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When Journalists Who Write about Prices Forget Opportunity Costs

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It’s conventional wisdom: they’re trying to rip you off by overcharging you. But you can’t calculate the true cost of providing any cost or service without including opportunity costs. When Sally French says, “And you’re definitely better off making pizza at home,” I hope my students are asking as they read: “Really? Even people with high opportunity costs of making their own pizza?”

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But, the Narrative…

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Here’s another great example of “what everyone knows” not being supported by hard data. At a minimum, the idea that Chinese companies simply steal technology or force its transfer lacks nuance. How many of my students would guess that China may be the second largest licensee of  technology?

If You Want Less of Something…

March 3, 2017 Leave a comment

tax it.

This article illustrates several things we talk about in the introductory and intermediate microeconomics classes: derived demand, tax incidence, and the relationship between price elasticity of demand and close substitutes.

I hope my students can read it and apply these concepts to what they read.

Don’t Panic

November 29, 2015 Leave a comment

Noah Smith says most of what you learned in Econ 101 is wrong.

Don’t panic.

It’s not that mainstream thinking about anything is never wrong. Often it is.

Still…

When an uneducated person claims to be in on a secret the rest of the world doesn’t know, we call that person a crackpot.

When an educated person sees the world from an enlightened position that the masses–including best selling textbook authors–simply can’t attain to, they write clickbait for Bloomberg. Or CNN.

It’s fun to watch someone explain why they understand something the rest of the world doesn’t:

But Mankiw’s book, like every introductory econ textbook I know of, has a big problem. Most of what’s in it is probably wrong.

After the fun, though, you should listen to the adults in the room:

He doesn’t actually make the case that would support that title….Here’s what’s striking. In an article that purports to show that Mankiw is wrong on many issues, he doesn’t point out how he’s wrong on ANY issues. Moreover, he doesn’t even try. At no point in his piece, does Smith ever relate anything he says to specific things that Mankiw claimed.

Don Boudreaux elaborates

I add here that when I teach supply-and-demand analysis I always label the horizontal axis “Qty./t” – in order to make clear to my students that the quantities demanded and supplied are quantities demanded and supplied “during some specific period of time” such as “per day” or “per year.”  Changing “t” changes the elasticity of both demand and supply.

Any professor who teaches supply and demand in a way that implies that the elasticity of demand and the elasticity of supply are invariant to time, or who otherwise implies that time is not a relevant-enough factor to account for when doing supply-and-demand analysis, is a very poor professor indeed.

I’m fairly certain my freshman economics students understand, after less than a semester of class, that the effects of a price floor or ceiling are smaller in the short term and larger over time.

I expect they also understand that we are working with simplified models that are far less complex than the real world. They might have been led to that thought by my saying it about 1,000 times, or by the hidden part of Mankiw’s text that (translated using a password-protected decoder code) says, “All models–in physics, biology, and economics–simplify reality to improve our understanding of it.” No, wait, that’s in Chapter….2.

So when Noah Smith says, “In other words, minimum wage hikes should quickly put a bunch of low-wage workers out of a job,” I’d like to know: whose “other words” are those? Not Mankiw’s. Not the freshmen students I teach.

Are they Noah Smith’s? But surely he knows better. Who’s getting everything wrong from Econ 101?

Really? Refugees Can Also Be Productive? Of Course!

November 20, 2015 Leave a comment

I wanted to use the “Remember, Journalists Who Write About Economics Often Majored in Journalism” title, but unfortunately, Mr. Cassidy actually majored in both.

Nevertheless, this silliness:

Turkey has taken in an estimated 2.2 million [Syrian refugees], Lebanon 1.1 million, and Jordan six hundred and thirty thousand.

Based purely upon these figures, you might think that the economies of these countries would be sagging under the burden, but they aren’t.
Really? GDP doesn’t contract when a country’s population increases? Stop the presses!
According to a new report from the Paris-based Organization for Economic Co-Operation and Development, the Turkish economy will expand by three per cent this year and by four per cent next year. Lebanon’s economy is also growing, at a rate of about two per cent this year, which will expand to more than three per cent next year, the World Bank reckons. Despite an influx of refugees that now amounts to more than ten per cent of its population, Jordan, too, is bearing up. Its gross domestic product will rise by about three per cent this year, the International Monetary Fund says.
Someone who studied economics should know better.
The only possible way a country’s GDP could not go up, ceteris paribus, given an influx of refugees, would be for not one single refugee to produce, or consume, anything of value.
That is incredibly unlikely. Refugees may typically be poor, but they aren’t incapable of productive work. They bring money, too, even if small amounts. They always increase the amount of consumption, and therefore production, of goods and services.
So, I can’t imagine who “might think that the economies of these countries would be sagging under the burden,” but it certainly wouldn’t be anyone with a freshmen-level understanding of how GDP is calculated.

Abnormally Normal, or Just Normal?

November 13, 2015 Leave a comment

I usually find articles in the Economist about the energy industry informative, but this one leaves me scratching my head:

Only rarely, says Jason Bordoff, director of Columbia University’s Centre on Global Energy Policy, has the oil market behaved like a normal market, more subject to the laws of supply and demand than to the whims of a cartel. Now is one of them.

Take supply. A year ago Saudi Arabia refused to allow OPEC to try to raise prices by pumping less crude, in the hope that a low price would drive competitors, especially America’s shale-oil producers, out of business. Since then it has used its low cost of production to carve out a bigger slice of the pie.

Question 1: Does the author mean “competitive” or “efficient” when using “normal”? It seems to me the oil market has always behaved as a typical (i.e. normal) monopolistically competitive market.

Question 2: How is a cartel’s decision to greatly increase production for the purpose of driving down prices more like a competitive market? If a single supplier (or multiple suppliers acting as a single supplier) can shift supply out, how is that different from a single supplier shifting the supply curve in?

It’s true that lower prices and higher quantities are what one would expect when a particular market transitions to a more competitive market structure. Some of what we are seeing must be attributed to more suppliers and better extraction technology. But if OPEC can still move the supply curve so effectively, in either direction, the drop in equilibrium price and increase in equilibrium quantity isn’t an indication of anything more “normal” than a normal, monopolistically competitive market structure.

Remember, Many Business Journalists Majored in Journalism, Not Business

November 2, 2015 Leave a comment

Students, for an example of business journalism you should read critically, see CNN Money’s Matt Egan’s article Saudi Arabia to run out of cash in less than five years:

If oil stays around $50 a barrel, most countries in the region will run out of cash in five years or less, warned a dire report from the International Monetary Fund this week.

That’s poor reporting.

Here are some clues that the reporter doesn’t understand the IMF report he’s covering:

(1) No link to the original source. When you attribute something to a published online report…why wouldn’t you link to it?

(2) Even if oil falls below $50 a barrel, all Middle Eastern countries will have cash in five years.

Maybe Mr. Egan has an unusual definition of “cash.” Surely he can’t mean that Saudi Arabia will run out of currency and coins. Does he really think the IMF is saying Saudi Arabia will have no currency or currency-equivalents in five years if oil prices don’t go up?

If Mr. Egan really thinks any one of these countries will “run out of cash” I’d like to make a sizable bet with him!

Saudi Arabia’s war chest of cash is still humungous [sic] at nearly $700 billion, but it’s shrinking fast.

(3) Can’t spell humongous. 🙂

(4) Sovereign wealth funds don’t exist to simply store up hordes of cash. Resource-exporting economies are supposed to draw on reserves of wealth built up in better years when resource prices fall. Saudi Arabia would be foolish to not use these funds in years of low oil prices.

The kingdom barely has enough fiscal buffers to survive five years of $50 oil, the IMF said.

(5) Mr. Egan must not understand the concept of ”fiscal buffer” as used in the report. The report actually says:

A good starting point is the size of governments’ financial assets—commonly referred to as “fiscal buffers.” In general, countries with larger buffers can afford to maintain fiscal deficits further into the future, so as to reduce the impact of lower oil prices on growth. On current trends however, all non-GCC MENA oil exporters are already projected to run out of liquid financial assets in the next three years [emp. mine] (see Chapter 1). In, contrast, …GCC countries are split evenly between countries with relatively large buffers (Kuwait, Qatar, and the United Arab Emirates—more than 20 years remaining) and countries with relatively smaller buffers (Bahrain, Oman, and Saudi Arabia—less than five years).

An asset is liquid if it can be converted into cash quickly and with little impact on the asset price. Saudi Arabia is smarter than to stuff cash from oil revenues into a gigantic (humungous?) mattress. Its investments are both in liquid assets like bonds and illiquid assets like real estate. If, in a year or two, oil prices are still low, and it needs more cash, it will simply begin to liquidate assets–that is, turn them into cash.

I will assume Mr. Egan isn’t responsible for the [mis]-“infographic” that is titled “Break-even Oil Prices in the Middle East.” The IMF says that Saudi Arabia needs a price of $106/barrel to balance its budget. Hopefully even my first-year students know that this is not the same as “break-even” when discussing oil production. Saudi Arabia has one of the world’s lowest crude production costs, and could continue to profitably generate positive cash flows even if oil prices drop further. It won’t be able to maintain its current level of government spending without borrowing or drawing down on reserves of wealth, but that’s not the same as not “breaking even.”

This is CNN. I wouldn’t depend on it for reliable business analysis.