Tuesday, September 19, 2017

econlife - Lighting Up Our Lives by Elaine Schwartz

Artificial light was once too costly to use. And now, it is so cheap that we barely notice it.
One reason is our illumination infrastructure. But first let’s start with some history.

Costly Light

In one of his farm journals, Thomas Jefferson documented the importance of light.
You can see below how the length of the workday varied with the seasons. During July, more daylight meant they could increase their spinning:


We depended on natural light because artificial illumination was too expensive. The president of Harvard noted in a 1743 diary entry that it took his household two days to make 78 pounds of tallow candles. Six months later he wrote, “Candles all gone.” Similarly, George Washington calculated that it cost him £8 a year (more than $1,000 today) to burn a spermaceti candle for five hours a night.

Cheaper Light

Like candles, nineteenth century sperm oil, gas, and kerosene lamps were expensive. In 1800, a typical middle class urban household spent approximately 4% of its income on the oil, lamps, matches and candles that illuminated their lives.

Today we spend much less for so much more. A Yale scholar estimated that we use less than 1% of our income for approximately 100 times as much artificial illumination. It is mind boggling to think that the labor that had created close to one hour of quality light several centuries ago now can illuminate us for 52 years.

You can see (below) the lighting price plunge at the beginning of the 20th century:


Our Bottom Line: An Illumination Infrastructure

Rather than a revolution that directly boosted the GDP, the illumination that spread across our country became a nationwide network. Similar to our financial and transportation infrastructures, our illumination infrastructure sustains our economy.

The Washington Post mapped the infrastructure that provides the power for our lighting:


And these are the 160,000 miles of high-voltage electric transmission lines:

Amazing to think that it all started with a tallow candle.

Sources and resources: This article conveys where the U.S. began while this one is about our current infrastructure. If you want more detail on illumination history and wage inflation, this Nordhaus paper is a classic (and summarized somewhat here). Then switching to the light side, this Tim Harford podcast is wonderful. Please note that I paraphrase several sentences from Tim Harford in this post.

After publication, this post was slightly edited.

Hazlegrove-6763_6bIdeal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

Thursday, September 14, 2017

econlife -The Upside of Texas Price Gouging by Elaine Schwartz

During the Hurricane Katrina clean-up, a man from Kentucky loaded 19 generators onto his rented U-Haul. Driving 600 miles to an area of Mississippi with no power, he tried to sell them. His price was double what he had paid.

The man never sold his generators. He was called a price gouger and wound up in jail for four days. Disagreeing, an economist would say he was solving a shortage problem.

Price Gouging

The Texas Attorney General’s office has received complaints about $3.50 a gallon gasoline and a $99.00 case of water. Because the Governor of Texas declared Harvey a disaster, those excessive prices for necessities are illegal in Texas.

As of 2012, more than 30 states had regulations that prohibited “excessive” price hikes during a disaster. (I could find no evidence that any of those states eliminated the regulation since then.):


When Hurricane Sandy struck my neighborhood in 2012, I learned firsthand about anti-price gouging regulation. New Jersey says that any retailer charging prices that rise more than 10% above their normal level during a state of emergency is violating the law.

During the NJ emergency, my local gas station resembled the following picture. Where they could find an open station, people waited on gas lines for as long as 3 hours:


Our Bottom Line: The Price Gouging Debate

If you oppose disaster price hikes, you are in good company. Nobel economics prize winner Daniel Kahneman said that businesses need to be known as fair in “Fairness as a Constraint on Profit.” Referring to economists who favor “gouging,” one of his co-authors, Richard Thaler recently added, “They are misunderstanding that if you piss people off, you pay a price…”

However, anti-gouging laws create a tradeoff.

On the supply side, higher prices encourage producers to sell more gas. They work a little harder to find extra, they extend their hours, and they buy generators in areas that tend to lose power. Meanwhile, higher prices encourage consumers to buy less. As a result, those of us at the back of the line have a chance of getting gas.

It can be win-win. Price increases during an emergency encourage the supply side to provide more and the demand side to conserve.

By contrast, the price ceiling that a price gouging law establishes creates a shortage:
So maybe $3.50 gas and $100 water in Houston are okay?

My sources and more: This excellent HBR article on price gouging gave some good background for assessing Texas policy as did this Mises Insitute discussion. More broadly, this econtalk podcast on a just price made one of my morning walks fascinating. But for the up-to-date news and regulation, you might just want to look at Business Insider and the Texas Attorney General’s office. And finally, here is the Kahneman fairness paper.

Please note that parts of this post were previously published at econlife.

Hazlegrove-6763_6bIdeal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

Tuesday, September 12, 2017

From the Homeschool Front...Frederic Bastiat by Colleen Hroncich

One of the perks of homeschooling is that I get to learn alongside my children. Not long ago we studied Frederic Bastiat, a French economist and statesman who lived from 1801-1850. He had a tremendous ability to use analogies from daily life to explain economic phenomena.

One of his most important essays was “That Which is Seen, and That Which is Not Seen.” Here Bastiat explains that we must evaluate an action not just by looking at the immediate – or seen – effects. We must also examine the subsequent – or unseen – effects from the action.

This, he notes, is the difference between a good economist and a bad economist: “the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.” We witness this frequently in the political world. Politicians love to gain votes by supporting laws that seem to be beneficial one group or another. They rarely worry about the future consequences of their actions, knowing they’ll be gone when it comes time to pay the piper.

Let’s face it, though, we can see the same thing right within our own homes. If we use a credit card to go on a fantastic family vacation, we might be paying for it for years to come. Every year millions of people take on a huge debt burden buying Christmas gifts for everyone on their lists. Some are probably still paying it off when the next Christmas comes around. It can be easy to whip out a credit card in the heat of the moment, but we need to look ahead and see what the long term effects of that swipe will be.

When it comes to raising children, the same principle applies. Sometimes it is easier for me to just clean up a mess than to corral my kids and get them to finish the job. The seen effect of me doing the work is that the mess gets cleaned up more quickly. The unseen effect is that I’ve missed the chance to teach my children to clean up after themselves … thus ensuring future messes left for me.

Whether dealing with economics, politics, or home life, considering the unseen effects of an action can save a lot of problems down the road.

Colleen Hroncich loves that homeschooling allows her to learn right alongside her children. A published author and former policy analyst, Colleen’s favorite subjects are economics/public policy and history. She has been active in several homeschool co-ops and is a speech and debate coach.

Tuesday, September 5, 2017

econlife - Can a Hurricane Help an Economy? by Elaine Schwartz

First as a hurricane and then a tropical storm, Harvey is sure to affect more than the local Gulf Coast economy. With a path near almost one-third of U.S. refining capacity and one-fifth of its crude production, the storm already has shut down a hefty proportion of the industry.
Where are we going? To why hurricanes do not help an economy.

Step 1: A Supply Summary

First we should look at the supply chain that Harvey is hitting. Below, you can see the location of the Gulf’s refineries and where they send oil along the U.S. East Coast:

Step 2: Shipping

When Hurricane Harvey approached the Texas coast on Friday, immediately, some links in the gasoline shipping supply chain were eliminated.
You can see the dive to zero for departing vessels and maybe 1 for arrivals in Corpus Christi, Texas:

Step 3: Markets

Meanwhile, before the storm’s landfall, markets also had something to say. Because less gasoline could mean higher prices, we just needed to look at futures markets to see the weather prediction.

On the New York Mercantile Exchange (NYMEX), last Friday’s ups and downs of futures for a gallon of unleaded gasoline corresponded to changes in the storm’s intensity. At first futures moved upward. But then they reversed when the weather prediction changed:

Now, with the storm’s impact spreading, we can ask about the aftermath.

Our Bottom Line:  The Broken Window Fallacy

Nineteenth century economist Frederic Bastiat (1801-1850) said “destruction is not profitable” because disaster recovery replaces what was lost. So, although a clean-up could make the GDP surge, the spike reflects an increase in spending, not national wealth.
Bastiat questions the assumption that a broken window can be an economic blessing. He agrees that a glazier would receive, for example, six francs to fix it. However, he then says, “…if…you conclude…that it is good to break windows, that it helps to circulate money…I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.”

Bastiat wants us to recognize that the money given to the glazier would otherwise have been spent on new shoes or a book. Having been able to spend the six francs on a new pair of shoes, their owner would have had new shoes and the old, unbroken window.
So, whether looking at Corpus Christi’s port activity, gasoline futures, or the GDP, we can see the downside of hurricane economics.

My sources and more: Always excellent for unexpected detail, Vox had the economic perspective for Harvey. But if you want a firsthand look, do go to Corpus Christi port information. In addition,  EIA is a solid source as is this Marketwatch analysis of gasoline prices. Finally, econlib is always handy for bios and economic background information.
Please note that my description of the Broken Window Fallacy was published in a previous econlife post.

Hazlegrove-6763_6bIdeal for the classroom, econlife.com reflects Elaine Schwartz's work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

Friday, September 1, 2017

Starbucks Moments by Jim Triplett

The other day I found myself automatically going to a Starbucks in the local mall.  The coffee shop was not on my list of places to visit; rather, I entered the store by habit.  In other words, this was a decision I made without thinking.  While the outcome of this decision has little overall impact on me, other than the opportunity cost of time I could have been doing something else and the economic cost of about $5 for the drink, I’m reminded of the number of decisions we make daily with little or no active thinking.

Reflection and asking questions of oneself reduces the likelihood one uses limited or zero active thinking.  Mental shortcuts - called heuristics - are quick ways of thinking that may work in routine and predictable settings with little negative impact, but may lead to problems when they don’t match the situation.  Individuals develop these heuristics to manage the number of decisions faced each day.  These mental shortcuts are developed over time based on experiences, cultural and religious influences, socioeconomic status, etc.  They become a filter - a bias - that leads people to make decisions automatically, often without even being aware of the decision.

Research in the field of judgment and decision-making by such notable persons as Herbert Simon, Amos Tversky and Daniel Kahneman, suggests that much of one’s thinking is really automatic decision-making that is performed without much thought (like driving and having a conversation with someone in the front seat - try to remember every driving decision you have made from point A to B).

Behavioral economist Dan Ariely (2008) suggested that when it comes to the effects of marketing, for instance, "We are pawns in a game whose forces we largely fail to comprehend ... just as we can't help being fooled by visual illusions, we fall for the '’decision illusions' our mind show us" (p. 243).  This research suggests because so many decisions are made on autopilot, people fail to make truly informed decisions until they actively think about how these decisions are made.  Ariely used the example of standing in line at Starbucks I noted above to illustrate.  At some point, one first encounters Starbucks and, lacking experience with the store, goes in to try it.  If the experience (and coffee) is pleasant, one may go back again.  Over time, one may find him/herself standing in line at Starbucks without even thinking about this (my wife almost always stops at Starbucks, even without thinking about it).  Ariely suggests the reader periodically ask themselves, "Why am I standing I line at Starbucks?"  If you are good with the decision, keep standing in line; otherwise, maybe it’s time to go to Dunkin' Donuts or even just go back to work.  Automatic decisions made every day will not change until you actively thinks about them.

So, next time you find yourself standing in line at Starbucks - or other moments or decisions that, upon examination you find are made with little or zero active thinking, consider how you might improve your awareness of them so you can make better decisions.

Ariely, D. (2008).  Predictably irrational: The hidden forces that shape our decisions.  New York, NY: Harper.

Jim Triplett is an author, instructional designer, and instructor in the areas of finance, economics, ethics, and critical thinking. Jim holds Masters Degrees in Finance, Organizational Leadership, and Instructional Design Technology, is ABD / PhD in Organization and Management, and is currently completing a doctoral degree, Ed.D, in Educational Leadership with a focus on Educational Technology.