Monday, February 23, 2015

Credit is the fuel for an economy. The resulting debt is the exhaust that chocks it.

That is the best analogy I can come up with at the moment.

This wise posting is from The New Arthurian. Go there to read the BEST stuff on credit vs debt, among other topics he dives deep into. You will be better for it.

(bold and underlined are my emphasis)
It's not that complicated 
The Real Effects of Debt, PDF, 34 pages, by Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli, 2011. They evaluate government debt and non-financial corporate debt and household debt. The opening sentences of the Abstract:

Dammit, no. Debt is not a flashing light that sometimes flashes red and other times green. Debt is always bad, period. Debt is the cost that is associated with credit use. Credit use is always good, and debt is always bad.
You may want to finesse that a bit, and say credit use is sometimes good and sometimes bad, and I won't argue with you. But please understand: I'm saying it my way to emphasize a point. Credit-use is demand. Credit-use is spending, and spending is demand. But credit-use doesn't cost anything, while it's still just credit-use. It's like getting stuff for free. That's why it's good. That's why it boosts the economy.
But then, a month or so after you use the credit, you get the bill. Now it's not credit-use anymore. Now it is debt. And now it's like paying for something, without getting anything. That's why debt is always bad.
Don't argue with me, dammit, I'm trying to make an idea simple.
In the PDF they say moderate levels of debt improve growth. But that's wrong. It's the credit-use that improves growth, because credit-use is demand. It's debt that harms growth, because the payment is disconnected from demand, and with debt there is payment but no demand.
Moderate levels of debt improve growth? Not really. Moderate levels of debt harm the economy less than high levels of debt. Moderate debt is easier to bear, because moderate credit-use can balance against it. When you have high levels of debt, it takes high levels of credit-use to offset the drag from the debt.
To understand debt, keep three principles in mind: Debt always hurts the economy. Credit-use always helps the economy. And credit-use always creates debt.
At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad?

To go along with my initial analogy, I think Art is suggesting there is no "clean-energy".  :)

Saturday, February 14, 2015

The US Exports water and land mass in the form of Ethanol. Madness.

I follow several agricultural organizations on Twitter because they provide lots of good info and graphics on things that interest me.

The US Grains Council is one of them.  They posted this graphic on my favorite thing to hate on---Ethanol.

They give a nice breakdown in the first orange bullet point below.  800 million gallons of ethanol exported they represents the use of 286 million bushels of corn (a bushel is about 56 pounds of corn which is between 45 and 60 ears of corn).

Couple of facts I calculated.

1.  How much water does it take to make one gallon of ethanol:  2.5 gallons (split estimate from HERE).

Just for the production of exported ethanol (not including water to grow the corn) we used at least 2 Billion gallons of domestic water.

Two Billion gallons of water would cover the whole State of Maryland in water one foot deep (one acre foot of water covers 3.07 acres of land). That is what we exported in water to make ethanol.

2.  In the US in 2014 the average number of bushels harvested per acre was 170. So, we utilized 1,682,352 acres of land to grow corn just for export. This is a little less than the size of Delaware and Rhode Island combined.

No one except lobbyists and politicians from farm states like ethanol. It is not supported by environmentalists or advocates for the poor (in the US or around the world).

Madness, I say, madness....

Why do the Ukranians and the Rebels continue to fight even when a cease fire is only hours away? Game Theory might tell us.

Ukraine crisis: Fighting rages as ceasefire nears
I read this headline and the accompanying story and wondered why the fighting remains at the same level when ALL the soldiers/rebels know a cease fire is just hours away.  Where is the "Invisible Hand" to direct the soldiers to do "what is in their best interest!" :)

Seems like simple Game Theory would come into play.  Both sides have full information that fighting will cease at a near pre-determined time.

If both sides continue to fight, they both will suffer high fatalities.  If the Ukrainians stop firing but the Rebels don't the Ukrainians will suffer deaths but the Rebels won't. The inverse is true it the Rebels stop firing.

Seems like the BEST outcome, since both sides know what the other could choose to do, would be for both of them to stop fighting and suffer no casualty's.

I made a simple Game Theory matrix to illustrate this.  You can see, with cooperation, the best outcome for each side is to cease hostilities (Lower Right Quadrant)....However...

...what if each side is a little "fuzzy" about the other sides intentions and does not know for sure they will stop firing?  If one side takes the initiative to stop firing they will suffer larger casualties relative to if they continued to fight. So, given the lack of information as to what the other side will choose, BOTH will continue to fight even though is seems the less rational thing to do. (Upper Left Quadrant below)

Or it could be they just hate each other so much that the "rational" human being in them is quashed. 

War is hell and human rationality is temporal...

Thursday, February 12, 2015

Chocolate and Simultaneous Shifts in Demand and Supply----Happy Valentines Day!

Can you feel the love of supply and demand yet?

A very nice article in the New York Times that can be used for a basic supply and demand example showing the possible outcome with a simultaneous change in a determinant of Demand AND Supply. This is a common problem encountered in a basic economics class.
Valentine’s Day Chocolate Will Cost More This Year, as Cocoa Prices Rise

The article suggest that the price of chocolate will increase because of an increase in Demand from emerging Asian countries, primarily China,  and a decrease in Supply though a combination of bad weather and a fungi that has attacked the cocoa bean plants.

I put together some slides to illustrate these affects.  For the purposes of this lesson I am going to assume the magnitude of change in Demand and Supply are equal. In other words, the curves will shift accordingly by the exact same amount/percentage.

Any comments or corrections are appreciated.

Wednesday, February 4, 2015

December Truck/SUV sales. Is there more to the story than low gas prices? Yes.

I got the graphic below from a Wall Street Journal article on the big jump in "large vehicle" sales in December in the US.  They give credit to easy credit and low gas prices.
Wall Street Journal

However, I think they might be missing one other key factor.

The purchasers of large vehicles and SUV's over 6,000 pounds who use them for "business purposes" are entitled to a depreciation allowance.  In 2014 the allowance was $25,000. This means a business could deduct up to $25,000 on there taxable income when they purchased a large vehicle/SUV.  This effectively reduces the price a business pays for the SUV---it is a subsidy through the tax code for the purchase of the vehicle.

That $25,000 depreciation allowance was only good for 2013 and most of 2014. However, in mid-December, the Congress extended this depreciation allowance for a very short time (the rest of month!) AND increased it to $500,000! Yes, read that again.  There are many caveats as to how this allowance can be taken, but the bottomline is, well, the bottomline: Many companies, small medium and large, probably purchase more vehicles in December before the legislation changes again.

Read more about the details HERE at Forbes.  It gets more complicated, of course.

Here is the ppt I put together to show students how this plays out on a basic supply and demand graph.  If you cannot read it, then go to the source HERE.  Comments welcome on any errors or omissions.

Thursday, January 29, 2015

Nice illustration of shift in crop production in the US(1990-2015). Good lesson on Allocative Efficiency

A nice visual showing how the allocation of agricultural land used for large scale farming has shifted in what it produces over time.  This can be the result of a change in consumer tastes, technology, environmental conditions or government policies.

In a basic economics class we refer to this as "allocative efficiency".

In Macroeconomics we identify it as a point anywhere on the Production Possibilities Frontier indicating a particular bundle of goods produced at its lowest cost (Productive Efficiency) and most desired by consumers

In Microeconomics we identify is at the point where the Price (P) equals the Marginal Cost (MC) of producing the last unit(s).  The price consumers are willing and able to pay and amount that at least equals the cost of the productive resources used to produce that unit.

Any hoot, this can be part of a lesson in allocation of resources and to pose the question "Why the movement away from Wheat production to Corn and/or Soybean?"

Found on Twitter and credited to The US Dept of Agriculture (that is all I know).

Wednesday, December 17, 2014

What came first: the egg or the California regulation on cage sizes?

A new regulation is set to take effect in California at the beginning of next year that will force hen houses to allocate significantly more room to each egg-laying chicken. 
Birds, long afforded a minimum of only 67 square inches a piece, will now need roughly 116 square inchesa more than 70 percent increase—if eggs are to be sold in the state. That extra space won't come free of charge, a cost that will almost certainly fall on consumers.
Lets say I have a hen house operation with 10,000 hens.  Prior to the passage of this law, I needed a building to house those hens that was at least 670,000 square inches. In square feet that would be 4,653 sqft.

With the new requirement of 116 sq inches, I would need a building that is 8,066 sqft---73% larger.

I could invest in expanding the building or constructing another, but the number of productive chickens I have would stay the same. More cost (however, only a "fixed cost"), same number of eggs.  I would have to receive a higher price for my eggs and/or cut expenses elsewhere to stay where I was before in terms of making a living.

I could make modifications to my existing building to make the cages bigger but I would have to reduce the number of egg-laying chickens I have by 4,224.  Now instead of 10,000 hens I have 5,776 to lay eggs for me. I would have to receive a higher price and/or cut expenses elsewhere to stay where I was before in terms of making a living.

What is chicken farmer (or is it rancher?) to do?

This is a terrific article with LOTS of opportunities to practice supply and demand and analyze the cost structure of a firm in a competitive business.

"Sugary Drinks" and Dead Weight Loss. Lets go to the graphs.

Many communities around the US  (and some other countries) have passed, or want to pass, a law that places a tax on "Sugary Drinks".  It is believed these types of products contribute to health problems and lost productivity within the economy.

The main argument is the production and consumption of sugary drinks does not explicitly include the tertiary costs to society in terms of treating conditions and diseases associated with these type of products. If we did include this cost, then the price would be higher and the market quantity would be lower.  I am going to use $.50 as the additional cost that is NOT considered in the private market production and consumption of these drinks.  This is known as an "external cost" that is not "internalized" in bringing this good to market.

The intent of the tax is to internalize ALL the costs of producing and consuming sugary drinks--even ones that have NO direct bearing on production and consumption.

Lets go to the graphs and see how this plays out.

Here is the market for "sugary drinks" in equilibrium where we ONLY consider the Private Market Demand (Marginl Private Benefit (MPB)) and Supply (Marginal Private Cost (MPC)) of this class of drink.  Right now the price of sugary drinks is $1.00 and the market quantity is "Qe".

The main policy goal is to DECREASE the market quantity produced and consumed in the marketplace.  Supporters of this policy believe the "Socially Optimal" amount of sugary drinks is LESS than what the market currently produces and consumes (graph below).

At the "Socially Optimal" market quantity, the cost to bring this good to market is $.75 (just go up to the Supply Curve) at Point "B".

However, if we include the $.50 not previously accounted for in production and consumption we see at the Socially Optimal market quantity, the producer would need at least $1.25 in order to supply that amount---Point "C" (look at the next TWO graphs to get this idea).

What is true between Points "B" and "C" is going to be true (certerus paribus) along all other points on Supply Curve "S* (MPC)---Points "A" to "D".

IMPORTANT POINT:  If we connect those new points we will derive a NEW market Supply Curve that now INCLUDES the external cost not previously included of producing sugary drinks.

We label this Supply Curve "S1 (MSC)"---MSC stands for Marginal Social Cost.  This curve includes the private costs of production and consumption AND the SOCIAL COSTS as well. Read that again!

Think of the original Supply Curve as "what is" and the new Supply Curve as "what should be". The difference between the two is the social cost.

The market is now in equilibrium at Point "C" where quantity demanded=quantity supplied---at a higher price ($1.25) and a lower market quantity (Q socially optimal).

The graph below is the same one only a little cleaned up.

Lets now consider Points "A", "D" and "C" and the neat triangle it forms.

Point "A" represents the market price and quantity as it "is". Point "C" represents the market as it "should be" if we internalized the exteranal cost of sugary drinks.  Point "D" represents at the private market quantity what the actual cost of producing each unit of sugary drink is---$1.50 as opposed to $1.00.

Graph below.  This triangle between "A", "B" and "D" represents the area of DEADWEIGHT LOSS (DWL) due to the under-pricing and over-production of these drinks.

In other words, when we include the external costs associated with the production and consumption of this good we can easily see that all the quanitities beween "Qe" and "Q socially optimal" now cost more to supply than consumers are willing to pay.

Prove it to yourself.  Pick any point on the horizontal axis between those to areas.   Go up staight up. You will hit the demand curve at at a lower price than you will hit the supply curve---cost to produce is greater than the price willing to be paid.

INEFFICIENT use of resources!

These units would not be produced if all costs associated with the good were included in the price paid and received!

Remember: The market IS at Point "A".  It is suggested that it SHOULD BE at Point "C". The difference is Dead Weight Loss.

Sorry for the repetition at times. I attempted to make this a step by step as possiblefor the beginning learner.  It can be a difficult concept to explain and learn in AP Microeconomics.

But is is a necessary one.  Guaranteed to be on the AP Test!

Let me know if you have any questions or can point out where I might have gone wrong.  Constructive criticism is always welcome.

The Russian Ruble (Rouble) turns to rubble. Apple Products edition.

This snapshot of the Russian Ruble (you see it spelled "Rouble" sometimes) value relative to the US dollar is from today's Bloomberg website:

Right now, the institutional market price (different (lower) than the market price we would pay) is $1.00US will exchange for 65.7746 Russian Rubles.

One year ago (look in red circled area) $1.00US exchanged for 32.4834 Rubles.

This means the US dollar can exchange for approx 33 more Rubles than it did one year ago. The dollar "buys" more Rubles than it did before, hence we can say the US dollar has APPRECIATED relative to the Ruble by about 102%  (rounded).

Exchange rates are reciprocal to each other.  If $1.00US exchanges for 65.7746 Rubles then 1.00 Ruble will exchange for 1.5 US cents

One year ago, Russians could exchange a Ruble and get 3.1 US cents. The Ruble "buys" fewer cents than it did before, hence we can say the Ruble has DEPRCIATED relative to the Dollar by 51% (rounded).

This has major consequences for US businesses that do business in Russia and want to expatriate profits or investments back into US dollars.

Simple example.  A year ago, a  business that earned 1,000 Rubles in profits could exchange those Rubles and receive $30.78US (1,000 Rubles/32.4834 Rubles per Dollar).

Today 1,000 Rubles would exchange for $15.20US (1,000Rubles/65.7745 Rubles per dollar).

Exchange rates matter because they can change the relative value of goods and services across borders WITHOUT changing the properties of those goods and services.

While writing this post, I checked the BBC and coincidently they have this story:

Rouble turmoil leads to Apple halting online sales in Russia

The company stopped sales of its iPhones, iPads and other products in the country after a day in which the currency went into free-fall. 
The rouble has lost more than 20% this week, despite a dramatic decision to raise interest rates from 10.5% to 17%. 
By afternoon trade the rouble was flat with one dollar buying 68 roubles.US Dollar v Russian Rouble 
$1 buyschange%
Its all time low, set on Wednesday, saw one dollar buying as many as 79 roubles. 
Apple last month increased its prices in Russia by 20% after the weakening rouble left products in the country cheaper than in the rest of Europe.
Timely! I hope this helps you understand exchange rates a little better.

Thursday, December 4, 2014

Cranberry production is out of control....

The supply of Cranberrys is almost double the amount the global market commands.  Bet you did not know that.  I didn't.

Here is an article and a short PPT I put together using supply and demand analysis to illustrate what is going on and the role govenments could play in this scenario.

The US govt is not buying all the surplus in the presentation below, but collectively governments in Cranberry producing countries could do so.

Feds buying surplus cranberries

The federal government’s decision to spend $55 million on cranberries may dent a global glut, support prices and speed up payments to growers. 
The purchase, however, won’t address production continuing to outpace demand, a step the U.S. Department of Agriculture declined to take this year.
“We have a very serious problem,” Long Beach Peninsula cranberry grower Malcolm McPhail said. “You don’t want anyone to have a crop failure. But you’d like to see average crops to keep things in perspective.”
U.S. and Canadian cranberry farmers produced this year a crop expected to be nearly as big as last year’s record harvest of 12 million barrels.
Between this year’s cranberries and fruit still unsold from 2013, the global cranberry supply stands at 16 million barrels (1.6 billion pounds). Demand over the next year is expected to be about 8.2 million barrels, according to the U.S. Cranberry Marketing Committee.

Thursday, November 20, 2014

Losing your Cool over COOL. It is (insert any time of day)--Do you know where your food comes from?

Here is an excellent example of a "Non-Tariff Barrier"(overt, non-monetary tax or quota) a country can impose on a good (or class of goods) coming into a country to (1) increase the price of that good or (2) discourage the importation of it.

The "Country Of Origin Labeling ("COOL")" requirement, part of the 2008 Farm Bill, on various food items is one such barrier.   

People like to know where their food comes from in the supply chain.

This imposes a financial burden on certain importers of food items. In this case it is beef producers:

Country of origin label for meat cuts endangered

The U.S. is running out of options in its effort to tell consumers where fresh cuts of meat originated after a successful challenge to package labeling by Canada and Mexico. 
A 2008 farm law requires that packages of steaks, ribs and other cuts of meat identify where the animals were born, raised and slaughtered. A label might say the meat was "born in Canada, raised and slaughtered in the United States" or "born, raised and slaughtered in the United States." 
The World Trade Organization agreed more than once with Canada and Mexico that the labels give the U.S. livestock industry an advantage. In a ruling Oct. 20, the WTO said the labeling requirement forced meatpackers to segregate and keep detailed records on imported livestock, giving them an incentive to favor U.S. livestock. 
The trade organization ruled in 2011 that an earlier version of the labels was discriminatory. That ruling was upheld in 2012 after a U.S. appeal.
 Canada filed a compliant with the World Trade Organization (WTO) and they prevailed.

The US can either ignore it and face retaliation in the form of tariffs on US exports to Canada and Mexico or Congress can modifiy the requirement to meet standards.

Advocates for keeping  COOL as it is are a strong group and it is in the interest of the Public to know where their food supply comes from. Lobbying groups for the goods that will face tariffs will put up a fight as well.  Exports and jobs are at stake.

Who will prevail?

Nice map showing the devolution of farm dependency in the US.

This image is via Big Picture Agriculture from a report by the Kansas City Federal Reserve Bank.

It shows how the US economy has devolved from dependency on agriculture. The Blueish Green areas represent, at the county level, that dependency in 1950 and 2000 (that is the latest date).

Observation: In the earlier time period agricultural interests and affects spread to far more people in rural areas.  Lets say it was more democratic in nature. This served as a counter-weight to the shifting power bases to/in urban areas.

Fast-forward to today. The politics of agriculture affect fewer people (nominally) and corporate interests have replaced the democratic nature of rural politics.

Policies of the bygone era had to appeal to tens of thousands of small business owners (farmers) with varied interests.  Today they have to only appeal to a concentrated number of large corporate farms with homogeneous interests.

Image via Big Picture Agriculture from a report by the Kansas City Federal Reserve Bank

Thursday, November 13, 2014

The Lottery--How much does your State payout in Prizes and gain in Revenue for the State Budget?

Over at  Five-Thirty-Eight Mona Chalabi has a blog entry on how much States receive in Lottery money (year 2012 is the latest data availble). She also shows, on a per capita basis, how much of the money goes to prizes, administrative costs, and into the State budgets as general revenue.

I went to the data source and created the simple table below to show, in percentage terms, how much each State pays out in prizes and how much goes into the State budget to be spent on...You take a guess.

How does your State do in terms of using the lottery as a revenue generating acitivity?

One observation: If the Lottery is played, in general, by low(er) income people (I think that is what the research shows) then in States where there are high pay-outs in prizes seem to be just re-distributing money within that subset. The Lottery is promoted as a way to raise money to advance some social policy---usually that is education which presumably benefits everyone rich or poor.

I have not played the Lottery in 20 years. I think I am richer, literally and figuratively, for it.

(Note: Numbers do not round up to 100%.  The balance percentage is from "Administrative Costs" to run the Lottery (Salaries, advertising, etc).

Monday, November 10, 2014

Nice Real Life Example of "The Rental Rate of Capital". An important Micro Econ concept.

One of the more difficult (and frustrating, I think) concepts in the Microeconomics Unit on Firm structure is figuring out what is an implicit (opportunity) cost when calculating economic profit.

One determinant of implicit opportunity cost is "the Rental Rate of Capital". In short, the rental rate of capital is the dollar amount I could receive for a physical input (i.e. tools, machinery, land) if I rented it to someone else to use instead of using it myself.

This is important to economists because it helps to determine if resources are being employed in the most efficient way possible. If a piece of capital could be rented out to someone else for more than what it could produce for you, then this would (could) be considered a mis-allocation of resources.

Assume I can use a barn on my property and it contributes $1,000 to my income.  What if instead I could rent it out for some other purpose for $1,200?  An economist would suggest that is an inefficient allocation of resources to the tune of a net $200.00.

I know, that can be VERY subjective, but let's go with it.

Here is an excerpt from a very short article on an effort to help farmers put a dollar value on some "dead capital" they possess that could be employed in an alternative use.

Survey could help determine fair prices for farm-building rentals (HT:Morning AG Clips)

Farmers, producers and landowners who have agricultural buildings on their property they are no longer using can turn the vacant space into extra farm income, according to experts with Ohio State University’s College of Food, Agricultural, and Environmental Sciences. 
Whether it is a farm building or livestock facility, farmers who want to put unused space into service to generate additional farm income first need to know how to go about creating a leasing arrangement and how to determine an appropriate rental price, said David Marrison, an Ohio State University Extension educator. OSU Extension is the outreach arm of the college. 
Many farmers may want to rent out buildings on their properties, but sometimes it’s hard to put a number on that, so it’s good to know what the going rates are on buildings in the region,” Marrison said. “Farmers need to know how to utilize those old buildings, whether it be to rent them out to another farmer or producer for extra hay space or to milk dairy cows.” (emphasis mine)
Here is a link to the PDF that gives prices for a wide variety of physical capital that my be laying dormant down on the farm.

Putting a price of these things can help a farmer make more income but, more importantly for economists, see to it that there is a mechanism for a more optimal allocation of societal resources.

Tuesday, November 4, 2014

The price of oil relative to the cost of producing oil. Nice graphic to help with graphing!

This is a follow up to yesterdays posting on the Break-Even point for oil drillers in different geographic areas of the US.

The point of that post was to use a firms costs curves (AVC + AFC =ATC) to show how low the price would have to go in order for firms to exit the industry.

Today in Business Insider they had this bar graph that helps clarify the point.  I inserted a horizontal RED bar to show the current price drillers are receiving for each barrel of oil produced.

Together they give you an indication of how drillers, at the current price, are faring in terms of profitability.

I think teachers and students alike can use info to plot on a graph of the firm that is a "Price Taker" in the marketplace.  Small drillers are relatively numerous and they must take the given market price (for the most part) for each barrel of oil the bring up.