As the line begins to inch forward, the lawyer "accidentally" smashes his cart into the economist's. The lawyer says, "I'm sorry about that, but I think we can internalize the transaction costs." So the economist pays the lawyer $10.

As the line inches forward again, the lawyer smashes into the economists cart again. Again, the lawyer suggests that they internalize costs. The economist rebuts, "I just paid you for the last accident!" The lawyer reminds the economist about sunk costs. The economist pays the lawyer $10.

The lawyer and economist repeatedly play this game until the economist tries to check out and finds he has no money left. While holding his empty wallet, the economist explains to the cashier, "I got smashed."

Three leading economists took a small plane to the wilderness in northern Canada to hunt moose over the weekend. The last thing the pilot said was, "Remember, this is a very small plane and you will only be able to bring ONE moose back."
But of course, they killed one each and come Sunday, they talked the pilot into letting them bring all three dead moose on board. So just after takeoff, the plane stalled and crashed. In the wreckage, one of the economists woke up, looked around and said, "where the hell are we?"

The second economist said, "Oh, just about a hundred yards east of the place there we crashed last year."

My dictionary defines "insanity" as doing the same thing over and over and expecting a different result. To ignore sunk costs is insanity.

Sunday, June 01, 2008

Friedman "Fooling" Theory

Say you're eating a lunch at a park. A robin searches for worms in the grass. Lilacs perfume the air. A breeze massages your senses. Your lunch companion asks, "What do you think the weather will be like in a couple of hours?" If you're like many, you'll form your prediction by looking at the past. You might say, "The weather will be like it is now."

Nobel laureate, Milton Friedman, believed that consumers formed their opinions on inflation as adaptive expectations. It was like driving while looking in the rear view mirror. In other words, people would assume that inflation would be pretty much like it was last year.

Now let's say that the government sends rebate checks out an unexpected stimulates aggregate demand increasing prices. Workers now mistake the higher prices as a change in demand for their work and increase output. Workers then ask for higher wages and employers grant their request. The higher costs reduce aggregate supply and the economy equates at its natural rate of unemployment. Thus, in the short-run workers are fooled but not in the long-run.

Q. What does an economist do?

A. A lot in the short run, which amounts to nothing in the long run.

Tips, Tastes and Preferences

After carrying a golf bag for a golfer at the country club, Miranda*, received a $10 tip. She works in the pro shop where 4 of the 5 workers are female. The workers pool their tips so that the tip are evenly distributed to account for weather and peak playing periods. But I think the tips are pooled because men golfers have a distinct preference for female waitresses. These tastes and preferences are well defined and lead to occupational crowding described in Thomas Schelling's "Dynamic Models of Segregation" 1971, 143-86. Of course, the dynamics of the tip can be disaggregated by game theory.
The golfer is a local resident so has an incentive to tip or the golfer will receive bad service the next time. The tip is a commitment device. The higher tip will attract more females into the seasonal occupation crowding males into traditional area of course maintenance.