Saturday, August 7, 2010

BP Exec says his family will eat Gulf Seafood---Reminds me of this scene from Erin Brokovich...

BP Exec: I Would Serve Gulf Fish to My Family

""BP's chief operating officer sought to give the southern US fishing industry a much-need boost Sunday, saying he'd "absolutely" eat Gulf of Mexico seafood after the massive oil spill devastated the region...." \
Reminds me of this scene from Erin Brokovich...

Adam Smith would be proud of this English Muffin...And I'm not talking about Mrs. Smith

Who would have thought making an English Muffin would require so much and be so technical in nature, and at the same time permit a relevant reference to Adam Smith?  Gotta LOVE Social Science!

NYTIMES: A Man With Muffin Secrets, but No Job With Them
""According to Bimbo’s filings, the secret of the nooks and crannies was split into several pieces to make it more secure, and to protect the approximately $500 million in yearly muffin sales. They included the basic recipe, the moisture level of the muffin mixture, the equipment used and the way the product was baked. While many Bimbo employees may have known one or more pieces of the puzzle, only seven knew every step.

“Most employees possess information only directly relevant to their assigned task,” Daniel P. Babin, a Bimbo senior vice president, said in a written court declaration, “and very few employees, such as Botticella, possess all of the knowledge necessary to produce a finished product.” ""
I was immediately reminded that I have heard this before---In so many words, Mr Babin is channeling the following quote from "The Wealth of Nations" by Adam Smith in regards to his famous Pin Factory analogy. 
""But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them.""

Friday, August 6, 2010

How The Average American Uses Energy---Nice graphic!

I was a bit surprised at how little oil we use for generating electricity and how much coal we use...

How The Average American Uses Energy

"Amber Waves of Grain..." Not so much in Russia---What does the price of wheat in Russia have to do with you?

From WSJ: Russian Export Ban Raises Global Food Fears and Wheat Goes Up, Prices to Follow
"Russian Prime Minister Vladimir Putin, responding to the country's crippling drought and deadly wildfires, said on Thursday that exports will be banned from Aug. 15 until the end of the year..."
Look at what has happened to the price of wheat in the last few months:

   Most people have a "ho-hum" reaction when it comes to commodities like wheat, corn, soy beans, etc.  But these are important inputs into so many finished food products.  When we have negative supply shocks like the one in Russia it affects the economy at both the macro and micro level.
     In the global market for wheat there has been a reduction in supply due to drought AND fires in the highly productive regions of Russia (Ukraine, especially).  Now added to the mix is a mandate by the Russian President that wheat is subjected to an export ban.  Graphically, the supply curve for wheat is going to shift to the left, indicating a decrease in market supply (at any given price, the quantity supplied is less than what it was before--graph those new points and you get a new supply curve (S1) that lies to the left of the previous one (S*).

As supply curve S1 shifts to the left, notice we MOVE ALONG the existing Demand Curve D*.  Demanders are responding to the supply reduction  by DECREASING the quantity demanded of wheat as the price of wheat increases, as the Law of Demand would suggest.  Think of it this way: as the price goes up then some demanders are simply not going to be part of the market as they were before because they are "not willing and/or able" to purchase the same quantities of wheat at the new higher price P1 (or maybe none at all now). The difference between market quantity  from Qe to Q1 illustrates this reduction in BOTH quantity supplied due to weather, fire, government policy and the quantity demanded due to the higer price. Here is an example of the decrease in quantity demanded from the article:
""The wheat price spike has forced the U.N. World Food Program, which helps feed more than 90 million people world-wide, to cut back on purchases, according to a spokeswoman""
They are not completely out of the market, but the higher price is limiting their ability to purchase the same amount as before, hence the decrease in quantity demanded. 
     On a Microeconomics level this is only the begining--how is this going to affect farmers/ranchers, aid organizatioins, food processors, retail and wholesale businesses in terms of the cost of production? On the Macoeconomics level--globalization, government policies that affect world trade, allocation of resources (as planting season approaches, is wheat a better bet than corn, soy beans, cotton, etc)? Is this a start of a broader increase in food prices resulting in harmful inflation? Will the rise in price for this essential input cause food riots in some countries?
      Something as simple as wheat can have a large impact on our lives is so many ways...This is why I love economics!!  So much to consider and ponder...

Thursday, August 5, 2010

Where do you put all YOUR Stuff? George Carlin and I know...

For the past several years when teaching GDP I frame it in terms of "stuff" or material goods.  I first ask students if they have a garage and if at least one of the bays cannot be used to park a car because of all the stuff (maybe two, or ALL the bays). I then ask if their parents have space at a storage facility.  Most hands still stay up.  Our High School is located near a road with MANY large storage facilities within a 5 mile radius.  This explosion in material goods really took off in the mid-eighties.  Hmmm...why was that?  Anyone my age (50) and older can testify to this.  I am pretty sure almost no one would trade the quality and quantity of stuff we have today with what we had in the 60's and 70's.  If you have any doubt, browse this catalog and see for yourself. Only good ol' day syndrome would cloud the thinking on this, I believe. Below are some interesting data on the Self-storage industry.  I highlighted some of the more prominent numbers and information...Also, a video of George Carlin talking about "Stuff" (caution, some language you may  find objectionable)...

Self Storage Data
The self storage industry has been one of the fastest-growing sectors of the United States commercial real estate industry over the period of the last 35 years

There are now approximately 46,000 “primary” self storage facilities in the United States as of year end 2009; another 4,000 are “secondary” facilities (“primary” means that self storage is the “primary” source of business revenue – US Census Bureau)

The distribution of U.S. self storage facilities (Q4-09) is as follows: 32% urban, 52% suburban and 16% rural

Nearly 1 in 10 US households (HH), or 10% (10.8 million of the 113.3 million US HH in 2007) currently rent a self storage unit; that has increased from 1 in 17 US HHs (6%) in 1995 – or an increase of approximately 65 percent in the last 15 years

It took the self storage industry more than 25 years to build its first billion square feet of space; it added the second billion square feet in just 8 years (1998-2005)

During the peak development years (2004-2005) 8,694 new self storage facilities (approximately 480 million square feet of space were added)

There are approximately 58,000 self storage facilities worldwide as of Q4 – 2009; there are more than 3,000 in Canada and more than 1,000 in Australia.

Fewer than 250 new self storage facilities came on line in the U.S. during 2009; the trend in new construction is down significantly the last four years

Tuesday, August 3, 2010

Primer on Externalities---One of the more interesting and relevant concepts in Economics

Here is an excellent blog post that summarizes externalitites, negative and positive,  better than I can do...It is an extension of the blog entry I did just below this one.

I Suppose That This Is One Way To Internalize An Externality, Turbine Edition…(From: Econogirl)

Let me start with a quick recap of the whole externality deal, in bullet-point form:
■Externalities are side effects in a market, i.e. costs and benefits that accrue to people who neither produce or consume a product. For example, pollution is an externality because I am affected by pollution from factories even when I neither produce nor consume the products that they make.

■Externalities can be either negative (as with pollution) or positive (as would be the case if I lived upstairs from a bakery and got the smells wafting into my apartment…though I suppose that would get old quickly).

■When externalities are present, free markets left to themselves don’t produce the socially optimal quantity of a good or service. If there are negative externalities, the free market produces more than is socially optimal because it doesn’t take into account the cost it is imposing on society by producing. If there are positive externalities, the free market produces less than is socially optimal because it doesn’t take into account the benefits it is providing to society.

■In these situations, taxes and subsidies respectively can increase overall welfare because they move production and consumption to the socially optimal level. Taxing or subsidizing in the amount of the externality that a good creates is referred to as “internalizing” an externality, and taxes (and subsidies, I suppose) of this form are called Pigovian taxes.

■Note that it is not necessary for the tax revenue generated to be spent on fixing the externality for this setup to work, since the taxes and subsidies are in this case merely used as a vehicle to move the needle on production and consumption. For example, Pivogian taxes to reach the socially optimal level of pollution do not require that the tax revenue be spent on pollution cleanup, but there is an implicit assumption that the tax revenue is being used for something socially beneficial rather than being flushed down the toilet.

This is usually where the textbooks stop, which means that they ignore a number of relevant subtleties and complications associated with externalities and Pigovian taxes. First off, they act as though calculating the amount of the externality is easy, whereas I am pretty sure there is a shiny new Ph.D. and academic job waiting for anyone who has a good way of figuring this out. I mean, by what dollar amount are you inconvenienced by the pollution resulting from the production of one beanie baby? Yeah, I don’t know either. But wait, it gets even more complicated, since this answer technically depends on the framing of the question- people typically give higher answers to the question “how much would you have to receive in order to tolerate one more unit of pollution?” versus “how much would you be willing to pay in order to make one unit of pollution go away?” And this doesn’t even come near the fact that differences in income and whatnot mean that different people probably give widely varying estimates of this amount.

Even if we could put a dollar amount on an externality, we still need to address a few more things before automatically jumping on the Pigou bandwagon. (Okay fine, there isn’t actually a Pigou bandwagon…but there is a Pigou Club.) When we say that Pigouvian taxes lead to the “socially optimal” level of production, we mean that this level of production is best for society in the aggregate under the assumption that a dollar to me is the same as a dollar to you is the same as a dollar to Bill Gates. (I’m not sure why he is always my scapegoat for these types of comparisons, other than that is has a lot more money that I or probably you do.) This does not mean that *everyone* is better off under a Pivogian tax, just that the winners win more than the losers lose. For example, consider a gasoline tax to internalize the pollution and congestion externalities of driving- those with their gas-guzzling SUVs are certainly worse off, since they have to pay more in taxes than they get in benefits from cleaner air and more open highways. People without cars are better off, since there is less pollution and they aren’t paying the gasoline tax. It is important to note, however, that while they may enjoy some public services that are funded by the tax revenue, they aren’t getting compensated directly for having to put up with the remaining pollution that is still in the air. (I will allow you to make your own judgment regarding whether you’d rather have $1 in cash or $1 in government services, but I think I can guess where this audience is going to come out on that.)
Wouldn’t it be nice then if we could eliminate the governmental middle man and have companies tell people “we’re sorry we @#$! up your air, here’s some cash?” It turns out that that isn’t as unreasonable as you’d think. From The New York Times:
Patricia Pilz of Caithness Energy, a big company from New York that is helping make this part of Eastern Oregon one of the fastest-growing wind power regions in the country, is making a tempting offer: sign a waiver saying you will not complain about excessive noise from the turning turbines — the whoosh, whoosh, whoosh of the future, advocates say — and she will cut you a check for $5,000.
Hm. Theoretically, this should work if $5,000 is an appropriate estimate of the per-household cost of the externality. It probably reduces the number of turbines that the company puts up (since more turbines would mean more noise and thus a higher payout required to get households to comply), and, if the households agree to the deal, their revealed preferences show that they are being compensated adequately for their inconvenience. It’s interesting to note that the article implies that some households were refusing the offer out of principle, since they didn’t like the idea of being bought. (Are you surprised by now that people don’t act like economic robots?) If I were trying to strike this sort of deal, I think I would have approached the households before the turbines went in so that they felt a little more in control of the process.
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