Originally posted on November 5, 2009.   David Beckworth sums up a lot of recent economic history in one figure.     A few thoughts:  I wish Arnold Kling were correct that inflation is around the corner.  We could use some inflation to get back on track.  Nominal wages are simply not flexible enough to get the job done in short order and there is much to fear from populist backlash.   See also the link above for a remarkably similar figure for the OECD which illustrates the US's role of monetary hegemon. ... View more

Originally posted on February 19, 2014.   William Luther recommends the use of NPR’s Planet Money podcasts in teaching a principles of macroeconomics class. He finds that listening to these podcasts informs students and increases engagement. Here, from Luther’s paper, is a chart connecting chapters in Modern Principles with links to relevant Planet Money podcasts.   Modern Principles: Macroeconomics NPR’s Planet Money The Power of Trade and Comparative Advantage Making Christmas More Joyful, And More Efficient GDP and the Measurement of Progress Why GDP Matters for Schoolkids   Would You Rather Be Rich In 1900, Or Middle-Class Now?   Black Market Pharmacies And The Spam Empire Behind Them The Wealth of Nations and Economic Growth The Secret Document That Transformed China   Can A Poor Country Start Over?   What Two Pasta Factories Tell Us About The Italian Economy   If Economists Controlled The Borders Growth, Capital Accumulation, and the Economics of Ideas Can You Patent a Steak?   How To Fix The Patent Mess   The Price of Things You Love   Can Andrew Sullivan Make It On His Own?   The Hidden Digital Wealth In Your Pocket Saving, Investment, and the Financial System A Financial Adviser Bets The House   The (Legal) Marijuana Business   Cyprus Takes Away The Security Blanket Stock Markets and Personal Finance A Father Of High-Speed Trading Thinks We Should Slow Down   A Billion-Dollar Bet Against Weight-Loss Shakes   Don’t Believe The Hype Unemployment and Labor Force Participation The Past And Future Of American Manufacturing   Keeping The Biggest Secret In The US Economy   LeBron James Is Underpaid   The Invisible 14 Million Inflation and the Quantity Theory of Money How Four Drinking Buddies Saved Brazil   Should We Kill The Dollar Bill?   Where Dollar Bills Come From Business Fluctuations: Aggregate Demand and Supply Inside The Great Depression   Why The Price Of Coke Didn’t Change For 70 Years Transmission and Amplification Mechanisms The 14-Year-Old Who Bought A House   The 15-Year-Old Who Bought Two Houses The Federal Reserve System and Open Market Operations If Teens Ran the Fed   The Birth Of The Dollar Bill Monetary Policy The Gold Standard   The Gold Standard, R.I.P.   Bitcoin Goes to the Moon The Federal Budget Lighthouses, Autopsies And The Federal Budget   When The U.S. Paid Off The Entire National Debt   What If We Paid Off The Debt?   The Surprisingly Entertaining History Of The Income Tax   The Price Of Free Breast Pumps   Why Some People Love Tax Day Fiscal Policy The Great Stimulus Experiment International Trade The Cotton Wars   Why K-Pop Is Taking Over The World   The Con Man Who Took Down His Own Country (Then Ran For Office)   The Lollipop War International Finance Should Iceland Kill The Krona? Political Economy and Public Choice A Big Bridge In The Wrong Place   Inside Washington’s Money Machine   Jack Abramoff On Lobbying   A Former Lobbyist Tells All   Why Taxpayers Pay For Farmers’ Insurance   Schoolhouse Rock Is A Lie   Why Buying A Car is So Awful   New Jersey Wine   Coney Island Back In Business ... View more

Originally posted on August 14, 2013. In our chapter on incentives Tyler and I point to evidence that incentives influence choices even as seemingly fixed as the time of birth and death. Here’s an article from the Washington Post on recent evidence on how people time births to get a tax break! ... View more

Originally posted on September 23, 2009.   In South Africa the problem of teacher absence is so bad that frustrated students rioted when teachers repeatedly failed to show up for class. But the problem is not limited to South Africa, teachers are absent throughout the developing world.  Spot checks by the World Bank, for example, indicate that on a typical day 11% of teachers are absent in Peru, 16% are absent in Bangladesh, 27% in Uganda and 25% in India. Even when teachers are present they are often not teaching.  In India, where a quarter of the teachers are absent on any particular day, only about half of those present are actually teaching.  (These are national averages, in some states the problem is worse.) The problem is not low salaries.  Salaries for public school teachers in India are above the norm for that country.  Indeed, if anything, absenteeism increases with salary (and it is higher in public schools than in private schools, despite lower wages in the latter).  The problem is political power, teacher unions, and poor incentives. Teachers are literate and they vote so they are a powerful political force especially where teacher unions are strong.  As if this were not enough, in India, the teachers have historically had a guarantee of representation in the state Legislative Councils so political power has often flowed to teachers far in excess of their numbers.  As a result, it's virtually impossible to fire a teacher for absenteeism. The situation in South Africa is not that different than in India.  The NYTimes article on South Africa has this to say:   “We have the highest level of teacher unionization in the world, but their focus is on rights, not responsibilities,” Mamphela Ramphele, former vice chancellor of the University of Cape Town, said in a recent speech.   Some reforms are planned in South Africa, including greater monitoring of teacher attendance but this offhand remark suggests the difficulties:   “We must ask ourselves to what extent teachers in many historically disadvantaged schools unwittingly perpetuate the wishes of Hendrik Verwoerd,” [President Zuma] recently told a gathering of principals, implicitly challenging the powerful South African Democratic Teachers’ Union, which is part of the governing alliance(!).  (Emphasis added, AT.) ... View more

Originally posted on November 2, 2009.   In this time of cutbacks and furloughs professors need a quick source of extra cash.  David Zetland explains how to sell a dollar for more than a dollar (and teach some game theory and something about political lobbying at the same time).                                                                                             ... View more

Originally posted on December 4, 2009.   In Modern Principles we strive to use modern examples to illustrate and apply theory thus we use Zimbabwe as our example of hyperinflation, rather than the more traditional example of 1923 Germany. The German hyperinflation of 1923 is still relevant, however, for understanding history.   The PBS series, The Commanding Heights, has lots of great material for an economics class. The first two minutes of the episode shown below drive home the point that hyperinflation destroyed the savings of the middle class and prepared the way for Hitler.   For copyright reasons, the YouTube version embedded below has more images than the official PBS version that you can find at the link above. ... View more

Originally posted on December 4, 2009.   In The Price System we show how even a product as simple as a rose requires the international coordination of flower growers, truck drivers, airlines, Dutch auctioneers and many thousands of others.  In our chapter on Price Ceilings we show what happens when a price ceiling prevents the necessary coordination from occurring.  You can find lots of interesting stories in the chapter of shortages, shrinking quality, misallocation and production chaos. The second half of the except, The Specter of Stagflation, from The Commanding Heights has a short introduction to the politics and economics of wage and price controls under Nixon.  Students may be amused that it features Ben Stein talking about his father Herb Stein and also has many figures from later administrations such as Dick Cheney and George Schultz.   The video makes several important points.  First, wage and price controls were initially popular with the public.  Second, the law created shortages and ultimately did not solve the problem of inflation.  Most interesting, there is a rather horrifying section showing farmers drowning baby chicks.  In fact, farmers gassed, drowned, or suffocated a million baby chicks at this time.   The video, however, is not clear on exactly why the farmers behaved in this way and this is a good opportunity to see if your class can figure out the answer.  The answer is that the price of chickens was controlled but the price of grain used to feed chicks was not.  A rising feed price and a fixed chicken price meant that feeding chicks to sell chickens was no longer profitable.  Thus, farmers drowned their chicks and shortages of chicken become common.   An article from 1973 in Time magazine notes the same process worked in other areas, “Other farmers sent pregnant sows to the slaughterhouse and dispatched old milk cows to hamburger heaven.” The article from Time also illustrates how one intervention in the price system often snowballs into further interventions.  In this case, “To buck up the supply and bring down the price of feed, the Administration clamped a temporary embargo on exports of soybeans and cottonseed.” ... View more

Originally posted on December 11, 2009.   In our chapter, Public Goods and the Tragedy of the Commons, we discussed  the 75% decline in the catch of southern bluefish tuna, which is highly prized as sushi.  60 Minutes has a great episode on this issue which covers the fascinating Tsukiji fish market in Tokyo, the biggest wholesale fish and seafood market in the world, the Mediterranean fishermen who are losing their livelihood as fish stocks decline, the industrialization of fishing (including tuna ranches!) and finally the decline of the tuna stock.   The whole video is fascinating but if you want to shorten it I suggest covering the first 4 minutes on the Tsukiji fish market then jumping to around the 8 minute mark when the purse seiners are discussed. An interesting puzzle is that tuna is relatively inexpensive.  Ask students whether this can be reconciled with an impending collapse of the tuna stock.  After all, isn’t a low price a sign of plentiful supply?  The answer points directly to the tragedy of the commons – the low price is possible because the purse seiners are scooping up enormous quantities of tuna which pushes today’s price down but too few fish are left to breed so future stocks are imperiled.  An entrepreneur who owned the stock of tuna–like Frank Purdue owns his chickens–would not do this but tuna are not owned until they are caught.  In other words, the current tuna boom is like “eating the capital stock,” you get a big party today but a tragedy tomorrow.   FYI, the tragedy of the commons is driving many other fish stocks into collapse. ... View more

Originally posted on June 6, 2010.   The stock of fish is declining worldwide at a rapid and accelerating pace.  In Can Catch Shares Prevent Fisheries Collapse? the authors survey fish stocks and find that individual transferable quotas (ITQs) do appear to work in stabilizing and even increasing stocks: Although bioeconomic theory suggests that assigning secure rights to fishermen may align incentives and lead to significantly enhanced biological and economic performance, evidence to date has been only case- or region-specific. By examining 11,135 global fisheries, we found a strong link: By 2003, the fraction of ITQ-managed fisheries that were collapsed was about half that of non-ITQ fisheries. This result probably underestimates ITQ benefits, because most ITQ fisheries are young. The results of this analysis suggest that well designed catch shares may prevent fishery collapse across diverse taxa and ecosystems.   One of the authors of the paper, Christopher Costello, is featured in the video below from Reason TV which covers the world wide decline in fish stocks, “capital stuffing,” and the use of ITQs to solve the tragedy of the commons (FYI, all these concepts are discussed in Modern Principles).   The video mentions but does not investigate further the problem of fish and whales that travel long distances making property rights more difficult to enforce–a good subject for classroom discussion. Catch-shares have recently (2009) been introduced in Cape Cod.  Here’s a good primer on the costs, benefits and difficulties of implementation.  One interesting observation: Doing away with season restrictions reduces ‘derby’ conditions, in which fishermen race out, even in dangerous weather, to catch as much as possible. It also eliminates seasonal market gluts, potentially increasing the prices fishermen can command for their catch.   See also this 60 Minutes video on tuna.                                                                                   ... View more

Originally posted on January 30, 2012.   Can hunting save an endangered species? Yes. In Africa hunting has been critical to the conservation of a number of species, despite the sometimes opposition of the United States which can prohibit US citizens from hunting even in foreign countries.   I was surprised to discover, however, that “some exotic animal species that are endangered in Africa are thriving on ranches in Texas, where a limited number are hunted for a high price.” Texas hunters have saved several endangered African species, unfortunately for the animals, the story does not end happily. The video from 60 Minutes contains some excellent material on incentives, ethics and conservation for classroom discussion. ... View more

Originally posted on August 19, 2010.   According to an interesting article in the NYTimes the Sahel, once thought to be a unreclaimable wasteland, has begun to bloom: Recent studies of vegetation patterns, based on detailed satellite images and on-the-ground inventories of trees, have found that Niger, a place of persistent hunger and deprivation, has recently added millions of new trees and is now far greener than it was 30 years ago. These gains, moreover, have come at a time when the population of Niger has exploded, confounding the conventional wisdom that population growth leads to the loss of trees and accelerates land degradation, scientists studying Niger say.   And the key to this growth?   Property rights. Another change was the way trees were regarded by law. From colonial times, all trees in Niger had been regarded as the property of the state, which gave farmers little incentive to protect them. Trees were chopped for firewood or construction without regard to the environmental costs. Government foresters were supposed to make sure the trees were properly managed, but there were not enough of them to police a country nearly twice the size of Texas. But over time, farmers began to regard the trees in their fields as their property, and in recent years the government has recognized the benefits of that outlook by allowing individuals to own trees. Farmers make money from the trees by selling branches, pods, fruit and bark. Because those sales are more lucrative over time than simply chopping down the tree for firewood, the farmers preserve them.   There is a video at the link which is good for showing the way of life in Niger but which unfortunately does not make the connection to property rights made in the article. ... View more

Originally posted on November 30, 2009.   The rigidity of employment index used in our chapter on Unemployment and Labor Force Participation comes fromDoing Business, the World Bank’s massive database on business regulations across 183 economies.  Using field teams the World Bank measures things such as the time and expense it takes to start a new business, the time and trouble to resolve a commercial dispute in the courts, the difficulty of hiring workers and the rigidity of employment.  Data on these characteristics across surveys can be easily downloaded here.   The Doing Business reports are excellent.  Scrolling through these reports it’s easy to find many useful graphs which can be quickly cut and pasted into a presentation.  Here, for example, is a figure on rigidity of employment and the share of women in employment and the youth unemployment rate (from Doing Business 2006).  Right click “View on Image” to open full size.   ... View more

Originally posted on April 7, 2010.   In our chapter on Getting Incentives Right we wrote: A tournament removes risks from outside factors that are common to all the players but it adds another type of risk called ability risk. Imagine that you had to compete in a golf game against Tiger Woods. Would you put in more effort if you were paid based on the number of strokes or if you were paid based on who wins the game? The probability that you could beat Tiger Woods at golf is so low that if all you cared about was money, it would make sense to give up right away –— why exert effort in a hopeless cause? Of course, for the same reason, Tiger Woods won’t much need to try hard either!   An excellent article in the WSJ reports on academic research that shows that the effect of “ability risk” is very real. According to a paper by Jennifer Brown, an applied macroeconomist at the Kellogg School of Management at Northwestern University, Mr. Woods is such a dominating golfer that his presence in a tournament can make everyone else play significantly worse. Because his competitors expect him to win, they end up losing; success becomes a self-fulfilling prophecy. Ms. Brown argues that the superstar effect is not just relevant on the golf course. Instead, she suggests that the presence of superstars can be “de-motivating” in a wide variety of competitions, from the sales office to the law firm. “Most people assume that competing against an elite performer makes everyone else step up their game and perform better,” Ms. Brown says. “But the Tiger Woods data demonstrate that the opposite can also occur. It doesn’t matter if the superstar is an athlete or a corporate vice president. After all, why should we invest a lot of energy in a tournament that we’re probably going to lose?” …Whenever Mr. Woods entered a tournament, every other golfer took, on average, 0.8 more strokes. This effect was even observable in the first round, with the presence of Mr. Woods leading to an additional 0.3 strokes among all golfers over the initial 18 holes. While this might sound like an insignificant difference, the average margin between first and second place in PGA Tour events is frequently just a single stroke.   Tournaments work best when the players are of similar ability because this minimizes ability risk.  Another way of countering ability risk is to handicap the stronger players.  If we added a stroke or two to Tiger Woods’ score, for example, this would encourage all the other players not to give up and if we don’t set the handicap too high it can also encourage Tiger to work harder! ... View more

Originally posted on January 20, 2012.   In our first chapter on growth Tyler and I illustrate the importance of property rights with the incentive effects of collective farming and the secret agreement of Xiaogang village. We write:   Farmers of households from Xiaogang signed a secret life-and-death agreement with their thumprints. (From Cowen and Tabarrok, Modern Principles: Macroeconomics) The Great Leap Forward was a great leap backward – agricultural land was less productive in 1978 than it had been in 1949 when the communists took over.  In 1978, however, farmers in the village of Xiaogang held a secret meeting.  The farmers agreed to divide the communal land and assign it to individuals – each farmer had to produce a quota for the government but anything he or she produced in excess of the quota they would keep.  The agreement violated government policy and as a result the farmers also pledged that if any of them were to be killed or jailed the others would raise his or her children until the age of 18. The change from collective property rights to something closer to private property rights had an immediate effect, investment, work effort and productivity increased.  “You can’t be lazy when you work for your family and yourself,” said one of the farmers. Word of the secret agreement leaked out and local bureaucrats cut off Xiaogang from fertilizer, seeds and pesticides.  But amazingly, before Xiaogang could be stopped, farmers in other villages also began to abandon collective property. In Beijing, Mao Zedong was dead and a new set of rulers, seeing the productivity improvements, decided to let the experiment proceed.   For more background, NPR’s Planet Money has a great story on this secret agreement including this: “Back then, even one straw belonged to the group,” says Yen Jingchang, who was a farmer in Xiaogang in 1978. “No one owned anything.” At one meeting with communist party officials, a farmer asked: “What about the teeth in my head? Do I own those?” Answer: No. Your teeth belong to the collective. In theory, the government would take what the collective grew, and would also distribute food to each family. There was no incentive to work hard — to go out to the fields early, to put in extra effort, Yen Jingchang says. “Work hard, don’t work hard — everyone gets the same,” he says. “So people don’t want to work.” …Before the contract, the farmers would drag themselves out into the field only when the village whistle blew, marking the start of the work day. After the contract, the families went out before dawn.   “We all secretly competed,” says Yen Jingchang. “Everyone wanted to produce more than the next person.” It was the same land, the same tools and the same people. Yet just by changing the economic rules — by saying, you get to keep some of what you grow — everything changed. ... View more

Originally posted on December 10, 2009.   When customers call Cingular threatening to switch to another firm or asking for discounts, operators see a handy thermometer that tells them the life time value (LTV) of the customer to the company. The higher the meter reading the more discounts the operator is allowed to offer the customer. The Consumerist has the details including excerpts from company documents explaining the system.   ... View more