Powell Center for Economic Literacy – AP Economics Teachers Conference

Tomorrow morning I board a plane from Zurich to Virginia, which in addition to being a key battle ground state in next week's election, is home of the Richmond Federal Reserve Bank. The Fed is hosting the National AP Economics Teachers Conference from Sunday through Tuesday, and I am lucky enough to get to attend this year.

This biennial national conference offers a forum for networking with other AP Economics teachers from across the country, updates on topics of interest, demonstrations of effective teaching techniques, as well as outstanding keynote speakers.

Keynote speakers will include Tim Harford, Columnist with Financial Times and best-selling author of The Undercover Economist and The Logic of Life; Federal Reserve Board Governor Kevin Warsh, appointed to the Board in 2006 and formerly Special Assistant to the President for Economic Policy and Executive Secretary of the National Economic Council from 2002 until February 2006; and Dr. J. Alfred Broaddus, Past President, Federal Reserve Bank of Richmond.

I plan to write a post for each of the four main workshops at this conference: “Demystifying macroeconomics”, “Demystifying microeconomics”, “Technology in the Econ classroom”, and “Understanding exchange rates and the value of the dollar”. Stay tuned for some great posts from an amazing professional development experience for economics teachers.

Shop Talk – Buying local, good idea?

I live two lives. In one, I'm an international school teacher who has lived and taught in three countries, travels around the world for work and play and flies 50,000 miles a year to and from the US, Europe and Asia. In my other life, I am a small town guy, who enjoys working in his yard in his mountain cabin tucked back in the woods of remote Northern Idaho, which is not so much a state as a “state of mind”, as the locals like to say.

When I'm in my “other” life as a small town homeowner, i.e. during my long summer breaks, I like to slow things down and reflect on the state of the world around me. I start to notice things about the local economy that seem so minute in the world of international travel that occupies 10 months of my year. I notice that twice a week farmers come to my small town of Sandpoint, Idaho, to sell their produce, bread, honey, arts and crafts, eggs and even meat. I notice that the buffalo, elk and cattle roaming the valley below my mountain cabin can be bought ready to grill and eat from the local butcher shop. I notice the local brewery, Laughing Dog, where I can buy my home town brew. I notice the natural foods market, where my wife and I do all of our shopping, and where many of the items for sale were grown locally or in the greater Pacific Northwest region.

I notice that, if one so wished to do so, one could sustain oneself almost entirely on locally or regionally grown food items. Compared to the lives of so many Americans, whose foods are so heavily processed, often times shipped from around the country or even the world, the choices available to those who chose to “buy local” seem so simple and straightforward, the benefits so obvious.

So the question is, why don't more people eat locally? According to economist Russell Roberts, the reason we don't all survive entirely on locally grown food is that, simply stated, the cost of doing so is too high.

In the article below, a Vermont magazine discusses he “buy-local” movement going on in communities across America today with Russ Roberts, whose enthusiasm for buying local is tempered by his economic rationale rooted in the basic economic principles of opportunity cost, specialization, and the gains from trade.

SEVEN DAYS: You've said that the buy-local movement has a “superficial appeal.”

RUSSELL ROBERTS: The emotional, nonmonetary appeal of “buy local” is very clear. It's nice to buy things from people you know, and often that interaction of shopping and trading with people you know enhances the quality of life.

But there's a cost to it, and when we say, “Let's buy the local apples rather than the apples from New Zealand,” the cost is hidden, because apples are only a very small part of our economic life. If we tried to replicate that strategy over a wide range of products, the cost would be much more apparent.

SD: Environmentalists like Bill McKibben say the cost of some products doesn't reflect their true environmental cost -

RR: And I think that's true, by the way -

SD: But a lot of people would say the idea of “true environmental cost” is diametrically opposed to your idea about true cost.

RR: It's a good observation. Rather than saying the true cost, it would have been better for me to say the full cost. Right now, if you buy local produce instead of produce that comes from across the country or across the ocean, the cost is pretty clear: It's a little more expensive, usually. Sometimes the quality is higher, so you say, “Well, I think it's a bargain after all.” Sometimes it's not, so you say, “Well, it's worth it, 'cause it's local.”

I don't know if people think through how those costs would add up if you tried to buy more locally than just food . . . I think it's a question of magnitudes. There's no doubt that when you make economic decisions based just on price, you're not getting the full picture, which is the environmental critique. But I think it's also true that when you purchase one item or category of items, such as food, locally, you don't think about what the full cost would be if you did that more aggressively across a wider range of products.

SD: You've said self-sufficiency is the “road to poverty.” Does that relate to this discussion?

RR: Absolutely. That's a quote from my first book, The Choice: A Fable of Free Trade and Protectionism . . . I think the word self-sufficiency has an emotionally attractive ring to it: We don't want to depend on others; we want to be self-sufficient; we certainly want our children at some point to grow up and become self-sufficient, rather than depending on us as parents. So self-sufficiency is generally seen as a goal, but in economic activity and in trade generally, no one really has self-sufficiency as a goal.

Discussion Questions:

1. Why does self-sufficiency lead to poverty?
2. What is the “true environmental cost” of buying certain products, namely cheap, imported food and consumer goods?
3. What is the opportunity cost of “buying local”, whether it be food or other consumer items?

YouTube – Obama / McCain 3rd Debate, Part 10 – Free Trade

Below is a clip from the third and final presidential debate, in which the candidates discuss the benefits of free trade.

Both candidates support the principles of free trade, one more enthusiastically and with fewer conditions than the other. Only Obama speaks of “fair trade”, which he seems to think means trade that does not encourage the violation of human rights abroad.

Notice how towards the end of the discussion of free trade, McCain attempts to wrap up the conversation when he claims:

“I don't think there is any doubt that Senator Obama wants to restrict trade and to raise taxes; and the last president of the United States who tried that was Herbert Hoover, and we went from a deep recession into a depression…”

Hoover, of course, was the US president at the time of the Great Depression, when the government's response to a financial crisis on Wall Street worsened the economic meltdown, throwing the US into its deepest and longest slowdown in history.

Discussion questions:

1. How would a free trade agreement with Columbia help “create jobs in America”? What are the “billion dollars or more that (America) has already paid” through its trade with Columbia?
2. What is the source of Obama's lack of enthusiasm for the Columbia Free Trade Agreement? Do you agree with his position on the importance of limiting free trade in order to stand for human rights? Why or why not? Is his view a protectionist one?
3. One of Obama's highest priorities is to hold auto makers responsible for improving the fuel efficiency of American-made automobiles. How does he plan to create “five million new jobs all across America, including in the heartland”? Does Obama's plan to invest in a clean energy economy sounds remotely protectionist? Why or why not?

Colbertnation | The Colbert Report Official Site | Comedy Central

Newsweek international edition editor Fareed Zakaria explains in clear terms the root causes of the United State's economic hardships. Simply put, Americans have lived beyond their means for far too long.

When a household, a firm, or a national government spend more than it earns (in income or tax revenues), it must borrow to do so. The only problem with this type of deficit financed spending is that at some point “the only way people will keep lending you money is that you have to pay higher and higher interest rates…” This, according to Zakaria, is why the US economy has begun to slow down. Higher interest rates make borrowing and spending less and less attractive, while making savings more attractive.

Savings rates have started to rise in America as our debts have come due. Higher savings means less spending, less spending means weak Aggregate Demand, which means slower growth and rising unemployment. There you have it, the root cause of our economic meltdown. Americans have spent beyond their means for far too long; the question is, have we learned our lesson? Will our current hardships teach us to spend more responsibly in the future?

FT.com / World – Anti-dumping investigations soar

Free trade is good, right? This sentiment is one that economists typically agree with wholeheartedly. The mutual gains from free trade among nations that specialize in the goods for which they have the comparative advantage results in increased global output and consumption among trading nations. That, at least, is the basic premise of free trade.

But is there such a thing as unfair free trade? The World Trade Organization, whose mission is the removal of barriers to trade among all the world's nations, thinks there is such a thing as unfair trade. Under certain circumstances, the WTO allows member nations to place protective tariffs on particular imports, and recently, more and more nations have taken action to protect their domestic markets from unfair trade practices of their trading partners:

The number of new anti-dumping investigations soared by nearly 40 per cent in the first six months of this year, the World Trade Organisation said on Monday, reflecting increased trade tensions as the credit crunch began to take its toll on the global economy.

Between January and June 16 WTO members started 85 new investigations compared with 61 in the first six months of 2007. China was the target of nearly half the probes, a jump of 75 per cent over the same period last year.

Under WTO rules, countries can put duties on unfairly priced imports that are sold in export markets more cheaply than at home. But until this year dumping actions had seemed to be on a downward trend, with 164 investigations in the whole of last year compared with over 200 in 2006.

Anti-dumping actions, once mainly taken by rich countries against poor ones, have become a tool increasingly used by developing nations while industrialised countries have increasingly become targets…

The EU was the third-ranking target in the first half of the year, after China and Thailand. Canada, the US, New Zealand and Norway also had investigations opened against their exports.

The WTO said the main products affected were base metals (21 investigations), textiles (20) and chemicals (10).

The number of new measures taken as a result of anti-dumping probes also rose in the first six months of 2008, with 54 measures against 51 measures in the same period in 2007. India applied duties in 16 cases, with the EU some way behind in second place.

China was again the main target followed by Taiwan, the EU, South Korea, Russia and the US.

Discussion Questions:

1. Why would a country want to keep cheap imports out of its domestic markets? Don't cheap goods make consumers happy?
2. Does dumping refer to the sale of a country's goods below the importing country's costs of production or the costs of production in the country where the good is made? Why does this distinction matter?
3. When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.

Op-Ed Contributor – Buy American. I Am. – NYTimes.com

So Wall Street has recently experienced its worst shocks since the great depression. Every day the Dow Jones is like a roller coaster, DOWN 800 points, then  UP 500 points, then DOWN 200 followed by another rally of 600! In just three weeks the Dow has gone from 11,500 to below 900 points. Surely, the wise thing to do is get OUT of the stock market, right? WRONG! At least, so says the richest man in the world, Warren Buffet, someone who should know a thing or two about smart investing.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Discussion Questions:

1. Why does holding cash seem like the smart thing to do during periods of volatile stock prices like the last month or so? Why does Mr. Buffet think that holding cash is NOT so smart?
2. Mr. Buffet's advice is counter-intuitive to some. Buying more of something that is falling in value (American stocks) may appear unwise… but what is Buffet's rationale for why buying now may in fact be the smartest thing for an investor to do?
3. Does the behavior of investors on the stock market reflect the behavior of consumers in a typical product market? In other words, do the laws of supply and demand apply to the stock market? Discuss…

The Huffington Post – Economic Honor Roll

The liberal blog and news site, Huffington Post, has an interesting post sharing excerpts from the writings of some prominent economists over the last several years who foresaw the economic meltdown now underway in the world's financial markets. It's interesting to read these passages today and realize that the financial crisis that seemed to take Washington by such surprise in the last few weeks was something economists have seen coming for quite some time.

Nouriel Roubini, NYU professor of economics: from “The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster” (subscription req'd), February 5, 2008

…it is possible that some large regional or even national bank that is very exposed to mortgages, residential and commercial, will go bankrupt. Thus some big banks may join the 200 plus subprime lenders that have gone bankrupt.[...]

Ninth, the “shadow banking system” (as defined by the PIMCO folks) or more precisely
the “shadow financial system” (as it is composed by non-bank financial institutions) will
soon get into serious trouble.[...]

Tenth, stock markets in the US and abroad will start pricing a severe US recession -
rather than a mild recession – and a sharp global economic slowdown.[...]

A near global economic recession will ensue as the financial and credit losses and the
credit crunch spread around the world. Panic, fire sales, cascading fall in asset prices will
exacerbate the financial and real economic distress as a number of large and systemically
important financial institutions go bankrupt. A 1987 style stock market crash could occur
leading to further panic and severe financial and economic distress.
In this meltdown scenario US and global financial markets will experience their most
severe crisis in the last quarter of a century.

Paul Krugman, New York Times columnist (and winner of the 2008 Nobel Price for Economics)

Krugman has been warning about the dangers of the housing bubble for years, and the terrible toll it could take on the economy when it pops. Here is a Krugman warning from August 29, 2005:

These days Mr. Greenspan expresses concern about the financial risks created by “the prevalence of interest-only loans and the introduction of more-exotic forms of adjustable-rate mortgages.” But last year he encouraged families to take on those very risks, touting the advantages of adjustable-rate mortgages and declaring that “American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage.

If Mr. Greenspan had said two years ago what he's saying now, people might have borrowed less and bought more wisely. But he didn't, and now it's too late. There are signs that the housing market either has peaked already or soon will. And it will be up to Mr. Greenspan's successor to manage the bubble's aftermath.

How bad will that aftermath be? The U.S. economy is currently suffering from twin imbalances. On one side, domestic spending is swollen by the housing bubble, which has led both to a huge surge in construction and to high consumer spending, as people extract equity from their homes. On the other side, we have a huge trade deficit, which we cover by selling bonds to foreigners. As I like to say, these days Americans make a living by selling each other houses, paid for with money borrowed from China.

One way or another, the economy will eventually eliminate both imbalances.

Joseph Stiglitz, Nobel Prize-winning economist: Washington Post, “The Iraq War Will Cost Us $3 Trillion, and Much More,” March 9, 2008

We face an economic downturn that's likely to be the worst in more than a quarter-century.

Until recently, many marveled at the way the United States could spend hundreds of billions of dollars on oil and blow through hundreds of billions more in Iraq with what seemed to be strikingly little short-run impact on the economy. But there's no great mystery here. The economy's weaknesses were concealed by the Federal Reserve, which pumped in liquidity, and by regulators that looked away as loans were handed out well beyond borrowers' ability to repay them. Meanwhile, banks and credit-rating agencies pretended that financial alchemy could convert bad mortgages into AAA assets, and the Fed looked the other way as the U.S. household-savings rate plummeted to zero.

It's a bleak picture. The total loss from this economic downturn — measured by the disparity between the economy's actual output and its potential output — is likely to be the greatest since the Great Depression.

Daniel Altman, author, economic journalist and Huffpo blogger, from “Contracts So Complex They Imperil The System”, February 24, 2002

When companies that rack up huge hidden debts and traders who illicitly amass mountains of risk are exposed, Wall Street's big players rush to cut their losses and collect on their debts. If that kind of rush were ever to result in a shortage of cash, it would paralyze the financial system. Stock markets would tumble and banks would close, putting the savings of households at risk.

Mediterranean Center for Sustainable Development – Collaborative School Programs

One of the great joys of teaching at an international school is the opportunity for travel. Not only during breaks and summer vacations, but also with students through programs such as Zurich International School's Classroom Without Walls.

My colleague and fellow Economics teacher (and blogger!) Joe Hauet decided last spring to organize an economics research and experiential learning trip to a sustainable living community on the banks of Egypt's Nile River, near the city of Beni Suef, two hours south of Cairo. 40 ZIS Economics students, mostly year 2 IB students, will spend the coming week learning about economic development from experts in the field who are part of the Mediteranian Center for Sustainable Development Programs. The students, Joe and myself will spend three days at the Nile delta's Kan Yama Kan village, followed by two days exploring the ancient Egyptian sites at Giza and around Cairo:

When teachers bring their students to Kan Yama Kan Village and engage them in our programs, they know we take a holistic approach to learning. Students learn about the environment through hands-on activities designed to provoke critical thinking and follow-up discussion in the classroom. They are exposed to sustainable development concepts and practices that are simple, easy to comprehend and replicable. Educating youth about the environment and developing their character leads to an informed citizenry with the capacity to reach the Millenium Development Goals

Our programming is proactive and flexible. We recognize that youth today face social and global challenges in a fast-paced world and we believe that as educators it is our responsibility to help them gain the intellectual and life skills they need to succeed. We do this by exposing students to practical learning experiences and modeling the behavior and values we teach; we use issues that arise while living in a community as learning opportunities about respect for others, good governance, human rights, and personal and collective responsibility.

Each visit to Kan Yama Kan is unique. Each program is tailored to the needs of the teachers, students or group. Whether the program focuses on biodiversity, animal behavior, renewable resources and searching for fossils or planning and building a habitat for tortoises, scripting a drama performance or revision for end of year exams, MCSDP works closely with faculty and school administrators to understand their objectives and meet their expectations.

The goal of the ZIS Classroom Without Walls trip to Egypt is to allow IB Economics students to experience the challenges faced by communities in developing countries, as well as to gain a deeper understanding of the development strategies rooted in sustainability that are going on around the Mediteranean region.

I owe a huge thanks to Joe Hauet, whose dedication and work in planning this trip over the last six months will truly pay off for the 40 students and four teachers leaving for Egypt bright and early tomorrow morning.

• How Government Stoked the Mania – WSJ.com

  Is the financial crisis purely a result of market failure? Professor Russel Roberts doesn't think so. Read this great post to learn how the government may be the real culprit behind our financial mess.

  “…before we conclude that markets failed, we need a careful analysis of public policy's role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?

  Part of the answer is a political class greedy to push home-ownership rates to historic highs — from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.

  Beware of trying to do good with other people's money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.”

  tags: economics, financial crisis, market failure

Formidable Opponent – Business Syphilis | Thursday October 2 | ColbertNation.com

Business syphilis infects the market after a corporate orgy…