Wednesday, March 28, 2007

Clearing out inventory in the United States: a problem

A friend of mine sent me this news story last week. And I was so shocked; I had to share it with you.

The story reads: "If you own a mom & pop store and can't get rid of some of your inventory, you can always clear out some shelf space by holding a sale. If the Supreme Court sides with business interests in a case they heard today, however, such sales may no longer be possible. Since 1911 it has been illegal for manufacturers to force retailers into setting a price floor for products — individual retailers get to decide how much they sell products for."

The article continues to say "But today the Supreme Court heard oral arguments in a case seeking to overturn this longstanding rule. Should the Court do so, it would drive up consumer prices across the board. This case is particularly salient in the era of Internet shopping: consumers are now easily able to shop around to multiple retailers to find the best price. The Court could wipe out this advantage."

What is a 'price floor'? Let me explain. A price floor allows manufacturers to set a price below which a retailer cannot sell their products - like a gun manufacturer telling Wal-Mart to sell their pistol no lower than $29.99 ("stop rollin' back prices on my pistol"). The above graph shows the the implication of this price floor. I don't think this will even get pasted ... but what if it did? Implications? Yes, there are two questions we need to answer: (a) What will be the impact on demand and supply? (b) Which markets could be affected?

(a) On the above graph, the floor price floor is represented by the green line. The quantity demanded at the price floor is given by the interception of the blue line - which is the demand cure - and the green line (the price floor). The quantity supplied at this price is given the interception of the red and green lines. What this tells us is that manufacturers will supply the market more than what the market will demand at the new 'price floor' price; that is, the producer will make more because they can get a better price for it.

(b) What does this mean for the market? Well, it will give manufacturers more power of the final sale price of their market and it could prevent 'clearance sales'. Retailers, therefore, will have less power to move inventory. If retailers misjudge the demand at the new 'price floor' price they will have to carry more inventory. Is this a big concern? No.

Most markets are very competitive. Production in China of everything from TVs to furniture suggests that the manufactures the try to put price floor in place will loose - thus there is little incentive to do so. Unless firms collaborate, prices will not rise. Who might do this? Maybe the makers of seven jeans might be concerned that their customers believe 'price means quality' and they would like to keep prices near $200 a pair (no more buy these at Winners for you). For them, never allowing retailers to sell their jeans for less might be part of their strategy (as a Dollar Store lover, clearly, I am not very concerned).

Here is a link to another version of the story: here

Happiness (and how to measure it)

This title is stolen from the 23/12/06 issue of The Economist. The subtitle reads: "Capitalism can make a society rich and keep it free. Don't ask it to make you happy as well". Are you angry yet? Does a new TV make you happy?

In the 1930s John Maynard Keynes predicted that Capitalism would create richer societies, in which people would work less and have more time to enjoy the pleasures that capitalism brings. From the heart of the Great Depression, this was a dream. Now, almost 70 years from 30% unemployment and falling prices, we enjoy 6% unemployment and low inflation. Incomes are higher, we all live longer. Computing power has fueled development. Everyone can buy a microwave at Wal-Mart for $29.99 and having a dishwasher too – unimaginable to my great grandfather working for a $1 a day in PEI in the 1930s. The problem is: warming up leftovers does not put a smile on my face. However, I think Keynes' conclusion was a reasonable one to make: when people can’t find jobs and are struggling feed their kids, economic growth will clearly make people better-off.

When you are not worrying about where you next meal is going to come from, or if you are going to loose your job tomorrow, you can focus on the future. In this light, we can see how spending money on the environment and our education systems is a luxury of the wealthy. And, by using our wealth to re-green the earth and provide the opportunity to get educated, we will also create a foundation for the future weather and leisure. We, as rich society, are now positioned to focus on the future and begin to enjoy the fruits of capitalism: leisure, health, and education. Will these things make us happy? Maybe they will not make us ‘happy’ but they do make us better-off.

In summary, Canadians are among the wealthiest in the world – generations of economic growth have provided us will millions of ways to spend money. However, asking economic growth to make us happy will only make us disappointed. Don’t get me wrong, without growing the economy unemployment would rise and hardship will ensue, but this is not the answer to everything.

Appendix: what else does Capitalism provide?
I was once told that the promise of Capitalism is that each generation will be better off than the previous one. People gave me examples like the infant mortality rate falling, a longer life span and a better quality of life. Improvements in these areas have occurred over the last 100 years (these are such commonly known facts I feel no pressure to cite references). A quick demographic analysis tells me that, on average, we are gaining about 2.5 years per decade in life span and Canada's infant mortality rate is now less than 8 per 1000. Both great accomplishments (interconnected of course).

Wednesday, March 21, 2007

Bloomberg and me

Mainstream economics news!
I find myself always going to Bloomberg for the latest world news. They provide market analysis and consensus forecasts on just about everything within the global economy and ... oil prices! I (way to many times a day) load this page and review the latest oil price movements. You have to understand: price movements are exciting. So, a price that no one can predict and everyone is affected is super exciting!!

The latest: the U.S. Federal Reserve announced they are holding their policy rate still ... and it seems like Bloomberg and several other analysts have focused in on what they 'didn't say'. Here is the headline: Fed Keeps Rate at 5.25%, Drops Reference to `Firming'".
Here is a link to the article.
Oil prices are currently at $60.07US ($/bbl WTI)

Just thought that I would share this golden nugget with you ... see for yourself.

Monday, March 19, 2007

Federal Budget 2007: Environment Spending?

YES: I have lots to say about the federal budget. Thanks for asking. Let me start with the environment. As I blogged (yes blog is a verb) on January 29th, I was looking for a meaty plan on the environment from our federal government. I don't know how you define 'meaty' but ... let's consider a few facts.

From what I can gather, the big environment announcements were: vehicle incentives and other things I don't understand (see below).

Taxing the heavy and helping the hybrid:
The government announced that they will give discounts on hybrid cars and they will tax energy intensive vehicles (more commonly gas guzzlers). Taxing? I like the idea of taxing gas guzzling SUVs - incorporating the social cost of pollution into the price. But discounts on hybrids? A quick sampling of the most popular hybrids in Canada shows something interesting: O'boy these cars are costly!
All prices are MSRP before taxes and blah, blah, blah ...

Car Name - Price - Government Program
Civic Hybrid - $26,250 - Tory kick-back: $2000
Toyota Prius - $21,175 - Government gives: $2000
Ford Escape Hybrid - $33,799 - $2000 in your pocket
Saturn VUE Green - $28,795 - tax dollars allowed: $1000 to you

In my personal view: I think this discounting of hybrids only kicks back money to people that already have it - new cars are costly and these are really costly for the average Canadian. Secondly, this hardly counts as a plan to save the planet. Marginally, I think this is great to promote hybrids and tax big SUVs, but I don't think this an answer to our problems. It is interesting to note that "The rebate plan will cost the government about $160 million over the next two years, while Ottawa expects to collect $215 million from the levy over those years." (CBC website) Crazy, this program actually generates cash for the government.

Assisted Development:
This budget also plans to phase out the accelerated capital cost allowance for general investment in the oil sands by 2015. According to the CBC, this money will be funneled into other programs ... but the government's website says little on the matter. So I am not sure what to make of this. Although, I have read that (according to Environment Canada), total greenhouse gas emissions in Alberta have jumped from 168.17 megatons in 1990 to 234.51 megatons in 2004 (that is ... hummm carry the 7) 39.4% between 1990 and 2004. This plan does not talk about that stuff.

Finally, we return to the government ecoTrust plan that will cost an estimate $1.5 billion. Which from what I understand is a plan to have a plan. The government press release from last month says: "This [$1.5 billion] funding will be contained in the upcoming budget ... This new funding will be available as soon as Parliament approves that budget." And so, I guess we have to wait.

In the end: I still wonder what has happened, how did we get into this? What about Kyoto? I thought we were doing somethings when the Liberal Government was in power, but we then voted them out and cut the $5.6 billion they wanted to spend (on what I am not sure). So, we have to wait for when the Environment Minister John Baird's climate-change policy paper comes out later this month for more answers. Or let's wait to hear what Rick Mercer has to say ...

Love me or hate me tell me what you think ...

yes, there was other stuff on this issue, here are a few more things ...
As for the other environment plans
Other fuels: "The government has announced $2 billion for renewable fuel production. Again, marginally, a good idea and sounds like a lot of money but "this includes $1.5 billion over seven years ..." - translation: no big spending here - we have to wait.
Clean Water: about $110 million to clean-up Canada's water (I would like a clean Halifax Harbour) and $324 million for six new Coast Guard vessels ... with costs starting in five to seven years.

Friday, March 16, 2007

St. Patrick's Day and You

Every year I do my personal best to celebrate St. Patrick and my Irish roots (mother nee Pierce). Most people, both Irish and Irish-for-a-day, actual know very little about the holiday. My favorite source on the matter is the History Channel! Here is my favorite piece of history: "On St. Patrick's Day, which falls during the Christian season of Lent, Irish families would traditionally attend church in the morning and celebrate in the afternoon." And the best part: "Lenten prohibitions against the consumption of meat were waived and people would dance, drink, and feast—on the traditional meal of Irish bacon and cabbage." Can you believe it: BACON and CABBAGE!! How great.

Have a Irish whiskey or an Irish cream in your coffee!
Here is to Ireland and the Irish economy! The wonders of the Irish economy is no hidden secret - they know how to celebrate.

Monday, March 12, 2007

The Intercolonial Railway: the long trip to Montreal

If you have ever taken the train between Halifax and Montreal, you probably asked: Why so very very long? It takes well over 20 hours! (I can drive it in 12)

The answer is one of my favorite Canadian economic history facts.
The Answer: because we were scared of an American invasion.

In the year of confederation (1867), Sir Standford Flemming was called to designed a rail to connect Halifax with the St. Lawrence at or near Quebec. Looking at a map, you can see that an 'all Canadian route' is a much longer then cutting through the northern U.S. - How much longer? Answer: 400 km (or if you prefer 250 miles). Now, almost 140 years later, we are using the same rail line that cost more to build, run, and use (who ever said political decisions don't matter?).

Why take the long way? Because if we were even attacked by the Americans, we would have an all Canadian route would secure supply lines from Halifax to Central Canada. Back then, there was no such thing as the St. Laurence ice breakers (which is not a hockey team).

Following the construction of the all Canadian route we needed something .... humm, in a very Canadian way, we need an assistance plan!

"... the Intercolonial Railway was designed, among other things, to give Canada in times of national and Imperial need an outlet and inlet on the Atlantic Ocean, and to afford to Maritime merchants, traders, and manufacturers the larger market of the whole Canadian people instead of the restricted market of the Maritimes themselves, also that strategic considerations determined a longer route than was actually necessary, and therefore that to the extent that commercial considerations were subordinated to national, imperial and strategic conditions, the cost of the railway should be borne by the Dominion, and not by the traffic which might pass over the line." Great economic reasoning - everyone is now safer, so everyone helps pay those disadvantaged by the longer route - I love it.

As soon as I said assistance, you know what happened next: this program was reviewed by the Auditor General and terminated in 1995.

Looking Forward
Now that we include the cost to the environment in the cost of transportation, is it time to reinvent of the railway in Canada? Speed trains sound cool.

Related Link
History Buffs may enjoy this book by Jay Underwood:
Built for War: Canada's Intercolonial Railway

Saturday, March 10, 2007

Principles of economics, translated

It seems like everyone I speak to has already seen this and they just had to tell me about it. Well, if I can't laugh at myself, I might be the only one not laughing.

Thursday, March 8, 2007

The Northend Diner is gone

After moving to the northend of Halifax a few years ago, I began to love the Northend Diner. Great food, wonderful service and a great price. It was just down the road, and they just started serving all day breakfast. Sadly, it has burned to the ground. I never knew I was so attached, until it was gone. Blah. Above is a picture I took tonight. From what I understand you can watch a YouTube video of the fire. I will not.

Wednesday, March 7, 2007

Infected by Facebook ...

After refusing several requests, I have now joined the Facebook cult. Rumour has it that these networking sites (and there is many of them) first started in the porn industry to coordinate actors, directors, producers, and otherwise interested insiders. In this light, the terms 'friends' and 'groups' have a whole new meaning (true or not, funny).

For me, each additional request increased the benefit of joining and before too long I was sucked in. Indeed, internet networking is a low cost way to stay in touch. However, now there is another place on the internet where future employers can gather all the dirty secrets on me from both my friends and my family. Gee, I hope those Wardroom Staff party photos never get out.

Sunday, March 4, 2007

15 Lectures: learning-by-doing

take a deep breath. pace yourself. 9 talks to go ....

Now, over halfway through the course, I sense momentum building. As I grip my chalk, I feel more confident. stronger, more articulate. concepts flow; one into the other. my graphs are straighter. what once was difficult and fun, is now much more fun than difficult. I am excited to ring in the aggregate demand- aggregate supply framework this week - we bring together the first nine chapters into conceptual harmony. The widgets (goods market), bonds (financial market) and the sex trade (labour market) together at last.

End teaching update.

Economic factoid
In my title, the term Learning-by-doing is a concept in economics that refers to the capability of workers to improve their productivity by regularly repeating the same type of action. The increased productivity is achieved through practice, self-perfection and minor innovations. The first theoretical model of this kind was constructed by American economist Kenneth Arrow (1921- ), but many empirical studies had been carried out in the early part of the 20th century. Note: Arrow is actually better know for his so called "Arrow's Impossibility Theorem" (- his contribution to learning-by-doing is buried in the above reference).

Thursday, March 1, 2007

"Roll Up The Rim" but will you win?

Do you have an over whelming desire to buy a "double double"? Even the institutionalized know that it is once again time for Canada's most popular contest! We are like bulls running into Tim's big red cup! But what is the odds of winning?

Total number of cups: just over 27 million
Odds of winner:
A car: 1 in 9 million cups
A TV: 1 in 2.7 million kicks
Some Cash: 1 in 0.54 million rolls
An IPOD: 1 in 27,000 jolts
A coffee or donut: 1 in 9 purchases!

Now, Economists tend to value these types of odds in the following way: Value = (the odds of winning) times (Price of the item you can win)

For Example: The IPOD value
Chance of winning: 1 in 27K = less than one per cent (~0.04 %)
Value: (according to Tim's website) $261
Economic theory tells us to price the prize at: about 1 cent off the price of the coffee. Think of it as an discount.

How about for the coffee? Well, you have a 8.3% chance at winner a free coffee, and a 2.7% chance at winner donut (the 1/9 odds is split 75% coffee and 25% donut/muffin/cookie), and a coffee is worth $1.47 in Halifax. The answer: 12.2 cents!

Overall, your desire to play Canada's favorite game is because the price of the coffee, considering the prizes and the odds, is about 16 cents lower. Yes, Tim's is having a sale on 27 million cups of coffee, tea, or other.

Needless to say, I have been buzzing all day.