ASSOCIATE PROFESSOR of Economics Keith Chen taught a bunch of monkeys to use money.
What he discovered was that not only could the monkeys learn to understand the value of money and how to use it, they were also very good at changing their consumption behaviour when prices changed.
This experiment provided four great insights:
money is a tool which is easy to learn how to use
money stores value, and can be exchanged for other things – a coin for jello, or a coin for sex
trading with money encourages selfishness (what you may have done out of a sense of curiosity, kindness or passion, money incentivises you to withhold until you get paid)
once its value is understood, throwing money around may drive you crazy. For example, excessive consumption causes jealousy which begets more consumption; handing money out for free encourages laziness
Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it ~ Ferris Bueller
THE FRENETIC pace of daily life in Ho Chi Minh City combined with incredible time lapse photography produce a short video that gives you pause for thought (hat tip to Mike Maier for the video).
Are your urgent engagements really that important? You’re moving pretty fast, but are you really going anywhere?
RECENT falls in the officially reported US unemployment rate are an optimistic sign.
That said, it is worth remembering that the official US unemployment rate (currently around 9.1%) systematically understates the “real” unemployment rate. This is not a new phenomenon, and occurs because of the particular way in which the US Bureau of Labor Statistics chooses to define a person as either ”employed” or “unemployed”.
1. Understating the number of unemployed people
The US Bureau of Labor Statistics defines a person as unemployed if they fit three criteria:
they do not have a job;
they have actively looked for work in the last 4 weeks; and
they are currently available for work.
The second criteria potentially excludes a large number of people from the definition of ”unemployed person” because, in order to be considered unemployed, a person needs to have actively looked for work in the 4 weeks prior to the survey date.
It seems reasonable that an unemployed person would actively look for a job in any given month, but there are two reasons why they may not do so:
Discouraged workers: An unemployed person might become discouraged. As difficult economic times persist, more and more people stop looking for work. This may happen because an unemployed person:
becomes discouraged due to previous unsuccessful attempts to obtain work;
believes (reasonably or not) that there are no jobs available in their industry or location;
lacks the skills needed for the jobs which are available, either because they never had the required skills or because their skills have eroded due to a long period of unemployment;
is discriminated against by prospective employers for some reason beyond their control (e.g. age, race, gender); or
becomes addicted to Twinkies and day time television. This one sounds like a joke, but it is conceivable that after a prolonged period of unemployment a person who previously had an aversion to receiving welfare payments could become welfare dependent.
Passive job search: Anyone who has not made active efforts to look for work in the last 4 weeks is excluded from the definition of “unemployed” person. The US Bureau of Labor Statistics considers passive job search methods to be any form of job search that does not have the potential to result in a job offer. So, this would mean that a person who has attended a job training program, searched through online job boards, and read through job classifieds for the last four weeks would not be considered unemployed. It is more likely that they are unemployed, but that they have become discouraged workers (see point 1).
2. Overstating the number of employed people
The US Bureau of Labor Statistics considers a person to be employed if they did any work at all for pay or profit during the week in which they are surveyed.
There are two reasons why the official estimate of the number of “employed” people will overstate the real number of employed people:
Underemployment: Some people are underemployed. For example, a PhD graduate who works at McDonalds would be considered underemployed because the person is highly skilled yet works in a low paid/low skill job. Any part-time or casual workers who would prefer to work full-time are also considered underemployed. For the purposes of calculating the unemployment rate, underemployed people are considered to be ”employed” which means that the unemployment rate overstates the percentage of population that is fully-employed.
Unpaid family workers: Under the US government’s definition of employment, a person is considered employed if they have worked without pay for 15 hours or more per week in a business operated by someone in their family. While working for free for your family may be dutiful and supportive, to consider a person who works for free to be “employed” would seem to overstate their employment status. Unless slavery within the family is permissible (I’m not a US lawyer, so I stand to be corrected), it would seem more logical to categorise unpaid family workers as neither employed nor unemployed. The problem with doing that of course is that it would increase the officially reported unemployment rate.
ECONOMISTS tend to favour a small positive rate of inflation, and there are 4 reasons why this makes sense:
Labour market flexibility: inflation allows relative real wages to adjust even if nominal wages do not move. A company that tries to pay workers less money is likely to meet with resistance. Disputes over wages can distract business leaders from strategic priorities and lead to strikes and industrial action. Most recently, Qantas grounded its entire domestic and international fleet due to widespread industrial action. While it may be difficult for a company to reduce worker pay, inflation can improve labour market flexibility by reducing the real wage of any worker whose nominal wage does not keep pace with inflation.
Avoiding the liquidity trap: central banks normally conduct monetary policy by controlling short term interest rates. Where interest rates are zero, or near zero, a central bank will not be able to stimulate the economy by lowering interest rates further (the liquidity trap). A moderate level of inflation helps to avoid the liquidity trap. For example, if inflation were 3% then a central bank could set the real short term interest rate at 0% by lowering the nominal short term interest rate to around 3%.
Investment in physical capital: moderate inflation encourages businesses to invest in physical capital (e.g. plant, property, equipment and inventory) instead of holding investments denominated in dollars (e.g. cash or bonds).
Avoiding “the deflation”: If people expect prices to fall then they are likely to hoard money and delay consumption. A widespread expectation of deflation is likely to be self-fulfilling, and reduced consumption would depress the economy.
For all its good deeds, inflation does have blood on its hands.
THE US Federal Reserve took steps yesterday to make it easier for European banks to borrow and lend dollars. The Fed is now providing such cheap money to Europe that the European Central Bank can borrow from the Fed at lower interest rates than American banks. The Fed was joined in its efforts by 5 other major central banks: the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank. The scope of the coordinated global effort gives you an idea of the enormity of the problem.
While the new world/old world solidarity is heart warming, the coordinated central bank action does nothing to address the underlying cause of the problem: European governments have too much debt. By providing cheap credit to Europe, the Fed aims to ease pressure on financial markets by increasing the supply of credit to households and businesses. Ironically, cheap money means lower interest rates and allows heavily indebted European governments to continue borrowing.
Even if Greece and Europe’s other credit junkies do not abuse the cheap money, pumping money into Europe may actually hurt Europe’s most vulnerable economies. How would this happen? Lending money to Europe means moving money into the Euro-zone which would increase the demand for Euros. A strong Euro would make goods produced in Europe more expensive compared with its trading partners. Expensive products are more difficult to export, and lower exports from Europe’s weak economies would lead to lower national incomes and less tax revenues. Embattled European governments that cannot raise enough tax revenue are likely to continue borrowing. They may have no choice.
Concerned well wishers hope that the supply of cheap credit allows Europe to buy itself time ahead of the scheduled intervention in Brussels on December 8. However, according to the Wall Street Journal, there are growing fears that Europe may not go to rehab before it is too late.
