Gas

American use of gas does not seem to be slowing down. We are like a truck that knows it has to stop but the brakes don't work.

Trade Deficit

Foreign trade is supposed to work like this. I trade a dollar for a Chinese Yuan. I buy Chinese goods. Somewhere someone has a dollar that eventually they will trade for US goods or US capital. Either way our trade comes back. When we spend the dollar, it's a debit. When we receive the dollar back as investment in treasure bills or purchase of US goods, it's a credit. The two are supposed to equal. This is an accounting identity in the macroworld. I have a trade deficit with Borders bookstore. Borders has never bought anything from me. I suspect I'll always have a trade deficit with Borders until they go bankrupt. In the long-run, the dollars I spend at Borders will come back to me. Maybe I'll be alive when they do. Just is trade with China who horders billions of US dollars.

Test

This is a test.

Minimum Wage Hike

The minimum wage in Iowa just went up 60 cents without fanfare. No observed change in the rate of unemployment or hours being slashed as neoclassical economics predicts. Most still complain that the hike wasn't high enough to meet the cost of living just as food. I think the media misses the point about inflation. Everyone is both a supplier and a consumer. So higher prices mean higher wages. It's true the prices outpace wages and the minimum wage hike isn't enough. But I observe most workers receiving a wage higher than their marginal product which suggests that wages in those occupations should fall. It's my experience that miminum wage workers are not paid enough and the wage hike should have been higher.

Fair Trade?

I only know about history is what I read or see on television. I remember that the white man would trade with native Americans and the native Americans would get the the fuzzy end of te lolipop. Our trade with China reminds me of those westerns. The dollar is falling and our capital account is raising to balance the balance of payments equation. Seems like we are trading our services for Chinese durables and their durables are worth more. The cartoon was meant to infer that economists may not be telling the truth about free trade. (Click to enlarge.)

African Folk Lore

There's an old African saying that translated means, "When two elephants fight, get out of the way." In Liberia, this means when the United States and China fight for oil, the Africans will get hurt.

A Test

This is a test to see if Movie Maker files will upload to blogger. This one did with errors. I started a video blog at www.macrovb.blogspot.com for my students who missed importantant lectures or want to review concepts. I tried to keep each video less than 2 minutes. I used a Flip camera to record the videos in July and could shoot, upload, and blog in less than 15 minutes. I plan to use this tool during the school year to help my AP students who seem to be gone for every activity in the school.

What's That Sound?

Higher prices should change the quantity demanded. Some of the data shows that people are buying less and finding susbstitutes. But I haven't noticed a change in behavior. I think most Americans think that big oil will drill in Africa to quench thirst for oil.

Chindia Rex

A former student just returned from Gabon, Africa. She told me that the Chinese are every where and well dressed. My guess is that China is looking to gain scare resources, especially oil, in order to satisfy unlimited demand. The Africans voluntarily trade since the alternative uses for their resources are nil. As more Chinese enter into market transactions with tribal Africans, I predict that you will see a transfer of wealth to China. The distribution of wealth will be a net transfer to China. Soon, Africans will not be able to live in their native country.

Love Affair

America has a love affair with their automobilies and gas toys. Is it any wonder why gas prices continute to skyrocket? When I mention to consumers that they should consider cutting back on gas consumption they feel that it's someone else's duty. I asked the 20 something woman next to me she needed a Hummer. She told me that she needed to haul her kids around and pull their boat on the weekends. I wonder why when I see an SUV there's only one passenger and that's the driver.

See The Math

See The Math has been reworded so that the explanation of the income and substitution effect are clearer. The editors are cool. A PDF file will be sent to you on request. Visit the website and work through the math that motivates the economics. This might be one of the most self-improvement plans you can make.

Utility of Money

Sometimes I wish I could have 10 million dollars. Then I'd be happy. According to this link, as one earns over $40k a year, the utility of each dollar earned decreases. This is the rational for our ability-to pay-tax philosophy. Taxing those with a lower value of money doesn't reduce happiness.

A man was in court for failure to pay his fair share of income tax. The man protested giving a long winded rebuttal. The judge found the man guilty and sentenced him to community service working the poor. The judge defended his decision saying that the man taxed his patience.

Liberia Rock

Pastor Dan Schoepf shot this video while performing missionary work in Liberia, Africa. The children work 4 hours to fill a 5-gallon bucket with gravel. They are able to redeem the bucket for $0.50. These children are able to fill 2 buckets in a day's work. They are among the 100 million who live on less than a $1 a day.
Paul Krugman in his micoreconomics textbook writes that children in the Philippines scavenger piles of trash for morsels of food. These children have to brush away flies and maggots to earn the equivalent of a $1 a day.
Dan performed church services at a church nearby this rock quarry. He had the opportunity to interview one of the workers you see in the video. The worker was thankful that the village was built around this rock so they would always have food.
Some in the US would object to child labor, but as this video shows, the alternative would be starvation. In his book co-authored with Ben Bernanke, Robert Frank asks, "Are these people poor because they do all of the work themselves or do they perform all the work because they are poor?"

Debasing Economics

My dictionary defines an economics teacher as one who talks in someone else's sleep.

Who says money can't buy happiness. See msnbc.

Finally, a reworked economics joke.

A renowned economist was held in high regard by his driver, who listened in awe at every speech while his boss would easily answer questions about choice, utility, and equilibrium. Then one day the driver approached the economist and asked if he was willing to switch roles for the evening's lecture. The economist agreed and, for a while, the driver handled himself remarkably well. When it came time for questions from the guests, a woman in the back asked, "Would you explain intertemporal choice and savings in a neoclassical model?" "That is an extremely simple question," he responded. "So simple, in fact, that even my driver could answer that, which is exactly what he will do."

Oxymorons

An oxymoron is an oxymoron. I offer the following economic terms up as oxymorons.

Average Total Cost

Monopolistic Competition

Balanced Budget

Fair Trade

Women Work and Happiness

I've collected anecdotal data that relates the quantity of women working out to men at the Community Y from 8:30 am to 11:00 am. If you're single, the results are encouraging as women outnumber men 8:1. Only once in the past month and a half has the ration been 1:1 and only for a minute. Women flood the Y in the early am when child care is provided by the Y. Regular business hours range from 9 am-5 pm Monday through Friday. My point is women have children and take care of them and thus have a lower cost of time to pursue health and utility maximizing activities.

When a woman chooses to stay at home, she makes a trade off between higher income and utility that her children bring. This choice is interesting to me since data clearly shows that having children decreases utility. See here. A multitude of research confirms that happiness increases has children leave the home. [Walker, "Some Variations in Marital Satisfaction", D. Myers, "The Pursuit of Happiness..."]

A woman will earn less income and earn a lower hourly pay then men. Labor economists explain that while a woman is at home raising a child, her skills depreciate while her male counterpart's increase. Labor economists conclude that a woman will take more time off from work for child-related issues and miss more work, so their pay represents their marginal product.

The women I observed at the Y were between the ages of 20-30 with some retired or teachers on vacation. Having children is a stabilization force in society. What is interesting to me is that given all of the data, why some of these women have 4 and 5 children. Maybe the choice to work is too much to bear.

Bad Hair

Do you know someone who works two jobs just to make more money? Do you know well-off income earners who use generic brands because it stretches their income? In both cases, economic actors are maximizing their income and this is just what the human capital theory predicts.

When I'm at work, I never have a free second. I eat my lunch while taking attendance on a slow computer and helping students. Even though the copy room is 300 feet away from my room, it takes me 5 minutes to walk there and back because of student interruptions.

Often, students make light of my hair since it seems to have a mind of its own. Why don't I comb it, they ask. My answer is that combing my hair doesn't maximize my income. Students, on the other hand, attend school to learn AND socialize. These students will maximize their social status if they comb their hair.

The theory predicts that I will comb my hair less than students, but both students and teacher will be acting rationally.

Vision Statement

In part, the Muscatine Community School District's Vision Statement reads, "School-community partnerships will prepare and challenge each individual to become a goal-oriented, lifelong learner in an ever-changing global society."

I was wondering if the language of the vision statement was self-defeating. As an experiment, ask yourself if you'd rather have a $1 now or a $1 next week. Paul Krugman, NYT, explains in his Microeconomics textbook that most people would rather have the dollar or Euro now. Consumers heavily discount the future so the present value of the $1 is $0.91. (Assuming the interest rate is 10%, then $1/(1.1) equals $0.91.)

If a student can fun now and do homework later, I say that student is discounting the future and will consume fun now at a cost of learning later.

So when the MCSD has as a vision statement "lifelong learner" the district is unintentionally discounting the future and encouraging entertainment consumption now at the expense of future learning.

Teens and Technology

ZITS often shows Jeremy using technology that baffles his father. Whenever my generation talks about teens today, they mention how technologically savvy teens are today. How is punching a phone number into a cell phone technologically savvy?

In my computer programming class in 1980, we programmed an Apple IIe to simulate 1,000 monkeys typing on 1,000 manual typewriters. The theory was that by chance the monkeys would create a work of literature. Monkeys can push keys on a typewriter and so can teenagers.

If teens are so technologically brilliant, why do I not see as a whole well developed study habits, transfer of learning, and discovery? The teens that I mostly see are like the cell phones they hold so dear--you have to punch information into them. By the way, isn't this the generation who gave us cordless screwdrivers? Weren't screwdrivers cordless before?

Blondes and Blue the Perfect Complements

Goldilocks and the Three Bears tells the story of a girl's tastes and preferences. In Latin, de gustibus non est disputandum. Tastes and preferences are subjective. Economists like to observe behavior and watch as economic actors reveal their tastes and preferences. I've watched men observe women, especially blonde hair and blue eyes, and I have come to believe that men prefer blondes who wear blue. With apologies to Marilyn Monroe, Gentlemen Prefer Blondes, I offer the following economic analysis.
Suppose gentlemen demand blondes and blue in equal quantities. This is like buying shoes. You always buy a left shoe and a right shoe. One consumes both in equal quantities. Another example might be dimes and nickels where one is exchanged for two. Any other exchange would not happen. So blondes are undesirable when not accompanied by a complementary blue.
If this blog offends you, I guess I blew it.

The Globalization Cow

Globalization allows countries to consume goods and services above their production possibilities curve and produce at their comparative advantage. Free trade allows the market to work without distortion of incentives. Most economists believe that free trade optimizes utility. We now join, Professor Max E. Mizer in his econ 101 classroom.

Prof: The globalization cow shows how interdependent we are. Nations will trade if it beneficial to both. Trash. Did you hear what I just said?

Trash: Huh? I heard you, but that's just a cow--not a herd.

Prof: Very funny. ESPN, you have a question. What is it.

ESPN: It's not a question. More of a statement. But when countries trade is the trade fair?

Prof: Good question.

ESPN: I mean. I got a new catcher's mitt for my girlfriend. Now that's what I call a "fair trade."

Market Failure

A market fails to provide the goods and services that society wants in the desired quantities when the costs and benefits to society don't align with the private costs and benefits. Economists call the differences externalities.

Economic actors do not always consider the costs they impose on third parties. When costs are forced on a third party who's is neither a buyer or seller of the good the market fails. Maybe your neighbor's motor cycle wakes you up every morning. Negative externalities are overproduced. A negative externality is an economic "bad" since it provides disutility. Many economists argue that a Pigouvian Tax will equate social costs with benefits.

In the cartoon, the demand for a product leads to overproduction of good. The good is bad since it hurts innocent bystanders. If you use this joke, you'll have students banging on the door--to get out of your room.

National Debt Calculator

The United States imports more goods and services than she exports. This statement infers that US citizens are spending more than they earn and have to rely on foreign capital inflows to fund consumption. What is the accumulated debt of the United States at this second? Follow this link.

Whether you want to argue that the debt belongs to the current generation or the future, is beyond me, but the numbers are eye-popping. Let's put a billion into perspective. This stat is from a reader's email.

A billion seconds ago it was 1959. A billion minutes ago Jesus was alive. A billion hours ago our ancestors were living in the Stone Age. A billion days ago no-one walked on the earth on two feet. A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.

Yogi on Choice

Economics is about choices since resources are limited. Econ 101 theory tells us that one considers the opportunity cost of making a choice and make a trade off when choosing Good X over Good Y. When purchasing Good X, one considers the relative cost of related goods and makes decisions at the margin. This simple, fundamental, concept is the basis for economics. Economic woman acts in a way that maximizes her utility and considers makes a choice only if the expected value is greater than the marginal cost.

Some mathematician has said that the shortest distance between two points is a straight line. I find that I cannot walk a straight line. Someone moving faster cuts in front of me, then stops without considering the cost they impose on others. If I slow down, someone runs into me. It's always a race to the checkout line at the store. Choices must be made instantaneously. Thus, economics is about behavior that is revealed in every tick of the clock.

Bilateral Union

Suppose a wife follows her engineer husband to Muscatine, Iowa, so he can advance his earnings. She is a certified teacher, but the problem is there's only one public school in Muscatine. The next schools are 50 miles away. Will she take a job at the local school if she wants to work?

I argue that she'll accept a lower wage because the local school is a monopsony. If a union is present, then the market structure will be a bilateral monopoly.

I argue that the two powers will balance each other and resulting collective bargaining negotiations will result in a win-win.

Unions as a Public Good

"In economics, a public good is a good that is non-rival and non-excludable. This means, respectively, that consumption of the good by one individual does not reduce the amount of the good available for consumption by others; and no one can be effectively excluded from using that good." This definition from the online source Wikipedia.com. (Aside. The information I have gained from this site rivals the information I have gained from textbooks.)

In Iowa, there are Right-to-Work laws so union membership is optional. Iowa requires collective bargaining for public school employees so those who do not join the union are free riders. Thus, a employee who isn't a member can reap the benefits of union negotiations without any of the cost.

Our union provides many nonpecuinary benefits as well including student safety. Without the existence of our union many beneficial goods would not be produced and thus provide less than the socially optimal quantity. This is market failure. Our union member is declining down from 98% in 1980 to less than 66% presently. Is there any relationship between union membership in numbers and the union power in negotiations?

A Biological Model of Unions

Unions that try to maximize rents will cannibalize the company. This is my take on a paper written by Micheal Kremer and Benjamin A. Olken. Marginal Revolution has a link here. When unions collectively bargain they must strike a win-win outcome. Unions who succeed in extracting higher wages might find that companies will substitute capital for labor or innovate less since there's less money for infrastructure spending.

Most unions are in the public sector.

When unions bargain, they might try to eliminate substitutes for their labor by demanding certified labor or stiffer OSHA regulation. If a union can change the demand for their labor, then it can increase employment for its members. A union that faces an elastic demand curve will increase wages at the expense of member employment. A union faces some difficult trade offs.

How does the union boss begin a fairy tale to his kid? Once upon a time and a half....

Economic Figures

It's often said that there are three kinds of economists. Those who can count and those who can't. Econometrics are often blamed because the data is based on observation rather than controlled experiments.

Gerald Loeb wrote, "I once read about a meeting of economists who agreed that if their forecasts were right 331/3 of the time, that was considered a high mark in their profession. Then, too, I read somewhere about the man who described an economist as resembling a professor of anatomy who was still a virgin."

Winston Churchill said, "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes. In that case, you get three opinions."

Economics isn't an exact social science but it does predict behavior. I end with another vignette from Professor Max E. Mizer's econ 101 classroom.

Prof: So what is the real GDP given the price index and nominal GDP? Anyone? You can round up. Yes, Trash.

Trash: Round up. Are we going on a cattle drive?

Prof: No, I meant a ballpark figure. Yes ESPN.

ESPN: Hey, I know this one. How about an umpire? He's a ballpark figure. And so is the hotdog vendor.

Utilitarianism

Neoclassical microeconomics assumes that a rational economic actor will seek to avoid pain and maximize pleasure. The foundation for this belief comes from Jeremy Bentham, a philosopher who espoused Utilitarianism.

Brooke, a college instructor, send this joke to help students understand the decision-making process. A Utilitarian is "One who believes that the morally right action is the one with the best consequences, so far as the distribution of happiness is concerned; a creature generally believed to be endowed with the propensity to ignore their own drowning children in order to push buttons which will cause mild sexual gratification in a warehouse full of rabbits."

When I judge people I often ask, "Are they happy?" Measuring utility is subjective at best. Daniel Gilbert has written a brilliant book, Stumbling on Happiness, on utility.

Have you ever heard the trite expression, "Be careful what you wish for. You might get it"? People often make decisions that are irrational as Dan Ariely wrote about in Predictably Irrational. You should only read these books if you believe that the utility you gain is greater than all of your alternatives.

GDP Calculation

GDP is the total dollar value of all final goods and services produced within a country's borders during the fiscal year. Let's look in on Professor Max E. Mizer's classroom where he's teaching Econ 101.

Professor: Any Questions? Yeah, Trash.

Trash: What if I like buy a used car? Does that count?

Professor: No, the car was counted when it was made. Yeah, ESPN.

ESPN: What about the man who works at home? Does he count?

Professor: Hey, you hit a homerun with that question. No, his work doesn't count. Economists like to say 'if you want GDP to go down, marry your house keeper.' Yes, ESPN.

ESPN: What I mean is, the Man who works at home.

Professor: Again, if I paint my own home, it's not counted in GDP.

ESPN: Man, you're really striking out on this question. I mean, the umpire.

Budget Constraint

Microeconomics assumes that income, Y, is constant and temporal choices are constrained by the budget curve. This is a huge assumption as it determines the amount of Goods, X and Y that is demanded and consumed. A consumer will maximize her utility by consuming that package where -$Px/$Py = MRS or the point tangent to her tastes and preferences given by the convex curve.

For a consumer to consume less than her budget line (yellow) will not maximize her satisfaction. A higher level of satisfaction is wanted (red) but unattainable given her budget. Only one point on the budget constraint curve that is tangent to the tastes and preferences curve is perfect. All other points are unattainable or give less utility than preferred. Microeconomists like to say that the consumer's income is constrained by her budget.

That is why it's call a budget line. You can't budge it.

Circular Flow

Economic activity is often modeled as a circular flow where income equals spending. I often have trouble with this model because it doesn't show that there are by-products of production and consumption. In my opinion, the model resembles a game of musical chairs. Each circle should get smaller and smaller not remain equal. To me, the circular flow shows that we are imploding as the law of entropy suggests.

Macroeconomists say that the economy is expanding as measured by the GDP. If the economy is expanding, why do I have such a hard time finding a parking place?

Economics is the dismal science. Economists only see the worst, but at least we know how to answer the question, "Is the glass half full or half empty."

The Production Possibilities Curve shows an increasing marginal cost when good X is produced. I guess that explains inflation.