Interest rates and the Business Cycle

Interest rates seem to move with the business cycle but lag. If the economy is in a recession, what other indicator should also be falling?

One should observe prices falling as well. In Muscatine, I've noticed that want ads consume a lot less space than they did two years ago. With a decrease in employment, comes falling prices.

Sticky Tastes and Preferences?

After moving my Internet service is now up, but with down times. I hope to be able to start blogging frequently.

This morning, I downloaded an iTunes song from 1975. I willing to opine that most consumers tastes and preferences don't change over time. Maybe, my taste in music is sticky? If so, then consumers would be slow to change buying behavior even in a boom. Now, if consumers become pessimistic, encouraging them to begin spending again will take a long time.

We're all Keynesians now.

Card Board Boxes and Harbringers of Recovery

My wife and I recently moved and decided we need some new furniture. First, we built our home and that created jobs for everyone. But, while buying furniture, I was shocked at the busy sales clip I saw. Usually people shop for durables when they are optimistic about the future. In a small town like Muscatine, just about every business is a monopoly. I saw people eagerly buying new furniture which I interpret as a sign that we are turning the corner to recovery.

I've lost my Internet connect for the next week, so my posts will be irregular at best.

Porn

Source: Online Education

HT to Chart Porn for the graphic. One claim made was Time-Warner makes millions from porn. I don't know how to substantiate that claim. Is porn demand inelastic? I would assume that porn is loaded with negative externalities, yet there appears to be a lot of it.

Iowa is a Great Place to Live

The data is a year out of date, but real income in Iowa is in the upper 20% of all states. Click here. An article in the Des Moines Register today reported that 330 teachers in the Des Moines School District were going to be cut. The recession has cost jobs and along with job losses come losses to tax revenue. Our district is going to cut teacher pay by reducing teacher quality money. When wages go down, prices follow so real income stays the same. Even with a cut in pay, Iowa still is a great place to work.

Union Goals

A union has three goals. 1) to increase the demand for its product 2) to decrease the elasticity of demand for its labor 3) to increase the income for a few members of the union.

A union might advertise that the product is "union made" to get more people to buy the product. Since the demand for union labor is derived, an increase in the price of the product increases the demand for the labor that produces it. If a union can make the demand for their labor inelastic by requiring a license or restricting membership, then if the wages increase, union membership won't suffer. What happens when a union loses its credibility like the teacher's union in Iowa?

Iowa teachers cannot strike. Iowa law requires collective bargaining so Iowa teachers must be represented by a union. In the last year, tax revenues have fallen since many workers in Iowa have lost their jobs. Many schools are reducing their labor force. Since teachers compose most of the bulk of the labor force, the most money can be saved by cutting teachers. The union can do nothing but use moral persuasion to the school board.

This is an interesting situation to me. As our school demands less labor, the quantity supplied of teachers is decreasing, lowering the wage. Indeed, our school board wants to cut teachers' salaries by as much as $500 per month. Our school board is going to ask us to work longer to make up for a reduced labor force. This is incongruent with the law of supply that infers that I will work less when my salary is decreased.

If economic theory is right, both wages and prices will fall and my real income will stay the same. Yeah right.

Jugaad--Buzzword

The Business Week definition is: "an improvisational style of innovation that's driven by scarce resources and attention to a customer's immediate needs, not lifestyle wants."

Jugaad, pronounced "Joo-gaardh" captures economics well. My textbook defines Economics as "how to satisfy unlimited wants with limited resources." In this definition I see that definition plus how consumer behavior to discount the future and maximize utility.

The Wikipedia defition is here. An example here.

Negative and Positive Externalities

1.5.2010 7:00 PM
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Should Prisions Be Privatized?

Does the market provide incentives for privatization of correctional facilities?

In microeconomics, I teach that the profit motive drives innovation and quality improvement. In monopolistically competitive markets, firms seek to differentiate their products by competing on non-price areas such as service, quality, speed, and location. Can a for-profit institution such as a jail deliver quality rehabilitation better than a state run? Can a private correctional facility decrease the rate of recidivism?

A state run prison is a monopoly. By definition, a monopoly is inefficient. Perhaps government workers have the incentive to shirk since their job is guaranteed. The workers might not see to the safety of the inmates. The guards might be hastily trained or the training might be minimal at best. Does a profit minded institution offer a better solution?

In the US 1 person in 175 are incarcerated. There are 2.2 million prisoners in our prisons. I'm told that sentences are cut short because there's not enough space to put all of the inmates. Of the 650,000 convicts set free, 2/3 will commit a crime and return to prison.

A for profit prison might have the incentive to ask law makers for longer sentences or law that impose a harsher sentence since their incentive aligns with a growing prison population. Is it possible to believe that a for profit prison will rehab an inmate when their profit is derived from incarceration?

There's no doubt that a for profit prison will save tax payer money and create jobs. I'll bet many for profit prisons would take the Gitmo detainees. I believe that a for profit prison will create a better penal system.

Adverse Selection and Moral Hazard

1.4.2010 7:37 PM
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Balance of Payments Accounting

In international trade, a country's balance of payments can be summarized by the equation: CA = FA. CA is the Current Account that measures Net Exports. The Financial Account measures investment in assets such as stocks, bonds, direct foreign investment, land, and the like.
What happens when the CA is negative? Then the FA is positive. If the United States imports more than she exports, NX will be negative and have a debit balance. The financial account will be positive and have a credit balance. A positive or credit balance in the financial account means that the US has a negative current account balance. In other words, she is selling off her real assets for current consumption now.

The graph on the right shows that the US has had four decades of a negative current account balance. We soon will have nothing left to sell except our ideas, education, and human capital.