Worthwhile Canadian Initiative

Three Changes Making It Difficult To Find a Low Skill Job

In the comments of an earlier post we discussed the difficulty entry-level applicants are having in obtaining jobs.  In this post I discuss 3 changes from the last 12 months making it difficult for workers with low- to no-skills find employment.

The Lender of Last Resort

What Paul Krugman is saying about Ireland and the Eurozone is not wrong. But he keeps missing the most important point. And it's bugging me.

Income Effects don't really exist

I'm an expert on how non-economists think. That's because every year I try to teach 300 non-economists to think like economists.

Non-economists think in terms of income effects. Economists think in terms of substitution effects. That's a stereotype that isn't 100% true, but it still contains a lot of truth.

Here's how non-economists think:

Conspicuous Production

Holiday parties are a time for conspicuous production: "Would you like some bread with sun-dried tomatoes - I just baked it this afternoon? The tomatoes? Oh, they're nothing - I had stacks of them in my garden this year, so I dried them in the solar-powered food drier that I built last summer."

It wasn't always this way. In grade 4, my best friend Suzanne always got Wagon Wheels in her lunch box. How I envied her. I just had boring home made cookies. Back then, prepared foods were relatively expensive, and their consumption signaled social status.

Fast forward a generation. Many middle-class families rely on two incomes to pay the mortgage, and time has become the scarce resource. Sure, I could afford to buy Wagon Wheels for my kids. I don't, because granola bars are (slightly) healthier. It wouldn't matter anyways. The new status good is a home made cookie - when time is precious, anything home made is a luxury.

Unobtainium and Walras' Law

Suppose people want to spend 30% of their income on unobtainium. But the supply is zero, because unobtainium is unobtainable. So there's an excess demand for unobtanium equal to 30% of GDP.

What does that imply, all you students of economics?

Random Sales, and the elasticity of supply for the option of doing nothing

This post is not about Boxing Day sales. It's about those seemingly random sales, where a good is heavily discounted for no obvious reason.

A couple of years ago I went to Canadian Tire planning to buy a $200 socket set. And was surprised to find the one I wanted on special that day at $80. I was pleased of course; but why would Canadian Tire do that?

I don't normally do micro. But this question kept bugging me. Here's my theory. It's a real option theory of price discrimination.

Best and Worst Economics Ideas of 2010

From Economy Lab:

From great ideas to policy blunders, Economy Lab's experts and analysts look at 12 months of developments in the dismal science

Fourteen economists give their picks including Frances, Stephen and I.  Reading over the picks I kept thinking "now why didn't I choose that?!?"  Also, it appears it wasn't a good year for our friend Tony Clement.

I would love to get your picks - please leave them in the comments.

Holiday pictures

Some images to capture the holiday spirit...

Milton Friedman's Thermostat

If a house has a good thermostat, we should observe a strong negative correlation between the amount of oil burned in the furnace (M), and the outside temperature (V). But we should observe no correlation between the amount of oil burned in the furnace (M) and the inside temperature (P). And we should observe no correlation between the outside temperature (V) and the inside temperature (P).

Firm Currency Exposure - Moving Beyond Transactional

Not a week goes by when we read a story in the media on how a high and rising Canadian dollar affects exporters. (See: Get ready for a $1.15 loonie) The story is typically one of transactional exposure - a company has a revenue stream in U.S. dollars and the value of that stream is reduced when the Canadian dollar appreciates.

However, that is not the only type of exchange rate exposure a firm needs to concern itself with.  There are two others.

Pictures of Ireland?

In countries like Ireland, there is currently an abnormally large Gap between nominal interest rates and the expected growth rate of nominal GDP. That Gap creates a nasty positive feedback loop, through two channels:

The Risk Channel. It's hard to pay down debt when the debt is compounding a lot faster than the growth in your income. The bigger the Gap, the bigger the risk of default, and the higher the interest rate new lenders will require.

The Aggregate Demand channel. The Gap between nominal interest rates and expected nominal GDP growth is a rough proxy for the tightness of monetary policy. The bigger the Gap, and so the tighter is monetary policy, the slower will be the growth in nominal GDP.

Adding both channels together, we see that any exogenous increase in the Gap will cause higher nominal interest rates and lower expected growth in nominal GDP, and so a further endogenous increase in the Gap. There's positive feedback. If positive feedback is strong enough, you can get an unstable equilibrium, and perhaps multiple equilibria. Or perhaps no equilibrium.

Ever since writing my post on Ireland's sovereign debt problem, an inchoate picture has been slowly forming in my mind. It's a bit clearer now.

But my mind is still not as clear on this as I want it to be. This is a work in progress. Continue at your own risk.

A 21st century misery index

The 20th century misery index was the unemployment rate plus the inflation rate. In 1982, Canada's inflation rate stood at 10.9 percent,while unemployment was at 11.0 percent, for a 21.9 percent misery index. 2009, with inflation of 0.3 percent and unemployment of 8.3 percent, didn't even come close by old-style misery index measures.

Yet, as recent commentators on this blog have passionately argued, this generation's misery is real too: "This recession isn't a short, sharp shock. It's a long, drawn out constant torture that wears you down".

Clearly we need a 21st century misery index. And where better to look than that 21st century catalogue of misery, www.fmylife.com?

Worthwhile D.I.Y. Macroeconomics?

The New York Times has just published its 2010 "Year in Ideas" issue. One of the trends it identifies: D.I.Y. Macroeconomics. The financial crisis plus the growing availability of on-line data has given rise to "growing army of knowledgeable 'econo-bloggers'."  

I agree with one of their conclusions: econo-bloggers "offer sophisticated interpretations of economic data and hold passionate debates with their readers over the merits of the data."

But you try and tell the young people of today that... and they won't believe ya

I've noticed a couple of recent media stories on the plight of youth ([1],[2]), and I have to say that I've seen worse.

The case against the penny

Mike Moffatt delivers the coup de grâce for the penny in today's Ottawa Citizen. Go read it. Tell your friends to read it. Tell your MP to read it.

The arithmetic of household debt

 The interest rate on your mortgage is three percent. If the interest rate increases one percentage point, the interest component of your monthly mortgage payments will increase by approximately:

a. 1 percent

b. 10 percent

c. 25 percent

d. 33 percent

e. None of the above.

Expectational Wicksell

I'm optimistic about US recovery. If I'm reading the signs right, the market is also optimistic about US recovery. But that's not what makes me optimistic. Again, if I'm reading the signs right, the market is more optimistic about US recovery than the Fed is. And the market believes it is more optimistic about US recovery than the Fed is. That's what makes me optimistic about US recovery.

Starbucks Bucks

What do you do when you're stuck in an airport with 15 pounds or 20 euros of local currency?

It's not worth paying foreign exchange fees on such a small sum. It's not enough money to buy whisky at Heathrow. So I generally take it home and put it aside for the next journey - and there it will rest, alongside my collection of worthless marks, francs, and other currency.

But now there's a solution to such problems: Starbucks bucks. Just find an airport Starbucks, and load up a Starbucks card. Starbucks will instantly convert the funds into your local currency. The card can then be used in Starbucks around the world.

Money, Barter, and Recalculation. A response to Arnold Kling.

Arnold Kling has a good "rant against monetarism", triggered by my saying "My position is that a general glut can *only* be caused by an excess demand for the medium of exchange."

Arnold's response:

"Most economists believe this, or something like it. I used to believe it, or something like it. I think that it is a horrible, horrible, confusion."

(I only wish he were right about the first bit, because I can find very few economists who believe it, and I've been trying hard to get them to believe it.)

Let's start with where I agree with Arnold.

Money for nothing, or how the federal government can make an easy $1b

Angelo Melino points us to this page summarising Bank of Canada note liabilities, and notes that

... the Bank of Canada has a lot of archaic notes outstanding.  In addition to about $12M of notes issued by other entities that it took on as its own liabilities, there are a few small commemorative issues (for $25 and $500 issued in 1935), and larger floats of denominations that have been withdrawn (1$, $2, $1000).  Other than the $1K bills, is this stuff really money?  Is it circulating?  Are the $1K bills useful to anyone other than criminals?  Given the problems with counterfeiting, shouldn't we give a window of, say, 12 months to hand this stuff in and declare anything else outstanding as no longer legal tender?  Should we do the same for old currency that is easy to counterfeit?  Lots of this stuff won't be handed in.  The Bank could write off some its liability and pass it along to the government.  It's an accounting trick, but there could be a billion dollars in it.