Monday, October 31, 2011

Discounting the Future

While looking at a design layout, I decided to enter Latin for the content.  I found this on a website,

"At vero eos et accusamus et iusto odio dignissimos ducimus qui blanditiis praesentium voluptatum deleniti atque corrupti quos dolores et quas molestias excepturi sint occaecati cupiditate non provident, similique sunt in culpa qui officia deserunt mollitia animi, id est laborum et dolorum fuga. Et harum quidem rerum facilis est et expedita distinctio. Nam libero tempore, cum soluta nobis est eligendi optio cumque nihil impedit quo minus id quod maxime placeat facere possimus, omnis voluptas assumenda est, omnis dolor repellendus. Temporibus autem quibusdam et aut officiis debitis aut rerum necessitatibus saepe eveniet ut et voluptates repudiandae sint et molestiae non recusandae. Itaque earum rerum hic tenetur a sapiente delectus, ut aut reiciendis voluptatibus maiores alias consequatur aut perferendis doloribus asperiores repellat."

1914 translation by H. Rackham

"On the other hand, we denounce with righteous indignation and dislike men who are so beguiled and demoralized by the charms of pleasure of the moment, so blinded by desire, that they cannot foresee the pain and trouble that are bound to ensue; and equal blame belongs to those who fail in their duty through weakness of will, which is the same as saying through shrinking from toil and pain. These cases are perfectly simple and easy to distinguish. In a free hour, when our power of choice is untrammelled and when nothing prevents our being able to do what we like best, every pleasure is to be welcomed and every pain avoided. But in certain circumstances and owing to the claims of duty or the obligations of business it will frequently occur that pleasures have to be repudiated and annoyances accepted. The wise man therefore always holds in these matters to this principle of selection: he rejects pleasures to secure other greater pleasures, or else he endures pains to avoid worse pains."
Now to economics.  I have found myself losing my patience with kids who play on Facebook all day long or play games on their iPads.  I suppose when you have a lot of time it's less valuable to you.  But when students heavily discount the future, I lose my patience.  Gary Becker wrote about how criminals often have a high discount rate.  So do those who rely on credit cards or gamble.  This is because the costs and benefits arrive at different times.  When a student plays on Facebook, the costs come later and the benefits come now.

Today, I wanted to show the students how $1 discounted for one year at 10% interest rate would only be worth $.91, but I couldn't hold their attention long enough to make my point.  Jeremy Bentham predicted that  man/woman will seek pleasure and avoid pain.  An old friend used to tell me that, "You can lead a horse to water, but you can't make him do the backstroke."  I guess the power of the present is enough to make good students heavily discount the future.

Sunday, October 30, 2011

Mr. Bernanke is trying to fix credit markets.  When pipes become clogged savings doesn't reach investors and the economy doesn't grow.

When I save money it's because I have a lower marginal propensity to consumer than those who spend more than they save. So money must flow freely from creditors to borrowers.  That's not happening.  More liquidity isn't the answer.  The answer is in restoring investor confidence.  This will unclog the pipes.

Haunted House

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Joe Heller, The Green Bay Press-Gazette, has the best political cartoon in the world at the link above.

Saturday, October 29, 2011

Keynes Criticisim

Allan H. Meltzer writes why the Keynesians have it wrong here.  I will summarize his points.

1.  Increased government spending now means higher taxes later.  Higher taxes destroy incentives.
2.  Government spending redistributes resources from the most productive uses to inefficient uses.
3.  Government intervention involves costly regulation.
4.  When jobs are created, they come at a high cost sometimes as much as $200,000 per job.

Lord Keynes' ideas were not new.  Most of his ideas were written in Irving Fisher's work years before.  It was Keynes who put the ideas into a model. Now the Keynesian Cross model is out of date.

When I think of our current economic situation, I do not believe government policies like closing the loopholes in the tax code for the rich will work to create jobs.  Mr. Meltzer recommends that,

1.  The government reduce the deficit for the next 10 years.
2.  Close loopholes.
3.  Enact no new regulation surrounding economic development.
4.  Target inflation.

I am sure that each of these suggests will have powerful and positive impacts on economic recovery.  I also think that people will change their behavior to counteract the impact of these proposals.  What is needed is a new technology like the Internet that spurs investment by risk takers and restores confidence in the future.  Simply making laws will not work.  Both Fiscal and Monetary Policy will not work.  Growth has to endogenous to the economy.

To achieve endogenous growth, let's look at developing an educational system that develops risk taking.  For example, I teach a class in Microsoft Office.  Instead of teaching 50 ways to capitalize an "a", we should be teaching visual Basic and developing apps for the tablets.  Instead of teaching theoretical economics, we should be teaching a companion class in entrepreneurship.  Like Keynes, our educational model is out of date.  Our model should be endogenous--building on our students innate  talents.

Friday, October 28, 2011

Hidden Data -- Unemployment

Big Al is a workout hound at the Community Y who has an exceptional insight into economic data. Today, Big Al wondered about the root causes of unemployment. With so many veterans returning from military tours and entering the labor force, would the unemployment rate go up? In addition, with so many state and local governments laying off employees, would these employees contribute the unemployment rate? The answer is yes if the vets and public employees are actively looking for a job and not entering the pool of discouraged job seekers. My research is incomplete, but the numbers from the St. Louis Fed look like Big Al's observation is correct. (I look at FRED data series, Layoffs and Discharges: Government (JTS9000LDL) From
Everyone in the economy, 16 years of age or older, who is neither institutionalized nor in the military, and is either employed or unemployed but actively seeking employment. The civilian labor force is the "official" specification for the national economy's labor supply. It is used for such calculations as the unemployment rate and the labor force participation rate. In particular, the unemployment rate is technically specified as the "percent of the civilian labor force that is unemployed." The size of the civilian labor force (along with the wildly popular unemployment rate) is estimated monthly by the Bureau of Labor Statistics (BLS) from data generated by the Current Population Survey (CPS).

Daily Review -- Real Variables has the best economics encyclopedia on the web.  This Daily Review was inspired by looking at current statistics.

If the CPI is 223.326 and real average weekly earnings are $349.42, then how much are nominal wages?

My answer is: average real weekly earnings are $779.21 (rounded).  Real earnings would be deflated by the price level so I multiplied $349.42 by 2.23.  The CPI is an index that is multiplied by 100 for reporting so I divided the CPI to have a useful denominator.

According to AmosWEB, the real weekly earnings increased by .2%.  If your real earning power increased because the price level fell, would you go out and buy more today or would you wait and see if if prices would fall more tomorrow?

Irving Fisher wrote extensively about deflation and is much of the subject in Grand Pursuit, the history of economic genius.

Thursday, October 27, 2011

Duration of Unemployment

From the Bureau of Labor Statistics:

By the end of 2010, the median number of weeks jobseekers had been unemployed in the month prior to finding work was a little more than 10 weeks.[4] In contrast, prior to the start of the recent recession in 2007, the median was 5 weeks. Unemployment duration also increased among those who eventually quit looking and left the labor force. Unemployed individuals were jobless for about 20 weeks in 2010 before giving up their job search and leaving the labor force. Whereas in 2007, those who were not successful in their job search had been unemployed for about 8.5 weeks before leaving the labor force.[5] (See chart 1.)
Say it takes two weeks to find one job, then the rate of job finding is .5.  Say it now takes 4 weeks to find one job, then the rate of job finding is .25.  The longer it takes to find a job the lower the rate of job finding.  One would expect the rate of job finding to be low in a recession.  This report from the BLS shows that the duration of unemployment is increasing and suggests that the natural rate of unemployment is increasing.

Wednesday, October 26, 2011

Daily Review - Perfect Competition

In the perfectly competitive market for Hair Balls shown in the graph, at what price will the fim minimize losses?  What is the firm's short run supply curve?  Do the firm have high fixed costs?

For the perfect competitor, producing at the point where MC equals MR maximizes profits or minimizes losses.  This firm would minimize loses at a price of P2.  The firm has low fixed costs given how fast the fixed costs are spread out over the left hand side of the ATC curve.  The firm's SR supply curve is the portion of the MC curve equal to and above the AVC.

If you like this quick review, you can get my FREE app for the Android here.

Look for my app for the Amazon Fire by Christmas.

Tuesday, October 25, 2011

Minimum Wage

Do minimum wage laws affect the unemployment rate?  Here are some comments from teachers and an economist who have been thinking deeply about the subject.

Greg Mankiw writes that there are startling changes in the the data.  From his blog,

  • The percentage of all hourly-paid workers paid at or below the minimum wage rose from 2.3 to 6.0 percent.
  • The percentage of part-time workers paid at or below the minimum wage rose from 5 to 14 percent.
  • The percentage of teenage workers paid at or below the minimum wage rose from 7 to 25 percent.
Steve Latter writes:

From my perspective there is no clear answer although, from the articles I have read it seems like more economists are against the minimum wage then are for it (85-15 split against it is my intuitive feel)).�

The arguments for would have to be centered squarely on more transfer payments into the economy by taking care of a lower socioeconomic group funded by citizens in the form of higher product prices and by companies via perhaps lower profits.

The arguments against include creating higher unemployment for those same types of unskilled workers subject to the minimum (due to higher labor costs causing firms to higher less unskilled workers), higher product costs contributing to inflation which lowers real incomes, and firms becoming less able to compete globally due to higher wage costs. In addition, there has been several analyses indicating that a significant percentage of people receiving the minimum wage today are actually NOT the poor, but rather the "second income earner" in the family, our youth, and retirees augmenting their pensions/social security. The minimum wage also reduces at least some of the incentive for workers receiving the minimum wage to improve their skills if the minimum wage continues to increase at or near the cost of living..

Cherly Laslo Writes:

79% of economists agree that a minimum wage increases unemployment among young and unskilled workers.

(Source: Alston, Kearl, and Vaughn survey published in American Economic Review, May 1992)

Like any science, economics should never come down to a vote. "Can the position be supported with rational reasoning?" is the question we should ask.

The reasoning behind the 79% is: Wages are a measure of the productivity of labor. When a man's productivity is earning the company $5/ hr and the minimum wage is increased to $7/hr, this man will be unemployed. It is now illegal for him to hold a job at his current productivity, so he can't get his foot on the first rung of the employment ladder. Former prisoners, non-English speakers, and youth raised in homes that didn't teach good social skills are harmed the most by minimum wage laws. How much would the crime rate be reduced if we made work at any wage legal?

Minimum wage laws enacted by the federal government do not account for standard of living in a particular area. After the Civil War, the northern states lobbied for federal minimum wage laws because the price floor was non-binding in the north but binding in the south. The north benefited as southerners unable to find jobs moved north and provided cheap labor.

Apprenticeships used to be common in the US. Getting paid a little to learn a trade provided incentive to teenagers. Today this pay is illegal, so students in vocational schools are not paid at all. Who benefits? Union labor. 

Mike Fladlien writes:

Minimum wage laws make wages sticky.  When market conditions change some can change their wages and some cannot.  Some structural unemployment has to result.  I think more workers are earning $8 or less is the result that economic theory predicts.  As more subs for labor are found, costs are being driven down to their long run average total cost.  The economy is working to efficiency.

An increase in the minimum wage would be an increase in a nominal wage.  During a tight labor market when the unemployment is less than the natural, it is very likely that the REAL wage will decrease.  One might find employers hiring more employees as the real wage declines.

It has also been my understanding that employers respond to an increase in the minimum wage by reducing the HOURS that their employees work and making the labor work harder.  Thus, the unemployment rate might not change.  I believe, however, that one would see in the data for the employment/population ratio for the population group in the 18-24 age group experience an increase in unemployment.

Sunday, October 23, 2011

iPhone 4S

The labor costs are $8.

Assume that the iPhone is made by foreign labor, but the iPhone is sold in the United States.  Even if the all of the parts are made in Korea, Japan, and southeast Asia the costs that accrue to foreign producers are $196.  But the value of the phone sold in the states is $649.  Most of the value is added by U. S. consumers and the profits stay in the domestic country.

Now, all of the parts are standardized and can be outsourced to low-wage countries where labor is abundant.  How is Apple shipping jobs overseas?  Would Americans work in this industry producing standardized parts for low wages?  I doubt it.

Would Americans work in a highly paid creative and design job creating iPhones?  I think so.  So, although the phone is assembled and the parts made overseas, the profits stay in the U. S. to designers and marketers.  What job would you like have?  I think you would like to have the creative one.

Shouldn't modern schools teach skills such as marketing and creative skills?

Daily Review

How sharp is your mind today?

14. If the reserve ratio is 10% and excess reserves increase by 100 million, what is the change in the banking system?

15. If the MPC is .8 and the government spends 100 M and raises taxes by 100 million, what is the net amount of the stimulus?

My answer to question 14 is $1000 million or 1 billion.    In AP Macro, we assume that all excess reserves are loaned out.  In practice, this is rarely the care.  Question 15 is 100 million.  The balanced budget multiplier is always "1" when there's an equal increase in spending and taxes.  It's interesting to note that Paul Krugman estimated the fiscal policy  multiplier in 2008 as "1" when Mr. Obama's stimulus plan went into effect.  Obviously, the increase in the deficit and debt proves the theory wrong.

In question 14, it's worth while to examine why banks don't loan out excess reserves.  My local banks were not going to make subprime loans which says a lot about our bank executives.  Also, many banks felt that in this climate of uncertainty they would be better off holding the funds.  

The Daily Review is a feed for my FREE app.  You can find it here.

Efficiency Wages and Structural Unemployment

When Juan when to work selling advertising for SignPro, a local business, Juan was paid $25 per hour.  Juan's wage rate was $7 higher than he could earn working for the newspaper and $8 higher than he could earn selling advertisements for the radio station.  The wage Juan receives from SignPro is above the market rate and is often called an efficiency wage.

Why would SignPro pay Juan a wage rate higher than what Juan's opportunity costs are?  One reason to pay Juan so much is that it's hard to know when Juan is calling on businesses or when Juan is calling his girlfriend.  So the higher wage encourages Juan to stay on task and not shirk.  Another reason to pay Juan $25 per hour is that it's hard for SignPro to monitor how hard Juan is working.  Juan might react to this higher wage by working harder.  Also, Juan has the incentive to work harder because if he loses his job, he will have to work for a lower wage assuming the other places will hire him.  Third, the costs of losing a job carry a high psychic cost and high job seeking costs.  Juan would be better working for SignPro.

What if every business in Juan's town decided to pay a wage above the wage that would clear the market?

I argue that there would be an excess supply of labor as workers waited for the right opportunity to arise when they could earn $25 per hour.  In this simple case I have presented, SignPro has unwittingly created a dual labor market in which the same laborers get paid high wages and others get paid low wages.  Now new market entrants will find it difficult to find employment in either the low or high labor market for selling advertisements.

So, do the efficiency wages contribute to unemployment?  I argue that the business practices of paying higher than market clearing prices defeat the free market mechanism and the result is structural unemployment.  Now, some math.

Exactly how much efficiency wages contribute to unemployment depends on the probability of the worker being able to find employment if the worker is fired or downsized or quits.  If the probability is low that the worker will find employment, then the worker will remain in the labor force and the unemployment rate will either stay stable or even decrease.  If the probability is high, the unemployment rate will increase.  In the current economy, the probability is very low so the unemployment rate will stay the same holding everything else constant.

Do you know someone who is holding out for a higher salary?  Do you know someone who is waiting for just the right job?  Do you know someone who is paid more than he or she is worth?  How easy is it for people in your geographical area to find work?  I believe that the economy is experiencing high structural unemployment in a dual labor market that rewards those workers with technical skills.  As long as schools prepare students for manufacturing jobs, entry level office jobs, or jobs where there's a million workers who are willing to work, the unemployment rate will remain at 9.1%.

What schools need to do is to prepare students to take entrepreneurial chances.  That should be education in the 21st Century.

Saturday, October 22, 2011

Diminishing Utility and Evolution

Could diminishing marginal utility be an evolutionary response?

Suppose you buy a piece of art.  After a while, you begin to notice it less.  Soon you forget about it.  This is diminishing marginal utility.  Now consider mating.  The more couples are around each other, the less they notice imperfections.  Does this tendency result in a higher birth rate?


Tom Purcell, a freelance writer is also a humor columnist for the Pittsburgh Tribune-Review, and is nationally syndicated exclusively by Cagle Cartoons newspaper syndicate.  His latest column is here.

Although this column was meant to be a satire on the failings of capitalism, especially crony capitalism.  I began to wonder about used furniture--the metaphor in the article. 

Personal items always have emotion attached to the price so the item is worth more to the seller than to the buyer, but why  does used furniture sell so cheaply?

My down and dirty answer is that used furniture is highly price elastic.  The characteristics describing elasticity include the time to shop around and the number of the subs.  That's the microeconomic answer.  The macro answer is that furniture is a durable good and during a recession, consumers cut back on spending for durable goods.  If consumer incomes fall, there will be a change in aggregate demand and prices fall.

I think my point is there are many reasons why an item is priced.  Markets can be monopolized, tastes and preferences could change, and the item could even be elastic.  That's why the government should not be in the markets--they simply do not have the data to know how to fairly price every item.  That's capitalism.

Friday, October 21, 2011

Stock Market and Unemployment Correlation

The abstract from a working paper by Roger Farmer, a UCLA economist, argues that the high stock market valuations caused the 2008 recession.  This is from the abstract
This paper argues that the stock market crash of 2008, triggered by a collapse in house prices, caused the Great Recession. The paper has three parts. First, it provides evidence of a high correlation between the value of the stock market and the unemployment rate in U.S. data since 1929. Second, it compares a new model of the economy developed in recent papers and books by Farmer, with a classical model and with a textbook Keynesian approach. Third, it provides evidence that fiscal stimulus will not permanently restore full employment. In Farmer’s model, as in the Keynesian model, employment is demand determined. But aggregate demand depends on wealth, not on income.
I thank Freakonomics for the link. If you want to read the paper, the pdf is here.

Wednesday, October 19, 2011

Labor Transitions

I'm jumping the gun on this post.  I plan on amending it later tonight.

This diagram shows labor transitions into and out of the labor force for selected years.  Note that mpm means "millions per month".  Notice how many some of the flows cancel each other out.  One conclusion is that the unemployed are not a stagnant pool of workers.

If I can do the math, I plan to amend this post to see if one can determine the natural rate of unemployment from labor flows.  I'm excited.

Begin by looking at labor flows.  There are nine, 9, labor flows that affect the unemployment rate.  Labor can move from employment to unemployment, eu, or from unemployment to employment, ue.  Likewise discouraged workers who dropped out of the labor force can reenter, ne, or labor can quit and exit employment, en.  Labor can enter the labor force and not find a job, nu, or drop out of the labor force after becoming discouraged, un.  Looking at the diagram there are still three other possibilities and those are a person who is employed will stay employed ee, unemployed will remain unemployed, uu, and a non-participant remains a non-participant, nn.

Before I go into the math, I want to look at what I call exogenous variables affecting the rate of unemployment.  US labor law requires advance notice of layoffs.  Workers who receive these advance notices, have a high probability of entering unemployment.  Thus, the variable that describes the movement from employment to unemployment is, Peu.  Changing exogenous conditions will change the probabilities of finding employment or remaining attached to the labor force.

Body Weight and Wages

With wrestling season starting for junior high on Thursday, I'm getting a lot of questions about weight cutting.  I got to thinking, "Is there a link between body weight and wages?"

In other words, what does your body composition say about you.  The St. Louis Fed has a nice article in this quarter's Regional Economist.  The results of an article are summarized here:
Studies that use BMI as a measure of body fat find inconsistent evidence for an obesity wage penalty both across genders and races. However, later studies that examine wages and weight controlling for body composition find that, regardless of gender and race, excess weight due to fat is statistically related to lower wages, but excess weight due to muscle is statistically related to higher wages, regardless of occupation. These findings indicate that there is, in fact, a consistent wage penalty for body fat and a wage premium for muscle, but discrimination might not necessarily be the cause. While the results support the notion that appearance is an important determinant of wages, the average wage differentials could exist if employers believed health and productivity were related and/or if high body fat were taken as a signal of possible long-term poor health.

Tuesday, October 18, 2011


The unemployment rate is found by dividing the number of unemployed by the labor force.  The current unemployment rate is 9.1%.  Although the media tells us that this is an historically high rate, it tells us little about who is unemployed.  Unemployment does not affect everyone the same.  What the data shows is: Young people ages 25-34 have the highest unemployment rate, men have a higher unemployment rate, those with less education are likely to be unemployed, and blacks more than white.

A very good link with nice graphs can be found here.

Programs designed to eliminate unemployment should be designed to help demographic groups and shorten the length of time a worker is out of work.  Duration of unemployment is, in my opinion, the real problem with unemployment as skills deteriorate and psychic costs take their toll on the unemployed.

Monday, October 17, 2011

Mr. Cain on Employment

If I misread this on Fox and Friends this morning, I apologize.  I think saw Gretchen, Steven, and Brian talking about Mr. Cain's 999 plan.  According to what I saw, Mr. Cain say's his plan can put 6 million unemployed workers back to work.  Since there are 14 million unemployed currently and approximately 154 million in the labor force, Mr. Cain's plan would reduce the unemployment rate to 5%, the natural rate.

Using the data from the St. Louis Fed, the unemployment rate seldom changes by more than .1 of a percent since 1948.  Now, suddenly here's a candidate who can solve all of our problems.  If Mr. Cain really wanted to help people, he would unveil his plan now and save families.  That is, unless he doesn't have a plan.

Cyclical Unemployment

Cyclical unemployment results when there's a down turn in the economy and workers are detached from their jobs.  During this time, workers have the skills, but the demand for the product they produce declines so they are laid off.

It's not the fault of the worker that national income declines.  What's a worker to do?  Is the decline temporary?  Should the worker take unemployment benefits?  Should the worker go back to school and get new skills?  Should the worker begin a job search.

Usually, recessions are short and spells of unemployment are short, but this time it's different.

(The graphic should replace Frictional Unemployment with Cyclical.  I'm really tired.)

This New York Times link shows that incomes fall during a recession.  I believe falling incomes are related to cyclical unemployment because falling incomes affect normal goods.  Most goods are normal goods.

Sunday, October 16, 2011

Unemployment Fundamentals

This might sound more like law than economics, but I believe the introduction is relevant.

When Mary Baker attended a baseball game, she was warned repeatedly that she might get struck by a foul ball.  The back of the ticket carried a warning, the announcer made two public address announcements, the big screen teletron showed the mascot for the River Kings, a raccoon, being beaned by a foul ball, and finally net were installed around the stadium.  While enjoying the AAA minor league game, Mary begins to drink and so forgets about the game until a foul ball hits her in the shoulder.  Mary sues the parent company, the Oakland As for the injuries she suffered.  How would you decide?

Most people would argue that the injuries Mary sustained were the proximate cause of her actions.  In other words, Mary caused her own injuries.  Mary should have been more careful and should not receive damages from the injuries she sustained while at the game.

This vignette probably belongs on my law blog, but I believe it makes the point that Americans believe that they assume responsibility for their actions.  It is true that a reasonable attempt should be made to keep patrons of a game safe, but ultimately, it's up to the individual.

When I went to college my dad was afraid that I was going to earn a degree in sociology.  He knew that I would never get a high paying job and would either be unemployed or underemployed.  If I chose to earn a degree in anthropology, for example, I would be responsible for my own unemployment by contributing to my own injuries--just like Mary Baker.  Many degrees in the social sciences would result in a career that would not maximize my potential.

My dad was also worried that I would be a house painter where vinyl siding would make my skills obsolete.  If I became a spray painter at John Deere, soon robots would replace me and then what would I do for work.

What my dad was referring to was structural unemployment.  He didn't want a son who was always looking for a job because his skills where either obsolete or the demand was non existent.

When I look at many of the jobs in today's market, there's a weak demand or there's no demand.  This structural unemployment might be the result of technology replacing labor, changing tastes and preferences, a changing market from goods to information, changes from unskilled labor to skilled labor, or even changes in the human evolution.

It is my contention that structural unemployment is the main reason for the current 9.1% unemployment rate.

Credit Markets

Juan is driving to work when he notices that his breaks are making a funny sound.  He drives his car into Mike's Auto Service and Sales to find out what's wrong with his Toyota Celica.  Mike looks over the car and tells Juan that the breaks need repaired now.  Mike says, "If you can hear the metal grinding, you've worn out the rotors and pads."  Mike gives Juan an estimate for break repair and service of $865.

Juan trusts Mike and Mike has a great reputation as a mechanic.  Juan needs the car to get to work and keep his family going.  Juan does not have the $865 to pay Juan so Juan uses his credit card.  If Juan didn't have a credit card, his life would suddenly come to a "grinding" halt.  Credit markets function to supply borrowers with credit from savers who do not have an immediate use for their saved funds.

Likewise, major corporations issue commercial paper that matures in less than 120 days to finance inventories and pay off short term accounts payables.  Banks often borrow from each other paying the Fed Funds Rate for overnight loans.  Repurchase agreements and Eurodollars are other examples of corporations and businesses taking advantage of short term credit to finance daily obligations.  Access to credit markets are essential for the operation of personal and business activity.

When credit markets clog up, business activity slows.  Since 2008 banks have kept their excess reserves instead of lending them as bank's confidence in the the ability of these loans to be repaid has lessened.  Consumers are spending down debt.  Corporations are hesitant to expand business in this business climate.  The credit markets are not flowing.

What will open the pipes in the credit market?  I believe that young entrepreneurs with fresh approaches to transacting business will unclog the pipes.  When this happens, they will employ new personnel in their businesses and reduce structural unemployment.  Will banks directly fund these new types of entrepreneurs is what remains to be seen.

Long Term Unemployment and Structural Unemployment

This graphic is from the Pew Charitable Trusts’ Fiscal Analysis Initiative via Chart Porn.   

The blue line shows that the number seeking employment for over a year is 31%.  There are approximately 154 million workers in the labor force.  If 9.1% are unemployed, that means that 14 million are unemployed and 4.34 million have been actively looking for employment for more than 52 weeks.  Kentucky has about 4.34 million residents so compare Kentucky to the geographical territory of the United States for a picture of the long-term unemployed.

When I hear unemployment statistics on Fox News, it is often in the same context as "this month the economy created 154,000 jobs..."  Why does the economy have to create jobs?  How come workers can just shift into other areas of work related to their previous experience?  For example, if I lose my job as a teacher, why can't I find work training new workers at HNI Corporation?  

My answer is that the teaching profession has changed in ways that teaching as I know it is obsolete.  In other words I have become structurally unemployed.  For example, HNI Corporation now has a series of videos that stream into a computer that new recruits can watch and take an online test before commencing to work.  That same technology also put the teacher out of work.  As an example, suppose that Rosetta Stone is now used to teach foreign languages.  I have also found that brilliant teaching modules at the St. Louis Fed prepared by Scott Wolla could replace my economics instruction. also have brilliant teaching interactives that anyone can watch and learn.  The point is, my method of instruction is becoming obsolete so that when I look for employment like my previous job, I can't find it.

But suppose that I have recently been downsized, and want to use my economics skills to enter the financial sector.  And suppose that the financial sector is creating new jobs as new financial derivatives are created.  Or maybe new laws require new employees to regulate accounting reporting.  Do I have the skills necessary to enter this field?  I doubt it.  I'll have to go to school for a couple of years to learn about the bond, mortgage, mutual fund, and all other markets to become adequate.  Most workers will not go back to work to improve and relearn the skills needed to compete in the job market.  These workers will remain unemployed.  It's my contention that the natural rate of unemployment will remain at 9% forever unless the definition of what it means to be unemployed changes.

According to the Pew Charitable Trust report, the CBO expects unemployment to remain above 9% through the year 2014.  Not good.

Saturday, October 15, 2011

Swinging has really good stats in an easy format to read here.

The economy had weak RGDP growth, exports declined but so did imports, weekly earnings are up 1.8%.

I will repeat that I think the 9.1% unemployment rate is here to stay as changes in the job market are structural changes.

Pink Elephants

Drugs alter the perceptions of reality.  When addiction is serious, hallucinations alter reality.  Mr. Obama is seeing things if he thinks he can control market forces with government programs.  I also like the pink elephant metaphor as it represents the Grand Old Party who have their own hallucinations.  So how do the elephants see Obama?

Gordon Growth Model

Say a stock currently pays dividends of $2 and the dividends are expected to grow at 3% forever.  If the Irving the Investor demands and 8% return from his portfolio, how much is Irving willing to pay for the stock now?  Use the Gordon Growth Model to make your calculation.

Irving would pay $41.2 for the stock (2.06/.05).  If other investors thought that the stock would grow at a different rate or demanded less of a return, the stock price might jump around and Irving might not buy the security.

Are the assumptions one reason why stocks might follow a random walk?

Daily Review--Market Structure

This is a quote from the WSJ.

Steve Jobs knew all about competitive markets. He once likened our school system to the old phone monopoly. "I remember," he said in a 1995 interview, "seeing a bumper sticker with the Bell Logo on it and it said 'We don't care. We don't have to.' And that's what a monopoly is. That's what IBM was in their day. And that's certainly what the public school system is. They don't have to care."
List as many characteristics of a monopoly as you can.

Characteristics generally required for the AP Microeconomics exam include:  only one seller producing output less than P=MC at a price higher than competitive markets.  The price > MC.  There are few or no substitutes for the good.  Production of the good results in a dead weight loss.  The firm produces on the elastic portion of the the demand curve.  There are significant barriers to entry.  I think the drive to differentiate is one reason why monopolies develop.  Textbook reasons include exclusive ownership of a resource, a patent, copyright, or economies of scale.

Public schools have a tendency to be a monopoly.  The school I work for tries to do what's best for the most students.  There is no one size fits all in education and budgets are constrained.  The answer for education is to have computers do most of the rote teaching then work individually with students to ensure human interaction which I think is necessary for meaningful learning.  As quoted in the WSJ from the same link as above:

Rocketship charter schools in San Jose, Calif., use a model that combines traditional classroom learning with tutor-led small groups and individualized instruction through online technology. 
It used to be that the principal is your pal.  Now, the computer is your tutor.

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Wednesday, October 12, 2011

Daily Review--Market failure

Juan has a gambling problem.  He gets a rush from playing the game plus he's good at it.  Juan isn't in debt and no one thinks he should call Bets Off!  In fact, poker dealers hate to see Juan coming.  Juan has heard of a poker tournament where the winner gets $1,000,000, but the entry fee is $50,000.  Juan wants to enter but doesn't have the moola.  If he goes to a bank, the bank won't lend him the money for such a risky proposition.

To get the money to enter the tournament, Juan tells his banker that he's going to open a shelter for underprivileged children.  After Juan gets the loan, he enters the poker tournament.  Identify the market failure.

I think the market failure is adverse selection.  Juan kept information from his banker.  The banker would not have loaned the money to Juan if the banker knew how Juan was going to act.  Now, the payoff is huge for Juan if he wins the tournament so there's an incentive to act recklessly since his winnings more than compensate him for the the loan.  Adverse selection kills the credit market if lenders believe that borrowers will not use the money for safe investments.  Also, it turns out that the people most desperate for a loan are the ones seeking the loan.  It turns out that the only people who can get a loan are the ones who need the loan the least.

How Many iPods Do You Have?

Economics teaches that the demand curve represents diminishing marginal utility.  Economics also predicts that an increase in supply lowers the price of the good and increases the quantity.  As technological innovations keep pushing the supply curve to the right for iPods, the marginal utility of the iPod falls along with the price.  Could this be the reason why 50% of my classes own two or more of these devices?

My survey was not scientific, but the new iPods are also better.

The next question I had was, why do I keep the old iPods?  Since the new iPods are better and cheaper, is it hard to sell my old iPods or do I hold on to them for sentimental reasons?

Daily Review--Market Failure

Here is the story that I'm telling.

A 17-year old female, Sandra, wants to buy a car.  Sandra can't afford a new car so she's looking at used cars.  Sandra hears her Law teacher talk about how minors can disaffirm a contract since they are an unreasonable person.  Sandra finds a car, makes a down payment on the car, takes possession and drives the car for 20 days until the car breaks down.  Sandra then wants her money back claiming that she was a minor when she bought the car.  Sandra knew that she would be rescued by the law when she entered the contract.  What economic principal of market failure am I trying to show?

a.  Unjustly enriched
b.  Adverse Selection
c.  Intertemporal Choice
d.  Moral Hazard

My answer is letter "d".  Sandra's actions became reckless after she entered the transaction.  Sandra knew that she would be  saved by the law so she had no incentive to take care of the car.  Her actions describe a situation in which she acted more recklessly than she would have if she could not be saved by the law.  If Sandra would have chosen the seller of the car because the seller was a patsy, then I think a strong case could be made for adverse selection. 

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Tuesday, October 11, 2011

Daily Review--Production Function

A firm has the SR production function of: Y = 4*X^2. Which of the following statements are true?

a. The slope of the function is marginal product
b. The curve increases at a decreasing rate
c. The curve displays constant returns to scale
d. All are true

 My answer is "d". A production function shows that adding more and more of a variable input to a fixed input yields less and less output. Returns to scale describes what happens when you increase all inputs while diminishing marginal product describes what happens when you increase one of the inputs and hold the others fixed. Also, because one of the inputs is fixed, the firm is in the short run. In the function in the stem of the question, the number "4" usually represents technology.

The Daily Review is my attempt to blog daily and provide content for the serious AP student. This blog is a feed to my FREE app located on this web page.  The author of this blog was recently a finalist for the IBEA Teacher of the Year.

Occupy Wall Street

This is a rough draft of my next editorial There was a scene in M*A*S*H when the doctors build a bonfire. They begin to throw anything on the fire and the doctors begin to feel the built up steam release with each object they throw on the fire. The bonfire became a symbol of any lingering anger projected at the war. The current demonstrations on Wall Street are like the bonfire. The demonstrations are a way of venting for anyone angry at the economy for any reason. Some of the demonstrators are upset over bailouts for Wall Street while the Main Street suffers. Wall Street’s biggest clients donate to both political parties; hence both political parties protect the Wall Street elite. JP Morgan recently donated $4.6m to NYPD Foundation, the largest donation in the Foundation's history. Is JP Morgan a good corporate citizen or more buying of protection? Demonstrators feel duped over the sub-prime mortgage mortgages that have lead to bankruptcy and foreclosures. Over1000 prosecutions leading to jail from the S&L banking frauds and crisis in the 90’s. So far zero has been arrested from the current financial crisis. Citizens have a lot to be upset about. It seems that the governments is protecting the Wall Street executives, but are the protests misdirected? The fact is that marketable securities account for only 43% of direct finance comes from stocks and bonds. It’s also true that less than 1/3 of stocks are sold directly to households. When corporations want to finance investment, they seek funds from banks, insurance companies, and other financial intermediaries. A National Public Radio interview of protesters found that there was no unifying theme. The protests on Wall Street is just a symbolic forum or pulpit for projecting anger at bad decisions made by Main Street. The ideals of the protests make sense. Money crimes or what lawmakers call white collar crimes should be punished. Laws should be rewritten to enable everyone to invest for a better future and protect property rights. Some issues cannot remain silent. I respect the demonstrator’s right to challenge the status quo, but the protests should be directed at the legislators who enabled predatory lending at not at the institutions that funnel money from the savers to the investors. (As the old saying goes, “You can change the door to the institution but not the institution.) Darren Lawson and Carl Herman contributed to this article.

Killer Apps

The killer apps include property rights and competition. Naills Ferguson delivers a TED Talk in which he explains why the wealth is concentrated in the western world. I stumbled upon this as I was researching for my next editorial on "Occupy Wall Street".

Monday, October 10, 2011

Share this Cartoon

Share this Cartoon

I really don't know what to think about the protest movement to occupy Wall Street. Well functioning markets are essential for economic growth. The protesters are disrupting the media which might be disrupting the markets. It could be that Wall Street is a scapegoat for projected anger by protesters who fell for sub prime schemes. It's easy to get mad at the rich so that my anger is directed at an intangible object so I don't have to take responsibility. Also, protesters want the government to do something. They don't want to do something themselves. These individuals feel that they should be taken care of by someone. I think I believe that the protests are projected aggression stemming from a need to blame someone else for their poor decisions.

I would welcome reader comments.


About the Author: Mike Fladlien is an AP Economics teacher from Muscatine High School in Muscatine, IA. He is an author, and also publishes the Mikeroeconomics and iMacroeconomics VB blogs.

Sunday, October 09, 2011

Cross of Gold

I have been reading, Grand Pursuit, on the recommendation of Tim Schilling, MV=PQ. What a dazzling account of economic history. I have always loved William Jennings Bryant after watching the Scoops Monkey Trial and found his Cross of Gold speech on YouTube. Some believe that the Wizard of Oz is about the Gold standard and Mr. Bryant's believe that a bimetalic standard would help the common man by increasing the money supply.

Cigarettes have smokers fuming

An article in the Des Moines Register by Tom Alex, reports that cigarette thefts have increased since the $1 tax per pack went into effect in Iowa. a link to the article is supplied.

How do Ethanol Subsidies Effect KFC?

Have you noticed the price of gas on the store marquees when you drive around town? Have you noticed that the choices at the pump are more expensive than the advertised price? That is, unless you are buying corn based Ethanol. Ethanol is subsidized by the state government so it should be cheaper. But does cheaper gas mean higher prices for food?

A recent report by the Federal Reserve Bank explained that "core inflation" crept up at a normal 2%. But core inflation does not include energy and food prices. Accounting for food and energy, prices last month climed at an unhealthy 7% according to Paul Samuleson in the April 30, 2007, Newsweek. How is it that Ethanol gas prices which are subsidized which should lower prices have actually increased prices?

The economic answer is that subsidies create an inefficiency and leads to a overproduction of the subsidized good.

Daily Review--Elasticity

In the graph to the right, explain why the Demand curve is inelastic?

My answer is that elasticity is defined as the percentage change in quantity demanded divided by the percentage change in price.  In this example, the quantity is constant so the change in quantity demanded would be zero.  Whenever you divide into zero, the answer is zero which defines an inelastic demand curve.

In other words, there is no change in the quantity demanded when the price increases.

Remember that a change in quantity demanded is a movement along the demand curve.

Suppose you own a liquor store and you believe that the demand for your product is inelastic.  Would you take steps to be friendly to your customers?  Would you invest in cool advertising and keep your store clean and up to building code?  A nicely written blog post found here, suggests that the incentives are lacking.

I try to write a daily review question to help students prepare for the AP exam.  The Daily Review is a blog feed to my FREE app found here.

I have also switched to using an Apple and found that my tools for blogging need work.  For example, I thought today's graph was embedded without the huge borders.  I also know that different browsers display the content on mobile devices poorly, and I'm working to solve that.

Saturday, October 08, 2011

Daily Review--Surplus

What is the producer's surplus in this problem?  Assume that the demand curve intersects the y-axis at a price of $20.  What is the consumer's surplus?  What is the point elasticity of demand at equilibrium?

Here are my answers.  Producer's surplus is $120.  Consumer's surplus is $80.  The point elasticity is 1.5.  I calculated the point elasticity as 1/M times P/Q.

What would happen to consumer's surplus if a technological innovation occurs?

If technology increases supply, the supply curve will shift to the right and the price will be lower.  As a result of this shift, consumer's surplus increases.

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Black unemployment rate: Highest since 1984 - Sep. 2, 2011

Black unemployment rate: Highest since 1984 - Sep. 2, 2011

Also in this CNN Money article is a video about why the older generation has a job but the teenagers do not.

My thought about black unemployment is very unconventional today. The unemployment rate is calculated by dividing the unemployed worker by the labor force. If a worker drops out of the workforce, the worker is not counted. What if black job seekers do not drop out of the workforce while white counterparts do? If this behavior was empirically observed, then blacks would have a higher unemployment rate than whites. I can't prove it yet without looking at data, but at this moment, I believe this could be the case.


About the Author: Mike Fladlien is an AP Economics teacher from Muscatine High School in Muscatine, IA. He is an author, and also publishes the Mikeroeconomics and iMacroeconomics VB blogs.

Friday, October 07, 2011

The Stand Up Economist

One of my favorite books is the Cartoon Introduction to Economics by Yorman Bauman.  He has a companion workbook that uses calculus here.  And one that does not use calculus here.  Life is good.

Daily Review--Related Goods

In the recent recession, many workers are finding that their hours are being cut.  Thus, for these workers, their income is declining.  Suppose that Juan used to buy only name brand products such as Colgate toothpaste, but now Juan buys the store brand.  For Juan, is Colgate toothpaste

a.  an inferior good
b.  a normal good
c.  a substitute good
d.  luxury good

My answer is "b".  Economists look at the behavior of an individual when the individual's income changes.  Since Juan bought less Colgate toothpaste when his income went down, the toothpaste is a normal good.  A hat tip goes to Mike Cahill for inspiring the question.

The WSJ also has an article here.

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Wednesday, October 05, 2011

Daily Review--Elasticity

Juan likes to drink soda pop.  When the price of Pepsi increased 10%, his demand for Coke went up 20%.  For Juan, are Pepsi and Coke subs?

Of course they are.  Look at the cross elasticity of demand.  20%/10% is 2.  For Juan, Coke is a definite sub as his behavior strongly suggests.

Wikipedia lists these cross elasticities.
GoodGood with Price ChangeXED
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