Sunday, November 30, 2008

The General Theory of Employment

Here's the book. Marginal Revolution will have a discussion soon. This will be cool

Personal Income Data

The Bureau of Economic Analysis released data for October. Table I with BEA comments are here. Let's decompose the data from Table I. Wages are 66% of Personal Income; Proprietor's Income 8.79%; Rental Income 0.64%; Personal income receipts on assets, 16.92%; Transfers,
15.52%; Consumers spent 954.47 or 7.81% on Durable Goods and 50.21% on Services. Personal Savings saw an increase to 2.14%. When savings start to increase, that means spenders are worried about the future. The actual data shows a rise in .34% in personal income which was adjusted for Hurricane Ike payments. Of course, with a weakening job market personal income should decline in the fourth quarter. With core inflation decreasing, consumers should see a bang for their buck through the holidays. In my humble opinion, when prices fall income follows. (Graph is from Wachovia Economics Group.)

Thoughts on Teaching Economics

These thoughts are from The Teaching Economist by Dr. William McEachern.

It is the supreme art of a teacher to awaken joy in creative expression and knowledge."
Albert Einstein

"A moment's insight is sometimes worth a life's experience."
Oliver Wendell Holmes

"The most extraordinary thing about a really good teacher is that he or she transcends accepted educational methods. Such methods are designed to help average teachers approximate the performance of good teachers."
Margaret Mead

"Human history becomes more and more a race between education and catastrophe."
H.G. Wells

Some pedagogy.

David Sollars of Auburn University at Montgomery sensationalizes his introduction to externalities by peeling and eating an orange in class. He walks around the room first peeling the orange, which in itself can be messy. He then pulls apart the orange amidst a spray of juice. He points out how the price he paid for the orange ignored the effects that consuming this orange could have on others.

Saturday, November 29, 2008

Random Walk

At a Math and Career and Technical conference I attended in October, a favorite lesson plan was to use the stock market as a vehicle for teaching economics. I do not believe that the stock market can be used to show economics. There are too many parametric variables to say "because of this, therefore this." I think the stock market might be a barometer that used in conjunction with hundreds of other economic indicators that it might yield some insight into economic activity, but the stock market cannot stand on its own as a valid and reliable measure of the health of the economy. To make a point, I plotted the change in the Dow Jones Industrial Average for the month of November with time on the x-axis and %change on the y-axis. Does the market seem to follow a random walk with equal drunken steps both positive and negative? One could argue with a linear regression formula that the trend is downward and be correct. I argue that you could not predict the direction of the model using economic indicators such as housing starts, employment and price data. A video about random walks is here.

Friday, November 28, 2008

Micro Loans

Comments from the You Tube video are:

"According to Mohammad Yunnus, Nobel Peace Prize winner for discovering microcredit loans, women who receive such loans start businesses that provide an average of 184 days of employment for their household. Microcredit builds watertight houses, drills water wells, and introduces crops that can grow in the seasons when traditional crops won't. Villages have clean water and food all year from this. Men can farm year-round, which reduces AIDS cases brought on by migration to cities for work."

"This could be "woman" instead of girl. Nobel prizewinner Mohamed Yunus has shown that wives and mothers who are given the chance to start a small business almost always raise themselves and their families out of poverty. But it doesn't have to be a herd of cattle that results. Many women use their seed money to manufacture small household items and clothing, to buy a rickshaw, etc. It doesn't have to be bad for the environment--which 600,000,000 cows would certainly be."

My comment is that you should invest in the human capital of men and women who will make marginal contributions to output. To learn more about micro loans, click here. A genuine thanks goes to Nizar for this link and the video. A friend offered this site as a way to make micro loans.

Thursday, November 27, 2008

Auto Industry

See all of Nizar here. Let's exclude all of the arguements about how the auto industry helps emerging markets. The reason why so many are against helping the auto industry is because politicans, consumers, and John Q want to see a giant fall.

Wednesday, November 26, 2008

Are Jobs Easy to Find?

This graph from the Confidence Board shows that workers think that jobs are hard to get.

Tuesday, November 25, 2008

How to Teach Economics

A valuable teaching newsletter for learning economics can be found at William McEachern's, The Teaching Economist. If you love learning theory, it's here. Dr. McEachern has a love for pedagogy and deep respect for student learning. The best selling book, Made to Stick, must have read this website. This site is recommended for anyone who teaches and for anyone who wants to make a difference.

Monday, November 24, 2008

Do Financial Markets Self-Correct?

Citizen Reno makes some funny points about borrowing money then interviews Robert Solow on classical economics.

Sunday, November 23, 2008

Ask Dr. Econ

You can find this valuable resource at the Federal Reserve Bank of San Francisco. Click here.

Rent in Muscatine

How do higher interest rates and a falling economy affect the demand and supply for rental housing in Muscatine, Iowa? Anecdotal evidence shows that the average rent for a two-bedroom home in this area has increased from $575 to $625 over the last year.

As many lose their jobs and can't make their mortgage payments, they seek rental properties increasing the rental price. The supply of rental properties are inelastic in the short-run. Landlords are not having difficulty renting.

Ben Zander tells a story of two shoe salesmen who go to Africa to sell shoes. One salesman calls headquarters and says, "No one down here wears shoes. I can't sell any shoes down here." The other salesman calls headquarters and says, "What a wonderful opportunity I have here to sell shoes. No one down here wears shoes." The current economic crisis will be a challenge and an opportunity for us.

Thursday, November 20, 2008

Flad's Proof of S equal I


Savings comes from households and budget surpluses. Investment comes from the demand for loanable funds by businesses and government deficits. Factoring out the public sector surplus and deficits, one is left with S = I.

Anemic Oil Prices

When oil falls below $96 per barrel, ethanol suddenly becomes unprofitable to manufacture. The great Nizar penned this toon to show that oil is now at 5 handle or 50 bucks per barrel. With the money supply increasing, oil becomes even more cheaper as the ratio of money to prices affords more buying power. Falling price should increase employment and output unless offset by pessimistic consumer expectations. These are indeed interesting times.

Robert Solow on Credit Crisis

Paul Solman has a nice interview with Nobel Laurate, Robert Solow, here. As usual, Robert is charming and easy to understand.

Wednesday, November 19, 2008

T. Bone Pickens on Wind Energy

Wow. In Iowa where we are a net exporter of energy, we are embracing wind power. Southeast Iowa is already filling up with huge wind mills. Presentation Zen is a website I use to make my speeches powerful so T. Bone's lecture was meant to show how to convey a message. MIT offers a free course in energy economics at the open course ware if you're interested.

Group of 20

The fantastic Nizar sent this toon. The G20 meeting is just political posturing. The meeting lasted five hours. I think the meeting did show a spirit of cooperation to reform the global economics.

Tuesday, November 18, 2008


The Group of 20 met to discuss the world economy. Among the discussion was reforming the International Monetary Fund and financial governance. I think the spirit of cooperation by the world's powers is probably the best asset to come from the meeting. I remember when this was the G-7 so the weight of the decision making is becoming more equitable. This toon courtesy of Quel and his gallery can be viewed here. I am pro free market. The Europeans demand lots of government regulation. I am not sure how much regulation is needed, yet when I examine my daily life, I see regulation all around me. For example, traffic laws, mandatory education, and hundreds of regulatory agencies like the IRS. I believe capitalism is the best economics but maybe it's the best of the alternatives.

Monday, November 17, 2008

G20 Summitt

Saving the global economy won't be easy. The G20 summitt plan to have one currency is just lip service. This cartoon is courtsey of Nizar, an award winning cartoonist. More of his insights are here.

Sunday, November 16, 2008

Cartoon Data

Retail sales are slowing right at the most wonderful time of the year. Only Walmart is turning a profit. The other big box retailers have seen negative sales compared to same store last year. Looks like the Grinch gets his wish this year.

Bonds and Interest Rate


World Recession

This toon is furnished by karlwimer. This cartoon shows how the US has lost its lead in economic growth. There is one race where the US will win and that's the race to the bottom. A heavy national debt will sink foreign confidence in our debt instruments. China isn't buying as much of our safe-haven treasuries. US GDP is sinking as huge labor movements from employment to unemployment added another 154K to the unemployed. Since January, 2008, 1.4 million have lost jobs. I don't think inflation will be a problem even if the government spends rigorously. The Phillips Curve suggests that a high rate of unemployment will result in a low level of inflation. My data concurs. Wage setters have lost bargaining power and will accept a lower wage which will in turn cause price setters to lower their mark up. I think disinflation will be a bigger problem as consumers will delay purchases while waiting for prices to come down. The US economy is in for a long recession that may take two years. I think you will see housing prices find a bottom after sellers take another 20% loss in the value of their homes. Community banks will be hugely profitable and fuel the source of recovery. I am now digressing.

Saturday, November 15, 2008

Are Consumers Holding Money?

I interviewed Mr. William Nus, Vice President, Corporate Compliance, at Central State Bank. I messed up the audio version so I'm blogging it here. The balance sheets are here. What the balance sheet shows that Muscatine depositors have increased the amount they are putting into reserves AND the bank is loaning more money out. As Mr. Nus explained to me, CSB is a community bank so GM doesn't knock at their door for a loan. CSB didn't have to leverage their capital and all of their loans were sound. Bill was quick to point out that the Midwest has experienced bubbles before when land prices ran up in the 80's. All of the Muscatine bans made solid loans according to Bill.
My perspective is that there's a lot of liquidity in the market because the Fed Funds Rate is well below the target. The TED Spread shows that banks are reluctant to loan to each other so it will be a while before confidence resumes. My research shows that the average American will take 40% of their paycheck in the form of cash. Even in this crisis, at least here in Muscatine, nothing has changed with banking consumers.

Unemployment in Iowa by County

A look at the data from the Bureau of Labor Statistics shows Johnson County to have an unemployment rate of 2.8%. The University of Iowa is located in Johnson County as well as many of the top high schools in the state. Why is the unemployment rate so low in Johnson? Many would argue that Iowa City is a magnet that draws so many professionals to the area to earn degrees or open a practice. I argue that the flood of 2008, tore the town apart and now Iowa City is hiring workers to rebuild infrastructure. The Chinese say, "In challenge there's opportunity." Iowa City offers opportunity for those looking for work. Blackhawk, Polk, and Muscatine were also affected by the flood yet their unemployment rates are higher and influenced by variables non-flood related.

Friday, November 14, 2008

Changing Marketplace

Nothing can stop the downward pressure on prices from competition. If you adopt a new technology and I don't, you will grab market share and make a higher profit. I will become the high cost producer and will exit the market. For firms in a perfectly competitive industry, there's no time to stop and smell the roses because someone will bumpt them out of the market.

Flad's Phillips Curve

The data on the scatter graph represents the change in inflation rate to the unemployment rate. My line regresses as shown by the red line and indicates a negative relationship between delta inflation rate and unemployment. Notice that the natural rate of unemployment appears to be 6.1, about where the US economy is at right now. Falling prices represent a problem for workers as they lose bargaining power and will have to accept lower wages. It's interesting to note that an adverse supply shock in the 1970's was a reason given for the erosion of the original Phillips Curve. I've observed falling oil prices in the last two months. I'm wondering if the economy will see and increase in aggregate income and employment as the economy naturally corrects. I want to thank Oliver Blanchard for the opportunity to explore the relationship graphed above.

Tuesday, November 11, 2008

Monetary Injection

Thanks to the rodrigo for his view of another monetary injection. If a stimulus is injected by increasing the money supply, interest rates will reach zero. The real pain will be inflation in four years when the temporary effects of government spending will wear off. Then, you will find much higher interest rates using the Fischer equation of Real Interest Rate plus Expected Inflation equals Nominal. I at least expect to see some employment generated from the stimulus. For you macro lovers, an injection finds equilibrium by adding "injections" of Government, Investment, and Exports. More of Rodrigo's cartoon can be found here.

Monday, November 10, 2008


CEO pay was 401 times greater than the average worker in 2008.

Free Course on Macro

If you want to sit through a class on macro offered by the University of California Berkley, click here. Dr. Wood claims that any time the unemployment rate grows by 1%, the economy is in a recession. Remember, this class begain in August. Again I will say that technology has connected people in ways unseen before. Seth Godin writes about how people form tribes and how to affect institutions through leadership in his new book.

Saturday, November 08, 2008

What is Economics?

This graphic by Freshman sensation student, Yolanda Taylor, shows how resources are limited. Human wants are unlimited. The cartoon also shows that competition for resources puts environmental pressure on the world's natural resources. Yolanda used a mechanical hand to emphasize that the dangers of technology growth may have unintended consequences. Way to go, Yolanda.

Friday, November 07, 2008

Derek Easterby donated this insight. You can view is gallery here. Even in tough times, I'll bet you'll find that the labor force participation rate is about 67% (unemployed + employed / civilian noninstitutional population). For all macro data visit the Bureau of Labor Statistics website.

Wednesday, November 05, 2008

Raising Cain

Justin Fox, Time, writes, "Once derided, his ideas now dominate DC's crisis tool kit. Not bad for a dead economist." (See Time, Nov. 3, 2008, page 60.) According to Keynes, $1 spent by consumers, government, or business multiplied to bring about an increase in income and employment. The spending multiplier is about 2 so whatever the government spends should increase household income by 2. Of course, government spending increases interest rates and induce households to save resulting in some crowding out of the government spending. This cartoon is courtesy of Johannes Anselm Hartmann whose cartoon gallery is at, or here.

Addendum: To gain the most from Johannes gallery, you'll have to read German. I think the greatest contribution of technology is how networks are extended. The far reaching influence of the internet makes sharing information a tool for human capital development.

Sunday, November 02, 2008

45 RPM in Today's Prices

My wife bought this 45 in 1973 when the price index was 44. If I inflate this good to today's prices I find that the cost of this 45 was about $2.40. ((.49 * (215/44)). Is a song really worth that much today? The CPI ignores changes in quality and substitution and technology. I actually believe that a cost of a song today is about 1 cent given all of the file sharing services and delivery mechanisms.

Okun's Law

Arthur Okun postulated that a 1% increase in unemployment would roughly result in a 2% decline in GDP. This is Okun's law. Recent data from the Bureau of Economic Analysis, BEA, shows that unemployment increased by .oo4 or .4% from August to September. Using the Growth Rate Form of Okun's Law, dY / Y = .o3 - 2dUn, I calculate that GDP will fall by .022 or 2.2% in the upcoming month. The actual decrease in GDP was .003 or .3%. The Bureau of Labor Statistics shows that 159,000 jobless claims were made in September indicating that GDP will fall.

This all makes intuitive sense since it takes labor to make output. People without jobs have a difficult time spending money and businesses cut back on investment. Confidence in the economy to sustain constant 3% growth wanes too. Last month, personal consumption expenditures fell .3% and saving increased 1.3%. My wife has noticed that Sunday papers are thicker and contain twice the number of coupons. It's clear that spending is way down.

Saturday, November 01, 2008

Flad Gets Serious

I am convinced that the banking system is swimming in liquidity. As an esoteric proof, (one step of many), I wrote a page and a quarter obtuse paper on the velocity of money. You can find the link here. I'm proud of the algebra I used and I'm sure that the purpose of this blog was self awareness.

Blocked Pipes by The Economist


Baloo donated his work for my blog on inflation. His web page is here. Now, for the economics. If you were a debtor, would you borrow money now knowing that the inflation rate will increase? I think you would borrow more since you would be repaying the loan with cheaper dollars.
Let's say that you borrow a dollar when the price level, P, is 1. If there's no inflation change, then you'd repay a dollar, $1/1 (no interest.) But now, assume that the inflation rate increases by 100% so that the price level is 2. Now you are repaying the loan with cheaper real dollars. You would be repaying $1 loan with cheaper dollars, $1/2 or 50 cents. Inflation is a friend to the debtor and an enemy to the creditor.