Bilateral Union

Suppose a wife follows her engineer husband to Muscatine, Iowa, so he can advance his earnings. She is a certified teacher, but the problem is there's only one public school in Muscatine. The next schools are 50 miles away. Will she take a job at the local school if she wants to work?

I argue that she'll accept a lower wage because the local school is a monopsony. If a union is present, then the market structure will be a bilateral monopoly.

I argue that the two powers will balance each other and resulting collective bargaining negotiations will result in a win-win.

Unions as a Public Good

"In economics, a public good is a good that is non-rival and non-excludable. This means, respectively, that consumption of the good by one individual does not reduce the amount of the good available for consumption by others; and no one can be effectively excluded from using that good." This definition from the online source Wikipedia.com. (Aside. The information I have gained from this site rivals the information I have gained from textbooks.)

In Iowa, there are Right-to-Work laws so union membership is optional. Iowa requires collective bargaining for public school employees so those who do not join the union are free riders. Thus, a employee who isn't a member can reap the benefits of union negotiations without any of the cost.

Our union provides many nonpecuinary benefits as well including student safety. Without the existence of our union many beneficial goods would not be produced and thus provide less than the socially optimal quantity. This is market failure. Our union member is declining down from 98% in 1980 to less than 66% presently. Is there any relationship between union membership in numbers and the union power in negotiations?

A Biological Model of Unions

Unions that try to maximize rents will cannibalize the company. This is my take on a paper written by Micheal Kremer and Benjamin A. Olken. Marginal Revolution has a link here. When unions collectively bargain they must strike a win-win outcome. Unions who succeed in extracting higher wages might find that companies will substitute capital for labor or innovate less since there's less money for infrastructure spending.

Most unions are in the public sector.

When unions bargain, they might try to eliminate substitutes for their labor by demanding certified labor or stiffer OSHA regulation. If a union can change the demand for their labor, then it can increase employment for its members. A union that faces an elastic demand curve will increase wages at the expense of member employment. A union faces some difficult trade offs.

How does the union boss begin a fairy tale to his kid? Once upon a time and a half....

Economic Figures

It's often said that there are three kinds of economists. Those who can count and those who can't. Econometrics are often blamed because the data is based on observation rather than controlled experiments.

Gerald Loeb wrote, "I once read about a meeting of economists who agreed that if their forecasts were right 331/3 of the time, that was considered a high mark in their profession. Then, too, I read somewhere about the man who described an economist as resembling a professor of anatomy who was still a virgin."

Winston Churchill said, "If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes. In that case, you get three opinions."

Economics isn't an exact social science but it does predict behavior. I end with another vignette from Professor Max E. Mizer's econ 101 classroom.

Prof: So what is the real GDP given the price index and nominal GDP? Anyone? You can round up. Yes, Trash.

Trash: Round up. Are we going on a cattle drive?

Prof: No, I meant a ballpark figure. Yes ESPN.

ESPN: Hey, I know this one. How about an umpire? He's a ballpark figure. And so is the hotdog vendor.

Utilitarianism

Neoclassical microeconomics assumes that a rational economic actor will seek to avoid pain and maximize pleasure. The foundation for this belief comes from Jeremy Bentham, a philosopher who espoused Utilitarianism.

Brooke, a college instructor, send this joke to help students understand the decision-making process. A Utilitarian is "One who believes that the morally right action is the one with the best consequences, so far as the distribution of happiness is concerned; a creature generally believed to be endowed with the propensity to ignore their own drowning children in order to push buttons which will cause mild sexual gratification in a warehouse full of rabbits."

When I judge people I often ask, "Are they happy?" Measuring utility is subjective at best. Daniel Gilbert has written a brilliant book, Stumbling on Happiness, on utility.

Have you ever heard the trite expression, "Be careful what you wish for. You might get it"? People often make decisions that are irrational as Dan Ariely wrote about in Predictably Irrational. You should only read these books if you believe that the utility you gain is greater than all of your alternatives.

GDP Calculation

GDP is the total dollar value of all final goods and services produced within a country's borders during the fiscal year. Let's look in on Professor Max E. Mizer's classroom where he's teaching Econ 101.

Professor: Any Questions? Yeah, Trash.

Trash: What if I like buy a used car? Does that count?

Professor: No, the car was counted when it was made. Yeah, ESPN.

ESPN: What about the man who works at home? Does he count?

Professor: Hey, you hit a homerun with that question. No, his work doesn't count. Economists like to say 'if you want GDP to go down, marry your house keeper.' Yes, ESPN.

ESPN: What I mean is, the Man who works at home.

Professor: Again, if I paint my own home, it's not counted in GDP.

ESPN: Man, you're really striking out on this question. I mean, the umpire.

Budget Constraint

Microeconomics assumes that income, Y, is constant and temporal choices are constrained by the budget curve. This is a huge assumption as it determines the amount of Goods, X and Y that is demanded and consumed. A consumer will maximize her utility by consuming that package where -$Px/$Py = MRS or the point tangent to her tastes and preferences given by the convex curve.

For a consumer to consume less than her budget line (yellow) will not maximize her satisfaction. A higher level of satisfaction is wanted (red) but unattainable given her budget. Only one point on the budget constraint curve that is tangent to the tastes and preferences curve is perfect. All other points are unattainable or give less utility than preferred. Microeconomists like to say that the consumer's income is constrained by her budget.

That is why it's call a budget line. You can't budge it.

Circular Flow

Economic activity is often modeled as a circular flow where income equals spending. I often have trouble with this model because it doesn't show that there are by-products of production and consumption. In my opinion, the model resembles a game of musical chairs. Each circle should get smaller and smaller not remain equal. To me, the circular flow shows that we are imploding as the law of entropy suggests.

Macroeconomists say that the economy is expanding as measured by the GDP. If the economy is expanding, why do I have such a hard time finding a parking place?

Economics is the dismal science. Economists only see the worst, but at least we know how to answer the question, "Is the glass half full or half empty."

The Production Possibilities Curve shows an increasing marginal cost when good X is produced. I guess that explains inflation.

Mike and Amy Finders Band

At a bluegrass festival in Aledo, Illinois, I heard Mike sing a song about Muscatine. On a crystal clear evening, Mike sings about the dirty old river, always changing course, watching it fill up with rain, "Did I come to this old river or did it come to me?"

A quote from The Volokh Conspiracy on the floods that have caused billions of dollars of damage in Iowa follows.

Flooding. Recent Iowa floods. In the event of floods should we feel sorry for those who are flooded? those who are nearby but not flooded? If you expect floods in the flood plain, you expect the value of property to be suppressed. The price differential should approximate the difference in losses when floods come. If the differential is too low people will continue to buy the hillside houses. If you have a flood that is not as serious as expected, the people in the flood plain got a benefit and those on the hillside paid too much. So, who you feel sorry for depends on what was anticipated. Suppose we start taxing the people on the hillside and use it to relieve those in the flood plain. Depreciates value of hillside property, more people will want to live in flood plain and will build bigger houses there and stocking them with better furniture; likely to have more newsworthy floods. Often people know that a flood is coming; if they know their damages will be covered by those on the hillside they have less incentive to pack up their belongings. John Stossel reports on buying a house on NJ coast and puzzled to be covered against hurricanes by Federal subsidy even though hurricanes are known to come around. Law of unintended consequences. Benefits of these programs get capitalized and end up helping nobody. Can end up with no gains to the property owners. Anticipated flow of benefits of $20,000 by government would get captured in the value of the properties.

This flood was the worst in recorded history. How could anyone reasonably anticipate the scope of the damage.

Dependent and Independent Variables

Economics graphs just about everything. They graph the total utility, then they graph the slope of the total utility. A student in my enriched economics class last year said, "If I had only one day left to live, I would live it in my econ class: it would seem so much longer."

Math students often get frustrated in econ because economists reverse the independent and dependent variables. Economists put the independent variable on the y-axis. So an economist might plot price on the y-axis and quantity on the x-axis. An economist might ask, "What happens to quantity when the price changes?" A mathematician would have reversed the price and quantity.

A neighborly economist went over to meet his new neighbor. The economist found his new neighbor painting his house. After they exchanged introductions, the mathematician said, "You must be a mathematician?"

"Why that's right. How did you know?"

"You've got your ladder backward," said the economist.

Purchasing Power Parody

The Law of One Price predicts that a good will sell for the same price all over the world. In not, arbitrage opportunities would exist. The Economist publishes the Big Mac Index as a way of teaching this concept. The Economist does it light heartily. Since the Big Mac is sold in over 100 countries world wide, the burger should sell for the same price in London as New York. If there were price differentials, one could buy a Big Mac in London and sell it in New York for a profit. The Purchasing Power Parity, PPP, predicts that the nations currency will converge to eliminate the arbitrage opportunities.

The PPP has some critics who argue that the demand and supply for a nation's currency depends on more than just the relative cost of goods. Critics also contend that transaction costs prohibit buying a Big Mac in London and selling it in New York. In my class, I teach that the income, price level, and interest rates move the nominal exchange rates.

The Economist, could electronically be sent to subscribers world wide without transaction costs and is a homogeneous good like the Big Mac. So how come The Economist does not follow the Law of One Price?

The Economist cover lists the price of the June 21st-27th, 2008, edition as 3.90 pounds. In the US the price is $5.99. The exchange rate is $2 for 1 pound. The PPP exchange rate should be $1 = .65 pound (3.90/$5.99). The actual exchange rate right now is .51 which means that an American buying The Economist in the UK would cost 7.80 pounds. A UK citizen could buy an issue in the US for $5.99 * .5 = 2.995 pounds.

What UK readers should do is buy The Economist in the US and save .90 pounds. Do you think the editors would allow UK citizens to subscribe and pay the US price?

Consumer Prices

The Economist reports that inflation in America increased to 4.2% over the course of the year. In Britain, the CPI index rose from 3% to 3.3%. CPI metrics aside, higher energy prices are kicking consumer prices. Every where I look, I see higher prices. Higher prices are all the fad lately. I guess that's why economists call it inflation.

Many criticize the CPI for excluding food and energy from the market basket. They contend that the PCE, Personal Consumption Expenditures, is a better measurement. I argue that the CPI is older and consumers form rational expectations more accurately with the old, trusty economic barometer. Plus, it takes less time to learn what the CPI means since so many pundits write about it. The CPI might not be perfect, but at least it's consistent.

As one of my idols, John Maynard Keynes, said, "I'd rather be vaguely right than precisely wrong."

As George Box said, "All models are wrong, but some are useful."