A Free Lunch

Obama, a pure Keynesian, believes that government spending helps the economy grow.

The president feels that the recession is caused by a lack of demand and that the government can fill the gap in demand by government spending. Further, the candidate believes that increased taxes on the wealthy do not have an impact on economic growth.

Therefore, Obama wants to increase spending and increase taxes through stimulus bills. Similarly, he plans to increase employment by additional spending on infrastructure.

However, Obama does plan for targeted tax cutting for small businesses to encourage them to grow and hire new employees.

Overall, I suppose that, according to Obama, there is such a thing as a free lunch.

Source: http://www.barackobama.com/record/economy?source=primary-nav

Rock the Boat

Someone is rocking the boat on the way to the old world.

Due to the extreme sovereign debt problems with the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), the Eurozone might break up in the near future.

The PIIGS are uncompetitive and unable to devalue their currency, since they are part of the Euro, which countries normally do when they face excess debt, their economies are poor, and they are uncompetitive in the global market.

I personally hope that the Eurozone breaks up, for my own selfish reasons. I would love to travel to Italy using the Lira, to revisit Spain using the Peseta, and to visit Greece using the Drachma.

Caio. 

Article: The Economist, "Is this really the end?", November 26, 2011.  

Drabbles of the Thanksgiving Variety

Let Them Eat Cake

This Thanksgiving, I was assigned the task of selecting the Thanksgiving dessert for our overwhelming party of four. “Buy two desserts,” my mother told me, “but don’t buy too much. God knows we don’t need it.” So, as others were throwing on their aprons to bake their Thanksgiving pie, I found myself standing in the meager Heinen’s dessert section attempting to buy two desserts that would not be too much for four people.   

While wading through the oh-so-festive Thanksgiving donuts, Éclairs, and Key Lime Pies, I found myself deliberating over each treat’s costs and benefits. Benefits of Éclairs: small, delicious, and a sense of non-conformity. Cost of Key Lime Pie: at the expected dessert to person ratio, each serving would bring a rather unwelcome deadweight gain.

As I presented the desserts I chose (a four x four inch lemon bar and a two x four inch tiramisu) to my family on Thanksgiving to a chorus of profanity and anger, I realized that perhaps I should have weighed the costs and benefits to my assignment before accepting it.

The Turkey and the Dough Boy

“Here, Meghan,” my mother told me as she handed me the whole wheat Thanksgiving rolls, “dig in.” As a vegetarian in a family with a father that prides himself on his steak and ribs, my Thanksgiving pickings were slim this year, to say the least.  Although some non-turkey eaters dug into various dishes, such as the “delicious” tofu-turkey, and other delectable substitutes, I celebrated Thanksgiving with the Pillsbury dough boy.

Although, peanut butter complimented the roll as well as my family’s stuffing complimented their turkey.

Dress Your Family in Blankets and Bump-Its

This Christmas, my family will be traveling to New York, so gift giving this holiday season will be limited. However, over a Thanksgiving breakfast of cinnamon rolls, my parents announced that gifts for family members must cost less than $20 and must be found in the “As Seen on TV” section of Walmart, Walgreens, or CVS.

So, on an ironically bright Black Friday, I made my way to Walmart to the section containing the world’s most useless inventions. Amidst a sea of blankets with legs and arms, pajama jeans, and lighted slippers, I was surprised to discover that the items that would provide the least enjoyment, such as, say, the oh-so-attractive Potty Patch, provided the greatest shopping experience. I suppose that within such a tight budget constraint, my utility from purchasing four pajama jeans and two pairs of lighted slippers would be the same as if I purchased three of each product.

Besides, won’t they all end up on the floor of my closet as their makers skip off to the patent lawyer with their next money-making invention?

Bonds and a Plate of Bratwurst

Article: “Debt Woes From Rome to D.C.” Randall W. Forsyth, Barron’s, November 14, 2011.

According to the article, “Debt Woes From Rome to D.C.,” Italian ten year bonds are trading around 7% while German ten year bonds are trading around 2%. In order to make investors indifferent to owning Italian Bonds over German Bonds, they require 5% more in interest than a German bond. Why is this?

As Italy is perceived to have a higher risk of default than Germany, due to their high debt and low economic growth, investors require a higher interest rate to compensate for the greater risk.

While German bonds are better than Italian bonds, when it comes to cuisine, the opposite is true. I think everyone would agree that pasta or pizza provides more marginal utility than a plate of bratwurst.  

Marginal Magic

Article: “Harry Potter does a little 3Q magic at Time Warner,” WSJ.com, Associated Press, 11/2/11.

The Wall Street Journal reports that Time Warner (Warner Brothers) had a record third quarter profitability due to the success of the release of Harry Potter and the Deathly Hallows Part 2.

As the November 11^th release of the Deathly Hallows DVD approaches, an interesting question arises:  Why do so many people want to see the movie on the big screen, or buy the DVD, on the first day?

The rule of thumb is that 40% of DVD and domestic box office sales are in the first weekend.  For Warner Brothers’ most recent movie, the box office take in the first weekend was 44%.

With that in mind, is there a marginal value of going to the theater and purchasing the DVD on day one rather than waiting a few weeks or months? How much additional enjoyment does the owner get from seeing the movie at midnight, or on opening weekend, rather than waiting for the DVD release?

The facts would suggest that there is.  I, and many others, seem to gain a great deal more utility from paying the price of the DVD or movie on day one rather than waiting weeks, even though it may be easier to buy it at that point.

Speaking for myself, having the DVD on the first day provides me more satisfaction than waiting weeks to purchase it.

That being said, will you be watching Deathly Hallows Part 2 on Friday? 

Fast Forward or Rewind?

According to The Wall Street Journal, Netflix has split their services into two subscription types and increased the combined price by products by 60%. They expected to only lose 4% or one million of their customers.

However, due to the price increase, Netflix customers responded elastically by canceling their subscriptions at a faster pace than the company had forecasted. In other words, the elasticity of DVDs and on-demand movies was greater than they had expected. In fact, in the last three months, their stock has fallen 63%, mainly due to this pricing misstep.  

Obviously, they did not take the time to read chapter 6 of Krugman’s textbook.

Although they have recombined their services into one subscription, they have kept the price increase. If I were you, I would not buy this stock as Netflix clearly does not understand how its customers will respond to changes in its services.

So, I now ask you, should Netflix fast forward or rewind? 

Just Cut to the Chase

Article: “Smooth Operators: The Blow-Dry Bar Scene,”  The Wall Street Journal, September 28.

The Wall Street Journal reports a new trend has forever changed the salon industry- Blow-Dry Bars. These salons cater to women who want their hair quickly styled for an affordable price.

The simplicity of the model allows Blow Dry Bars to succeed despite the hair salon industry’s struggles. Stylists are pressed to abandon a perfect quality to quickly cycle customers through the salon, and innovations, such as hair dryers suspended from the ceiling, allow the producers to increase the number of appointments they are able to supply. As profit is determined by the number of treatments, efficiency is the key to this business model. Pricewise, the market price for this service is approximately $35, and companies, such as west coast based Halo Blow Dry Bars Inc., have been able to increase their price from $25 due to high demand.

Personally, I think this is a fantastic idea. What woman would not be drawn to the promise of quality, efficient hair styling in a fashionable salon? In addition, in a recession, Blow Dry Bars provide an alternative to frequent haircut appointments, where the hair is styled. So, now women can look good for less. Besides, in an efficient world, it’s important to cut to the chase. 

Pity for Pumpkins

Just in: A Pumpkin Shortage! Will Halloween be ruined?

I read in the USA Today, that due to the destruction caused by Hurricane Irene, the Northeast is facing a dearth of pumpkins. One farmer reported that over 20,000 of his pumpkins washed into Lake Champlain in New York. Pity.

This farming disaster has great ramifications on both the producer and the consumer. The rain damage from  Hurricane Irene causes the supply curve to shift to the left, and with the increased demand for pumpkins during the holiday season, the price of each pumpkin increases. As a result, the consumer surplus shrinks, therefore putting a damper on his holiday.

Furthermore, if the price of pumpkins increases in the Northeast, I speculate that the Midwestern farmers will truck their crops east as northeastern farmers cannot produce enough pumpkins for the region. This could put a damper on the Pumpkin Roll.

This pumpkin shortage will cause inefficiency in my household. My father is a lover of the Heinen’s seasonal Pumpkin Roll dessert. He looks forward to the six weeks in which my mother would normally purchase a weekly roll. However, since he is not the shopper in the family, and my mother is a tightwad, she will NEVER authorize the purchase of a pricier pumpkin roll. Pity.

Meghan Inc.

Over the summer, while friends of mine were lifeguarding and working at local shops, I was cooking pasta, monitoring piano practice, and vacuuming Dorito crumbs from the floor of my car. But, I was making well over the minimum wage, tax free.

My personal experience with babysitting reflects the economic principle of demand. I have found that leaving my phone on during school proves problematic when mothers text me asking for my services on the same days and times. In some cases, demand for my childcare services is so high that mothers now book me weeks, sometimes months in advance at hourly rates almost double minimum wage.

However, this principle not only applies to Chagrin Falls, but apparently nation-wide. For example, during a visit with my cousin in a Central Park playground, I was asked by a New York City mother whether I babysat. Unfortunately, I do not reside in the city. But I wonder how much an excellent babysitter makes in a city with a high cost of living.

Due to the summer’s demand for child care, I made the choice to babysit rather than seeking employment at a local shop or grocery store. I have found that the opportunity cost to vacuuming Doritos, wiping faces, and helping with homework is very low. While over 25% of teenagers were unemployed in August, I do not face this problem (High teen unemployment cuts learning opportunities, USA Today 9/6/11). Due to the demand I have experienced in Chagrin Falls for my services, I have gained insight to the world of business, employers, and customers. Moreover, I have discovered how marketable a teenager can be when there is great demand for a service.  

By the way, Mr. Womack, I can drive. 

Irene, Economics, and Clementine

In the wake of Hurricane Irene, I am noting that many principles of economics are applicable to the aftermath.  

Due to the hurricane, towns will need to be rebuilt, according to the article, “With Help, Towns Rebuild” in the September 1^st Wall Street Journal. This job will require the construction trade (lumber, workers, concrete, etc.). Since these resources will be in demand, I expect that their prices will increase, and the resources will eventually become scarce.    

Government intervention will also play a role in the reconstruction. According to the article, “Relief Crews Tally Damages” in the August 31^st Wall Street Journal, the Federal Emergency Management Agency is providing funds to rebuild many towns and cities. In addition, the Department of Health and Human Services is aiding hospitals and health centers in affected areas. Clearly, government intervention can improve society’s welfare when cities do not achieve efficiency.

Additionally, business is affected by Irene. According to the article, “River, at 100-Year High, Ravages New Jersey City That Once Thrived on It,” in the September 1^st New York Times, the immense flooding has damaged businesses in Patterson, NJ, as well as along the East Coast. In addition, thousands of people have been evacuated from their homes. Flooding and evacuation hurts business because stores and plants are shut down, and people cannot buy their products. Therefore, businesses and individuals are hurt as they are not able to receive income, as one person’s spending is another’s income.

On a personal note, my Grandmother, who resides in Long Beach, New York, was evacuated from her home due to the immense flooding that threated her safety. In Long Beach, the water from the Ocean has flooded streets, as well as my Grandmother’s basement. As a result, she had to evaluate the opportunity cost of fixing her home. She decided to hire workers to pump the sea water out of her basement. She is now in Massachusetts, sipping wine, while visiting her sister.