Money, Money, Money

Economists are supposed to be interested in money. (If so why did I become an economist, particularly an academic one?) Well compared to most people I am very interested in money, maybe not so much having it but the actual coins and bills. I am facinated by little factoids like more US currency circulates outside the US than inside. (How do they know, I wonder.) Or a large percentage of $20 bills have trace amounts of cocaine on them from the drug trade.

James Lileks is an writer I like reading. He is always coming up with weird stuff including this site that has pictures of interesting bills. Take a look at some strange money.

SubPrime Lenders

In recent days the stock market has reacted quite negatively to problems "Subprime" lenders have been having. Subprime lenders specialize in home mortgage lending to borrowers with credit problems. The lenders have been raking in the bucks due to heavy fees and high interest rates. The loans are usually sold to someone else so that the lender can keep on making loans.

For a while the game worked. As long as housing prices were rising then if a borrower got in trouble he could sell the house, pay off the loan (and perhaps some penalty fees as well) and even pocket a little cash. However, in many markets, home prices have been stable or even falling. Now if a borrower gets in trouble and can't make payments he is stuck. If the borrower sells the house he takes a loss, especially with all the commissions and fees. These borrowers most likely can't afford a loss, they are not top notch remember, so they hang on to the house until the lender forecloses.

So the lender now has a house that is probably not worth the loan it made which eats into those profits obtained earlier. Well, this is bad for the lender and would explain why the stocks of those lenders are dropping but why stocks in general?

Well, those foreclosed houses must be sold which further depresses housing prices. Falling prices cause a drop in sales. Sellers don't want to sell when they see prices are too low. Buyers are happy to wait for lower prices in the future. Housing sales drag along a lot of other spending as well, new appliances, furniture, carpet, and stuff that people have to have to make the new house complete. Hence, stock traders are worried that these subprime problems will spread into the rest of the economy. Chances are they probably won't but stock traders are entirely focused on the future.

Markets on the Cheap

Sometimes I'm asked how do I get into the stock market? My advice would be to start reading business and financial news and get used to the terminology as well as the ebb and flow of the markets. However, if you want to gain some experience trading with real money on the line (not a lot) check out the Iowa Electronic Markets. There are marekts for the upcoming Presidential election, Federal Reserve Policy, and even a market for bird flu. You can open an account for as little as $5.

It's Not Easy Being Green

My favorite magazine has the wonderful title of "The Economist". The website is www.economist.com Actually it is a British news magazine something like Time or Newsweek. (With one exception, unlike Time or Newsweek you are unlikely to read about where is Anna Nicole Smith's body in The Economist.) The reporters for The Economist are anonymous, only when they retire do they get a byline. The Economist now has a blog, Free Exchange which like the magazine has some interesting articles.

Recently there has been controversy over Al Gore's house. It seems that Mr. Gore uses more electricity in a month than the average family in a year, which is a tad inconsistent with reducing global warming. Free exchange weighs in on the controversy pointing out unintended consequences of trying to be "carbon neutral". Here is the post.

Economics of Speed Traps

Perhaps you know of places or town that have a reputation of being "speed traps". There is one town in Texas that would save everybody time if the cops would just take VISA on the spot. Well economists are fond of determining if something causes towns to rigidly enforce traffic laws. The following is an except from a paper (HT Tyler Cowen)

Speeding tickets are not only determined by the speed of the offender, but by incentives faced by police officers and their vote maximizing principals. Our model predicts that police officers issue higher fines when drivers have a higher opportunity cost of contesting a ticket, and when drivers do not reside in the community where they are stopped. The model also predicts that local officers are more likely to issue a ticket when legal limits prevent the local government from increasing revenues though other instruments such as property taxes. We find support for the hypotheses. The farther the residence of a driver from the municipality where the ticket could be contested, the higher is the likelihood of a speeding fine, and the larger the amount of the fine. The probability of a fine issued by a local officer is higher in towns when constraints on increasing property taxes are binding, the property tax base is lower, and the town is more dependent on revenues from tourism. For state troopers, who are not employed by the local, but the state government, we do not find evidence that the likelihood traffic fines varies with town characteristics. Finally, personal characteristics, such as gender and race are among the determinants of traffic fines.

That is from Thomas Stratmann and Michael Makowsky, both at George Mason. Here is
the paper.

Labratories of Democracy

It has been said that states are "Laboratories of Democracy", places were ideas can be tested. If the idea is worthy, other states can copy it or it can be implemented nationally. On the other hand, if the idea is a loser, at least only a relatively few people are harmed.

Well this idea comes from the state of Wisconsin. Put this in the "free lunch" category. It seems the Governor of Wisconsin wants to tax oil companies but not have any of the tax passed on to consumers. Specifically,

The tax would be 2.5% - or currently $1.50 - per barrel of oil meant for sale in Wisconsin.

Usually, a tax of this magnitude would raise gasoline prices 3-4 cents per gallon. Should those nasty oil companies try to raise prices then,

If oil companies passed the tax on to consumers, the firms could be fined for the gains from the price increase or company officials could face the jail time.

My Mother used to say if you are going to criticize something offer at least one suggestion for improvement. So here goes. If the Governor of Wisconsin wants to raise money from oil companies without those companies passing on part of the tax to consumers he should propose a law that says for this time and this time only we will tax you say 10 cents a gallon for every gallon of gasoline you sold last year. Now I won't guarantee that prices will not rise, but it would not be profit maximizing if they do, assuming firms are maximizing profits now. (It is a fixed cost, unrelated to current output.) Of course, when people do this they get sent to prison for robbing convenience stores.

A Blogger I Read

One of my favorite bloggers isMarginal Revolution. Take a look around. Here is an article the MR pointed to about trees and incentives.

Price Controls Strike Again

I mourn for the people of Venezuela. Their government is embarked on a course to completely trash their economy. Still, as a teacher, I am grateful to President Hugo Chavez for providing yet another example of the effects of price controls.

Regrettably, we don't know a whole lot that a government can do to make an economy grow faster. Surely an efficient government, one that provides a high level of service for the tax revenue it receives, helps. But that is true for any industry, an efficient industry is good for everyone. But, we know from far too many examples the actions government can take to destroy an economy. Price controls are one of the worst.

Externalities in Space

An externality or spillover is a cost or benefit imposed on someone else though the production or consumption of a good. Most goods do not create spillovers, at least in substantive amounts. But some goods or actions do. A recent test by China of an anti-satellite weapon created a large amount of space junk. Space junk is stuff left in space by launching space craft. Space is a big place but the area where people are interested is not. There are orbits that are particularly useful for certain applications. So when a piece of junk is left in space, it becomes a hazard to latter satellites. Should two objects collide, it could not only destroy a valuable piece of equipment but the collision will create even more junk. This link discusses the possibility of a chain reaction occurring creating so much junk that space becomes too dangerous to utilize.

The Simple is So Complex

There are not many things around that are as simple or as cheap as the ordinary pencil. But as this article demonstates simple things are quite complex.

What to do about the Penny

Austan Goolsbee has a suggestion.

Saving Gasoline

President Bush has proposed raising the CAFE standards (Corporate Average Fuel Economy. The CAFE standards require automakers to produce a fleet of cars that meet a minimum number of miles per gallon (27.5 for cars 20.7 for trucks and SUVs.) CAFE standards do not require all vehicles to meet this level, a car maker could sell a car that gets 37.5 mpg and one that gets 17.5 mpg and still meet the standard since it is an average for their fleet. There are also provisons for earning credits for exceeding the standards or taxes for not meeting the standards which being gov't regulations are incomprehensible to life as we know it.

The purpose of the CAFE standards is to reduce the demand for gasoline. If cars get better gas mileage, then consumption of gasoline will fall and hence the demand for crude oil will also fall. Benefits of lower crude oil demand are less dependence on foreign sources, and since less fuel is consumed, cleaner air.

The problem is that it is not at all clear that any of these benefits will result. Consumption of gasoline will probably decline but that is not certain. Cars that get higher mileage are less costly to drive. Since the cost of driving a mile is lower, we can expect that people will drive more miles. Since consumers are driving more they will use more gasoline, at the very least offseting some of the reduction in demand due to higher mileage.

If the demand for gasoline and thereby oil is reduced then we would expect the price to fall. Quantity demanded for other uses, like home heating, will rise due to the lower price. Quantity supplied will also fall due to the lower price. Where will quantity supplied fall? Those producers that have the highest cost of production will reduce output first. Most of these high cost producers are domestic so domestic quantity supply will fall relatively more. Will imports drop? Maybe or maybe not.

So CAFE standards might or might not lower consumption of gasoline. If gasoline consumption does fall it might or might not lower consumption of imported oil.

If we really want to reduce consumption of gasoline, raise the gasoline tax. Higher prices will reduce the quantity demanded of gasoline. If we really want to reduce quantity demanded of foreign oil, put a tax on imports. Higher prices will reduce the consumption of gasoline. People will drive less and over time buy higher mileage vehicles.

Growing Exports

We all hear about America's trade deficit. The USA imports far more from other nations than it exports. (Why, exactly this is a problem is rarely discussed.) However, our exports are growing as discussed by this piece in the Washington Post article (free registration required). The article discusses the growth in exports:

In the first 11 months of 2006, U.S. exports reached $1.31 trillion, a jump of 13.1 percent over the corresponding period in 2005, the Commerce Department said. That was an improvement over the 10.7 percent gain of the year before.

Exports to China -- whose dominance on American store shelves stokes worry -- increased by 33 percent in the first 11 months of 2006. Combined with Hong Kong, China now stands as the United States' third-largest export market, behind only Canada and Mexico.

One concern often expressed about trade is that we are losing our manufacturing jobs. The Post comments:

But even as exports have improved profits for American companies, they have not meant more jobs for American factory workers. In 2006, the United States had 14.2 million manufacturing jobs, according to the Labor Department, roughly the same number as in 2004. American firms have managed to squeeze more goods out of their plants with the same number of workers.

"Growth in output has not been fast enough to require manufacturers to expand the workforce," said David Huether, chief economist at the National Association of Manufacturers in Washington.

Manufacturing is strong in the US but labor productivity grows so fast that employment does not keep pace. Indeed the only way to get more manufacturing jobs is to export, our own economy just cannot grow fast enough to keep up with productivity increases in manufacturing.

Finally, the Post article gives some insight on America's comparative advantages.
Surviving manufacturers have gone high-tech, supplemented by dozens of new entrants: firms specializing in medical technology, electronic commerce, software and telecommunications equipment. The town of 60,000 people -- nearly 10 times its population in 1970 -- boasts 50,000 full-time jobs.
"There's an international wage rate for turning a screwdriver, and we're never going to be able to compete in that market," said Scott H. Neal, the city manager. "But the high-technology, high-intellectual-capital, design-and-testing work is going to be done here." Read it all.

Do You Set Your Clock or Watch a Little Fast?

I tend to even though it does not work. Since I know it is fast, I discount the actual time. Here is a solution from Henry Farrell

Health Insurance

Economists spend a lot of time studying health care and health insurance. One reason is that there are so many interesting issues. Another reason is money, with about 15% of our GDP tied up in health care and growing all the time, there's gold in them thar sick people. One issue that economists mostly agree upon is that insurance, which is really a price discount plan for most people, increases the quantity demanded of health care. (Something about the Law of demand, lower prices, higher quantity demanded.)

In the US most private insurance is provided through work. There are some good reasons for this but one not so good reason is tax avoidance. Employer-paid premiums are tax-deductible to the employer, but tax-free for the employee. If your income tax rate is 25%, then if your employer is willing to give you a $1000 raise you will realize $750 in after-tax income. The employer could instead spend $1000 on health insurance and that would not be taxed. So the choice is $750 in cash or $1000 on health insurance. Given that choice, a lot of people would say give me the health insurance. But if health insurance was taxed then more people would opt for cash which they could spend on anything they want.

The President is proposing to limit how much employer-provided health insurance is exempt from taxes. This proposal is attacting a reasonable amount of favorable opinion even from people that do not usually agree with him. Check out this editorial from the Washington Post.

Does Your Grocer Want You to Shoplift?

Of course not, but as this article from Slate explains sometimes the cost of preventing shoplifting is greater than the benefits.

Business Opportunity

While I offer no comment on the appropriateness of the following activity, I found the price differences described in this article, which create opportunities for profit, the be quite amazing. Link

Looking into the Future

We all want to know what going to happen. That's one reason I love economics, it lets me make predictions about the future. For example, supply and demand analysis isn't about drawing graphs its about making predictions about future prices.

Another way to predict the future is to study futures prices. Many products have futures markets where buyers and sellers trade contracts for delivery of some product in the future. Some examples are cotton, wheat, gasoline, and even currencies. These futures prices are not always correct, in fact, they are almost always wrong but they tend to be "unbiased estimates" of actual prices in the future. An unbiased estimate is equally likely to be higher or lower than the actual figure.

Gasoline is one product we all buy which is traded in these futures markets. To tell what is going to happen to prices in the very near future, I check Bloomberg and add 55-60 cents and that will be the pump price in Monroe 1-3 weeks from now.