Monday, February 23, 2009

Thinking About Technology

In some ways, technology has brought us down. Overall, I would rather have a computer than not. Technology probably helped that teacher get to work, keep up on world affairs, and keep a grade book. There are costs and benefits of every invention.

Saturday, February 21, 2009

Questions About Growth

Now, let’s see what implications this has on two relevant discussions about today’s economy. First, what happens if people are scared and start to save money? This will increase the savings rate, γ. If we assume a straight line depreciation, δ, of 10%, .10, an initial savings of .8 then y = 8. If savings increases, to .9, then y increases to 9. This simple derivation concludes that an increase in savings will INCREASE income per worker. In macro we discuss the paradox of thrift. Is it a paradox? Consumers are saving more fearing a long protracted recession. Are consumers really helping to build capital stock for future generations?

The next question I address is how to spend the stimulus. Returning to point 2, an increase in k will increase income per worker at a diminishing rate. Not obvious from the equation is that the economy will begin to accumulate capital and work toward a higher steady state. In other words, spending on infrastructure will provide more income and tools for long-run growth. Does this sound Keynesian?

Social Networks

A few years ago, Hush Puppy shoes was heading for bankruptcy. Malcolm Gladwell tells the story better, but Hush Puppy shoes zoomed to profits when the right people were seen wearing the shoes. Suddenly, everyone wanted to wear Hush Puppy's--a shoe I grew up with in the 1960's. I was wondering what effect social networks had on the dynamic adjustment in product markets.

In a Facebook post by Troy White, "MySpace says it already has 130 million users worldwide, including 76 million in the U.S. Facebook says it has more 175 million active users, 70% of which are outside the U.S. Facebook has been growing at a torrid pace lately, adding new users at a rate of about 600,000 a day." You can read the article here.

My questions are: (1) with information that can be shared so quickly, are all markets approaching perfect competition? (2) Can a critical mass develop that unsettles equilibrium by affecting supply chains? (3) How do social network affect general equilibrium?

I really do not understand myself what I'm thinking, but enjoy the thought process.

Friday, February 20, 2009

mock trial practice

for those on my team, here's the link...

Wednesday, February 18, 2009

TED Talk

Mr. Schwartz discusses incentives in making moral choices.

Monday, February 16, 2009

Random Stuff

Here's just stuff I've found while completing miscellaneous research. There's no theme.
18% of our national debt is owned by foreigners.
The stimulus package represents 5% of GDP.
20% of the unemployed are long-term.
The IMF does think there is any difference if the government spends or reduces taxes/
The table above is from McConnell-Brue shows the composition of exports and imports.

Mean Duration of Unemployment

The data shows that the length of time one remains unemployed is 10.3 weeks. Do unemployment benefits encourage a longer time unemployed? I doubt it.

Sunday, February 15, 2009

Where's The Economics?

I believe that everyone weights the benefits and costs when making a decision. Many will spend more energy getting out of an assignment that it would take to complete the assignment. In this cartoon, the professor makes the assignment worth the cost of the alternate activity.

Are You Serious?

Fox and Friends has been airing a nice series on pork spending and the stimulus, Are You Serious? The lastest installation is a mayor of Bringham, Utah who wants 15 million for a sports park that creates 33 jobs. She wants a 20 million dollar dance academy. The video is here. Here are some more in the series: $20 for zoo construction; $5 million for a new polar bear exhibit; The Shreveport mayor defends request for stimulus dollars to pay for fleet of Harley Davidsons; Virginia Beach's deputy city manager defends request for nearly $1 billion from stimulus package.

Will Rogers, to paraphrase, said all he has to do to be funny is watch government.

Saturday, February 14, 2009

Sticky Wages?

I have got to believe that wage contracts will expire long before the economy begins to recover. I expect to see wages decrease and labor lose bargaining power. This is classical economics working to equilibrium making a long run adjustment.

Thursday, February 12, 2009

Pegged vs. Floating Currencies

The IMF lists all the countries with pegged and managed floats and those with floating exchange rates. The number of countries with pegged exchanged rates outnumber those with free floating rates. This graphic from Frenstra and Taylor, International Economics was a shock to me. There are more currencies pegged than float. When a country pegs, they adopt a foreign courntry's monetary policy. When the US enters a recession, the rest of world has no choice but to behave like they are in a recession.

Trade Balance

December exports were 133.8 billion, down 6% since November as the USD appreciated during this time. Imports subtract from GDP and unemployment reached 7.6% with most of the unemployment based on consumer confidence. To buy goods from abroad a country will have to have capital inflows which means selling off capital assets. I like cheap goods. I don't like protectionism. I believe that America will continue to produce goods and services at a faster rate than we sell off our assets.

Wednesday, February 11, 2009

Good Banks Bad Banks

Paul Solman has an instructive video on a way to get banks to start lending. The link is

Tuesday, February 10, 2009

Current Job Loss

The very sharp, Tim Schilling, pointed me to these websites that look at the graph from my previous post. Cafe Hayek. The Daily Dish.

Monday, February 09, 2009

What Does the Current Job Loss Look Like?

The reaction to bad economic times has been swift.

No Relevance to Economics

A cardinal in Birches.

Free Textbook

An introductory microeconomics textbook is here. The book is rigorous and uses calculus. It is free for download. Jason Welker gets a nod.

Sunday, February 08, 2009

Blog Revision

This blog helps me to grow. My latest area of growth has been trying to understand the balance of payments. This is the data from the third quarter, 2008, release from the BEA. Net Exports = -174.1. Balance on Capital Account = 38. Net Capital Inflows = 135.1. All amounts are in billions. Here's the equation I believe represents the summary of flows: Nx = CA + FA where Nx is Net Exports (E-I); CA is the Capital Account; FA is the Financial Account (capital outflows - capital inflows). Thus, my equation becomes: -174.1 = 38 + 135.1. The difference of one billion represents rounding. During this time the USD depreciated 4%. Life is good.

Circular Flow and Capital Inflows

The circular flow model that I use in macroeconomics can be used to look at the current stimulus package. If the government wants to spend one trillion dollars, the government must get the money from taxes or financial markets. Assuming private savings from households is not enough to fund the stimulus, the funds have to come from the Rest of the World. Foreign lending means that the rest of the world is buying our financial instruments like stock and bonds or our capital assets. What happens to the interest rates, investment, and GDP is debatable, but the circular flow shows that the loanable funds have to come from the rest of the world. Our deficit spending and our trade deficit is tied to the inflows of capital from the rest of the world. As long as we keep borrowing, we are selling off our country. Paul Krugman estimates that 39% of our GDP is owned by foreign investors.

Recession Data

The data represents the length of each recession since WWII. The source is the NBER. I downloaded the dates from the FRED data base. From the data, it appears that recessions don't last very long. I don't say that this proves the classical economists wrong or supports Keynesians, but only point out that the fluctuations seem to be short term. Also past behavior of recessions does not predict future as the recessions don't have a memory. The data suggests that the length of the recession might not be as protracted as politicians are suggesting to pass the stimulus package.

Unemployment Data and Unemployment

The current unemployment rate is now 7.6% as the economy shed almost 600,000 jobs last month. Government workers and those in education were insulated.

Say the country of Wii has a labor force of 1000 (unemployed and employed) with 100 workers unemployed and 200 discouraged workers who are not counted in the labor force. The unemployment rate is 10% (100/1000). Due to a prolonged recession, assume 100 of the discouraged workers enter the labor force. Now the unemployment rate equals 20% without any job loss. As more enter the labor force seeking employment, the unemployment rate goes up if everything else stays equal.

I am only speculating now. Suppose I live with my parents and both lose their jobs at the factory. I would be now motivated to seek employment to supplement unemployment insurance. Plus, job opportunities exist that previously did not. Maybe some of the jump in unemployment is due to new or discouraged workers entering the labor force. (Source is Wachovia.)

According to Fox News, 15% of the unemployed have a college degree.

Saturday, February 07, 2009

John Huizinga on Obama

Excellent video here. Recession isn't the worst and probably will not be (my intuition). The US is not Japan. The unemployment rate will go up as more and more discouraged workers enter the labor force. Finally, financing the deficit will requires selling off American assets or decreasing capital investment. This part of the video made my weekend since I'm going to use all of it in my macro class next week.

Dark Knight

The great Rodrigo, makes a sharp point. We need the banks, a lesson we learned in the Great Depression, but which ones? I know the community banks are solid. For years I watched the auto industry over produce a product and sell it for an over valued price. I also believe that the auto industry created the wealth the US citizens enjoy. We are now witnessing the dawn of a new era of economics. New macro models are going to be invented to solve new problems. In this great challenge will be great opportunity.

Friday, February 06, 2009

Falling Objects

This cartoon warns pedestrians of crumbling buildings. In other words, that Wall Street is falling apart. I don't agree. Wall Street is an institution. You can change the actors in the institution, but you can't change the institution. In two years, the Dow will be higher than ever.

Keynes, Cowen, and Stimulus

A nice podcast on President Obama's stimulus package is here. Interviewed is Tyler Cowen from George Mason University. Tyler has a new book on macro growth to be released in October. Mr. Welker's blog is one of the best economic sources for teachers and students.

Thursday, February 05, 2009

Crowding Out

When the government spends money, it raises interest rates. Fiscal policy crowds out private investment and spends. The government forces households to save more. The saving is counterbalanced against government spending. The results of fiscal policy are minimal at best.
"Government´s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it." - Ronald Reagan

Lecture Toon

I think this cartoon is the favorite among economics teachers. (Click to enlarge).

Wednesday, February 04, 2009


My latest podcast features Mr. Jim Greenhaw. He comments on the auto industry and forecasts about the future of the industry.
I love this cartoon on many levels. A crash dummy doesn't get hurt so it looks like this one will survive the current crash with the help of taxpayers. A random thought is that the auto industry looks like Humpty-Dumpty and no one will be able to put it back together again. Jim's comments are salient.

Tuesday, February 03, 2009

Personal Savings

Are you saving more? Data shows the worried consumers are saving more of their income after taxes. There's only two things you can do with disposable income--spend or save. If savings increases then consumption decreases. This graph from Wachovia shows that households are saving a bigger percentage of their disposable income. My research shows that demand deposits have skyrocketed but consumers are writing the checks that normally accompany deposits into checking accounts. So banks are flush with deposits, consumers are saving, and the recession rages.

Monday, February 02, 2009

Pesky Trade Deficit

Let's use national income accounts to prove that the trade deficit is equal to capital inflows. If Y, income, equals consumption, C, plus Investment, Ig, plus Government spending, G, plus Net Exports, Nx, the Y - C - G -I equals Nx. The terms on the left represent savings, S. So our equation becomes S - I = Nx. Because the balance of payments uses double entry accounting Nx = KI. Rearranging this equation becomes 0 = KI - Nx. If Nx is less than 1, then KI + Nx = 0.
Wow, is this esoteric or what? Why have I taken the time to do this rigorous algebra. Because a trade deficit means that we are selling off part of the United States. According to my textbook, 4.3 trillion of US assets are owned by foreign countries. This is 37% of US GDP.
What does high government borrowing mean? Higher interest rates that might crowd out investment. Foreign countries might doubt our ability to repay our debt. Lastly, there's the threat of inflation through government borrowing.

Natural Rate of Unemployment

This graphic from my Krugman-Wells textbook shows that the natural rate of unemployment is 5.6%. The natural rate of unemployment is equal to structural plus frictional unemployment. A deviation from 5.6% means short-run fluctuations in the business cycle. At 5.6% the change in unemployment is zero and thus, the economy is in equilibrium. The shaded bars show a recession. Note that unemployment is greater than the natural rate during recessions. The current unemployment rate is 7.2%. One should observe inflation when the natural rate is below 5.6% according to the Phillips Curve.

Sunday, February 01, 2009

Commerce Bank

The translation from German to English is, "According the evaluation and estimate of the analysts at Commerce Bank, the payouts and dividends for 2009 will lie at 23.6 Billion and thus only 15% under the record year 2008."

I think the cartoon is sartorically pokes at CEO pay at Commerce Bank who in troubled banking times make sure they get their cut.

Train Wreck

For a 1000 years the standard of living improved only slightly. When the railroad began to move goods, the stimulus was so large that it created jobs, income, and production. Moving goods across land was hard in the middle 1800's so the economy grabbed a hold of the new technology and a period of long-run growth was ignited. I love this cartoon on many levels.

Both fiscal policy, taxes and government spending, and monetary policy, open market operations, are ineffective. When an economy is as large as the US, maintaining 3.5% growth requires huge job creation and innovation in the private sector. I believe the only thing that will get the US back on track is a huge demand shock like the railroad. Thanks to NetRightNationBlog for the cartoon.