Nice graphic showing all the items in the Consumer Price Index. Lots of numbers but I see something else...

Here is a graphic (Business Insider) that presents the latest Consumer Price Index (CPI) for November (2013) in a very helpful way. It orders the change in prices of the items in the "market basket" of goods and services the Bureau of Labor Statics tracks on a monthly basis from high to low.  There are 175 items listed below.  The numbers are small because they represent the percentage change from a year earlier (November 2012).

If you were to add up all the positive numbers that extend to the right and subtract all the negative numbers that extend to the left  you would come up with a year over year percentage change of 1.2%.

Relatively low inflation, indeed.

Observation:  What you see is a bunch of numbers.  What I see is globalization.  Compare the change in prices of the top and bottom 10 items. The goods and services at the top of the list are considered "Non-Tradable" items. They are produced domestically and are virtually impossible to "off- shore". They are not so much subject to global competitive price pressure. These prices tend to increase consistently.

The goods at the bottom are "Tradable" and subject to the competitive price pressure of being produced off-shore.  These prices tend to decrease, or at least remain stable, over time.

Source Business Insider (go here for larger image)

A scene from "Wolf of Wall Street" plays out in real life (sort of). See the daily chart of the penny stock that went through the roof because of mistaken identity.

Opps! Here is a nice example of "Animal Spirits" on steroids.

Google recently announced it was going to purchase a company called Nest,  that makes high tech thermostats and fire equipment, for $3.2 billion dollars

However, it looks like the biggest (in the short term anyway) beneficiary is a company called NESTOR that is traded in the stock market under the tracking name "NEST".  See the confusion?  However, Nestor makes and sells traffic control equipment to cities.

Prior to Google's purchase NEST was traded on the stock market for, get this, $.0020 cents PER SHARE. Yes you read that right.

Below is a screen shot of the stock from Yahoo Finance I took a few minutes ago.  You can see the price is invisible until yesterday afternoon.  It had a meteoric ride up to $.10 cents.

So, if you bought $1,000 dollars of NEST at $.0020 per share you would own 500,000 shares.  If you were able to sell at the high point you would have ($.10 X 500,000 shares) $50,000.

That is quite a rate of return.

Note: you can see the price I snapped on is $.0021 (in blue near the time and date).  I could not get the cursor to settle on the low point of $.0020)

How to smartly use the Community College system to reduce the cost of getting a 4 year degree. It is important to choose your classes wisely

Unless you are rich, a star athlete, or your parents were able to fund a 529 educational savings plan, then you are going to be concerned about paying for college.  There are several well established ways to help reduce the cost of going to college, but I would like to discuss one, Community College, that is often recommended but the improper use of them could pose problems for students as they move to their chosen university.

All classes are not created equal.  While there are absolutely some exceptions, core subject classes at 4 year universities are more rigorous than the equivalent class at a Community College.  I know, that is not polite to say, but it is important to acknowledge so correct decisions can be made.

Here is what I suggest to students to economize on the cost of college by taking advantage of the Community College system.  Take the core classes at a local Community College that DO NOT directly pertain to your prospective major. For instance, if you are going to be a math major do not take math classes at a Community College.  Instead take the English, Social Studies or Theater classes that are required of you even if you are a math major.  Take ALL your math classes when you get to your chosen university because, for the most part, they are going to be classes that build upon themselves as you move through the universities math department.  I believe this will ease the transition to the upper level junior and senior level classes.  Not having establishing that solid base by taking the introductory core classes within your major’s department will put you at a disadvantage.

Bottom-line:  Save money by taking classes at a Community College that are not within your chosen major.  Resist the temptation to do otherwise.  I hope you will be thankful for this advice because (1) you reduced the cost of college for yourself and (2) you excelled in your major because you took the right classes at the right time.

Having fun with the Consumer Price Index. Can you spot the goods produced domestically? Internationally? Good times!

Economist Tim Taylor posted this chart on his blog.  It shows how prices, as calculated by the Bureau of Labor Statistics (BLS) through the compilation of the Consumer Price Index (CPI), have changed over time

The BLS calculates the CPI by surveying a "basket of goods and services" that a typical consumer might purchase on a daily, weekly, monthly or yearly basis.  They then determine a Price Index that results in number in base 100 form. The base year CPI is always 100. If in a subsequent period the Index is different from the base year Index then we can say the price level has increased or decreased.  This gives us some measure of inflation or deflation in the economy.

Currently the BLS uses the time period of 1982 to 1984 as the base year for the index for most of the goods and services in "the basket".

So, using 100 as our base we can see how the prices of various goods and services have change over time.

For instance, the category of "College Tuition and Fees"  has a current price index of 706.  This means that it is 606 index points higher than it was in its base year of 100.  We can infer from this that the price of college and it various fees has increased by 606% since the 1982-84 time period.


Every Index number you see that is OVER 100 means the prices of those things have increased over time. Every one under 100 means the prices of those things have DECREASED over time.  To find the percentage change just take the Index number you see in the chart and subtract 100.

Observation:  There are many things going on here and Professor Taylor writes of several.  I would like to add one more that he did not.  Look at the items at the bottom of the list.  Notice Toys and Televisions have actually DECREASED in price A LOT.  Durable Goods (cars, wash machines, etc) and Apparel have increase only marginally since 1982-84.  I see the effect of globalization on the bottom few categories. Production of those items have increasingly moved to low(er) cost production countries.  The categories as you move to the top are goods or services that are not easily, if at all, mobile in terms of where they can be produced.

Here is the link to the most current Consumer Price Index.  Go to it and see if there are other goods or services that conform to my observation (or not).  Really, go do it. IT IS FUN!!

Understanding the difference between credit and debt. One makes us happy and the other doesn't, right? Why are we so dumb when it comes to this distinction? Find out here!

My cyber friend over at The New Arthurian has a posting (HERE) I think is very important for students and young adults. It will make your financial life much better if you understand the distinction between "Credit" and "Debt".

No debt produces anything. New uses of credit can sometimes be for productive purposes. But after that money is spent, nothing remains but the evidence that it was credit we were spending: Nothing remains but the debt.  

Debt is evidence of credit use. Debt is the cost associated with credit use. 

Borrow a dollar today, spend it today, and boost the economy today. Tomorrow, nothing remains but a dollar of debt, the cost of interest on that debt, and the cost of repayment. These costs do not boost the economy. Just the opposite, in fact. This is true no matter who borrowed the money. It is true, no matter what the money was used for. 

In the short term your income is fixed.  After you pay taxes what you have left over is termed your "disposable income".  All of that disposable income will go towards meeting "needs" and "wants".

Going outside of our disposable income to buy something with credit to meet a need and/or want leads to a debt that requires us to pay, not only the amount we borrowed, but the interest for the privilege of having that credit extended to us. That principal and interest did not exist to us before.

It WILL exist going forward and BOTH will have to be paid for out of your fixed disposable income.

When you pay interest on a debt it means an amount of money comes out of your disposable income that you COULD HAVE used to buy something else.  But you can't. Probably not for a long time. You committed future earnings to pay for this past purchase when you accepted the credit. I repeat: a part of every paycheck going forward is committed to a past purchase.

The original amount you borrowed PLUS the interest payment is the present opportunity cost of using credit.  It prevents you from new consumption this month, next month, next year...

Better be happy with what you bought on credit.

Here is the litmus test:  Does what you bought in the past on credit bring you the same satisfaction TODAY as what you could purchase with that principal and interest tomorrow?

Perhaps that is a false choice.  However, when I think about it in these terms AT LEAST it makes me pause and consider if that purchase is something I want to serve as a drag on my future consumption.

Hope this helps you make better financial decisions!

NOW I know why trucks and SUV's are Top Sellers in the US. It is tax rather than a "Bubba" factor. And Bubba knows taxes...

Once in a while I will post the monthly and/or yearly car and truck sales data as a point of interest in an economic activity, auto manufacturing that is important industry in the US. (See HERE and HERE)

Without fail trucks and SUV's have been the top sellers for quite sometime.  I think it you asked most people they would say passenger-type cars (2 door and/or 4 door) were by far the best-sellers.

We underestimate the value of trucks/SUV's as a family vehicle AND one used for business purposes. From personal observation, I believe the two are mixed quite often and the US government through the tax code is very helpful in this regard.

I came across this link from an accountant informing clients of the advantageous tax benefit from the purchase of an truck/SUV for businesses purposes (link courtesy of Economix).  The accountant gives a nice example of how this works to the vehicle owners advantage:

"...For example, if you bought a new SUV over the 6,000 pound limit for $70,000 and use it 100% for business, you would be able to expense the $25,000 immediately under “section 179” and $22,500 immediately under the 50% bonus depreciation rules. The remaining adjusted basis of $22,500 is then eligible in 2013 for a depreciation deduction of $4,500. This brings your total 2013 deduction on a $70,000 purchase to $52,000..."

So, the owner the vehicle will be able to reduce their taxable income by $52,000 in the year they purchase the vehicle.  If they were in the 25% tax bracket (could be a lower or higher bracket) that means their income tax bill will be reduced by $13,000.  

This particular tax "break", created by the political system and administered through the tax code, has two goals.  One, it lowers the cost of purchasing a work vehicle that allows a business to presumably be more productive.  Two, it helps the auto manufacturers (and dealers) to produced and sell more trucks and SUV's.

This is a tax break that has been subject to lots of abuse.  A person who buys a truck/SUV and uses it for at least 50% of the time for business purposes is eligible for a tax deduction as well (around $11,500).  Go HERE for a simple explanation of how this works.

That would amount to several thousand dollars in income tax savings for someone who can justify using the vehicle 51% of the time for a business purpose.  The other 49% can be for personal use.

Remember that the next time you see a work truck/SUV (blue collar OR white collar) parked at the ball field or some place other than a work site and used for personal reasons.  

I am not judging this (or am I?). Only suggesting this COULD BE a contributing reason trucks and SUV's are top sellers.

Made you look. Made another chart showing the change in the number of people claiming disability benefits. Now, this one REALLY perplexes me...

This is a follow up to my last post showing the change in Social Security claims by "Retired Persons" from 2005 to 2013 and how it impacts the labor force participation.  See that HERE.

Another variable that affect the participation rate is the number of people that exit the labor force via disability. Using the data base from the Social Security Administration (HERE) I charted the quarterly claims for disability benefits from January 2005 to December 2013.

The RED BARS represent the 1st quarter of each year. The YELLOW area represents the official time span of "The Great Recession".

Observations:

(1)  The large spike in disability claims in the midst of the recession was not unusual.  You can see similar one time increases took place in prior years when the economy was doing well.

(2) Post official recession (after June 2009) there was a consistent average quarterly increase up to the 1st quarter of 2012.

(3) After the 1st quarter of 2012 up to December 2013 the average decrease significantly.

(4) If you look at the averages pre-recession and post official recession you will see they are similar, 74,020 versus 74,020.  There was approx a 12% increase in average quarterly claims during the official recession.

There are STILL more people exiting the labor force than we can account for with disability claims and workers retiring.

The puzzle remains.  Where are those 100's of thousand ADDITIONAL people?

Looky here at the chart I made. Might help in understanding the role of retirements in the changing nature of the US labor force. Must know the problem before we can address it...

One of the major contributors to the declining labor force participation rate in the US is the aging of the Baby Boom Generation.

Using the database from the Social Security Administration I put together this chart which shows, by quarter from 2005 to 2013, the number of people claiming Social Benefits for retirement.  There are several categories for which people can claim SS benefits but I just used "Retired Workers" for this chart.  The assumption is these are people exiting the labor force, whether they were employed or not.

A couple of observations.

(1) the RED bars are all the first quarter of the respective year (January to March).  Notice the surge EVERY 1st quarter of the year to claim benefits. In general the low quarter is the 4th quarter (October to December) of the year.

(2) The 1st quarter of 2009 seems to be a major inflection point (the HIGHEST bar).  Retirements surged that quarter and stayed elevated on average thereafter. I inserted a horizontal GREEN bar to show the quarterly average BEFORE 2009 (145,000) and AFTER (280,294).  That is a significant difference of 135,294 per quarter in new retirements (a 93% increase!).

This is not the whole story of the decrease in the Labor Force Participation, but as you can see it is not small part.

I hope this helps you in visualizing this important issue. If we don't know the facts, then we cannot address the issue with good policy.

Are people exiting the Labor Force because they are giving up looking for work or because they are retiring?

One of the variables cited as the reason participation in the labor force has been contracting is "Demographic".  Specifically, baby boomers are retiring and exiting the labor force. No doubt this is happening.

With the latest report (Dec 2013) the Labor Force Participation Rate (LFPR) did take a significant plunge.  This helps to artificially decrease the Official Unemployment Rate.  Even though an inadequate number of new jobs were created, the unemployment rate decreased, mostly because of the decline in the LFPR.

Ok, fine.  I get it.  I am sure we will hear in the coming days one of the major reasons is as I stated above.

The Social Security Administration keeps VERY current data on claims for benefits. So, I went there.

Below is a snapshot, by month for 2013, of the number of people classified as "Retired Worker" who claimed benefits.  In YELLOW I highlighted the last few months.  In RED I calculated the change in claimants from month to month.

Notice the numbers actually DECREASE starting in August 2013.  Surprised?  I am, quite frankly.

Not sure how this contributes to the debate BUT, well, it somewhat calls into question the emphasis the exiting of "the olds" have on the Labor Force Participation Rate.

What do you think???

Your first look at the latest JOBS REPORT and where the jobs were created (or not). This was NOT a good month for employment!

The latest jobs report for December 2013 is out and it is not good by any measure.  My very informal survey of various economics blogs (Left and Right) had guesstimates of between 175,000 to 235,000 new jobs projected. The official measure from the Bureau of Labor Statistics as a net 74,000.

Here is the section of the report that shows the major sectors of the economy and the number of jobs businesses have reported to have created in December. There is also the prior two months AND the jobs created one year prior.  This helps give perspective to the current number.

I highlighted in RED the areas where there was significant job LOSS(!) and in YELLOW the areas of significant job gains. In BLUE is "Health care and social services". This one is unusual because in prior periods this category of employment has been most always positive. For it to turn negative is unusual.

The increase in Retail jobs is not unexpected. What is worrying is that the 55,000 new jobs in this sector are relatively low-paying jobs.  The same can be said, for the most part, of the 40,000 in "Temporary Helps Services".

These jobs are certainly good for the people who got them.  However, no one can claim the quality of these jobs are ones that are going to significantly boost the economy.  Certainly they are not going to address the issue of inequality.

 Significant shrinkages in Construction, Information and Government were a drag on employment market.

One notable area was the very small decrease in "Healthcare and social services" (In BLUE).  This area of employment has been the workhorse for job creation for many years.  Seldom does it go negative!

January has to be better...RIGHT???

What motivates you more to do something that produces a predetermined desired outcome---The threat of losing $10 or the enjoyment of gaining $10? See here why the answer is not so easy...

IF the private or public sector is going to design policies that will elicit a specific response from consumers (or citizens) then sometimes they have to go against conventional thinking.

One such example comes from a new study (GO HERE FOR THE STUDY) on consumer behavior in regards to the use of plastic or reusable bags for buying groceries.  Stores are trying to GO GREEN and reduce the use of plastic bags for environmental reasons.

There are 2 real life options the study looked at from grocery stores in the Washington D.C and Montgomery County (VA) area: (1) a 5 cent TAX on the use of each plastic bag OR a (2) a 5 cent CREDIT (or Bonus) from the store for each reusable bag the shopper brings and uses for their groceries.

Keep this in mind when you read the following from the WSJ: With the per bag TAX the consumer is GIVING UP 5 cents when they use a plastic bag.  With the CREDIT/BONUS they are GETTING 5 cents (or reducing the total of the grocery bill) when they bring their own reusable bag.  In other words, in one instance you PAY the tax and the other they pay YOU to bring a reusable bag.

"...Observing 16,251 shoppers at 16 grocery stores in Washington, D.C., neighboring Montgomery County, Md., and northern Virginia and data from grocery store scanners, she found that a 5-cent tax on disposable bags substantially decreased disposable bag use while a 5-cent bonus for using a reusable bag did not. 

Before the tax, several stores offered a 5-cent bonus to shoppers who brought their own bags. In stores that offered no incentive, 84% of shoppers took at least one throwaway bag per shopping trip; in stores that offered the nickel lure, 82% did. 

In contrast, some 82% of Montgomery County shoppers used at least one disposable bag per shopping trip before the bag tax was imposed; 40% did afterward...."

So, the possibility of losing 5 cents with a tax had a stronger effect on consumer behavior than the prospect of gaining 5 cents with the credit/bonus.  So much for the "a little sugar goes a long way" method of persuasion.

The study notes that this is an established and observe behavior called "Loss Aversion".  

"In economics and decision theory, loss aversion refers to people's tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains." 

The study includes this bit of advice for private and public policy makers by using a couple of examples where they can "motivate" consumers to produce the desired outcome:

"These findings suggests the importance of accounting for behavioral insights when designing a wide variety of environmental incentives. 

For example, Starbucks Coffee rewards customers who bring their own coffee mugs with a ten-cent discount. My results suggest that this policy might be more effective if Starbucks instead reduced the price of coffee by ten cents, but charged for using a paper cup. 

Similarly, the federal government awards a tax credit to customers who purchase environmentally-friendly Energy Star products. This policy might increase consumption of these products if they were taxed for purchasing energy-inefficient products."

Sometimes the counter-intuitive is the most effective, but hardest to implement because, well, it is counter-intuitive.  

Guess that is why I LOVE reading stuff like this! :)

The US has the SAME number of manufacturing jobs as it had in 1960. Why don't they mean as much as they did back then?

Here is a graph from NPR that shows, over time, the number of jobs classified as either manufacturing and service.

A few observations:

(1) One problem I have with it is the numbering on the vertical axis.  The red line representing manufacturing jobs hugs the 20 million mark but it does appear over it more than under it.  Because the measurement scale is small it is hard to see that even small changes represent 100's of thousands and/or multiple millions of jobs gained or lost in a given time period.

(2)  The sum total of manufacturing jobs has stayed within a pretty constant/consistent band over time, with the exception of the Great Depression and Great recession. It has had its ebbs and flows.

(3) Look at the two historical points I put on the graph (1960 and 2009-ish). Both are at 20 million manufacturing jobs.  However, in 1960 the civilian labor force was 69.63 million so those 20 million manufacturing jobs represented 29% of the labor force.  In 2009 the civilian labor force was 157.7 million so those 20 million represented 13% of the labor force (data source HERE).

Politicians and Policy Makers focus a lot of attention on the manufacturing sector in terms of how to promote jobs.  Given the history of the nominal number of jobs in this sector, is this a proper focus or a misplaced one?

In 10 short years the US has gone from being #1 in college attainment (age 24 to 34) to 14th compared to the rest of the developed world. What happened? See the numbers here!

Below are historical data on the percentage of the population of select developed countries that have attained at least a bachelors degree.  I high-lighted in yellow the year and age group I was interested in.  The US is high-lighted in BLUE-ish at the bottom.

In 2001 the 29.9% of the US population, age 25 to 34, had attained at least a bachelors degree.  That percentage ranks #1 on the list in 2001.  Look at that again!  WhooHooo!  Our percentage is statistically much larger than the closest countries.

Fast forward just 10 years to 2011.  The US percentage increased to 33% for that age group BUT now we rank 14th.  Look at that again! Whoo, ummm, Whoops.  Our percentage is statistically much SMALLER than many that are ahead of us

If you look at 2007 (just prior to the recession that started in Dec 2007), same age group, the US falls to 7th place BUT the percentages are statistically small and not that much above he US.  An inflection point, it seems.

The countries ahead of the US appear to have done a better job in getting students through college during the downturn.

What lesson can we learn from this??

Source: National Center for Educational Statistics

The National Center for Educational Statistics have some really terrific data on a wide variety of education related topics. Check it out!

Is a new house about to become more expensive? Plywood producers seeking an Import Tariff on plywood from China. Let's go to the graphs and examine this!

Plywood manufacturers in the US petitioned the Government to investigate claims that Chinese producers of plywood were "dumping" their plywood on the US market at unfair prices.  The implication is the Chinese government is giving their producers subsidies so they can sell the plywood at prices that are actually below the cost of producing them.  The overall goal of "dumping" is to gain market share as (1) the company sells more because the price is cheaper and (2) competitors without the subsidies go out of business because the dumping price is lower than their cost of producing.

U.S.Plywood industry's plea for help rejected: Firms complain of Chinese 'dumping' on domestic market.

That's more than Sloan can say for the inside of the mill, where Columbia has been hit hard by Chinese competitors dumping plywood on the North American market, undercutting price by as much as 56%, says Gary Gillespie, Columbia's general manager for northern operations.

Dumping is defined by the U.S. Department of Commerce as a foreign company selling a product in the U.S. at "less than its fair value."

U.S. producers are crying foul and would like have tariffs imposed on each piece of plywood imported into the US.

Welch testified before the ITC this past September, urging it to impose tariffs on Chinese plywood imports to ensure a "level playing field."

Microeconomics has a lot to say about the effect tariffs have on the marketplace.  I am going to show you graphically how this MAY/MIGHT play out in the Market for Plywood. This is an IMPORTANT concept in AP Microeconomics so I hope it will be helpful to you.

The following graphs have made up prices and quantities.  They are just for instructional purposes and not to be taken literally.

If an economy is not open to trade with foreigners it is said to be in a state of Autarky (pronounced "Otter-Key").  The first graph shows the market in this state with a domestic price or $10.00 and a domestic market quantity of 1,000 pieces of plywood.

This next graph is the same as above but shows the areas of Consumer Surplus and Producer Surplus in equilibrium in autarky. 

Now, assume the country engages in trade and comes out of autarky.  The price of the same good when it is imported is $5.00. Half of the domestic price!

When the price of the good changes we MOVE ALONG the respective Supply and Demand Curves (Law  of Supply and Law of Demand). We can see in the graph above, when the price is $5.00 the Domestic Quantity Supplied is 500 (Point "B") and the Domestic Quantity Demanded is 1,500 (Point "A").  Our Domestic Market for Plywood is no longer in equilibrium---Quantity Demanded ("C") is GREATER than Quantity Supplied ("B"). Normally this would result in a shortage, but the shortfall is going to be made up with  IMPORTS or 1,000 pieces of plywood from China.

Important point: Notice what happens to Consumer Surplus in the graph below.  There is additional CS for consumers: They get to "enjoy" more plywood at a lower price than before trade. However, notice that Producer Surplus is less than it was before.  Some producer surplus was transferred to consumers.  Producers are left with a small sliver on the bottom left hand portion of Supply*.

So, US consumers are much better off and US producers are much worse off.

Because US producers are worse off, they may choose to try to "level the playing field" by lobbying for a tariff to be assessed on imported plywood so the price will closer reflect the US cost of producing.  In other words, to take away the un-competitive edge the foreign governments may have given their producer.

Assume they are successful  and a tariff of $3.00 is levied on each piece of plywood (graph below).  This will increase the price to $8.00. 

Remember: PRICE increases we (again) MOVE ALONG our respective Supply Curve (from Point B" to "F") and Demand Curve (from Point "C" to "E"):

As a result of the tariff, we have a change in Imports, Domestic production, Domestic Consumption, Surplus, Dead Weight Loss, and Tariff Revenue.  The most significant change is imports have been reduced to 500 pieces of plywood. The higher price as a result of the tariff induced the producers to increase quantity supplied by 250 (movement from "B" to "F") AND the the higher price has decreased the quantity demanded by US consumer by 250 pieces of plywood (movement from "C" to "E"). 

Other significant changes take place as well.  These areas have the "?" in them and are important to be able to identify.  Note they are all areas that USED to be Consumer Surplus. That is going to go away!

The first one (below) Producer Surplus is recaptured by US manufacturers of plywood. Because the price is now $8.00 in the marketplace they are induced to produce an additional 250 pieces of plywood (Law of Supply!).

The second area is "Dead Weight Loss" (DWL) to consumers.  This is the area just below the Demand curve between Point  "C" and "E".  This means that as a result of the tariff consumers lose the benefit of purchasing 250 pieces of plywood at the lower import price of $5.00.

The second area of "Dead Weight Loss"(DWL) is attributed to "Society" (graph below).  It is DWL because resources were allocated to produce additional plywood SOLELY as a result of the tariff.  This implication is society could have benefited in two ways: (1) consumers could have enjoyed more plywood at lower prices from the foreign producer and (2) the resources allocated to produce the additional units of plywood could have been used for something else.  You might recognize this as  "Opportunity Costs".

Lastly, the some lost Consumer Surplus is transferred to the Government by way of the tariff.  We can calculate the Tariff Revenue ("T.R.") by taking the amount of the tariff ($3.00) and multiply it by the number of imported pieces of plywood (500) and get $1,500.  This area is not considered DWL because the tariff revenue could be used by the government to subsidize the production of another good, creating surplus somewhere else.  

Oh, wait, isn't that what the foreign government did in the first place to create this situation?  Makes you think, doesn't it?? :)

Makin' Bacon in 2014 may be a little more expensive.These little piggies, unfortunately, are not going to make it to market...

Makin' Bacon is likely to cost a bit more this year. All is not well down on the farm.  Here is a short article about it. Read it and then "go to the graphs" below for a basic supply and demand lesson.

Pork market prices are expected to rise in 2014

The million-dollar question that many livestock producers want the answer to is: How market prices will fare in the future.Steve Meyer, the founder and president of Paragon Economics, said in a recent interview that producers can expect to see some changes in pork figures next quarter as a result of the porcine epidemic diarrhea virus, which hit first in June and July. 

Due to this, he noted, that there will be a reduction in slaughter numbers from where they would have been had the animals not been sick. 

The first and second quarters of the new year probably will be down between 2 percent and 4 percent in slaughter production, Meyer said. 

The good news for pork producers is that hog prices will be positive.
“Reduce supplies, prices go up,” Meyer said, adding that producers whose hogs were infected with PEDV most likely lost three to four weeks of production. 

Another thing that will help producers in the coming year is that the cost to produce a pig will be $35 lower per head. Meyer explained that this can be attributed to a good corn and soybean crop. 

“It was the fourth-largest soybean crop ever,” he said, adding that a bigger crop helps drive down the average cost of feed. 

Although Meyer doesn’t believe a lot of new individuals will start raising pork, he does believe that pork producers who have been waiting to expand, but hadn’t because they were waiting for better market prices, finally will expand their sow herds.

There are a many basic microeconomics concepts we can cull from these few paragraphs.  The one I want to focus on is how a short run disruption on the supply side, as described in the article, affects the market.

A couple of qualifications: (1) I just made up the prices and quantities you see in the graphs just to give reference points, (2) I make assumptions regarding the relative elasticities for both the Demand and Supply Curves in the Market for Pork products. The second one is certainly open to debate but for simplicity, go with it.

At the end of the article it is suggested that in response to the high(er) price additional producers may enter the market.  This means that over time the situation will reverse itself.  The Supply Curve will shift back towards the RIGHT, indicating that at the market price there will be an INCREASE in Quantity Supplied.  Quantity Supplied will be greater than Quantity Demanded (Surplus!!) and the price will decrease.  As the price decreases, the quantity demanded increases (Law of Demand).

The market will tend towards settling at the Long Run price and quantity...Until it doesn't.

Lunch time. For some reason I am craving a BLT.  :)