Market Power

Fighting Inflation and Deflation at the Same Time: The Canadian Monetary Authority Edition

Doc has a great post on the challenges faced by monetary authorities when one region of an economy is booming and another is declining (because the other is booming).  The whole thing is worth a careful read.  Here's a snippet:

Consider a simple quantity-theory-of-money model with modest growth in the money supply and no change in the income velocity of money. In this economy, with moderate economic growth, there will be little-to-no inflation.

Now shock this economy with a massive increase in demand in one sector and one geographic region (say, a big increase in the demand for oil in Alberta). In that part of the economy, wages will go up because labour mobility is costly and the adjustments are not instantaneous. Also, in that part of the economy, prices of fixed inputs will sky-rocket (e.g. housing and land).

If those prices go up by considerably more than the rate of growth in the money supply minus the rate of growth in real output (still assuming velocity is constant), then prices somewhere else have to fall. Where?

The primary candidate is housing and land elsewhere in the economy, but that's a difficult political move and could trigger bankruptcies in those areas, especially if consumers have used home equity to support their consumption;

Assistant Coach Salaries

There were two articles recently on the salaries of assistant coaches in Division 1 NCAA football programs:

1.  From the Charleston (SC) Post and Courier (HT to Skip at TSE):

"The rising salaries for head coaches draw most of the headlines, and that's understandable," Glenn said. "But the trend definitely applies to assistant coaches, too. In 2000, N.C. State got a lot of attention for building one of the first $1 million staffs, and remember that's spread over nine men. Now, what paid nine men six years ago is paying three to five men in 2007."

2.  The same subject from the University of Missouri:

The nine Missouri assistant coaches will earn a collective $1,451,396 this year. That’s slightly more than the average Big 12 staff earned last season, according to a 2006 NCAA survey of the six major Division I-A conferences. The average Big 12 coaching staff, not including the head coach, earned $1,394,491 in base salary last year. The league average ranked second only to the Southeastern Conference ($1,425,130) among the six major conferences.

Advice for Students Interested in Economics

From Bill Polley:

On this day dedicated to remembering Milton Friedman, I would like to encourage today's students to take a little time to browse the library for the works of the masters--Friedman in particular. You don't have to become a scholar of the history of thought, but you should be familiar with some of the ideas that changed the discipline. You might even get hooked on some of those ideas. I firmly believe that students should find something in their discipline that inspires them, and many people would tell you that Milton Friedman's work is fertile ground for those ideas.

For better or worse, this is not something I did until I got to my current university - especially since I began reading (and writing) blogs.  It's not that I didn't read things that weren't part of my classwork.  I did.  I read books on philosophy (esp. Plato and Aristotle) and history (especially American Civil War History).  But I do not recall reading stuff written by economists outside of my classwork - until the past several years.

Many readers of this blog are familiar with these works, but here are some readings that students of economics might find interesting:  Hispanic Pundit's list of interesting economic articles is particularly good.  HP's list includes Milton Friedman's "The Social Responsibility is to Increase Its Profits", an article I mentioned in my MBA class last week.  Of all the works listed, the only one I assign is I, Pencil, the most succinct explanation of the power (and necessity) of capitalism I know of.  Here's an article on Milton Friedman and the Chicago School of Economic Thought (HT to Knowledge Problem).  And here's the Library of Economics and Liberty, a site which has many classics online including the Wealth of Nations.

Becoming Energy Independent? How Ironic

Long-time readers know my position on protectionism and moves towards energy independence.  So it should be no surprise that I find this wonderfully ironic.

At a ceremony this month, energy firm Maple Cos. closed a deal to buy 25,000 acres of unused and heretofore unwanted land near the city of Piura. The Dallas company announced plans to invest $120 million in an ethanol processing plant, a sugar-cane field to provide raw material for the fuel and a mile-long underwater pipeline to the Pacific Ocean to deliver fuel to tankers and onward to U.S. customers.

...It's easy for entrepreneurs and government officials to wax on about ethanol as they contemplate booming U.S. demand, which last year grew 30% and could have years of expansion ahead. President Bush, in his State of the Union address Tuesday, called for increasing use of alternative fuels such as ethanol — which can be made from sugar, grains and even plant waste — as part of a strategy to reduce U.S. dependence on imported oil.

Maple sees Peru, with its favorable growing conditions and trade preferences with the United States, as the perfect platform from which to fulfill such demand.

"The big driver for us is that Peru is one of the best places in the world to grow sugar cane in terms of how many tons you can produce per acre per year," Canon said.

Ah, the wonders of comparative advantage.

Milton Friedman Day

Don't forget that today, Jan. 29th, 2007, is Milton Friedman Day.  DOL has more.  Here's the Idea Channel with Free to Choose.

Super Bowl Shirking

A day after the Chicago Bears and Indianapolis Colts earned spots in the Feb. 4 game, a consulting firm estimated that lost wages could exceed $16 million a minute as millions of Americans chat about the game, plan parties, organize betting pools or research big-screen TVs.

That's more than $820 million from the week before the game alone.

That's from this MSNBC story about Super Bowl Slacking:  goofing off at work by doing stuff related to the Super Bowl.  Here's how the consultant got his number:

John Challenger, chief executive of Challenger, Gray & Christmas Inc., reached the $810 million tally by multiplying the average hourly wage by the number of U.S. workers by the percentage of Americans who annually watch the Super Bowl. Then he allowed for each of those workers to spend 10 minutes each workday on game-related activities.

No doubt that there will be some Super Bowl Slacking and the 10 minutes per day seems reasonable for the general fan.  But a fallacious assumption implicit in the calculation is that people would actually be working had there been no Super Bowl, making this rough estimate a gross estimate.  There are plenty of ways to take leisure at work, the Super Bowl just being one of them.  Reading about this "lost productivity" report is another.  The important effect, as usual, is the marginal effect:  how much slacking does the Super Bowl cause that otherwise would not take place. 

Another implicit assumption is that the average worker wouldn't make up at least some of that 10 minutes of slacking at some point.  As I wrote last year on a similar subject, sometimes time spent goofing off is time spent recharging the batteries.  And sometimes workplace discussions can lead to better camaraderie among employees.

While this lost productivity is a fun thing to talk about, it's basically a non-issue in the grand scheme.  Now stop slacking and get back to work. ;-)

Doctors and Medical Students Respond to Incentives

Kip Esquire has a nice piece on how the push towards more socialized medicine will affect the decisions of doctors and medical students.

If you're smart enough to become a doctor, then you are smart enough to become a lawyer, accountant, investment banker or a dozen other ultra-skilled occupations that are not price capped. The laws of economics are not subject to repeal by any legislature. An artificial price ceiling creates a shortage, regardless of what "noble goals" underlie it. Doctors, especially future doctors, will not be turned into indentured servants without limit.

Speaking of which — Exhibit B:

Even doctors in training are figuring out how [California Governor Arnold Schwarzenegger's socialized medicine] plan might affect them. Some physicians believe Schwarzenegger's plan might drive doctors out of state, but University of Southern California medical student Julia Cormano says she would stay in California — but reconsider her choice of specialties. Cormano, co-president of the med school's students' association, says the talk on campus is whether students, who can carry as much as $200,000 in loans, would be forced out of general medicine with the additional drain on future income.

So at best (i.e., assuming doctors don't leave the state or retire early, and that young people don't switch from pre-med to pre-law), Schwarzenegger's plan will be like pushing on a wallpaper bubble: the problem will just pop up somewhere else. You might still have doctors — just the wrong kind (which, somehow, "solves the problem").

And the solution to that problem will never be the repeal of the law/order/whatever that created the problem in the first place.  The bureaucrats will have gotten too intrenched and too dependent on the bureaucracy for their standard of living.  So more cash will get thrown at the problem, creating an ever-larger and inert bureaucracy with ever larger problems.

 

Steroids vs. Gambling: Why Absolute and Relative Quality Matter

The demand for a sports event depends on the usual suspects: the price of watching the event (ticket prices, pay-per-view charges, etc), the average income of fans, the number of fans, the price of related froms of entertainment, etc.  The quality of competition that fans expect to watch also matters.  In sports economics we refer to two types of quality:  absolute and relative quality

Absolute quality refers to the overall level of talent on display in the event.  The average NFL game has more talent on display than the average Division 1A college football game.  The average NFL game thus has more absolute quality.  The average Wimbledon match has a higher absolute quality than the average high school tennis match and so on.  Since fans would rather watch more talent on display, higher absolute quality translates to higher willingness to pay (all else equal).  That's one reason why attendance levels and/or prices are generally higher at events with more talent on display.

Relative quality refers to the comparative talent of the opponents in the event - competitive balance.  A Duke-Murray State basketball game has a lower level of relative competition than a Duke-North Carolina basketball game.  Non-conference Division 1A football games are loaded with low relative quality competitions while the conference games generally are more interesting because team playing strengths are more equal.  All else equal, people have a higher willingness to pay for more-balanced competition: this translates into higher ticket prices and more people following the game.

Simon Rottenberg's Uncertainty of Outcome Hypothesis (which, among other things important to us Sports Economists, is found in this seminal work)  is related to the relative quality of competition.  Rottenberg hypothesized that fans would be more willing to pay to watch events where the outcome is in doubt, all else equal.  This explains why the average live event is watched more than the same event shown on tape delay.  Indeed, sporting events are the grandaddy of all reality shows, and just knowing an event has concluded takes some of its luster away even if the outcome is unknown.  It also explains the old axiom that might be expressed by George Steinbrenner, owner of the New York Yankees: "Oh, Lord.  Let us be good but not that good!"

Understanding that there are two types of quality in sports explains why sports team owners etc. look the other way when it comes to steroid use and the use of other "banned" performance-enhancing substances while these same people go whole-hog after gamblers and point shavers.  If all players used steroids, then they would become bigger, stronger, faster - increasing the overall level of talent on display.  But if each participant's talent improved by the same proportion, the relative quality of competition would remain unchanged.  The absolute quality increases without hurting competitive balance.  When this happens, the demand for the event increases and the bottom line is improved. 

Gambling, on the other hand, not only hurts the relative quality of competition, but it also hurts the absolute quality of competition b ecause players aren't giving "full effort."  This necessarily lowers the amount of talent on display.

Leagues are collections of those who run the teams in the league.  To understand why leagues do the things that "they do", one needs to understand the motives that the individuals who run the league face.  The reason why steroids are tolerated in sports while gambling is fought tenaciously is because steroids help the bottom line of league owners while gambling hurts it.

Reason for Increasing the Minimum Wage

Tyler Cowen writes about some research by Dan Klein on reasons why prominent economists support increasing the minimum wage although theory and evidence suggest that it will make some low-income people worse off:

...The results are striking, most of all for how far they stand outside traditional economic reasoning:

Two of those listed by Tyler point to supporting democratic institutions:

...Peter Dorman: Since Tocqueville (at least) there is a well-established argument that greater equality of income and respect is associated with better democratic performance.  This is a near-consensus position in political theory.

...Jeffrey Waddoups: Reducing wage inequality will increase the quality of democratic institutions.

I realize it's difficult to measure "quality of democratic institutions," but has this been formally studied before?  In any case, I like Tyler's summary:

Bernard Wasow: A low cost demonstration of concern for low wage workers that causes little damage.  Elicits a buy-in by low wage workers to the polity

...It is easy to read these and think "Ah, how narrow is neoclassical economics in contrast to these fine thoughts."  My response is instead: "These people are making a mountain out of a molehill."  Bernard Wasow is the guy who makes the most sense.

I agree.  Raising the minimum wage is a low-cost way for politicians to show they care for the downtrodden in society - low-cost to the individual politicians, that is - not to those negatively affected by higher minimum wages.

Does Scarcity Matter?

Bill Polley has two very interesting posts on scarcity, specifically its usefullness in defining what "economics" is all about.  From his first post:

In a slightly different vein is this little title hoisted from a syllabus from one of my grad school courses back in the day. From memory (I'll hunt around for the actual copy to make sure I got it right), it was something like this:

Macroeconomics:  A study of allocative (in?)efficiency

I've always liked that one. Then there is the definition that I have used for quite a number of years in teaching macro and micro principles. To my knowledge it is not in use anywhere else in precisely these words. I first put it on paper as a grad student and have used it ever since, maybe changing a word or two over the years. I was inspired to write this while trying to put the familiar "circular flow" into words.

I'm not sure that would pass my smell test because the obvious question is "what is being allocated and why?"

Economics is the study of choices made by individuals, how markets coordinate those choices, and how governments influence those choices.

See how it reflects the circular flow that is part of nearly every textbook description of economics? Like Heyne, Boettke, and Prychitko, I give individual choice top billing in my definition. I dislike definitions that put it in terms of how "society chooses". Society doesn't choose. People choose. How those decisions are aggregated matters immensely.

This point about individuals is one I make at various times in Micro Principles:  people make decisions among alternatives.  What we observe as what "society" has done is little more than what has emerged from individual choice.  But more to the point of this post, Bill writes in his second post:

Michael Mandel responds with a comment on his blog that reveals the point he really wants to make.

But I'm just wondering whether "constrained optimization" or scarcity is really the most useful or interesting angle to approach economics with. Right now I have access to far more information, at a zero marginal money price, than I can ever consume (trust me...we in the MSM are living with the flip side of this right now). I could in theory set this up as a constrained optimization problem--time spent online versus time spent working. But solving the constrained optimization problem never would have shown me that blogging, say, or wikipedia, would be useful ways of organizing the flood of information.

Granted, information and knowledge do not seem to be subject to diminishing returns over time, but information is not the only thing that people make choices over.  Time use, the means of production, whether to sign this player or that player, whether to eat out or cook at home, whether or not to drink tonight and have a hangover tomorrow etc. all are, inherently, decisions that involve making choices over alternatives:  i.e. under conditions of scarcity of some sort.  The fact that people face choices over scarce things underscores that people respond to incentives - an important point that should be pointed out in Principles courses.  If I choose this then I can't have that:  the basis of opportunity cost.

So the key points that I try to get across to my students when defining the term "economics" are twofold:

Economics is a social science:  economists study human behavior (why people - individuals -  do the things they do)...

Because this isn't sufficient (it also describes sociology, psychology, anthropology, political science, etc.) I add:

under conditions of scarcity from the individual's point of view

to a. diffferentiate it from other social sciences and to b. point out an important part of what we study in one way, shape, or form.  This doesn't mean that we can't get across points on topics like voluntary trade, the role of private property (and the role of respect for), what capitalism is, and how all these things lead to higher standards of living.  That all fits in well with what Stephen Karlson referred to as "standard issue economics."