Wednesday, July 16, 2014

I visited the "Shawshank Redemption" Prison this week and came away with this observation (why, yes, of course it involves economics)

I visited the prison that was used as the backdrop for the GREAT movie "Shawshank Redemption".  It is located in Mansfield, Ohio and is open to the public.  It is an unbelievable facility and if you are a fan or the movie (or prisons) it is a must see!

I am always looking for an economics lesson and by luck they had this pay stub for a prison guard from 1962.

His pay was $315.00 per month ($2,481.00 in 2014 dollars) or $157.50 every two weeks ($1,240.50 in 2014).

I assume he worked a 40 hour week which means he earned $1.97 per hour over 80 hours in the two week pay period.  As a comparison, in 2014 dollars that would be $15.52 per hour.

There is a new correctional facility right next to the old prison.  According to the median salary of a correctional officer at that facility is about $38,000. Using 2,000 as the number of hours worked in a given year (with 2 weeks vacation unpaid vacation--not likely) that works out to $19.00 per hour (this is wage and NOT other non-cash benefits which I am guessing are much better today than in 1962).

The salary of a prison guard today in Mansfield, Ohio has at least kept up with inflation ($19.00 versus the $15.52).

Not sure if Andy Dufrane or Old Red would appreciate that or not.

Friday, July 11, 2014

LeBron, Johnny and the Republican nominee walk into a bar in Cleveland....

After the Republican Convention in 2015, the Republican nominee, Johnny Manzeil and Lebron James walk into a bar in Cleveland.

Johnny gives the bartender his "money" sign with his hands.  He gets a beer.

LeBron tilts his head back and says "Sup".  He gets 5 beers.

The Republican nominee tells the bartender "I am going to cut your taxes and the taxes of all your customers. They will have more money to spend and you will have more to invest. You will sell more beer and have to open another bar or two.  Tax revenues to the Government will increase!"

The bartender looks at him and says "Dude, you have had enough. I will call you a cab".

Wednesday, June 25, 2014

Nice map showing the uneven job recovery in the US.

The New York Times has a lengthy article on the economic recovery from 2007 to 2013 with a focus on the post-recession state of the economy.

They had this map below showing the percentage change in jobs since 2007. High growth areas are in dark(er) GREEN.

This is a "flyover" economic recovery centered in the mid-section of the country (I inserted the rectangle to highlight the area).

I think the major media on both "coasts" miss the story.  They see overall employment numbers improving but don't see it in their own backyards so there must be something wrong.

Perhaps.  The recovery in jobs is definitely uneven.  What can we do, if anything?

Source: New York Times

Sunday, June 22, 2014

Hammer and nails. Cheese and Beer. Regulatory over-reach or Public Safety?

Recently in a speech at West Point President Obama used this phrase in referencing Iraq/US foreign policy:
"Just because we have the best hammer does not mean that every problem is a nail." 
It is a variation of the original version by Abraham Maslow:
"I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."
 And this from Abraham Kaplan who formally classified the phrase as "The Law of the Instrument":
 "Give a small boy a hammer, and he will find that everything he encounters needs pounding."
Now that is out of the way, what does it have to do with this posting?

In the last couple of weeks I have read the following articles:

1.  Has The FDA Brought On A Cheese Apocalypse? Probably Not (NPR: The Salt).  The FDA proposed a rule to regulate the ageing of high quality cheese on wood boards, a process that has been used for 100's of years, because of a fear of listeria.  

"As for the cheese aging boards, "There's no question there's a risk," Acheson says, but the question is, how much. "I'm not aware of any evidence that the wooden boards on which cheese is aged led to listeria outbreaks," he says.
(Emphasis mine)---Is this a hammer in search of a nail?

2.  New FDA Regulation Could Cripple Ranchers, Beer Brewers (HuffPo). Beer Brewers, large and small, for 100's of years have been either giving away or selling cheap the spent beer grains to farmers to use as high quality animal feed. 

"Since the grains are used to brew beer, they have already been deemed safe for human consumption. But the FDA fears the lack of oversight from the time of brewing to the time the grains are fed to the animals could lead to contamination. 
The FDA did not comment on a request from The Huffington Post for reports of any illnesses related to the consumption of spent grains."
(emphasis mine)---Is this a hammer in search of a nail?

Read both articles and ask yourself:  Regulatory over-reach or pro-active governing in the name of public safety?

Are there any nails here that need hammering?

Friday, June 20, 2014

Chased something down a rabbit hole today.

Chased something down a rabbit hole today.

I tried to examine the budget of the Federal Highway Trust Fund and the Federal Highway Administration in general that uses the Federal gas tax money (primarily) and Income taxes to pay for the construction and/or repairs of Highways, By-ways, Roads and Bridges and on and on and on.  I came across this link that showed grants to a myriad of projects in every State.  You can look at the list yourself and ask if these are good uses of Federal tax dollars.

After spending a few minutes scrolling through the list examining the projects and looking at the various dollar amounts this came to mind:
If you watch your pennies today, you will have dollars tomorrow. If you squander your dollars today, you will have pennies tomorrow.
Not an original thought.  But one I used as I looked through the list.

What do you see?

Thursday, June 19, 2014

Ever wonder how farmers get paid for not planting crops? Here is my explanation as it pertains to the new farm bill. Enlightening...

I have been semi-immersing myself in learning about the new Farm Bill that was recently passed and signed into law that will dictate US farm policy for the next 5 years.

I even attended an online seminar sponsored by the US Dept of Agriculture whose target audience was farmers who wanted to learn more about the changes in the law.  It is complex and if you want to learn more yourself, please go HERE for all you can consume.

Here is an interesting tidbit I learned I cannot get my mind wrapped around.  Very strange, in my opinion.

Say I am a farmer and have 1000 acres of land suitable for growing Wheat or Soybeans.  Assume my planting history shows I use 500 acres for wheat and 500 acres for soybeans.

For the purposes of satisfying the requirements of the Farm Bill, this 50/50 allocation of acres is what I declare as my "Base Acres" for claiming subsidies or any other government program for which I may be entitled.  So far so good.

Now, suppose next year I KNOW the price of soybean per bushel is going to be high and the price of wheat per bushel is going to be low---very low.  So low, in fact, it will be lower than the legal PRICE FLOOR that was set in the Farm Bill.  According to the Farm Bill, if the market price is below the Price Floor set in by the Farm Bill I am entitled to a payment (or subsidy) equal to the difference between the two prices PER BUSHEL of the crop---in this case wheat.

Here is what I am going to do:  Not plant ANY wheat and plant 1,000 acres of soybeans. Yes, can do that even though I have declared a 50/50 split based on historical plantings

I am going to sell my 1,000 acre harvest of soybeans for the high market price.  GOOD FOR ME, RIGHT?

It gets better.

Subsidies are paid on declared BASE ACRES, not actual harvest of a crop.  Since 500 of my 1,000 acres are declared for wheat I can receive the subsidy for WHEAT on those 500 acres even though I grew NO WHEAT AT ALL.

So, based on average historical bushels of wheat per acre harvested, I will receive that number times the subsidy (the difference between the Price Floor and the actual market price for wheat at the time) times the number of acres.

If the subsidy is $1.00 and the average yield is 47 bushels per acre then that = $47.00 per acre. I have 500 base acres in wheat so $47.00 X 500 =  $23,500.  For growing no wheat.

I told you. Strange, right.

This is the way it was explained to me.  If I have any details wrong or there is more to the story let me know. Always open to revisions.

Note:  The average farm is much less than 1,000 acres and the subsidy payout is likely much LESS than $1.00 ( could be just pennies).  So both those numbers I used are, in most cases, over-stated.

Wednesday, June 18, 2014

How many football fields worth of corn did we use everyday last week to produce the surge in ethanol production? We're gonna need a bigger stadium...

Saw this and of course had to do some calculating.  You know how much hatin' I do on ethanol.

U.S. ethanol output surges to record high as gasoline costs rise (HT: Big Picture Agriculture)

U.S. ethanol production increased for the sixth week in a row to a record high, government data showed on Wednesday, as rising gasoline prices helped boost demand for the grain-based biofuel. 
Ethanol production surged 28,000 barrels per day, or about 3 percent, to an average of 972,000 bpd in the week ending June 13, according to the U.S. Energy Information Administration. Production surpassed the previous record of 963,000 bpd reached in the last week of 2011.
A "barrel" as a measure is 42 gallons. If production increased by 28,000 barrels that is 1,176,00 gallons of ethanol.

One bushel of corn (about 56 pounds) makes approx 2.8 gallons of ethanol.  It we divide 2.8 into 1,176,000 we get 420,000 bushels of corn needed for the extra DAILY production.

In 2013 the average yield on an acre of land used for growing corn was 158 bushels.

If we divide 420,000 by 158 we get 2,658 additional acres needed every day to support that "surge" in demand. Not the SAME 2,658 acres but additional 2,658 acres.

A football field is 1.33 acres.  Divide 2,658 by 1.33.

Last week we used the equivalent of 1,998 football fields for the extra 28,000 barrels of ethanol--EVERY.DAY.

Nice comparison of National GDP to Metropolitan Statistical Areas (MSA's). Terrific learning tool for students.

Here is another way to quantify the size of the US economy (From US via CityLab).

Economies are measured using Gross Domestic Product (GDP)---the monetary (dollar) value of the production of goods and services within the borders of a country in a given year.  That total dollar amount is derived from each the individual 50 states Gross State Product (GSP). In turn, each states GSP comes from the sum of production from all its cities, towns, villages, etc.

The Census Bureau divides the country up into "Metro Statistical Areas" or MSA's.  MSA's could be all contained within a state OR they could be the combining of the population areas of a multiple of states.  For economic and social purposes you could consider these MSA's separate and distinct from the areas around them because of their concentration of people, commercial and social activities.

To get an idea of the economic impact these MSA's have, this report compares their economic output with countries around the world.

For example, the MSA of the New York, NJ, Pennsylvania has a GMP of $1.335 trillion dollars.  If this MSA were its own country, it would rank as the 13th largest economy in the world (below Australia, above Spain).

Here are the Top 90. Go to the report to see the whole list and find your MSA or country and see how it ranks!

Tuesday, June 17, 2014

Having fun with the CPI. I show how you can read this report quickly and actually get something out of it!

Looking at a government report can be overwhelming.  SO MANY numbers and categories!  In this blog posting I would like to offer a simple way of breaking down a report and getting something useful out of it.

The latest measure of consumer prices is out today (June 17th, 2014).  While we have a relatively low level of over-all inflation, not all parts of the market basket that the government uses to measure prices necessarily reflect it. Some prices have increased, some decreased and some stayed the same.

Here is a simple exercise I do when this report comes out.

I look at the how prices have changed over the past year.  Below is the first page of the whole report and it starts with "Food", my favorite subject.  Focus on the highlighted column in YELLOW.  This shows how the price of food has changed, in percentage terms, over the past 12 months.

The first line shows that "All Items" as measured the CPI have increased 2.1% in the last 12 months.  Food as a category has increased 2.5%.  From this we can conclude the price of food as a category has increased slightly faster than all the other items in the CPI market basket.  Now we can dig deeper.

Food as a category has two components:  "Food at Home" and "Food away from Home".  I only screen shot "Food at Home" to use for this but you can find the other category in the whole report.

Food at Home has increased 2.7%.  This is 29% higher than prices over-all (2.1%).

Now the fun part.  Use 2.7% as your baseline and compare it to all the other "Food at Home" prices. If the percentage number you see is below 2.7% than that category has risen slower than all items of food at home OR it has actually decreased in over the past year (see negative numbers).

If the number is above 2.7% then the prices of that category of food at home have increased faster than the category as a whole.

What do you see?  What has increased faster than the average? Slower?  Actually decreased in price?  WHY????  So many opportunities to tie in basic econ principles with current events.

Have fun!

Monday, June 16, 2014

Having fun with data. The change in hospitals and hospital beds since 1975 perplexes me. Explain to me what is going on.

In 1975 there were 7,156 hospitals (Federal and Non-Federal--which would be State, Local and Private) in the US.  In 2011 there were 5,747.  A decrease of 20%.

In 1975 there were 1,465,828 hospital BEDS (Federal and Non-Federal).  In 2011 there were 924,333.  A decrease of 37%.

In 1975 the US population was 216,000,000  . In 2011 it was 311,000,000.  An INCREASE of 44%

If you look at the line that is highlighted in GOLD you see the number of beds at very small facilities have increases by 2,000 BUT at every other bed range there have been decreases.  Some small, some large decreases but decreases nonetheless.

Our population is greater.  Demographics have trended much older. There are FEWER hospitals and beds when the demand, it seems to me, is effectively much higher.

Did this surprise you? Did me. I am kinda at a loss to explain it.  Any ideas?

Source: Centers for Disease Control (CDC)

China Cuts "Required Reserve Ratio" to stimulate lending and Investment. What does that mean exactly?

One of the tools modern Central Banks around the world have to affect money supply, hence interest rates that money is saved or borrow at, is the "Required Reserve Ratio (RRR)".

To prevent banks from lending out (or otherwise use) all of a deposit made by a customer they are required to with-hold a certain  percentage of that deposit in an account with the Central Bank.  After they with-hold the required amount banks put the remaining balance in their "Excess Reserve" accounts from which they can make loans.
China’s largest banks are currently required to hold 20 per cent of deposits as reserves at the central bank, while medium-sized lenders must meet ratios of 18 per cent. Rural banks and other small lenders are subject to a rate of 16.5 per cent or less. (Source: Financial Times)
Simple example: I make a $100.00 cash deposit in my bank. If the RRR is 20% then the bank puts $20.00 of that in their Required Reserve account and $80.00 in Excess Reserves.  The bank may loan up to $80.00 to a borrower.

At least that is the story that is told.  For now, we will go with it since it is a BIG part of the AP Macroeconomics curriculum.

You can see the constraint on lending in this scenario is the RRR.  If the RRR is LOWERED than banks are required to with-hold LESS of a deposit and the Excess Reserves to be loaned out are HIGHER. Banks tend to make more loans.  More loans are made to businesses for projects and/or capital equipment purchases. Economy boosted. Key vocab term for AP--"Expansionary or Loose Monetary Policy" designed to stimulate Aggregate Demand ("Investment" (I) in C+I+G +N):
Zhang Zhiwei, China economist at Nomura, described the move as “significant”. By his calculations, the new cut will inject about Rmb95bn ($15bn) back into the banking system. When added to other measures, such as the April cut, Beijing will have added Rmb545bn of fresh liquidity into the economy by the end of this month, equivalent to a 50 basis point cut to reserve requirements for all banks.
China has taken a fresh step to boost flagging growth by cutting the amount of cash reserves some lenders must hold at the central bank in a bid to boost lending to small businesses and the rural economy. 
The People’s Bank of China said it would reduce the “required reserve ratio” by 0.5 per cent for banks that mainly lend to small businesses and rural borrowers.(Source: Financial Times)
 At least that is the story that is told. For now, we will go with it since...

Friday, June 13, 2014

Corn, Wheat and Soybeans OH MY! I calculate "Economic Profit" for each. See which one gets planted.

In my last posting (HERE) I used USDA cost and crop yield data to show the different costs per bushel a farmer faces when choosing to produce Corn, Soybean or Wheat.  I balanced that against the Price Floor for each crop as established by the 2014 Farm Bill ("PLC or "Price Loss Coverage" provision) to show that the price floor amounts were enough to cover all the farmers Variable Costs but only some of the Fixed Costs. Please re-read that post for more clarification.

In this posting, I want to compare the two different cost numbers I calculated to the current market price for the respective commodity.  I used the table below from the USDA to show costs per acre for each crop.

The USDA projects yields for each of these crops to be (in 2013-14):

   Corn: 165 bushels per acre.
   Soybean: 43 bushels per acre.
   Wheat: 47 bushels per acre.

If we divide these projected bushels per acre into the "TOTAL ALLOCATED COSTS " (Variable PLUS Fixed and Opportunity Costs) for each commodity we will arrive at a "Cost per Bushel" for growing each of these crops:

    Corn: $4.18
    Soybean: 11.10
    Wheat: $6.78

If we divide the projected bushels per acre into just the "TOTAL OPERATING COSTS", or ONLY the Variable Costs then the cost per bushel would be:

Corn: $2.19
Soybean: $4.27
Wheat: $2.77

Here are the current market prices (per bushel) for these crops according to

The prices are highlighted in YELLOW and you should read them as follows:

Corn: $4.47 
Soybeans: $12.21 
Wheat: $5.86 

If we subtract "TOTAL ALLOCATED COSTS" from the market prices we find:

Corn yields an "Economic Profit" of $.29 per bushel
Soybean yields an "Economic Profit"of $1.11 per bushel
Wheat yields an "Economic LOSS" of $.92 per bushel


This year (2014) the projected plantings for:

     Wheat down 347,000 acres
     Corn down 3,674,000 acres
     Soybean UP 4,960,000 acres (yes, that is almost 5 million acres)

At $1.11 per bushel in potential "economic profit" the market has reallocated agricultural resources suitable to produce corn, wheat or soybean to its highest (or higher) value commodity.

As always, constructive comments on methodology are welcome.

Perfect Competition, Price Floors, VC's, FC's, Opportunity Costs, Farm Policy---this blog entry has it ALL!

I am going to attempt a layman's (VERY layman!) view of how farm policy, in terms of Price Floors, works in the US. I am using actual US Dept of Agriculture data to do my calculations.

Not claiming it is perfect and I am SURE I am leaving out some (a lot?) of details, but I think for the AP Microeconomics Unit on Perfectly Competitive firms AND Price Floors it will be instructional.  Any constructive criticisms are welcome.

First, here are the projected cost data (2014-15 growing season) for a typical farm growing either Corn, Soybeans or Wheat.

The costs are very conveniently divided up into "Variable Costs" (Operating Costs) and "Fixed Costs" (Allocated Overhead).

What make this a bonus for Economics teachers is the Fixed Costs include explicit money costs ("hired labor, taxes and insurance, general farm overhead") AND implicit "opportunity costs".  The opportunity costs are "Unpaid Labor, Rental Rate of Land and Capital".

This distinction will be important at the end of this lesson.

Source: USDA ERS
The USDA projects yields for each of these crops to be (in 2013-14):

   Corn: 165 bushels per acre.
   Soybean: 43 bushels per acre.
   Wheat: 47 bushels per acre.

If we divide these projected bushels per acre into the "TOTAL ALLOCATED COSTS" (Variable PLUS Fixed and Opportunity Costs) for each commodity we will arrive at a "Cost per Bushel" for growing each of these crops:

    Corn: $4.18
    Soybean: 11.10
    Wheat: $6.78

If we divide the projected bushels per acre into just the "TOTAL OPERATING COSTS", or ONLY the Variable Costs then the cost per bushel would be:

Corn: $2.19
Soybean: $4.27
Wheat: $2.77

The latest Farm Bill (2014), which dictates US farm policy through 2018, set Price Floors (called "Reference Prices") for these commodities at:

Corn: $3.70
Soybean: $8.40
Wheat: $5.50

The means that if the actual market price in any given year falls BELOW these floor/reference prices then the Federal government will compensate farmers for the difference between what they sell their crop for at market and the above reference price. In other words, the reference prices you see above are the guaranteed minimum per bushel the farmer will receive for their crop.  If the market price is ABOVE the reference price then the farmer receives that price and the reference price is "non-binding".

IMPORTANT POINT:  Notice how these Price Floor/Reference prices fall IN BETWEEN the two versions of costs I calculated above.

The Floor/Reference Price is higher than the farmers Variable Costs BUT lower than his/her TOTAL ECONOMIC COSTS.

So, the price floor guarantee helps the farmer cover ALL Variable Costs and some of their Fixed Costs, but not ALL of the Opportunity Costs of being a farmer.

Anyways, I think this is interesting and I have never seen it broken down like this before.

Makes me understand farm policy and the plight of the farmer a little bit better.

Again, any comments, corrections or guidance as to where I went wrong are welcome.

We are all fellow travelers on the road to knowledge.

NOTE: This particular aspect of the Farm Bill is called "Price Loss Coverage (PLC)".  There are other important programs that complement/substitute for the one I described above.  More on the PLC and these other programs can be found HERE.

Updated map showing US Gross State Product (GSP) vs the Rest of the World. Students love this!

Mark Perry over at AEI has quickly put together the latest (2013) "Gross STATE Product (GSP)" data onto a map that students find interesting every time I have shown it in the past. It gives a great perspective as to just how large the US economy is and will continue to be (hopefully!).

In place of the name of the US State it puts a country whose dollar value of Gross DOMESTIC Product (GDP) is equal/similar to the dollar value of output of that State.

For instance, Australia's GDP is roughly the same of that of Texas's GSP. Brazil similar to California, so on and so forth.

Source: Carpe Diem at AEI

Here is the accompanying data in Excel form that show the numbers used for each State.

Tuesday, June 10, 2014

The total acreage of which US State is used for fuel instead of food?

In the US in 2013 we planted 97.2 million acres of Corn. Of that, 37.78 million acres were used to produce ethanol (39%). (Source HERE--I did the calculations for acres based on data given for bushels per acre)

In the US in 2013 we planted 77.2 million acres of Soybeans.  Of that, 10.9 million acres were used for Bio-diesel (14%). (Source HERE--I did the calculations for acres based on data given for bushels per acre. Data on Soybean for bio-diesel HERE)

The total number of acres used to grow "food for fuel" was 48.68 million acres. That is 28% of the total planted Corn and Soybean crop.

How much is 48.68 million acres?

The State of Nebraska is a little over 49 million acres. In other words, we have an energy and agricultural policy that diverts the whole State of Nebraska to producing fuel instead of food.


Source of map HERE