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Where I’ve been…
Posted by Mike Mandel on June 13, 2010
While I’ve been delinquent from this blog, I’ve been occupied with several worthy pursuits. First, I’ve put together a new venture that produces economics news videos designed explicitly to fit into the intro economics curriculum. You can see a teaser video at http://www.visibleeconomy.com. These videos will be up-to-date, and provided through the McGraw-Hill online system.
Second, I’ve been doing a economic blog focused primarily on innovation, which you can find at http://innovationandgrowth.wordpress.com
Third, I’ve been doing short video commentaries on the economy for Reuters. I will post links as they come up.
Posted in Updates | Leave a Comment »
Number of the Week: The Price of Televisions
Posted by Mike Mandel on December 17, 2009
At 8:30 this morning, the hard-working statisticians at the Bureau of Labor Statistics in Washington issued their report on consumer prices in November 2009. It showed that the average price of consumer goods and services rose by 1.8% between November 2008 and November 2009. That’s the inflation rate.
But what about the price of individual items–like televisions, say? According to the BLS, the average price of televisions has actually plummeted by 28% over the last year, even while all sorts of other goods and services have been increasing in price. So that giant flat screen TV that you’ve been wanting–much, much cheaper.
In fact, the price of TVs has been falling for years. In 2006, the average price of a 23-inch LCD TV was $752, according to research firm iSuppli. Today, at the end of 2009, the average price of a 23-inch LCD set is $451. That’s a big drop!
Now, the BLS has been tracking the price of TVs since the 1950s and 1960s. Here’s a chart of the price of televisions over the last 40 years.
This chart shows that the price of televisions was basically flat until the early 1980s. It may be no coincidence that prices started to drop right even as imports of televisions were soaring.
Posted in Chapter 14, Chapter 8 | Tagged: Inflation | Leave a Comment »
Number of the Week: Rents Finally Start Falling
Posted by Mike Mandel on August 24, 2009
If you own your own home, my sympathies—it’s tough to be you these days. Your house is probably worth 30-40% less than a few years ago. Your real estate taxes are likely going up, there’s a big ‘foreclosed’ sign on the house across the street, and you can’t sell your house even if you want to.
But suppose you are a tenant, part of one of those 35 million household who pay rent each month to landlords. Guess what? Good news for you–average rents in urban areas actually went down in July, for the first time in recent record (chart). That’s according to the Bureau of Labor Statistics, the government agency in charge of tracking all prices in the U.S.
Rent inflation, at annual rates
Now, the monthly decline was very small, only -0.03%. If rents continue to fall at the same rate for a year, that would total up to a -0.4% decline To put it another way, if you are paying $1000 a month for the crummy one-bedroom apartment, this decline means that you might end up paying $4 less each month…not much of a change.
But even small declines matter, especially since renters tend to be young, or poor, or both.. About 40% of renters are under the age of 35, for example, making every penny count.
Actually, the real surprise is how long it took for rents to start dropping. Home prices hit their peak in mid-2006 and since then have fallen more than 30%. By comparison, averager rents for tenants have increased roughly 10% over the same stretch. Part of the reason is that most apartment leases are signed for a year or more, which may include some increases already built into the agreement. These help push up the average rent.
But there are demand and supply factors which have also kept rents rising. When the housing bust hit, home mortgages became harder to get. Lenders tightened up, requiring bigger downpayments. And many people lost their homes because they couldn’t pay their mortgages.
As a result, quite a few people who would have wanted to buy homes were forced into the rental market. In effect, the demand curve for rental housing may have shifted to the right. This kept rents rising, and the number of renters going up. For example, over the past year, the number of renters rose by about 1 million, even as the number of homeowners fell (chart).
In addition, real estate developers have been mostly focused on building homes for sale, not for rent. Over the past year, there were roughly 960,000 new housing units completed, according to the Census Bureau. Out of those, about 520,000 were intended for sale, and only 440,000 intended for rent—not enough to keep up with all the new renters.
Now, eventually the market takes care of this imbalance. Renters start buying cheap houses. Owners of homes that they cannot sell start renting them instead. And builders start putting up apartment houses rather than giant one-family mansions.
How long and how far will rents drop? There’s no way to tell right now—but this is a darn good time to be a tenant.
Posted in Chapter 03, Chapter 10 | Tagged: Housing, Inflation | Leave a Comment »
Number of the Week: Unemployment Rate for Young College Graduates
Posted by Mike Mandel on August 14, 2009
If you are a young college grad looking for a job, it’s tough out there. But how bad is it, really?
Bad—but not as bad as it could be. That may be cold comfort if you have been hunting through want ads and redoing your resume for the 20th time. The numbers, though, don’t lie.
In June 2009, the unemployment rate for young college graduates was 7.3%. By comparison, the unemployment rate for young high school graduates with no college was 16.3%, more than twice as high.* Education pays—not just in better wages, but in a lower likelihood of unemployment, even in these tough times.
What do these numbers mean? By ‘young college graduates’, we mean all U.S. residents who are 20-29 and have finished a bachelor’s degree. ‘Young high school graduates with no college” includes all U.S. residents who are 20-29, have finished high school, but have not started college.
The government’s monthly survey puts these people into three categories: Working; actively looking for a job; and not looking for work (no, “laying on the beach until the sun goes down” is not an acceptable answer). You are “in the labor force” if you fall into one of the first two categories—either already employed, or actively searching for one.
The unemployment rate is the percentage of the labor force who don’t have jobs, but are actively searching. So in June 2009, 7.3% of the young college-educated labor force was unemployed.
One way to think of this number: If you draw a card randomly out of a deck of cards, the chances of you pulling an ace is slightly bigger than 7.3% (actually it’s 1 out of 13, which is 7.7%). Take a deck of cards and pick a card—if you get an ace, you are unemployed. Otherwise you have a job.
Now, don’t get me wrong. The labor market for young college graduates is a lot worse than previous years. For example, in June 2007, before the recession started, the unemployment rate for young college graduates was only 4.1%. That’s a big difference from today.
Still, when it comes to finding a job, it’s still better to have a college degree.
*Not seasonally adjusted. These results come from the author’s tabulations of the June 2009 Current Population Survey. They are consistent with published data.
Posted in Chapter 10, Chapter 16 | Tagged: Education, Unemployment | 1 Comment »
The Basics of the Credit Crunch
Posted by Mike Mandel on March 29, 2009
[This item will soon be moved to McGraw-Hill's Connect online homework management system, where it will be available along with a customized problem set]
We’ve heard the term credit crunch over and over again—but what does it mean? In the simplest terms, a credit crunch means that it may be more difficult for you to get a loan for a home or for a car, and the interest rate that you have to pay may be higher. It may also be more difficult for a business to get a loan to pay for a new building, a truck, or a computer.
However, from an economic perspective, we can look a bit deeper in order to understand why a credit crunch occurs. Let’s revisit the basics of financial markets. Suppose that you go into a bank and take out a loan to buy a home or a car. Where does the bank get that money from? There are three possible sources for the funds (see figure) First, virtually all banks have depositors, who have put their money into savings accounts or into certificates of deposit. The bank can then lend that money to borrowers.
A second source of funds: The bank can borrow money itself by issuing bonds to investors. That is, the bank can borrow the money and lend it out again at a higher interest rate. Many banks did that in recent years.
Finally, the third source of funds for loans is called securitization. Securitization is a fancy word for saying that the bank can make mortgage loans to home buyers, package them up into what is called a mortgage-backed security, and sell the mortgage-backed security–that is, the bundle of loans–to investors. It can do the same with other types of loans, like auto loans.
In all three of these cases, the bank is a financial intermediary. That means it helps direct money from suppliers of capital—that is, depositors and investors—to the users of capital, borrowers.
When the financial markets are working well, this flow of money from depositors and investors to borrowers is free and easy, like water flowing through a pipe. If you want a loan to buy a home or a car, you go into the bank, which checks your qualifications—do you have enough income to pay back the loan, do you have a history of paying your debts on time. Then if you are qualified, the bank offers you the loan at the going market rate.
A credit crunch occurs when the banks—the financial intermediaries—are wounded or broken in some way. Investors and depositors still have their money, but the flow of funds to borrowers is interrupted. You can think of it as being blocked, like a broken pipe.
Today, the banks have been wounded because they are absorbing enormous losses on mortgages they have made, as more and more homeowners default. Because so many of their existing loans are going bad, banks are afraid to make new loans. Instead of lending to households or businesses, banks are investing their deposits in safe government securities–that is, they are lending to the government.
In addition, it is harder to raise money to make loans. Savers are still willing to put money into banks, because up to some level it is guaranteed by the government. But investors are less willing to lend money to banks, because they fear that if a bank goes out of business, they could lose their money. And securitization is tougher, too, because investors are less willing to buy loans which might go bad.
The result: Because loans are more expensive and harder to get, households buy fewer cars and homes, while businesses do less capital investment.
Posted in Chapter 13, Chapter 19 | Tagged: Financial Crisis, Financial Markets | Leave a Comment »
Fiscal Stimulus and Construction Workers
Posted by Mike Mandel on March 18, 2009
It’s a tough time to be a construction worker. The unemployment rate in the industry, as of February 2009, was a stunning 21%, up from 11% a year ago. Homebuilding has come to a standstill, and there are few new office buildings being started.
But there is one part of construction which is about to get a boost—and that’s highway and bridge construction. The fiscal stimulus bill passed by Congress and signed by President Obama in February had $27.5 billion in funds for fixing and expanding highways and bridges. On March 3 the Transportation Department began doling out these funds to states.
(To see how much highway fiscal stimulus money your state got, take a look here. If you live in or near a large city, this list may tell you how much is going to your area.)
These funds translate into jobs. American Infrastructure is a Pennsylvania-based highway construction contractor, which got the very first contract from the federal stimulus package (to resurface a highway in Maryland). So far they’ve called back about 50 of the 350 people they’ve had to lay off since October, says Mark Compton, who handles public relations for the company. But they have made a bid for work in Pennsylvania—that is, offered a price for doing the construction–and hope to get the contract soon, with projects in Virginia and Delaware to follow. These contracts would allow them to make big dent in layoffs. One employee who was rehired said, “When I was laid off my family survived, now that I’m working, we live.”
That means construction firms that specialize in highway and bridge construction are calling back laid-off workers, and in some cases actually advertising for more. For example, constructor contractors in Iowa have set up a online jobs listing here.
This is good news for workers in the highway and bridge construction business. Not only are jobs being created, but wages are going up for these kinds of jobs. In the “heavy and civil engineering construction industry”—a category which includes highway and bridge construction, hourly wages have risen by 4.9% over the past year.
By comparison, for workers in the residential construction industry, wages have only risen by 2.1% over the past year. The chart below shows how wage growth in these industries has changed over time.
These figures are based on 12-month moving averages.
But suppose you are one of the many unemployed construction workers who used to build homes. The question is: How do you get a well-paid job at one of these new highway and bridge projects—say, operating a $70,000 asphalt paver? There are two problems with moving over from homebuilding to highway construction. First, state governments are being encouraged to get construction moving as quickly as possible, in order to generate jobs. That means construction firms are more likely to hire workers who can get to work right away—who already have experience operating heavy equipment like bulldozers and pavers (which are the machines which spread the asphalt or other road material on the highway). “We have so many experienced workers sitting on the bench,” says Compton of American Infrastructure.
Second, it’s expensive and time-consuming to get experience operating heavy equipment. Either you can get ‘on-the-job’ training, or you can go to a special “heavy equipment” school. For example, West Coast Training in Woodland, Washington, offers an 8 week course—320 hours–in operating heavy equipment such as bulldozes, graders, and backhoes. The total cost of the course is a bit over $7000, but unemployed workers can sometimes get money for retraining from the government.
But the training school has not yet seen an increase in students, says Criss Jaeger of West Coast. They have “high anticipation” that the highway stimulus will boost demand for training, but so far it has not. The bottom line: For now, it looks like the stimulus bill is going to help a limited number of construction workers.
Reported by Judy Scherer
Posted in Chapter 11 | Tagged: Fiscal Stimulus | Leave a Comment »
Paying for Retirement
Posted by Judy Scherer on March 18, 2009
For many people, putting together the resources needed for retirement is not simple. Take Eleanor, an 81-year-old who had worked for 20 years as a researcher for a nonprofit consulting firm. She raised two daughters and a son with her husband, who died in 1981. Since then, she has lived alone, most recently in a college town in Ohio, near one of her daughters.
About to retire at 63 in 1991, Eleanor needed to ensure that she had enough resources to support her for the rest of her life. She had worked long enough at her non-profit employer, which qualified her for a defined benefit plan. However, that plan by itself—which paid out $500 per month every year–was too small to live on. Her late husband had a defined contribution plan from his work that is adjusted for inflation each year. But she knew that even these two pensions, plus social security payments from the government, were insufficient to support her and her serious interests.
Eleanor assessed her situation. In addition to the pensions and social security mentioned above, she had regularly contributed to a 401(k) account partly matched by her company and an IRA (‘Individual Retirement Account’) she had opened earlier. An IRA provides tax breaks to individuals who save towards retirement. In addition, she had the value of her home. She decided to continue working part-time for a few years after retiring because she enjoyed the work and the additional money. Much of her financial plan was formulated in conjunction with an independent fee-only certified financial planner.
Eleanor is pleased with the choices she’s made. About five years ago, she sold her home to pay the entry fee for an apartment in a continuing care retirement community. In addition to her living space, the retirement community provides her a daily meal and light housekeeping, plus some coverage of medical costs not covered by Medicare or her secondary medical insurance.
An alert and healthy woman, Eleanor has managed her finances to enable her to live comfortably and travel both in the U.S. and around the world. Between her travels on business and with family, church and photo groups, she has covered all fifty states. A serious amateur photographer, she has traveled to Ecuador, the Galapagos Islands and Alaska and plans to spend about two weeks in Italy this coming year. In the past, she and her camera have spanned the globe from Bolivia to Mongolia to South Africa and the former Soviet Union.
Reported and written by Judy Scherer
Posted in Chapter 20 | Tagged: Retirement | Leave a Comment »
Credit Crunch: The Cost of Auto Loans
Posted by Mike Mandel on February 13, 2009
How did the credit crunch affect the market for auto loans? When buying a new car or a truck, most people have to borrow at least part of the money. They get an auto loan from either a bank, or the company selling them the vehicle (generally through a car financing company). The exact interest rate on the loan depends on their credit score, a number which reflects several factors, including whether they have paid back previous loans on time.
In the past, the interest rate on auto loans has usually fallen when the Federal Reserve has lowered the fed funds rate. That was because a lower fed funds rate generally means that the Fed had put more money into the financial system, increasing the amount of funds that banks and car financing companies have available to lend.
But the credit crunch broke that link between the fed funds rate and the rates on auto loans. Starting in late 2007, the Fed has cut and cut the fed funds rate, down to close to zero.
However, auto loans did not follow. As the chart below shows, the interest rates on auto loans are barely cheaper than they were two years ago. Even when car companies offer “zero-rate” auto loans, they are only available to the customers with the very highest credit scores.
Posted in Chapter 13 | Tagged: Financial Crisis | Leave a Comment »
How Business Works: A Professional Hair Salon
Posted by Judy Scherer on February 8, 2009
[This item will soon be moved to McGraw-Hill's Connect online homework management system, where it will be available along with a customized problem set]
To understand how a real-world beauty salon makes its business decisions, we visited Subway Salon, an upscale hair-cutting and coloring establishment located in a New Jersey suburb. The business—started in 1970—was still going strong in early 2009, despite the weakness in the economy. The owners, Robert and Barbara Castagno, employed 40 colorists, stylists, assistants, receptionists, and other employees as of January 2009. That puts Subway in the top 1-2% of beauty salons, based on number of workers (80% of beauty salons employ less than ten workers, according to statistics from the Census Bureau).
Robert and Barbara both still keep a full schedule of hair-cut and hair-coloring clients. So to run the business day-to-day, they hired a salon manager, Isaac Molina. Isaac explained to us how the salon is organized. There are 37 ‘stations’ for hair-styling and coloring. The hair styling stations line the exterior walls and their chairs have natural wood arms, while the black-armed coloring stations fill the middle of the salon. Four of the busiest colorists have two stations apiece to handle two customers simultaneously.
Each hair-styling station has a chair, a built in mirror and a side panel with a door containing equipment: curling and flat irons, blow dryer, clippers, trimmers, a set of hair products (moisturizers, gels, styling aids, and samples of products, cutting capes, and a collection of shears). Each coloring station has the same basic structure; however, the equipment includes bowls, brushes, spatulas, color capes, and a selection of combs).
In addition, there are four other main areas: a shampoo section with nine shampoo units with sinks and back washes; a nail and wax department ( with two pedicure chairs, one waxing bed, three manicure stations and one nail dryer), a coloring room (with a few different color lines, developers, manuals and catalogues); and a reception area with desks and binders. To supplement the blow dryers, the salon has specialized dryers: four hooded dryers using hot forced air and two rolling ball dryers that look like space age helmets that use electrical resistance.
In terms of other costs, Robert and Barbara undertook a major renovation of the salon’s two floors of leased commercial space in 2001. They also purchased software which helps them handle client reservations, along with the necessary computer hardware, including seven computers on site. Subway uses the services of professional accountants, lawyers and marketing firms.
What about labor? The salon pays colorists and stylists a base salary, plus an additional sum—known as a commission–based on the number of customers they handle and the revenue they bring in. Robert offers the example of a stylist with a weekly base salary of $500. The stylist might also get a commission equal to 30% of the revenue she brings in through her customers above a preset sales quota. For example, in a particular week, suppose a stylist generated $2000 in sales. That week, she would earn her base salary of $500 plus a commission of $225 (which is 30% of $2000-$1250 sales quota). This example excludes the per customer service charge deducted from the commission.
Not everyone gets the same salary and commission, of course. When workers are hired, they have to perform a demonstration on a model. Based on their skills, they are assigned a level of expertise, on a scale of one to five with five as the highest, with the highest prices. Customers choose the level of expertise they want. If new customers don’t know what they want, says Isaac “the staff at the front desk asks them about the service they desire, the kind of expertise they seek and the budget they have.” Answers such as ‘very experienced’ will usually generate assignment to a higher level, more expensive employee. A customer who stresses value is usually given an appointment with a level one or two employee. Isaac noted that taking the time up front to talk with the customer ensures greater customer satisfaction and makes good business sense.
Ultimately, the business-know knowledge of how to run the business comes from the owners, Robert and Barbara. Since the beginning, they’ve been focused on trying new and different techniques for cutting, shaping and coloring hair. Today they belong to Intercoiffure, a Paris-based organization of high-quality hairdressers, with members in 50 countries. In addition, Robert and Barbara participate in fashion industry shows in Paris, New York and Las Vegas.
How is the salon doing during the downturn? Robert doesn’t appear to be worried. “We’ve been through this before,” he said. He believes that they can weather this recession better than other salons due to their longevity, image, reputation and size. “We would put any expansion plans on hold, of course,” he added. In terms of expenses, the salon anticipates spending more on promotion and advertising, with an emphasis on electronic e-mail. If absolutely necessary, Robert would have to consider reducing the size of his payroll by cutting back on assistant hours. He hopes that business will continue to be brisk and he will be able to avoid that possibility.
Reported and written by Judy Scherer
Posted in Chapter 04 | Tagged: Cost Function, Production Function | 1 Comment »
