Saturday, October 30, 2010

Updated Payscale---Economics holds its own against the Engineers!! Resistance is futile!

Wall Street Journal
In class today this particular blog entry generated much discussion.  This chart below is from 2005.  It shows the percentage of Fortune 500 CEO's and the undergraduate degree they received.  I was wrong about the engineers and their numbers in the CEO rankings.  However, you Liberal Arts majors REJOICE! There is still hope for you!! :)

THERE! GOTCHA! Liberal,, America Hating, Media bias at the New York Times exposed...or is it???

I do not agree with this franchisee (NOT condoned by the McDonalds Corporation) who inserted at political flyer into employees paycheck envelops which urged them to vote for particular candidates.  It is not the place for such material.  What I am MORE curious about is the reporting AND the headline attached to the story.  I understand at many/most major print media outlets, there are people who write the articles and there may be someone who creates the headline for the story.  As best I can tell from the article, NO ONE was TOLD who to vote for! Why does the title, which draws you into reading the article suggest they were?  Am I knit-picking?  Trying to get a media "Gotcha! being biased!!" I just read the article and it prompted the thought...Note: pointing out that when I blog I do the same thing with my titles (GUILTY!!) is not the same thing. No one believes my writing is news (except for my disciples)---it is all commentary.  As far as I can tell this is not an opinion piece.  Read for yourself...

NYTIMES: McDonald’s Workers Are Told Whom to Vote for

""When workers in a McDonald’s restaurant in Canton, Ohio, opened their paychecks this month, they found a pamphlet urging them to vote for the Republican candidates for governor, Senate and Congress, or possibly face financial repercussions....The pamphlet appeared calculated to intimidate workers into voting for Republican candidates by making a direct reference to their wages and benefits, said Allen Schulman, a Democrat who is president of the Canton City Council and said he obtained a copy of the pamphlet on Wednesday."

Extra Credit! Is there a relationship between the production of Ethanol and the Price of Corn?

Comparison of Ethanol production (on left) and the price of corn (on right) over roughly the same time period...Is there a relationship? Extra credit on the next test if you can offer an supportive and/or alternative explanation.

The Coconut havesting machine MUST NOT be invented! Jobs will be lost! Where is the local Luddite Party when you need them?

But what about all the jobs that will be lost when capital is substituted for labor?  Luddites Unite!

From UK Guardian: Who wants to be a coconut millionaire?
""The contest was to devise a machine that could ascend a coconut tree and harvest the nuts, thereby doing away with the need for human climbers.
Today, Mr Satheesh's machine, designed with the benefit of practical advice from his father, will be one of eight shortlisted entrants to be tested in a two-day trial overseen by government officials. The organisers received more than 450 entries, and even at this stage people can bring their machines to the finals to compete. Three winners, whose machines are judged to have most effectively scaled the tree and completed the task, will each receive 1m rupees (£14,000).
"The economy of Kerala is very agrarian and many people depend on agriculture and the coconut. It's one of the most important products we have, and every part of the tree is used," said D K Singh, a senior official with the Kerala state government's office in Delhi.
"But nowadays, the younger generation does not want to climb trees. So the government planned to develop a mechanical device.""

Friday, October 29, 2010

Latest GDP Report broken down by its component parts---We need more "P" in our GDP!

Latest GDP report. This graphic shows the breakdown of each component of GDP (C + I + G + N(x) ) and each sectors contribution to GDP in percentage terms.  Consumption  (C) is the value of domestic production that purchased by individuals. Investment (I) is the value of domestic production purchased by  businesses to use in conducting business. Government (G) is the value of domestic production purchased by local, state, federal government agencies. Net Exports (N(x)) is Exports, domestic production purchased by foreigners MINUS Imports, foreign production purchased by Americans domestically.  Notice that this results in a rather large negative contribution to GDP.  When you add the positives (C+I+G) and subtract the negative (N(x)) you get a 3rd quarter (at an annualized rate) increase in GDP of 2.0%.  Tepid.  If you refer to past blog entries concerning actual GDP relative to potential GDP, you know we have a significant output gap.  We must grow faster than 2.0% to get back to full-employment by 2016-2020.  Just chugging along...

Wall Street Journal
Update: Below is a BETTER breakdown of the component parts of GDP, especially with "I"  Investment Expenditures.  Remember, residential housing is a part of "I", not "C" as we might intuitively think.  I believe this will be a drag on GDP for sometime.  It suggests an over-allocation of resources towards many aspects of the housing market and will require a much longer time lag to re-adjust itself.  Those resouces will have to find a new place to settle within "I" or one of the other components of GDP. 
Business Insider

Dirty Politics and Name calling have NO place in Politics!! Really? Someone should have told John Adams and Thomas Jefferson in the Election of 1800...See the vidoe HERE!

This video is GREAT! The more things change, the more they stay the same...It uses quotes from Jefferson and Adams campaigns in the election of 1800.  Worth a look.  The actual sources for the quotes are below as well...(Source: The Agitator)

For those interested, here are some of our sources for the statements made in "Attack Ads, Circa 1800."

John Adams is a blind, bald crippled toothless man,+bald+crippled+toothless&source=bl&ots=9lbKRZPRGk&sig=G8iF_6jamjrAWBg5_f9aRsW093U&hl=en&ei=FuvJTLTTCYOglAel07SnAQ&sa=X&oi=book_result&ct=result&resnum=2&ved=0CBcQ6AEwAQ#v=onepage&q=adams%20blind%2C%20bald%20crippled%20toothless&f=false

who secretly wants to start a war with France.

While he’s not busy importing mistresses from Europe

he’s trying to marry one of his sons to a daughter of King George III.

John Adams is a hideous hermaphroditical character with neither the force and firmness of a man, nor the gentleness and sensibility of a woman.

Murder, robbery, rape, adultery and incest will be openly taught and practiced, the air will be rent with the cries of the distressed, the soil will be soaked with blood and the nation black with crimes.

Are you prepared to see your dwellings in flames? Female chastity violated? Children writhing on the pike?

Jefferson is the son of a half-breed Indian squaw raised on hoe-cakes

Hamilton is a Creole bastard brat of a Scotch pedlar.

Another nice graph of Actual RGDP relative to Potential RGDP...Impress your High School (guess that is me) or College Econ teacher with this knowledge

Another nice graphic illustrating the output gap, which is the difference between what we actually produce and the output potential of our economy, as measured  by Real GDP:

In common graphical form that we have come to know so well in AP Macroeconomics, we can illustrate the output gap in both the Production Possibilities Frontier and the Aggregate Demand/Aggregate Supply Model of the Economy:

The PPF shows our productive capacity in terms of raw production of capital and consumer goods.  The Long Run Aggregate Supply Curve (LRAS) is this raw production converted to inflation-adjusted GDP.   We know we are not always at our potential in the PPF. Sometimes we are outside it and sometimes we are inside it.  We can certainly say our economy today is under-producing/under-utilizing resources, mainly people (9.6% unemployment rate, well over the Natural Rate of Unemployment). 

Point "B" represents the under-employing of resources relative to our potential Point "A". When we convert the raw production at Point "B" to inflation-adjusted prices, we get a Real GDP to the left of our FE RGP. This is represented as movement along our Short-Run Aggregate Supply curve to Point "B" on the  AD/AS Model. 

How soon do we close the gap between Actual RGDP and Potential RGDP? The first graph gives two Real GDP growth rate examples. One is the growth rate from the end of last severe recession we experienced, 1983-84. The second is a tepid growth that seems to be the consensus growth rate we will actually have (again, this is a best guesstimate scenario). Recovery back to full-employment is not going to be quick, UNLESS we get a HUGE positive Aggregate Supply Shock, such as the one in the 1990's.  Don't see that is going to happen, but as mentioned in class, I WISH it would come in the alternative energy sector--significantly reduce energy costs in a clean way,  which will significantly reduce the cost of production across the board. In turn, this may open up new possibilities in a broad range of industries.  Any other suggestions as to what you would like see contribute to a "Positive Supply Shock"??? Let me know--I am always willing to learn new things!

Thursday, October 28, 2010

What comes first to increase college tuition for all---increasing costs or increasing subsidies?

This graph shows the rise in cost of attending college, public and private, since 1980.  It is in the form of an price index where the year 1980 is 100. and currently we are at 359, which means there has been a 259% increase in the cost of college tuition to a public university.  Notice as we reach the 2000's the slope of the graph increases considerably, indicating the cost of college is increasing at an increasing rate. Why? Lots or reasons, but subsidies to students have grown considerably.
WSJ...""But the federal government gave out $28.2 billion in Pell grants to students in the 2009-10 school year, almost $10 billion more than the previous year. Pell grant numbers for the current school year are not yet available, but are expected to rise.
Federal grants, including Pell and veteran's benefits, accounted for 44% of the $94 billion in total grant money awarded to students in the 2009-10 school year, compared with 34% the previous year, according to the data. Ten years ago, federal grants represented 29% of the total. The other major sources of grants are colleges and universities, and employers...""
The writer quoted below is commenting on an excerpt from THIS WSJ article about rising college tuition. It reminds me of the chicken and egg conundrum of what comes first.

""From The Enterprise Blog: ""College tuition and fees climbed once again this year, but the burden was tempered for some students and their families by a big jump in federal aid…""

Correct me if I’m wrong, but couldn’t it just as easily have been written:

""Federal aid for college climbed once again this year, but the help was tempered for some students and their families by a big jump in college tuition and fees…""
Hypothetical: I have my own college and I call it "Hayward University" or as it is better known, "Hay, YOU!" (look at the photo above--yes, we are all about the athletics!).  In the short run, there are a fixed number of seats available for college students at my university to meet existing demand.  I currently have 5,000 seats and no plans to expand.  The Supply curve for the seats is vertical at 5000 seats. No matter what the tuition is, I ONLY have 5,000 seats to offer.  I am a captive of the Demand curve!

The Demand curve for those seats is downward sloping to reflect the inverse relationship between price and quantity demanded. The Demand curve intersects the Supply curve at $10,000 per year tuition for each of my 5,000 seats. See graph below that illustrates this equilbrium:

Assume my students become aware they are now eligible for additional student aid in the form of a $1,000 subsidy (Pell Grant et al). So, now instead of paying $10,000 tuition, each student now only has to pay $9,000.  At $9,000 the quantity demand for seats to my school is 6,000 (Point "B").  So, now my quantity demanded (6,000) exceeds my quantity supplied (5,000).  The lower the tuition, the more students want to come to my campus.  I am out of equilibrium.  As shown below, I NOW have a shortage of seats relative to the quantity demanded (Point "B").  How do market forces take care of this? 

The price will increase along the demand curve (as price increases, the quantity demanded decreases) from Point "B" back to Point "A".  Right where we started:

BUT, that is not the end of the story. We cannot forget about the $1,000 subsidy.  Well, I GET THAT TOO!  The market tuition returns to $10,000 PLUS the subsidy---$11,000 to attend my school:

What is true at $10,000 tuition and quantity supplied of 5,000 seats is going to be true at every tuition price and quantity demanded of seats RELATIVE to the original Demand curve. We find that the Demand curve shifts to the RIGHT:

Bottomline? Tuition in the end does not DECREASE and likely INCREASES,  nor do more students necessarily get additional access to college. Nice for me. I will start tuition rates NEXT year at $11,000 for subsidized students and non-subsidized students.

This comment from the article will not be to the liking of college administrators "like me"...
""But Patrick Callan, president of the National Center for Public Policy and Higher Education, said colleges and universities need to get tuition under control. He likened the trends in costs and federal aid to a treadmill, where prices rise, federal money gets pumped in, and costs increase again.
"Unless governors and legislatures stiffen their spines and not allow schools to pass so much of the cost on to families, we are never going to make a dent in access and affordability," said Mr. Callan, whose research group tracks higher-education issues. ""

Wednesday, October 27, 2010

A more elegant and nuanced view (in video) of my provocative statement in class that "Donating to UNIFEF leads to more starving people, not less"---This will be 10 minutes well spent if our discussion interested you at all...

Also, here is a link (HERE) to an article that somewhat refutes MY argument.  I can agree with many of his points, however, the writer does not address AT ALL governments (i.e. Sudanese, Etheopian, Zimbabwean, North Korean, etc) role in humanitarian disasters concerning food security.  This is the elephant in the room that no one addresses on a meaningful level...

The Cheese Cake did not make me gain weight, my credit card did? Huh? Yes, it is true...find out why here

I know when I pay with a credit card, or even my debit card, I tend to eat at places where the final bill will be much higher than if I forgot my credit card at home.  EVEN if I have enough cash in pocket to eat at the more expensive place, I find myself "down-dining" when I am going to pay with cash. Why do I do this? I have to pay for the meal either way, so why do I spend more when it is charged to a card as opposed to paying cash?  Is this YOUR experience too? Please say yes, so I don't feel lonely...Read the article at the link or just the part I have below...I tend to believe in the "pain" theory of spending cash....

WSJ: Buying Junk Food With Plastic
When we pay in plastic, credit or debit, we’re more likely to buy unhealthy food, according to  research in the forthcoming Journal of Consumer Research by professors Manoj Thomas of Cornell University, Kalpesh Kaushik Desai of State University of New York, Binghamton and doctoral candidate Satheeshkumar Seenivasan of SUNY, Buffalo.

In recent years, the use of credit and debit cards has ballooned. So have American waistlines. The average American carries 4.4 cards in her wallet and a third of U.S. adults are obese these days, up from 23% in 1988.

But does the mode of payment make a difference when it comes to buying unhealthy food? According to these researchers, the answer is yes.

“If you like cheesecake, that craving activates neurons and takes over part of your thought processes,” Prof. Thomas says. “When you use cash, you’re trying to curb the momentum of the cheesecake.”

Purchases like cookies are impulsive in nature, whereas purchase for low-fat yogurt and oatmeal tend to be contemplative. For that reason, using cash will have less of an impact on buying more virtuous foods because they were contemplated purchases to begin with. “People feel a physical pain when they spend cash,” Prof. Thomas says. With plastic, however, people feel less pain when they spend.

Monday, October 25, 2010

Capacity Utilization, Aggregate Supply and The Production Possiblities Frontier---Your future is contained within these Graphs--How is the view?

     I believe one of the most important connections I try to make with students is the link between our economy's productive capacity and students future careers and aspirations.  A mantra familiar to my students: "If politicians, policy-makers, and business leaders are NOT working TODAY to make the necessary investments to ensure future increased productive capacity, then students will find their career prospects limited when that future arrives.  Your job is not created when you are ready to go to work. The preparation for that career/job to exist (or not) is, taking place TODAY".  Keep this in mind as I illustrate how productive capacity affects the economy in the short and long run.
      We need to link three familiar AP Macro concepts together: Capacity Utilization, The Production Possibilities Frontier, and the Aggregate Demand/Aggregate Supply Model of the Economy.  First, lets look at Capacity Utilization:
""Capacity utilization is a concept in economics which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output that 'is' produced with the installed equipment and the potential output which 'could' be produced with it, if capacity was fully used.""
     In other words, it is a measure of how efficiently and effectively (aka "productive efficiency") we employ our societal resources (Land, Labor, Capital, Entrepreneurship) to produce goods and services.  It is impossible to fully employ all of our resources and it is not necessarily desirable to do so.  It seems it would be a prudent policy to conserve resources for future use by subsequent generations.  There will always be some amount of resources that are not employed at any given time.  The consensus in the economics community is that if an economy can achieve approx. 83% of Capacity Utilization (resource employment) then it is theoretically at "Full-Employment". I repeat,  this does not mean 100% resource employment but if you reach 83% of capacity then that should be the best you can expect to do in the long run. 
     The two graphs below show the economy at full-employment in two different ways, but each are linked.  The first is the PPF, which shows the potential production of goods an economy can achieve if it is fully employing all of its resources in the least costly way ("Productive Efficiency").  More simply, it is the measure of raw production of capital goods and consumer goods.  The second graph on the right shows the dollar value, denoted by "FE RGDP" (Read that "Full-Employment Real GDP"), of that raw production of consumer and capital goods.  When Aggregate Demand (AD) intersects our short-run ability (SRAS) to produce goods AND our long-run ability (LRAS) to produce goods, then we are said to be at "Long-Run Equilibrium".  Point "A" on both graphs represents this nirvana.  Presidents easily get re-elected and the TEA Party's and's of the world go away. 

     Where are we today in terms of Capacity Utilization? This graph shows capacity utilization for an extended time period.  Note the ebbs and flows from the full-employment baseline of 83%---anything below is under-utilizing capacity and anything over is producing beyond our capacity.  The blue vertical bars represent recessions.  You can see there is always a dip during recessions and a rise during periods of recovery.
     The last bar to the right represents the most recent recession.  Notice how capacity utilization has recovered somewhat from its nadir in 2009, however it is still near its lowest point in 40 years. How do we relate this situation to the PPF and the AD/AS Model of the Economy?  See the next two graphs below:

     We are obviously under-utilizing resources in our economy. We see it everywhere--closed stores, friends or family members losing jobs.  The actual unemployment rate is close to 10%, which is double the Natural Rate of Unemployment, roughly 5%.  Other resources, land, capital, entrepreneurship, are standing idle as well.  Currently our capacity utilization is at 75%.  This can be represented by point "B" in the PPF graph and in the AD/AS Model of the Economy.  We know we COULD be producing at point "A" but currently we are not.  Why?
     One explanation is that there is not enough demand for those under-utilized resources.  As the financial crisis took hold in early 2007, people started losing their jobs.  Unemployed people don't buy as much as they did before; businesses don't sell as much as they did before and either lay people off or close stores altogether; manufacturers produce less because retailers don't reorder, so they lay people off or close factories... Do you see the idle capacity being created before your eyes as the situation ripples across the economy!! The productive capacity STILL exists (store-fronts, factories, skilled workers, etc, have not gone away), but the demand for them is not currently there.  This is shown in the graph above on the right.  Aggregate Demand for goods and services DECREASES and shifts to the left (Point "B").  We have high unemployment and potential deflation, both not desirable to have in an economy. 
     What happens, if and when, the economy recovers and Aggregate Demand picks up? Hopefully we get back to the situation in the very first set of graphs---Full-employment at a stable price level.  However, there is potential for Aggregate Demand to shoot past FE RGDP and into inflation territory. Why? Because we will start to use that under-utilized capacity and IF the recovery in Aggregate Demand is so strong that is uses up all that under-utilized capacity and then demands MORE, we hit a new problem--Inflation!  This is illustrated in these two graphs below:

     Capacity utilization moves above 83% and our productive capacity becomes over-employed and stresses start to appear.  Factories operate at a level they were not designed for and employees are working overtime and/or extra shifts.  Something has to give!! We are wearing out existing productive capacity! During the downturn businesses may not have  replaced capital equipment, purchased new capital or technology, or built new facilities and the productive capacity is not there to meet the new demand.  The ability to supply goods lags behind the demand for those goods---Too few goods are being produced relative to the money flowing though the economy from (1) fiscal stimulus and (2) Federal Reserve monetary policies. This is the classical definition of inflation.   Now Congress, the President and the Federal Reserve have a new problem on their hands!
   So, during a downturn do the powers-that-be focus just on the demand-side to get the economy moving forward (Aggregate Demand shifting to the Right) to absorb excess/under-utilized capacity (mainly people) and put them back to productive work making goods, or do they focus on the supply-side, so when the inevitable(?) pick-up in the economy occurs the productive capacity (SRAS and LRAS) has increased sufficiently to absorb the new demand without igniting inflation? Hmmm...Feed demand, starve supply OR Feed Supply, starve demand? What would YOU do??  I am glad I have no additional responsibility other than to write this blog entry...Not sure I could take the pressure of answering the question....

Sunday, October 24, 2010

Excellent defense of the Keynesian point of view on how to "prime the pump" of the economy..

This is an excellent defense of the Keynesian point of view on how to deal with an economy at less than full-employment. Notice it has MANY of the elements of Fiscal Policy we have covered recently in class and a couple we will cover this week, i.e. "the crowding out effect" of government borrowing.  It also provides an nice seque into Monetary Policy, which we will start in Week 11.  The script of the textbook is playing out on the stage of life so we can observe it, applaud it, or pan it...A bad time for the economy, but a good time for critical observers like me---and YOU! :)
NYTIMES: Now is not the time to cut the budget deficit by Christine Romer (former Obama Admin Chief Economist)
""THE clamor to cut the budget deficit is deafening.... Make no mistake: persistent large budget deficits are a significant problem. Government borrowing in good times crowds out private investment and lowers long-run growth.... So the question is not whether we need to reduce our deficit. Of course we do. The question is when.

Now is not the time. Unemployment is still near 10 percent.... Tax cuts and spending increases stimulate demand and raise output and employment; tax increases and spending cuts have the opposite effect. This is a basic message of macroeconomics and a central feature of public- and private-sector forecasting models. Immediate moves to lower the deficit substantially would likely result in a 1937-like “double dip” as we struggle to recover from the Great Recession.

Some advocates of austerity argue that, contrary to the conventional view, fiscal tightening now would lower long-term interest rates and improve confidence so much that the impact could be positive. But an ambitious new study in the World Economic Outlook of the International Monetary Fund confirms that fiscal consolidations — that is, deliberate deficit reductions — typically reduce growth.... The recent experience of countries already carrying out austerity measures is consistent with the central finding of the I.M.F. study. Ireland, Greece and Spain have all had rising unemployment after moving to cut deficits....

But once the economy has substantially recovered, the Federal Reserve will be ready to raise interest rates. At that point, the Fed could help maintain growth by instead continuing very low rates as the deficit is reduced. Waiting for conventional monetary policy to be back on line is like waiting for the anesthesiologist to arrive before doing surgery.

True believers might say we should never wait, because a slow-growing tumor could turn virulent. But we need to think about actual risks. Today, markets are willing to lend to the American government at the lowest 20-year interest rate since 1958. In the crisis of 2008 and 2009, money flowed to the United States because it was seen as the safest spot in the storm. There is no evidence that we have to act immediately.

Countries that enjoy the markets’ confidence have another reason to wait. Greece and other troubled nations on the periphery of the euro zone can no longer borrow at affordable rates. They must immediately cut expenditures and raise taxes, despite the terrible toll on employment and output. Countries like the United States, Germany and France can play an essential role as sources of growth and demand for the world economy. Strengthening our economies will help keep the world from slipping into another recession, and allow for continued healing of vulnerable financial markets here and abroad....

The best thing would be for Congress to pass a plan now that will reduce deficits when the economy is back to normal.... History shows that well-designed backloaded plans are credible. For example, changes to Social Security eligibility and taxes have been passed years, if not decades, before they took effect. And in an environment like today’s, when Congress has again agreed to pay-as-you-go rules, deviating from planned reforms forces countervailing actions. Such backloaded deficit reduction would not hurt growth in the short run — and could raise it. If uncertainty about future budget policy is harming confidence, as some business leaders suggest, spelling out future spending and tax changes could be helpful...""
HT: Grasping Reality with Both Hands
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