Saturday, January 31, 2009

Books for Economics in the Elementary Grades: How to Eat Fried Worms

This entry makes reference to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.
5. Incentives produce predictable responses.
8. Quantity and quality of available resources affect living standards.

Another one of the elementary level books I've been reading is How to Eat Fried Worms by Thomas Rockwell. The title is gross enough to engage many upper elementary students, but the story is full of potential economic lessons.

It revolves around two boys who make a bet for $50. The bet is whether one of them, after boasting about how he can eat anything, can actually eat a worm a day for 15 days. They agree on some ground rules and the challenge is on. After choosing to go through with the bet, both have second thoughts at differing points, after they begin to face the consequences or possible consequences of their decision. But the incentive of $50 acts as a spur to both of them as they each try to win the bet.

One of the more intriguing ties to economic thinking comes from one of the ground rules. The
boy who has to eat the worm may do so any way he wants. By adding resources of various quantities and qualities: varying from condiments to a mother willing to stretch her culinary skills, we see how these resources improve the boy's "standard of living."

The book is fun and students will enjoy the various predicaments. And I will not give in to the temptation to refer to Keystone Economic Principle #2: There ain't no such thing as a free lunch.

I would appreciate any thoughts you might have on the book.

Friday, January 30, 2009

What Is Fair?

This post refers to two Keystone Economic Principles:

1. We all make choices.
4. Economic systems influence choices.

There is a fascinating article in The Atlantic that delves into the idea of fairness in the marketplace.

In economics, we often have opportunities to discuss the idea of "fair exchange". And the idea is central to our idea of how markets work.

Furthermore, in recent years, much has been done in the area of experimental economics with something called "The Ultimatum Game" which is explores how people approach the idea of fairness.

If you're not familiar with the game, it involves two people: a proposer and a responder. The proposer has $10 and must make an offer to the responder on how to split the money. If the responder accepts, they split the money. If the responder rejects, no one gets the money.

Basic economics would suggest that any split should be accepted. After all, anything is better than nothing. But research has shown that if the responder does not view the offer as fair, it gets rejected.

The article goes deeper, exploring the evolution of the idea and the word (relatively recent surprisingly), but it's worth a look. The idea of fairness is an informal institution in our society and, consequently, it affects how we choose. It's something we all might want to understand better.

I look forward to your comments.

Books for Economics in the Elementary Grades: The Homework Machine

This entry refers to the following Keystone Economic Principles:

1. We all make choices.

3. All choices have consequences

5. Incentives produce “predictable” responses.
8. Quantity and quality of available resources impact living standards.

Recently, I've been reading some books for younger readers. It's been part of a program with the lower School here at Collegiate. They have a lunch-time enrichment program called Chat-and-Chew. Students select from a list of books, and then have a book club meeting over lunch. The program directors asked the Powell Center to provide some insights and questions for discussion that are grounded in economic concepts. Consequently, I've been reading selected titles for the lower grades, and I have some titles to recommend for anyone looking for book ideas. I'll be posting on them over the next few days.

The first book is The Homework Machine by Dan Gutman. The book focuses on the activities of four fifth-graders - thrown together as a group by their teacher. While it initially looks like they will not have much in common, they eventually find a basis for friendship - a common aversion to doing homework.

The reader finds out that the smartest one in the group has developed a homework machine - a computer that can optically read questions or problems, and then seeks the answer on the internet. He lets this information slip out to his teammates, and soon they convince him to demonstrate and share the technology.

The book offers opportunities to discuss the choices they make (to use or not use the machine) and the incentives to use it; the consequences of the choice (fear of being discovered, and formation of "couples"); and even how the available resource (the machine) impacts the living standards of the students.

It's an enjoyable book, and I would recommend it as a way to bring these economic ideas into your class, whether the book is a read-aloud or a class assignment.

If you're familiar with this book, please share your thoughts and experiences.

Wednesday, January 28, 2009


This post relates to the following Keystone Economic Principles:

1. We all make choices.
4. Economic systems influence choices.

Back when I worked at the Federal Reserve, I often heard questions about whether the penny should be discontinued. While I lived and worked in Chicago, Illinois (Land of Lincoln), I would explain that the role of the penny was decreasing in importance; that we could probably do without it; and that eliminating the penny would open up a slot in cash registers to accommodate dollar coins. (I know. That's an entirely different issue.)

But I often told questioners, "It depends on us. If we choose to not use the penny, it will eventually disappear." Essentially, the choices we make about the penny are a function of the system - we provide it, so it's part of the process. If we don't use it, it won't have a purpose and it eventually will disappear - like the two-cent piece from an earlier time.

That brings this post by Greg Mankiw, and an interesting follow-up about a number of merchants in Concord, Massachusetts who are taking it on themselves to do without the penny. Essentially, cash transactions are always rounded down to the nearest nickel (to eliminate the charge that businesses will rip us off by always rounding up).

It's interesting to note that Illinois' current favorite son is in favor of eliminating the penny. I'd like to hear your thoughts.

Tuesday, January 27, 2009

First Powell Webinar for Teachers








Please join us.

Monday, January 26, 2009

A Different View of Outsourcing

This post can be used to illustrate the following Keystone Economic Concepts:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.

4. Economic systems influence choices.
8. Quantity and quality of available resources impact living standards.

I suspect that if you discuss trade issues with your students, the term 'outsourcing' gets bandied about with reckless abandon. People will discuss how cheap labor undermines the ability of other people to work and earn a good living. But I suspect the folks using the term restrict its use to the arena of foreign labor.

Today's issue of The Wall Street Journal has an interesting article about the number of cities and towns that are outsourcing work - to nearby prisons. The inmates provide a wide variety of services in many towns and cities, at no or reduced cost. Now that state budgets are being hit by lower revenues because of the recession, some prisons may be consolidated - removing a source of cheap or free labor for the same towns that use them. This means the town will have to cut services or pay higher prices to provide them.

I think it woudl be interesting to ask students what they feel about this type of outsourcing. I was surprised by the extent to which some small towns depend on the nearby prison as a labor pool. Here are some questions for the students:
1) Should prisoners provide service to the nearby community at no or reduced cost?
2) What does this choice mean to ability of other people to secure good-paying jobs working for local government?

The practice is old (how many movies have you seen with scenes of "chain gangs"?). Is it right?

I look forward to your comments, and I invite you to share your students' thoughts.

Friday, January 23, 2009

Looking Good

This post incorporates the following Keystone Economic Principles
1. We all make choices.
4. Economic systems influence choices.
5. Incentives produce “predictable” responses.

There is a very interesting article in The Economist magazine that asks why people are involved in philanthropy. The article asks whether economics can explain why people engage in charitable behavior. It cites research that attempts to explain the behavior. The findings are interesting. It seems that image is an important factor, and monetary incentives may actually be counter-productive in encouraging philanthropic behavior. Some of us may be more charitable if we're not paid to be.

But while some may find this puzzling, I do not. In The Theory of Moral Sentiments, Adam Smith postulated that much of our behavior is based on how we wish to be seen by others. You can call it what you will, but I see it as a return on a choice. If we believe we are better off (image-wise) because of a charitable choice; I don't see where that differs significantly because we think we're better off (materially) because we paid for goods or services.

I think this even has implications in a personal finance environment. Should a personal budget include charity? For those who believe in a cause, definitely. This even applies to our time budgets. We may not give money but we may volunteer extensively for causes we believe in. But there is an economic motive behind it. We see an image improvement for ourselves and for others who observe us. Part of participating is that others will see. For those who believe as we do, it may be less important that they see us. For those who do not believe as we do; it may not be important that see us individually, but that they see broad support. Either way, it is still a return on a choice as I see it.

Are our beliefs and personal values part of the institutional structure - the rules - that influence our choices? I look forward to your thoughts or the thoughts of your students on this question.

Price of Prejudice

This post addresses the following Keystone Economic Principles
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.

People often overlook some of the social implications of economics. One of the best examples of this is how we think about prejudice. I find that students frequently don't see a connection. But prejudicial behavior has an economic cost.

This article in the January 17th issue of The Economist talks about the price we pay for prejudicial behavior. The research cited looked at questions of weight, gender and race. In all cases, prejudice was more prevalent than many of the participants admitted to, and in some cases there prejudice implied some significant costs, both personal and social. The lesson is that when we make choices based on prejudice, we give up something. And the choice can have long-term consequences for many people involved and many who are not involved in the immediate decision. (An externality?)

I look forward to your comments.

Thursday, January 22, 2009

What Should Central Banks Do?

Today's post relates to the following Keystone Economic Principles:

3. All choices have consequences.
4. Economic systems influence choices.

The most recent issue of Monetary Trends, produced by the Federal Reserve Bank of St. Louis, addresses whether the Federal Reserve should be taking on all kinds of "securities" and expanding its balance sheet as it tries to bring stability back to the financial system.

The essay refers to the classic work by Walter Bagehot. For those of you who are not familiar with Bagehot, he was one of the first editors of The Economist magazine, and his book, Lombard Street, remains one of the classics in macroeconomics from a period before there was macroeconomics.

For what it's worth, the author seems to think the Fed is doing the right thing. Right or wrong - based on the essay, Bagehot would approve.

The essay is worth a look.

Wednesday, January 21, 2009

Specialization & Comparative Advantage in Sports

Today's post relates to the following Keystone Economic Concepts:

2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
7. Economic thinking is marginal thinking.

Occasionally, students will have trouble with the difference between specialization and comparative advantage. This fact was reaffirmed for me when I was listening to an Econtalk podcast featuring a conversation between Russ Roberts and Don Boudreaux.

Specialization speaks to the idea reducing wasted resources (moving from step to step on a job); gaining skill through repetition; and eventually finding a way to apply capital to the procedure. But it fails to capture the idea of opportunity cost that is inherent in the concept of comparative advantage. The idea is that we chose an activity because of the opportunity cost - what are we giving up by producing this good or service - not necessarily because it's what we do best.
Because of recent attention on college bowl games, NFL playoffs and even college basketball in my house, the distinction between specialization and comparative advantage caused one of those "ah-ha" moments.

For any game, the coach is going to put players in a position because they are specialists. They likely have the position because they specialize - they have done the procedure many times and are very good at it. But what happens when there is an injury to a player? "You put in the back-up," might be your first response. But what if, because of previous injuries or other circumstances, there is no back up? Is the team forced to forfeit because there's no available point guard or power forward? Does the team take the loss for lack of a middle or inside linebacker for short-yardage situations? In those circumstances, you look to comparative advantage.

Of the resources (players) you have, who can move from their position with the least cost - the least loss of effectiveness? Maybe a receiver moves to defensive back because several other players can fill in on the receiver side. Maybe one of the forwards becomes a temporary shooting guard because they can make the three-pointer, leaving you adequate resources on the bench who can fill in at forward.

Does this analogy help or am I off on the wrong track? Please share your thoughts.

Labor Markets, Incentives and Development

This post incorporates the following Keystone Economic Principles:

4. Economic systems influence choices.
5. Incentives produce “predictable” responses.
8. Quantity and quality of available resources impact living standards.

First of all, I want to give a HT to the folks at Izzit for making this post possible. It's a good resource if you want to be able to integrate current events into your teaching.

There have been a couple stories featured on Izzit recently that can be put together for an interesting discussion on labor markets, incentives and economic development. The stories basically illustrate extreme situations in labor markets - but by illustrating the extremes, it becomes your students can discover that the desired effect is somewhere in the middle. The question to your students then becomes "where?"

The first story to grab my eye was actually from The Wall Street Journal, and addressed the idea of employee absenteeism in Belgian businesses. It seems the government mandates unlimited sick leave for employees and the standards for what constitutes sick are quite lenient. Consequently, a lot of employees take a lot of time off for situations that others might not think would qualify under a less generous system. Essentially, the system sets up incentives and people respond in predictable ways. The fact that employees (a resource) are often not available has an impact on living standards - a fairly high tax rate if the example given is representative.

The second story is actually an opinion piece from The New York Times by Nicholas Kristof. In the piece, Kristof discusses the idea of imposing labor standards on underdeveloped economies such as Cambodia. The idea is to eliminate sweatshops. But the question he raises is whether by imposing higher standards than the economy can support, we are hurting rather than helping the poor of Cambodia? (By the way, I strongly recommend watching the video if you can.) Again, systems create incentives - people (investors? employers? employees?) respond to incentives - and the standard of living is impacted by the quantity and quality of resources (investment capital in this case).

One would expect that the ideal is somewhere in between. Should industrial labor standards come before industrialization? Or are they a result of industrialization? If the former, does it create an unnecessary or insurmountable hurdle? If the latter, at what point should it be expected? And finally, since people respond to incentives, what are the incentives of the people and or groups that advocate the extreme positions? What are the incentives for people outside the system to advocate or block change? What are the incentives for people inside the system to advocate or block change?

I look forward to your comments.

Friday, January 16, 2009

The Future of Fiscal Policy?

The following Keystone Economic Principles are related to today's post:
1. We all make choices.
2. There ain’t no such thing as a free lunch.
3. All choices have consequences.
4. Economic systems influence choices.

There is a thought-provoking piece on the second page The Wall Street Journal today. It basically outlines the policy choice facing the incoming administration. And I think it does a good job.

The author refers to a "Grand Bargain" - the long-term cost of the short-term stimulus that is on the horizon. I'm starting to see more discussions of this type - the upshot of which is this: Tax cuts and spending increases are probably inevitable. Given that, once the economy is on the mend, what's the next step?

I find the question interesting because of the current interest in Keynesian economics. Keynes was brilliant. He did believe that government policy could be used when the economy went into a deep recession. But he also felt that once the economy recovered, policy called for a reversal or a dropping of the programs put in place and the return of balanced budgets (balanced meaning generate surplus to offset the previously imposed deficits). That would seem to indicate a return to higher interest rates, higher taxes, and a return to reduced spending. Do we think policy-makers can follow through? It would seem some rough choices are lurking in "the long run." I think this could be a good article to use as a discussion starter on Tuesday. What are your thoughts?

Have a good weekend.

Thursday, January 15, 2009


The Keystone Economic Principles related to this post are as follows:
1. We all make choices.
3. All choices have consequences.

Neal Templin's "Cheapskate" column in The Wall Street Journal is rapidly becoming a "must-read" for me. He is entertaining, informative, and his experiences connect. Today's column discusses some of the simple decisions we make, never thinking that they will affect our finances. But ultimately they have a higher cost than we thought (or, in some cases, didn't think). His first example illustrates a choice that many people would have trouble making using economic principles, but it still resonates. The others are clearer.

I would suggest this can be the basis for discussion in a personal finance course - what choices do we make without thinking about the consequences? What time-frames do we use in making choices?

But I also think a basic economics course can benefit from this story, because the choices made are, with one exception, outside the realm of decision-making as our students frame it in class. And this encourages them to think outside the box – apply the “economic way of thinking.”

I have an example that fits this category. Back when I still worked in Chicago, I was rushing to catch a train in order to be at the Federal Reserve Bank to hear Chairman Greenspan address the Bank staff. As I boarded the train, I stumbled on the stairs and my briefcase fell outside. Unfortunately, as I fell, the "door closing" chime sounded. I quickly stood up and started back down the stairs to retrieve my briefcase, but instead I tripped, fell out of the car onto the platform, and broke my wrist. I often think about what I would have done differently - leave the briefcase - miss the train. But the cost was definitely higher than just missing a speech.

Do you have a decision that would fit in this category that you use with your students? Would you mind sharing? I look forward to your comments.

Monday, January 12, 2009

More Perspective

There’s some interesting insight from the Federal Reserve Bank of Minneapolis to put The Recession in Perspective. (HT to Marginal Revolution.) My main observation is that with the spin many people put on the recession, you wouldn't think this was the case. As one of my high school teachers used to say, "Einstein told us it was all relative." For most of our students, this is the biggest economic event of their lives. For those of my age, it currently barely ranks in the top five (out of ten events).

I will be interested to see if the authors continue the study. And if the authors do follow it through, how will it all shake out? Do you have any comments to share? How does it feel to you? I recently told a colleague that some aspects of this recession remind me of the 1990 event. Other aspects are closer to the early 1980s, although my memory there may not be as clear.

Alex Tabarrock at Marginal Revolution did a little more digging into the Minneapolis data, even goin so far as to contact the folks at the Minneapolis Fed. It seems he had some questions about the information. Here's a post on the follow-up that's worth reading.

Friday, January 9, 2009

Historical Context of Homeownership...and Some Consequences?

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.
4. Economic systems influence choices.
5. Incentives produce “predictable” responses.

The Federal Reserve Bank of Richmond's Region Focus magazine raises an interesting question in the most recent issue. "Are there economic consequences to promoting homeownership?" The article, House Bias, looks at the history of homeownership in the U.S. and the policy decisions that led to its growth. While many of us would agree that there are significant benefits to home ownership, there are some interesting costs raised by research. The article can provide some interesting fodder for discussion in both personal finance and economics courses.

One that particularly struck me arose from cited research linking homeownership to the unemployment rate. It seems that increased levels of home ownership can be correlated to higher rates of unemployment. The finding connects with one of the special characteristics of labor as a productive resource that some of us learned in our early economics courses - immobility. The idea is that people are not as mobile as other productive resources - largely because they lack the willingness to get up and move easily, whether for economic or other reasons. Given that connection, are there advantages to renting instead of owning a home, and should that be a consideration in and individual's lifestyle? It would seem sensible that someone who wants to be free to follow job opportunities might be better served renting than owning.

Give this short article (four pages) a quick read and share your thoughts and observations.

Thursday, January 8, 2009

Save or Spend: Connecting the Personal to the Macro

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. Our choices have consequences.

Earlier this week, I ran across a couple articles that provide the basis for discussion. Together, they did a good job of explaining how personal budgets and choices are reflected in the larger, macro-economy. They lend themselves well to both personal finance and macroeconomics. Subsequently, I ran across another couple of pieces (HT to Planet Money) that could be used with the same articles to flesh out a classic debate within economics.

The first two articles were in Monday's edition of The Wall Street Journal. The first article was about the choices families were making in their consumption, as a result of the economic downturn. Cutting spending as income falls - which may seem obvious - is not always easy to do. And the families in the story provide good background for discussion in a personal finance course. But what's the larger impact of deciding to save rather than spend? Does cutting back on one's budget really impact the macro economy? That's the point of the second article from the Journal. It provides a clear explanation of how not spending can create further problems in a weak economy.

That idea provides the segue to the other two pieces. The idea that reducing spending in hard times acts to slow the economy further; which instills fear for the future and provides additional incentive to save and not spend is referred to as a "liquidity trap." Recent Nobel Prize winner, Paul Krugman, provides a well-written and classic explanation of the dangers of a liquidity trap in this piece from The New York Times.

But not everyone believes that explanation. There's a good counter-argument in this piece at the Mises Institute blog. The idea presented is that reduced consumption is not so much the cause as an effect. However, what seems to be missing for me is an explanation of role of the effect in generating a downward spiral. Personally, if we hold that consumption spending is two-thirds or more of domestic spending, any reduction in consumption must have an impact on GDP. While consumers may not cause a recession, their decisions may serve to amplify it.

I'd be interested in hearing your take on these articles, or the responses of your students.

Tuesday, January 6, 2009

For the AP Econ - Macro Teacher

An interesting question to kick off the new semester over at Cafe Hayek.

Please let us know what your students think.

Going Global...A Long Time Ago

Today's post relates to two of the Powell Center's Keystone Economic Principles:
6. Do what you do best, trade for the rest.
8. Quantity and quality of available resources impact living standards.

Much of what is currently available on the history of globalization seems to focus on the era since the "age of discovery". There are usually three "waves of globalization" identified: the aforementioned age, the late 19th century (or age of empire) and the late 20th and early 21st century.

I've thought that this is a bit restricting. If one is willing to define "global" more loosely - maybe areas that are known and accessible with given technology - then we see "globalization" taking place much earlier. And that globalization includes the trading of ideas, the sharing of culture, and political systems, and not just trade - just like the current definition.

There's an interesting article in today's issue of The Wall Street Journal that speaks to the idea of early globalization, and it focuses on a current show at the Metropolitan Museum of Art in New York. The main takeaway is that globalization has been going on a long time; and nations seem to benefit in the process.

I look forward to your comments.

Friday, January 2, 2009

Fuel Taxes, Revisited

One of my resolutions this year is to relate my posts to the Powell Center's "Keystone Economic Principles" more clearly. You can find all of them at this link. Today's post relates to principles 1 - 5.
1) We all make choices.
2) There Ain't No Such Thing as a Free Lunch.
3) All Choices Have Consequences.
4) Economic Systems Influence Choices.
5) Incentives Produce Predictable Responses.

Back in early December, 2008, I posted on a story about the Chinese government increasing fuel taxes to fund research and investments into alternative energy. There were some comments received about whether predominantly market economies could do what a predominantly command economies could do. I think they can, but that it's a matter of economic education and making informed choices.

More recently, there have been some opinion pieces calling for higher gas taxes. One of the better ones was brought to my attention by a colleague (thanks, Donna). It's a piece by Charles Krauthammer that appeared in The Weekly Standard. The piece is a well-reasoned and well-written case for the U.S. to increase fuel taxes. And while Krauthammer's objective is more in-line with the "Pigou Club" that Greg Mankiw's been posting about than it is about funding alternative energy research; it still has the benefit of using prices to alter short-term behavior for a longer-term benefit.

Now here is a story courtesy of the Associated Press that indicates a Congressional group is advocating a 50% increase in fuel taxes. So far, so good. The twist on this story is that the money will be used to fund highway construction.

I have questions you could pose to your students after reading these pieces.
1) What are the long-term effects of a) the Chinese plan, b) the Krauthammer proposal, and c) the Congressional group's proposal?

2) What short-term consumer incentives are created and how is behavior impacted?

3) What long-term consumer incentives are created and how is behavior impacted?

I think the last proposal is potentially counterproductive. What's your take on it? I look forward to your comments.