Monday, March 30, 2009

Who's Going to Fix Those Cars?

If the automakers go broke, will we eventually rely on public transportation? Will the United States look like Cuba in 20 years still driving vintage 2000 models? I was wondering if a new industry would emerge that specialized in finding used parts to repair the vehicles now on the road. I think you are seeing the economy work to efficiency as structual unemployment will become rampant. I think it will be years before public transportation becomes a workable solution. Meanwhile, learn how to ride bicylces, walk, and carpool. Is this dismal or what?

Sunday, March 29, 2009

Nominal and Real Interest Rates

Here I show that the ratio of nominal interest rate to expected rate of inflation equals the real interest rate.

Power of Thinking at the Margin

In his new book, The Adventures of Johnny Bunko, Dan Pink writes about persistence triumphs over talent. These stones represent marginal thinking and the power thinking at the margin has to bring huge results. A 1% gain every day for a year, is a 360% improvement over a year. Economists always consider the marginal benefit and the marginal cost for each action.

Saturday, March 28, 2009

Why Does NX + KI = Zero

In this video, I attempt to explain how double-entry accounting is used to show that net exports equals capital inflows.

Thursday, March 26, 2009

Just a thought during our trial

My mock trial team was in competition today and will be in competition today, but I had this random thought during Molly's cross examination. China is slipping into a recession yet they recently hosted the Olympics. They must have spent a massive amount of money on this event. Doesn't it follow that their economy should have been jumped started? China was spending last year--where's the stimulus? It doesn't follow that increasing spending will boost the economy.

Wednesday, March 25, 2009

One Trillion

My favorite morning show hosts posted a link to show what one trillion dollars looks like. Here it is. Basically, the stack of $100 bills is 6 foot high and two football fields. In the book, Made To Stick, the Heath brothers make the point that numbers should always be relative to make a lasting impression on the listener's mind. For more tips on delivering information, see I also believe that the use of cartoons reinforces learning. An excellent example of how an author used the principles of Made to Stick and delivered a message, see Daniel H. Pink's book, Johnny Bunko.

Cash in the Hat

This is a cute video about saving passed on by Mr. Troy White.

Sunday, March 22, 2009

What Makes Us Happy

This graph (click to enlarge) is from Youtube and is a TED talk. This graph shows that an increase in real GDP contributes little to happiness. An article is here. What makes you or me happy varies. Author Dan Pink, suggests making an imprint with your life in his new book, Johnny Bunko. In other words, be a contribution to society.

As an aside, this graph is used to show why the rich should be taxed more than the poor. Assume that the slope of this curve takes the function y = SQR(x) where y is happiness and x is personal income. This equation infers that you received less and less happiness as you make more and more income. If this is true, then the rich can give up more in taxes without diminishing their happiness.

This is one argument why the rich should get taxed more. I know that if I plan to leave an imprint, I would like to leave some to my family or to a charity. Taxes rob that imprint ability.

As usual, your thoughts are welcome.

Saturday, March 21, 2009

Nominal and Real Minimum Wage

In 1975, the minimum wage was $2.10 and a loaf of Sunbeam bread cost $.36 a loaf. A worker in 1975 would earn $.035 per minute and would need to work 10.28 minutes to buy a loaf. The consumer price index in 1975 was on average 54.4. Inflating the 1975 minimum wage to 2009 terms, one derives $2.10 * (207/54.4) equals $7.99, which would be the equivalent of minimum wage in 2009. Minimum wage workers today are worse off than minimum wage workers in 1975.

The CPI that is reported to the public excludes food and energy since these items are volatile. The following excerpt was sent to the AP List Serve:

"In 1945, at the end of World War II, the price of gasoline in the United
States averaged 15 cents a gallon and milk, 62 cents a gallon. So gas was
less than a quarter the price of milk. Gas now averages about $1.40, and
milk $2.50, so gas costs more than half as much as milk. Compared to its
1945 price, gas now costs about nine times as much and milk about twice as
much. By way of comparison, the consumer price index (1982-1984 = 100) has
increased tenfold from 18 in 1945 to about 180 today. And the minimum hourly
wage increased thirteen-fold from $0.40 in 1945 to $5.15 today (though it's
higher in some states)."

I post this only to show the difficulty in interpreting the relative effects of inflation as I try to understand how inflation redistributes wealth. Any thoughts?

Friday, March 20, 2009

World Poverty

Mr. Cowen is one of the best economists in the nation. Listen to his discussion with Mr. Peter Singer.

Thursday, March 19, 2009

Demise of Newspapers

Newspapers are smaller and contain less content. The newspapers I read have also risen in price. Many of newspapers including the Des Moines Register have reduced their staff including the op-ed cartoonist. It's a self-fullfilling prohpetcy to me that reducing content reduces costs and reduces readership. I was wondering if consumer utility function has changed for newspaper readers.
When a consumers buys a newspaper from a machine, they take the top one and only one. This is because the utility of a newspaper diminishes quickly. I think the whole act of buying a newspaper involves a utility set such as buying a cup of coffess, tucking the paper under your arm, and getting ready to read it at the kitchen table or at a desk.
Now, consumers can read the headlines on line with the help of Google Reader. I think the whole utility function of buying a paper has changed, which in turn, has changed the marginal utility, which in turn, has fostered a decrease in demand. I forecast that new technology will render print media almost obsolete in five years.

Satisfying Unlimited Wants With Authenticity

This talk discusses how selling the experience adds value to a commodity. This video is worth your viewing.

Current Account

The current account is the summation of a country's merchandise trade balance, net factor income, and net unilateral transfers abroad. The merchandise trade balance is the difference between exports and imports of goods and services. Net factor income is income that accrues to a factor of production such as dividends, interest payments, wages, salaries, and other income payments. Net unilateral payments abroad include foreign born workers in the host country sending money back home. A comprehensive explanation is in Wikipedia.

The Economist prints the current account balance weekly on the last page of its magazine in the Economic and financial indicators section. forty-three countries are listed with their current-account balances. I've added them up to see if the balance equals zero. The result was $-128.1 billion.

This is only the current account which must be matched with the capital and financial account. But my simple and incomplete calculation shows that countries featured in the Economist have a current account deficit.

Tuesday, March 17, 2009


I have often heard that we are now in an information age. This comment explains why manufacturing is declining all over the world. Information is valuable. Have you noticed that the size of daily newspapers are getting smaller? I think that the delivery mechanism of information is changing. I've seen inventions on TED.COM that allow users to interact with data in real time. As information technology becomes more affordable, watch the decline of print media accelerate.

Milton Friedman on Price

May I recommend reading the Price of Everything by Russell Roberts. His explanation is brilliant.

SNL Advice on Credit

Steve Martin is the greatest comedian of our time. Watch has he learns how to postpone a buying decision.

How Much is a Trillion?

This link, forwarded from the AP Economics listserve, shows how to relate a trillion to students.

Monday, March 16, 2009

Nominal and Real Interest Rates

Using One-Year T-bill rates and the CPI (less food and energy), I plotted the monthly changes in the nominal interest rate and inflation rate. The difference is the real interest rate. One can observe that the real interest rates are high and this could discourage investment. Notice that the two mostly move together. The real interest rate as shown on far right-hand side is .96 = 1.01/1.05 which means that a creditor receives slightly less back than they loaned. I don't think many loans will be made since the lender could spend the dollar now and receive the full benefit. (click to enlarge)

Interactive Graph on Wage Inequality

This is cool. Roll over the dots on the interactive graph and see the pay inequality. The usual view is that women are interrupted by child rearing duties and miss work. So the employer imputs this cost on her wages. During a leave of absence, skills might deteriorate and new skills might be acquired by those working. I suspect, discrimination plays a part.


In the flower store, I overheard a father telling his children that the reason he lost his job was because of President Obama. From what context this man was speaking and from what platform of truth, I don't know. I can only say that last year households lost 11 trillion in assets. If President Obama was able to pocket that money, I could see the man's argument. But where did that money go? How would Obama benefit? I don't see how any enlightened man could blame one person for the current state of the economy. I think some of the stimulus money has been spent irresponsibly. Also, the government has always been spending so what makes this time different?

Sunday, March 15, 2009

Truth in a Court of Law?

Recently, my mock trial team competed in regionals in which we had an expert and the opposing counsel had an expert. Both experts cancelled each other out. This is the classic prisoner's dilemma. If we don't call our expert and the other side does, then my client is shown to be bipolar. Of course, the case always boils down to what the judges believe. To look for truth in a court of law is like looking for light at the bottom of an abyss.
By the way, our team advances to state, March 25.

Shared Consumption

Candle light can be shared without diminishing the source. After one candle is lit, hundreds can be lit without diminishing the light of the original candle. If a candle light is a metaphor for technology, does one have the obligation to share ideas? Here is a fantastic link to an blog where MIT students share an idea. Of course, if I have to give my idea away, how much incentive do I have to innovate?

Money and Barter

How does the use of money create jobs? Last night my wife and attended a symphony in which a young lady played the violin. This young lady wanted to be a performing arts major in college. Would she be able to pursue this career if she had to barter?
For her to barter would require a double coincidence of wants. She would have to find someone who wanted to exchange food for violin music. That might be hard and time consuming. I argue that if we traded to satisfy our wants and needs, many jobs would not be created. Comedians would not be funny, teachers would almost be nonexistent, and writing would be for the elite.
In a society where money serves as a medium of exchange, that society allows for the creation of opportunity.

Wednesday, March 11, 2009

Monday, March 09, 2009

The Logic of Life--Racial Segregation

Haleigh and I worked on our own version of this over winter break, but this is more professional. I believe this video explains why lists order naturally. So when students select where they want to sit in a class, they will sit in an order that aligns with their tastes and preferences.

Sunday, March 08, 2009


Banks will be fixed when pigs fly. How much of the banking problem is because banks maintain a fractional reserve? How much is greed? How much is needed regulation?

Saturday, March 07, 2009

Will The Stimulus Work?

Polls like Fox and Friends shows that the country is divided on whether the stimulus package will work. As I have said before, the government was spending money last year during the beginning of the recession. Why should the spending now have a different effect? I think the money will be spent in old ways. To show what I mean, here's a joke.

Three contractors are bidding to fix a broken fence at the White House. One is from Chicago , another is from Tennessee , and the third is from Minnesota . All three go with a White House official to examine the fence. The Minnesota contractor takes out a tape measure and does some measuring, then works some figures with a pencil. "Well," he says, "I figure the job will run about $900: $400 for materials, $400 for my crew and $100 profit for me."

The Tennessee contractor also does some measuring and figuring, then says, "I can do this job for $700: $300 for materials, $300 for my crew and $100 profit for me." > > The Chicago contractor doesn't measure or figure, but leans over to the White House official and whispers, "$2,700."

The official, incredulous, says, "You didn't even measure like the other guys! How did you come up with such a high figure?"

The Chicago contractor whispers back, "$1000 for me, $1000 for you, and we hire the guy from Tennessee to fix the fence."

"Done!" replies the government official.

And that, my friends, is how their stimulus packages work. It is nothing new.

Tuesday, March 03, 2009

Investment Component

GDP is calculated by adding up Consumption, C, Investment, I, Government spending, G, and Net eXports, Nx. When the FED buys securities, nominal interest rates lower and this stimulates investment. I calculated the percentage of investment spending from 2004 back to 1996 and found that the mean level is 16.38%. Consumption spending is roughly 70% and Net Exports are roughly -5%. How can a component that only makes up 15% be so stimulating to the economy?

Monday, March 02, 2009

Who Do We Owe the Public Debt Too?

I like to argue that we owe the debt to ourselves. This graph shows that approximately 25% of the debt is owed to foreign countries. Much of the debt is owed by the government to the government. As Ronald Reagan said, "Government is not the solution to the problem. The government is the problem." I still argue that when the government spends today, the current generation pays for it tomorrow. Either the current generation repays the loan in higher taxes or they increase savings now. (Source: the Skeptical Optimist)

Sunday, March 01, 2009

What Does Saving Equal Investment Mean?

Assume that Consumption, C, is 5; Investment, I, is 2; Government spending, G, is 2; Exports, Ex is 1; Imports, Im, is 3. Use the national income accounts identity to find GDP, Y. That is: Y = C + I + G + (E - I) or 7 = 5 + 2 + 2 - 2. Calculate National Saving as Y - C - G. Thus, 7 - 5 - 2 or 0. That means that all of the funds for Investment, I, must have come from some where. In other words, the economy must have had loans to fund domestic investment. If I calculate national savings and move Investment to the left side of the equation, the identity is: S - I = Nx. Since Net Exports are negative, that means flows of domestic currency left the country. Those flows return to the country as a "Capital Inflow" or investment. Thus, if one takes I - E one can derive the inflow of capital into the domestic country which is used to augment domestic investment.

If the investment is in capital goods, technology, and education I believe that the inflows will have a positive effect on future growth. In this case, if the government is incurring a deficit, then the future generation will receive benefits greater than the costs of government spending.


i've lost my blog.

Phillips Curve

Does the Phillips Curve partly explain why Aggregate Demand is downward sloping? I think the data suggests that this relation still holds. With data on the inflation rate and unemployment, I plotted a scatter graph then used a TI-83 graphing calculator to find a linear regression formula. The TI-83 exaggerates the slope but shows that when there is a change in the inflation rate, there is a change in the unemployment rate as well. The change is less than 1, (a = -.397).

For those interested in data, the Phillips Curve combined with Okun's Law and money growth give empirical proof that AD is downward sloping.

Aggregate Supply

The recent data suggests an upward sloping aggregate supply curve.

[1] The Consumer Price Index for All Urban Consumers (CPI-U) decreased 1.0 percent in December, before seasonal adjustment. The December CPI-U level of 210.228 was 0.1 percent higher than in December 2007." (January 16, 2009)
[2] Employment and Unemployment Nonfarm payroll employment decreased by 598,000 in January and the unemployment rate rose from 7.2 to 7.6 percent. (February 6, 2009)
[3] Real GDP Real gross domestic product decreased at an annual rate of 3.8 percent in the fourth quarter of 2008. In the third quarter, real GDP decreased 0.5 percent. (January 30, 2009)
[4] Federal Reserve At its January 28, 2009 meeting, the Federal Open Market Committee decided to keep its target range for the federal funds rate at 0 to 1/4 percent.(January 28, 2009)

Aggregate supply relates the price level and the quantity of real GDP. As the price level decreased by 1%, GDP decreased by .5 percent in the third quarter, or annually 3.8 percent. Exogenous to the data is the relationship between employment and GDP. If less is being produced, then there will be less workers needed. The IS-LM model suggests that a lower price level is associated with lower nominal interest rates (the ratio of money to prices).

The data indicates that aggregate supply is upward sloping and to the right.