Category Archives: guest post

May 04 2 comments
economics, guest post, macroeconomics

The Starbucks Recession Indicator

by Elena Foshay

Starbucks Coffee, one of the success stories of the booming economy and now global symbols of prosperity, is suffering. John Borden of Eyes Not Sold reports that over the last twelve months Starbucks stock has gone down 41% while the S&P 500 is down 3%. Howard Schulz, now beginning his second term as Starbucks’ CEO, reported to Time’s blog,

“for the first time in our history as a company, we have negative traffic this year vs. last.” [link]

Is this a bad sign?

An individual’s daily grande vanilla nonfat latte is a luxury good whose consumption depends on disposable income. Though some would place their latte above other essential items in terms of priority, the marginal propensity to consume lattes becomes lower with permanent decreases in income. Schulz blames the macroeconomy for the Starbucks’ declining performance: Schulz told Time,

“The current economic environment is the weakest in our company’s history, marked by lower home values, and rising costs for energy, food and other products that are directly impacting our customers.” [link]

If disposable income decreases, the daily Starbucks is one of the first things to go.

In his interview with Time, Schulz explained that there is little room for adjustment of Starbucks coffee prices. This is partly due to fairness towards their employees, who enjoy relatively high wages and good benefits. But Schulz also said that Starbucks tested different methods of decreasing prices (like offering $1 coffee or free refills), and “wasn’t happy with the results.” Sticky price logic tells us that, since prices can’t adjust, a decrease in Starbucks consumption will have a multiplier effect. The first response will be a decrease in production, leading to a decrease in employment as fewer baristas are needed, which eventually leads to a decrease in national income. And a decrease in national income, or GDP, that remains consistent over the course of a few months indicates a recession.

Leamon Crooms, posting on the Inside Arizona Business blog, argues that the decrease in consumption of Starbucks is something we should pay attention to. He describes the “Starbucks Recession Indicator,” which shows that:

A recession is approaching if your neighbors are buying fewer and smaller non fat lattes. A recession is here if you are buying fewer and smaller lattes. [link]

If this is true, the drop in Starbucks’ stock prices is something to worry about, particularly if the drop is matched among other luxury brands. Perhaps here we would see a substitution effect towards relatively more inexpensive goods (Dunkin Donuts drip coffee, for example). This increased consumption of drip coffee could mitigate some of the ripple effects, but a recession still seems inevitable.

May 04 2 comments
course-related, economics, guest post, miscellaneous

After All, Maybe Money Does Buy Happiness?

By Aaron Ordower

In last week’s NY Times David Leonhardt discusses a new study published by the Brookings Institute which refutes the Easterlin Paradox which stated that money doesn’t necessarily lead to more satisfaction. See Arnav’s earlier post for more on this perspective.

The study’s authors looked at a number of new studies in the past 34 years which allowed for a more comprehensive look at the question, and they decided that in fact, income does matter.

But what I thought was really interesting was when the NY Times wrote,

Economic growth, by itself, certainly isn’t enough to guarantee people’s well-being — which is Mr. Easterlin’s great contribution to economics. In this country, for instance, some big health care problems, like poor basic treatment of heart disease, don’t stem from a lack of sufficient resources. Recent research has also found that some of the things that make people happiest — short commutes, time spent with friends — have little to do with higher incomes. [link]

An interesting parallel comes from the world of psychology where Maslow’s hierarchy of needs shows that people have a pyramid of needs to be filled, starting with the physiological, safety, love, all the way up to self-actualization. The higher up on that pyramid, the happier people are.

Now take a look at the map plotting GDP and happiness. There is largely a positive relationship between the two, which is to say that GDP and happiness are obviously related in some way. However, the countries with the highest levels of happiness are those with the most socialized governments with plenty of services provided by the state.

Not surprising, the Scandinavians ranked highest on this chart, but look at Canada and even Venezuela, which rank higher than the United States in terms of happiness. Canada, demographically and economically very similar to the US ranks higher, which I argue is because Canadians do not have to worry about those lowest levels of Maslow’s hierarchy. In a number of areas, the Canadian government takes care of its citizens’ needs (healthcare, education) so the average Canadian is not concerned by these issues which are essential to achieving higher levels of personal satisfaction, according to Maslow. It also doesn’t hurt that Canadians, by and large, are really nice people. Looking at psychological or sociological factors such as these tell that while Americans have more worries, our neighbors to the north are comfortable because they have the security blanket of a welfare state.

Apr 22 0 comments
course-related, economics, guest post, macroeconomics

With US or Without: Chinese Imports

by Beau Rowland

In the international furor surrounding the 2008 Olympics in China, I find myself in the rare position of agreeing with Bush’s steady line of support for Beijing. The reasons, I think, are in part economic. Here’s how I see it:

In a recent article in The Economist, the debate over what is driving China’s economic growth seems to be coming to a close: while some economists maintain that China’s astronomic growth rate in the last decade is mainly attributable to exports, The Economist makes a strong case to the contrary: That growth has never been led by the export economy and is primarily driven by increasing domestic demand consisting of investment and especially consumption (particularly as of late).

Between 2005 and 2007 exports only contributed 2 to 3 percentage points to GDP, whereas domestic demand contributed 8 or 9. And, even with slowing exports to America, increase in domestic demand buttressed GDP—thus the percentage drop in annual GDP for 2007 due to decreasing American imports was only slight. Surprisingly, one Beijing-based firm expects that net exports will drop to zero in 2008 while imports are surging (up by 8%), which serves to significantly undermine the preconception that growth is driven by exports.

So, why support the Olympics, despite the propitious occasion to cite China’s domestic human rights abuses and foreign policies? The main reason, as I see it, is that we want to continue to be one of China’s main trading partners. As China diversifies its portfolio of countries which it can turn to for various resources, goods, and services, it becomes more preferential in its trade agreements, potentially opting away from the US for products it could procure elsewhere and at a cheaper price. Additionally, as China becomes richer, the kinds of products that will comprise its imports will be those of higher value—essentially, the ones America and Western Europe are most capable of supplying.

In terms of the exchange rate, about a week ago the yuan dropped below 7 for the first time. Loosening of the exchange rate makes imports cheaper and exports more expensive, allowing for increased US exports to China. This is also good news for the US, as growth of China’s trade surplus slowed significantly over 2007.

The political dimension completely aside, to compromise this trade relationship seems potentially quite costly. If China is trending towards greater import demand, greater high-value products, and greater international leverage, to sour economic relations seems unwise.

Apr 22 2 comments
course-related, economics, guest post, macroeconomics

China’s Overheating Economy “Smoothes” Things Out

by Lillian Sun

China is one the world’s largest manufactures and currently holds an important position within the global market. Through the past decade, China’s immense double digit GDP growth has caused it to become the role model for all developing countries. In most classes that I have taken on the development of China and the Chinese economy, China’s significant growth rates and profitability have always been emphasized. However, an article recently published in the New York Times offers an explanation which may change your opinion of the Chinese economy and of China’s reports on its growth rate.

Despite repeated denials from Chinese government economists, a variety of Western economic studies have suggested that the Chinese government “smoothes” its economic data — exaggerating performance in weak quarters and understating growth in during booms so as to present an image of stability. [link]

The practice of “smoothing” suggests that China may not have always experienced such stable growth, which the rest of the world believes. Instead, this article suggests that the Chinese manipulates their growth data to portray stability which they may not actually have. I am not saying that all of the data which China reports are therefore absolutely inaccurate, but this article offers a degree of skepticism of which investors should be aware.

Stephen Green, an economist in the Shanghai office of Standard Chartered Bank, said he suspected that the true Chinese economic growth rate in the first quarter might have slowed a little more than the government acknowledged.

The Chinese government is known to be notorious for regulating the flow of information to the rest of the world. The amount of problems which the Chinese economy is still punctured with, such as their weak banking system, along with their highly unregulated stock market, really puts China in a risky position within the global community unless certain institutions are implemented to address these problems. These problematic issues suggest that it is very likely that “smoothing” does actually take place within the Chinese economy, and I am sure that in the long run, this can become a serious issue if inaccurate data is reported often.

In dealing with an overheating economy and the scares of inflation, China is also hurting from the current global economic downturn. Those who invest in China must realize that a profitable economy or market does not last, that is just how the business cycle works. However, as a socialist country with an authoritarian regime controlling the correct and the flow of information, the rest of the world must be wary of the manipulated data and reports which the Chinese government may be feeding the public.

Apr 20 0 comments
course-related, economics, guest post, macroeconomics

Bad Policy – Multiplied

by Mike Lowry

In this critique of George Bush’s economic stimulus plan, economist Frank Shostak sets out to debunk the myths of the Keynesian philosophy. Specifically, he levels a common-sense attack at the concept of the “spending multiplier” which the success of the stimulus package is predicated on.

Recall that the spending multiplier is the change in Y that results from a change in autonomous spending. The degree to which Y changes is dictated by the MPE, the slope of the planned expenditure line. The goal of the Bush stimulus plan is to increase consumer spending by increasing the disposable income of low- and middle-income consumers. Under the assumption that these individuals have a high propensity to consume, the logic is that the increase in consumption will result in a cascading series of transactions between firms and households that will stimulate production thereby increasing Y.

According to Shostak’s characterization, the multiplier model indicates that increasing savings is bad for the economy and that the Keynesian philosophy says that only demand for consumer goods drives economic growth. Shostak takes exception to both of these points. He argues that the reasoning behind the multiplier effect demands that something be derived from nothing. The cascading series of transactions does not result in the creation of new wealth; it only redistributes the amount of real savings that is already tied up in consumer goods. Furthermore, rather than production being driven by demand, production can only truly increase by investing in capital. Therefore, the stimulus package, which is intended to increase the demand for consumer goods, will be fruitless unless the increase in disposable income is reinvested in capital.

Shostak’s argument against the multiplier makes as much sense to me as the level of emphasis our textbook places on the multiplier’s importance. That is to say I’m as easily swayed one way as the other. To me, determining whether or not the stimulus package is a good idea is much more simple. Decreasing taxes at a time of heightened government expenditure really just means that Bush intends to send us Chinese yen cleverly disguised as U.S. dollars.

Apr 20 0 comments
economics, finance, guest post

Students and the Credit Crunch

by Katherine Roberts

Today’s headline in The Daily Californian warns us that undergraduate fees are likely to rise as a result of the current California budget. This comes at a time that credit, even for student loans, is extremely tight. According to the Financial Times:

“A rising number of private and public lenders have been backing out of offering student loans, hit by the fallout from the credit squeeze and the declining profitability of federally-insured education loans.” [Link]

Students, who are already prone to low credit scores, will find higher rates and more scrutiny in the months to come. In an attempt to curb this growing problem, the House passed a bill today that will attempt to guarantee access to student loans by increasing the liquidity of the market.

The bill gives the US Education Secretary the ability to buy student loans directly from the lender. But will this encourage private companies to loan more? Currently, 75 percent of federal student loans are made by lenders who bundle them into securities. Therefore as profit margins diminish across the market, the return on student loans will continue to decrease. According to…

Kevin Bruns, executive director at American Student Loan Providers, a coalition of lenders and guarantors, said a provision in the bill that requires that the loans be bought at no cost to the government meant lenders would have to sell at a loss. This which would be unattractive to most lenders and so might not encourage them to make more loans, he said. [Link]

Still, the fact remains that about 13 percent of the student loans market has simply stopped making loans. How dramatically this will affect the market depends on the number of new lenders willing to enter the market and how serious the House will continue to act upon this problem.

Most student loans are made between now and August, leaving a good amount of time before the true extent of the problem is understood. Similarly, it gives the government and the market time to act and react to this increasing problem.

Making student loans profitable, in a market where credit is generally unprofitable will prove a challenge. The federal limit for student loans was also raised $2,000 for the upcoming year, but it is questionable how much of a difference it will make, especially under the threat of continued tuition increases.

Apr 18 0 comments
course-related, economics, guest post, macroeconomics

We Should Care About the Costs of Inflation

by Breana Pennington

It was noted in lecture that we shouldn’t care about the costs of occasional, expected inflation because the negative effects of an increase in the overall price level of the economy are subtle. However, we should care about sustained, long-term inflation because one important effect can be an increase in unemployment. This is explained by Milton Friedman’s natural rate hypothesis, which is interpreted by Paul Krugman as occurring

…after a sustained period of inflation, people would build expectations of future inflation into their decisions, nullifying any positive effects of inflation on employment. For example, one reason inflation may lead to higher employment is that hiring more workers becomes profitable when prices rise faster than wages. But once workers understand that the purchasing power of their wages will be eroded by inflation, they will demand higher wage settlements in advance, so that wages keep up with prices. As a result, after inflation has gone on for a while, it will no longer deliver the original boost to employment. In fact, there will be a rise in unemployment if inflation falls short of expectations. [link]

Therefore, there is a short-term benefit of increases in wages (whether psychological or real) that are caused by inflation, but in the long-run expectations may change due to the likelihood of unemployment that is induced by inflation.

Additionally, sustained, unexpected inflation affects baseline investment. Arguably, investment decisions will be affected by inflation that occurs over a long period of time even if it is “unexpected.” Creditors would be harmed by the loss in purchasing power on the loan payments they receive. At the same time, the unexpected inflation would allow borrowers to have less of a burden in paying off their debts. As a result, optimism within the business community will rise after a sustained period of inflation. This will increase baseline investment in order to take advantage of the loans that have become less burdensome. Consequently, as baseline investment increases so too will the real interest rate. According to the flexible-price model, this change in the real interest rate will affect the equilibrium of the flow-of-funds and flow-of-output approaches, which allows potential output to equal actual output.

It is also worth noting that Friedman argues that only a high rate of growth in the money supply can lead to long-term, sustained inflation. Friedman summarized this idea when he stated that

…inflation is always and everywhere a monetary phenomenon. [link]

As a result, governments should not be blamed for sustained inflation because their policies, unlike the Federal Reserve, do not have long-term affects on the money supply. Therefore, the negative costs to politicians due to the belief by voters that inflation is a sign of government mismanagement are unwarranted.

Apr 18 0 comments
course-related, economics, guest post

Another Reason for Sticky Prices

By Rosemary Lu

The Economist wrote about the rise of prices at grocery stores and at restaurants due to the rise in costs for foods such as eggs, milk, corn, and wheat, as well as the cost of electricity and fuels that add to the transportation costs. Although some of the cost of these new price hikes have been passed down to the consumers, and I have personally noticed the prices of eggs and milk increasing at our local Trader Joe’s, the article explains there are different tactics food companies and restaurants have been trying to do to keep from changing their prices.

“Restaurateurs are trying to avoid passing the higher cost of ingredients on to customers by increasing productivity—by training waiters to double as kitchen hands, for example.” [link]

Not only are restaurants “training waiters to double as kitchen hands” but food businesses have been changing their recipes and the way they package their foods so they can keep prices down. These innovations by the food companies and restaurants are another reason that although prices should fluctuate more, they are kept sticky!

On the other hand, these tactics by the food industries can also be seen as forms of the sticky price reasons that we have discussed in class. For example, the reason that restaurants may want to find other ways to keep prices down, may be due to the cost of changing the prices on their menu. Therefore, in this case, the menu costs have the double meaning in both economics as well as the idea that is based off restaurants having to print new menus.

In addition, pushing their waiters to work harder, or to double as workers in the kitchen and in the restaurant increases their marginal productivity of labor. Assuming that the waiters are doing a good job helping in the kitchen, they are improving their labor productivity and doing more for their money. This falls under the category of the irrational economic agents, where maybe before they did not calculate their point of max MPL, but now that they have more pressure to do so, they must get more work out of their employees.

And to add to the worries or faith that people have in the current workings of the economy, imperfect information could possibly be another factor in explaining sticky prices in the food industry. Perhaps they feel that the economy is going to get better and that the prices of food will decrease eventually, therefore experimenting with the recipe or overworking their waiters could be a good short term solution. However, if perhaps they knew/felt that this economy would not be getting better they would just start raising prices now. I suppose that this last one is a little difficult to know for anyone because as we’ve discussed in class, many economists feel that economics itself is filled with imperfect information.