Abnormal Returns and Facebook Investors

Just one quick google of Facebook will provide an abundance of news articles like the one above. Facebook is definitely slipping, and investors are not happy.

Reading these headers reminded me of the term abnormal return- the difference between the actual return of an investment and the expected return of an investment. Consider an investment that was expected to rise 8% but actually rose 10%. This investment would have a +2% abnormal return. Similarly, if that same stock that was expected to rise 8% actually only 6%, that stock would have a -2% abnormal return.

As you can see, an investment can have a negative abnormal return even though an investment has a positive worth.

Abnormal returns are clearly linked to the present Facebook stock situation... Many people who invested in Facebook with the expectation of a positive return but are instead disappointed with a negative abnormal return.

I intend on writing another blog post soon related to the relative value of Facebook. Until then, keep your eye out for other abnormal returns and let me know if you find any interesting ones.

Hosting the Olympics: A Potentially Risky Investment

I would like to start out by saying that I love the Olympics. As I watch the the security, venue building, and ceremonies, however, the economic part of my brain fires off. Does the host country actually make all the money back, or are the Olympics a big public relations scheme?

After research, I found an answer on Businessweek. The conclusion is that the Olympics are a boon to cities that are "upcoming"- cities such as Seoul- because these places can be helped by the tourism and the exposure. For established cities that already draw tourists, however, hosting the Olympics may not make sense.

So what about London? London is definitely an established city, so it is speculated that the city will not fully recover all its expenses within a reasonable time frame (essentially, there is a high opportunity cost. London could have invested the money into more worthwhile investments)

Of course, there are strong arguments on both sides. Some sources say that no matter what, "hosting the olympics is a huge money suck". One person from reason.com made the following argument:

These days the summer Games might generate $5-to-6 billion in total revenue (nearly half of which goes to the International Olympic Committee). In contrast, the costs of the games rose to an estimated $16 billion in Athens, $40 billion in Beijing, and reportedly nearly $20 billion in London. Only some of this investment is tied up in infrastructure projects that may be useful going forward...."

Then, of course, there are others who adamantly argue the opposite. One person from nationmultimedia.com made the following argument:

While almost everything has a price, there are some things in life - such as reputation and soft power - which remain priceless.

As you can see, there is no clear answer to the value of hosting the olympics; there are too many factors and too many different pieces of the puzzle to consider.

Personally, I think businessweek made a solid argument- upcoming cities should host the olympics.

If you do happen to come upon an interesting opinion piece on the olympics, please make sure you weigh in under the comments! It is interesting to read the different thoughts on the event.

Normative vs Positive Analysis

Economists tends to juggle between articulating facts and arguing what should be done with those facts. For example, one economist might say, "The American debt went up 3.8 billion dollars today, and we should therefore cut down on spending." Another economist might say "The American debt went up 3.8 billion dollars today, but those spendings are investments that helps America grow."
I used a very simple example, but you can see that both statements have two parts: the fact and the prescribed application of that fact.
The fact ("The American debt went up 3.8 billion dollars today") is the positive part of the analysis. It is a statement that can either be clearly proven to be right or wrong.
Each of the second parts of the sentence ("we should therefore cut down on spending" or "those spendings are an investment that helps America grow") are referred to as normative analyses. Those statements are opinions, and there are people who would both agree and disagree with that statement.

It's pretty simple, but there are a few things to keep in mind. For example, false statements can still be positive.
For example, "The American debt went up 3.8 billion dollars today, August 13" and "The American debt went up 100 billion dollars today, August 13" are both positive statements. One is right, and one is wrong. However, they are both positive because they can be easily proven or disproven.

Also keep in mind that there can also be disagreement over positive statements. One company may have calculated that there was a 3.8 billion dollar debt and another company may have calculated that the debt was 3.9 billion dollars- there can be a debate over whether good X, worth .1 billion dollars, should be accounted for. You can see how there is potential conflict over positive statements.

As you keep this concept in mind and potentially try to categorize statements into one analyses category, you will find there are a lot of grey areas. This is completely expected; as long as you understand the concept, however, you shouldn't worry too much.

McSpicy Paneer (Even McDonalds has to regionalize their business model)

On my current vacation to India, I decided to indulge in some McDonalds with my cousins. As we pulled up to the drive-through, I couldn't help but smile as I saw the menu which was full of items such as the "McSpicy Paneer" and "McAloo Tikka Burger." The burgers are spicy and so is the ketchup!

It made me realize that even the extremely well-known McDonalds has to be sensitive to the region they are in to remain profitable. The majority of Indians simply won't buy the "Angus Bacon & Cheese Wrap" or "Quarter Pounder with Cheese." In general, Indian people don't like meat, and they prefer lighter burgers without lots cheese.

On the other hand, some McDonald items seem to appeal to the palates of both Indians and Americans (for example, The McFlurries and Filet-O-Fish)

It was the corporation's job to determine what to change and what to keep the same, and I'm sure those decisions came after much consideration.

If you're curious as to what the McDonalds menu looks like in other countries around the world, here's a wiki link where you can see some of the items on each menu internationally:

http://en.wikipedia.org/wiki/International_availability_of_McDonald's_products

Wealth vs. Income: Two Different Conepts

If you and everybody who earns an income in your family were fired today, would your family still be able to sustain a quality of life somewhat comparable to the one you live today? (If your answer is yes, then your family is wealthy!)

I believe my aforementioned question is the best way to explain the difference between wealth and income. As far as wealth is concerned, earnings do not matter but investments do. As far as income is concerned, earnings do matter but investments do not.

To illustrate by example, let's say there's a girl named Maya who makes $200,000 a year (her income). This is definitely a very respectable income, however Maya may not necessarily be wealthy.

For example, let's say Maya may spend almost all of her income and lives a lavish life. Perhaps she never puts money in the bank and she decides not to think of the future. As a result, the amount of money she has at the end of the years may be equal to zero.

Maya is not wealthy. She may have a huge apartment and lots of things to fill it, however she would not be able to maintain her quality of life if she were fired at a moment's notice. Maya would still have to pay rent on a monthly basis, and she would still need to put food on the table. Without an income, Maya would be in trouble.

However, let's take case B. Let's say Maya now puts away 15% of her income every month and invests that money intelligently. Maya lives below her means. She buys used cars, lives in a modest home where she has payed off her mortgage and makes sure she pays the bills on time.

Maya is very wealthy!

If she were to be fired today, she could fall asleep knowing that her life is in order. She has already saved for retirement and she doesn't really need to worry about bills.

Applying this example to other cases, you can see how doctors can either be wealthy or not and people who make minimum wage can be wealthy or not.

In fact, this concept can be very interesting to keep in mind if applied to the Lorenz curve (which I intend on writing a post on very soon!)

Cartels: what are they and why do they fail? (I call it the Lemonade Effect)

A cartel is best defined as an agreement between competing firms in order to standardize features such as price and amount of output in order to increase each firm's profit. Why would competing firms be willing to sacrifice a potential area of interest or agree to limit the amount of products they sell? I always like to think of it as something I call the lemonade effect.

Imagine two people are selling lemonade at stands right next to each other. They both may set the price at a dollar and they would both get equal amounts of traffic for a while. After a few minutes though, one person realized they would get more traffic if they reduce the price to 75 cents. Well, the other person would too... and you can see how it would only go down-hill from there. Pretty soon, they would both end up either reducing the price to where they're making negligible profit OR, they would have to shut down. You can see why it would make sense, then, for the both to agree to take different zones. One person can take the north part of town and the other the south. Cartels also often include a production quota in order to ensure that prices stay up. Both parties selling lemonade may agree to only make 20 cups of lemonade a day.

Cartels, however, often fail long-term.

If you've kept up with my posts up until now, you can probably guess why! Game theory (prisoner's dilemma) suggests that there would be many incentives for a company (or in this case, a lemonade stand) to lower their prices. If it isn't clear to you as to why, here's a link back to the Prisoner's Dilemma explanation. :
One person may start to cheat and sell 30 glasses a day. The other person will notice and produce the same. Soon, the cartel is broken!

A real example of a cartel is OPEC (Organization of the Petroleum Exporting Countries) which influences aspects of oil production for all firms that produce oil. By this point, it must be evident that consumers benefit from the absence of cartels.

No cartel means cheaper lemonade!
In a future post, I will explain how OPEC has managed to remain successful.

What's the difference between a Recession and Depression?

In my last post, I explained that a business cycle's contraction phrase could either implicate a recession or implicate a depression. Today, I would like to explain the general differences between the two. [If anything I talk about doesn't make sense, refer back to my last post]

There are many definitions of a recession. Simply, the term implicates a market with a declining economy. Going back to my last post, I like to think of it as the part of the business cycle that follows the peak. However, different sources have defined it in other ways. For example, a 1975 New York Times article more specifically stated that a recession is a period of "two down consecutive quarters of GDP." In this definition, what follows a peak isn't necessarily a recession. Similarly, the Business Cycle Dating Committee of the National Bureau of Economic Research defines it as "a significant decline in economic activity spread across the economy, lasting more than a few months." .

As varied as the definition of a recession is, however, the definition of a depression is even more-so. Until economists can agree on a definition, let's say it occurs when there is a notable decline in GDP (10%) for over two consecutive quarters in two or more national economies. It's a vague definition, but you'll still find people who disagree with it.

Remember, recessions and depressions are both phases of declining growth in an economy. Recessions are most commonly defined as a period of "two down consecutive quarters of GDP," and Depressions are just more severe and globalized recessions (10% decline in GDP).

I know these definitions are vague (and I apologize), however there has been no organization who has had the ability to standardize the definition of a "recession" or "depression." I hope in the future this will be resolved and I can come back with a more clear post!

References:
http://en.wikipedia.org/wiki/Recession
http://en.wikipedia.org/wiki/Depression

Business Cycle: The Four Phases

A business cycle has been defined as the tendency of economic activity to go oscillate between periods of expansion and contraction. Because the fluctuations are unpredictable however (as displayed in the graph above), many economists point out that “cycle” is a misleading term. In any case, the phrase is still used today.
Here are the four phrases of a business cycle (almost always in this order)

I. Contraction/Recession: Economic activity slows down. This period, if really bad, could even be a depression.
II. Trough: A turning point right after contraction. Economic activity rises and turns to the third step, expansion.
III. Expansion/Boom: Rise in economic activity
IV: Peak: A turning point right after expansion. Economic activity slows and returns back to contraction.

As you can see, although the amount to which an economy contracts or expands is not constant, the phases will occur in a repeating manner.

This concept isn't very difficult! However, you should understand that this is a short-term graph and in the long term, Real GDP (output) will look somewhat like this:



This is because in the long-term, our economy will generally grow stronger as a result of improving technologies, etc.
And that's all the basics of a business cycle!

Governor Whitman on Policies that Impact our Economy (Clean Energy Act)

A few weeks ago, three ex-governors of New Jersey (Governor Byrne, Whitman, and Kean) visited my school. Among the many topics they discussed, I thought it would be especially relevant to write about Governor Whitman's response to my question: "What is your opinion of the Clean Energy Act which invests billions of dollars into clean energy facilities?" Governor Whitman, who once served as an Administrator of the Environmental Protection Agency, said the following:

"My problem only with government investing in clean energy programs is we ought to let the private sectors figure out which ones work. To me, governments responsibility is setting out what we want to achieve. We don't have a national energy plan in this country but we desperately need one."

Governor Whitman seems to advocate a system under which the government sets a goal forth and the private sector then carries it out. Governor Whitman has far more expertise than me on this subject, but I do believe she is absolutely correct in stating that the government needs to take responsibility for regulations and enforcement.

There wasn't too much else directly relevant to economics, however listening to the governors speak and meeting them was still a very exciting experience. All three governors encouraged the future generation to get involved in our community and become well-informed individuals.

Governor Byrne, Whitman, and Kean- thank you for visiting our school and sharing your perspectives!

Monopolistic Competition Explained (Long Run)

I decided it's time to face my biggest fear and the bane of my existence...Monopolistic competitions. This concept took me forever to understand and it was the source of much frustration when I first took an introductory Econ course.

If you're like I was, however, don't worry! I finally understand it and I'm about to explain everything in simple terms.

I) Definition: A monopolistic competition is a type of competition in which there are two or more firms which sell similar products that are not perfect substitutes. For example, consider the toothpaste industry. Each toothpaste company essentially sells a product that you use on a daily basis to clean your teeth. However, each product is slightly different (the features they offer, the color, the branding/marketing, the target consumer). For example, one company may focus on encouraging the consumer to avoid heart disease, another company may focus on creating a flashy product with celebrity endorsements.

As you can see, each company is somewhat of a monopoly because there is no exact substitute. However, there is also competition because there are similar products that exist.

Now to explain the graph...
Above (Image 1) shows a graph of the overall graph. However, I will now explain how this graph is derived.

Step One: Demand line. Simple. Here it is:



Keep in mind that the demand curve in a monopolistic competition should appear to have a more 'shallow' downward slope because buyers are sensitive to a change in price. If Toothpaste company A, for example, increases their price 2 dollars, you would quickly switch to Toothpaste company B.

Step Two: Marginal Revenue Curve.
Self-explanatory diminishing marginal revenue curve. Keep in mind that it touches the demand curve only at one point. If you don't understand any of the shapes, see my previous posts explaining them.


Step Three: Marginal Cost Curve.
Find the point where Marginal Revenue = Marginal Cost. then, Trace it up to the demand curve. This is the profit maximizing point.
Again, if you don't understand any of the shapes, see my previous posts.


Step Four: Average Cost.
It is tangent to the point of maximizing profit (mentioned in step three) It falls then rises.

名牌的东西在中国: The Power of Brand Names in China

在中国， 很多人愿意付很多钱买名牌的东西。 我想问你一个问题: 你觉得这个主意有好处吗？ 我一个朋友三年前主在中国。他说了吃饭便宜是便宜，可是他说衣服，别的东西, 太贵了。实际上, 92%来美国从中国人说：“名牌的衣服质量比较好。”（www.telegraph.co.uk）买东西的时候，他们只买名牌的要不然就不买。我觉得不一定。我觉得每个月少买名牌医些，他们一年可以省很多钱。 你穿什么衣服都可以好看。再说, 虽然不必买名牌不可，可是不觉得不穿名牌。要是衣服是打折的，你当然应该买。
Translation: In China, Many people are willing to spend a lot of money to buy brand name clothes. However I would like to ask you if you think this is a good idea. Consider one of my friends who lived in China three years ago. She said that although dining is definitely cheap, buying other things is often too expensive. In fact, 92% of American visitors from China say that "Brand name clothes automatically are of better quality." When it comes to buying clothes, they will buy brand names or not buy at all. I don't necessarily agree. If they would be willing to cut down on their shopping even a little each month, they will save so much money in a year's time. I believe you can make clothes that are not brand name somewhat fashionable. Finally, I am not saying that one should not buy brand names at all. If something is on sale, for example, then you should definitely buy it. I am simply an advocate of shoppers making decisions after some thought.

Consumer Price Index (CPI) and Seasonal Adjustment Explained

The consumer price index, created by the bureau of labor statistics, is designed to be a month-by-month report on the changes in prices paid for a specific service or good. In more basic terms, it is a measure for the increase in price. The CPI is definitely very dense in information- I intend to break it down to the very basic aspects. In all the examples, I will be using the March 2012 CPI. I will first explain trends. For a given month, the CPI will highlight the overall findings. For example, the March 2012 index states that "The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in March on a seasonally adjusted basis, the U.S.Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 2.7 percent before seasonal adjustment."

What does this mean? Well, in order to understand the meaning, you must first understand the concept of seasonal adjustment. Seasonal adjustment is best expalined as an adjustment rate used to elimate the inevitable seasonal changes in data. This allows for a comparatively more accurate findings. For example, people are inevitabley going to pay more for lawn-mowers in the summer because it is more of a neccessity. However, if we were not to include the seasonal adjustment, we would misleadingly believe that people have gained a sudden interest in lawn-mowers. Now let's talk about the .3 percent increase. This increase means that in March of 2012, people are paying .3 percent more than they were previously. (As said before, it's essentially a measure of how much prices go up, and in turn, inflation.)Imagine that this number was exaturated to 5%. Although this may not seem like much, it means the average consumer cannot buy as much as they were before. Also keep in mind that these For example, The relative importance (how important is each item in the CPI? See chart above.) Caveat: Look at the breakdown! Sometimes, the CPI figure will be announced with the caveat that the CPI would be different if a certain product were not included. For example, the CPI for a month may be 2%. However, without gasoline, it may have been 1%. This means that the price of gasoline had a huge spike in prices and therefore affected the CPI a significant amount. Remember, increase CPI means people are paying more (inflation). The table below also tells us some other things, however I explained the CPI in a nutshell. I may elaborate further in future posts, but I think that even understanding this much is a great start.

Pareto Efficiency

According to definition, a Pareto efficient situation is one at which no party can be better off without making another party worse off. To be more specific, all resources are being used. Similarly, a Pareto inefficient situation is one at which one or more parties can gain something without making anybody else worse off.
These definitions are a little vague, so I will illustration a simple example. Let’s pretend that you and I are walking and we come across a gold mine with five nuggets, and we each take two. This is a Pareto INefficient situation because there is one nugget remaining and either one of us could take it without making the other worse off. Although we were trying to be fair be each only taking two, we are also being inefficient according to the aforementioned theory. Let’s now say that you decide to take the one remaining gold nugget. We are now in a Pareto efficient situation, because all resources are distributed. In addition, neither party can have an additional nugget without steeling from somebody else.

Notice, however, that Pareto efficiency has nothing to do with equality. All resources in the world have to be in use—however, they can be used by one person or by seven billion people.
If, for example, you went ahead of me and got all five nuggets, the situation would still be Pareto efficient. Although I would have zero, it would not matter according to the theory. As you can see in the graph below, there are many Pareto efficient points. They all equality ‘efficient,’ so any one of these points would satisfy efficiency in the same way.

Game Theory: Prisoner’s Dilemma

Prisoner’s Dilemma, a famous game used to demonstrate the ironic nature of incentives, is one example of game strategy. In the game, there are two arrested prisoners convicted of a crime. The two prisoners are separated into different rooms, where they are asked whether or not they committed a crime (let’s call the prisoners Red and Blue). As seen above , there are four possible scenarios. If Red confesses but Blue does not, Red gets 0 years in jail while Blue gets 3 (visa versa). If they both withhold, they each get 1 year. Finally, if they both confess, they each get 2 years in jail. No matter what circumstance a person considers, they realize that it is always the best choice for an individual to confess.
Now, let’s pretend you are the prisoner named Red. There are two possible scenarios.
I. You think Blue will NOT confess.
[Your Choices: Confess and get 0 years in jail. Don't confess and get 1 year in jail]
If he doesn't confess, then it is in your best interest to confess!


I. You think Blue will confess.
[Your Choices: Confess and get 2 years in jail. Don't confess and get 3 year in jail]
If he does confess, then it is still in your best interest to confess!


Both parties are selfish. It makes sense that even though the best option for both parties not to confess, this would rarely happen. See next two slides for ideal outcome vs actual outcome.

Andrew Carnegie: The Gospel of Wealth

In his document titled “The Gospel of Wealth,” Andrew Carnegie makes the excellent point that money should be a symbol of one one’s ambition and hard-work. He proposes that families should not hoard their wealth or pass on their savings to the next generation. He communicates two reasons for this; the first of which is that “it is not well for the children that they should be so burdened.” Carnegie states that by giving a child inheritance, you are taking away their ambition and sense of motivation. Second, Carnegie states that society will have no reason to work if many people gain wealth through inheritance. He states that if too many families hoard their wealth, the country will be in danger of becoming an aristocracy and commoners would no longer have the opportunity to rise to success. Both these points are absolutely true. Carnegie is stating that those who work hard should be rewarded, and that the wealthy should demonstrate “competency, which […] should be the aim of all to acquire.” I also respect the fact that Carnegie believes that the rich should help the poor and that this help should come in the form of resources such as libraries and educational institutions—not cash. Carnegie clearly adhered through the philosophies he preached. He funded many charities in his lifetime and created an extremely respectable University (Carnegie-Mellon). He communicates the rich man’s burden as providing “moderately for the legitimate wants of those who depend upon him.” He states that the rich should help the poor get to their level, however this transition must come only after struggle. In the document, he also states that 'death taxes' can be necessary in cases where a person does not voluntarily give up their fortune.
However, there can be an argument on the other side as well. Parents want to provide security to their kids, so is it really fair that we should take this right away? Perhaps some people work to provide for their family and for the generations that will follow them.
"The Gospel of Wealth" is controversial, but it is absolutely worth reading through. Carnegie definitely offers some "food for the thought." I, myself, was conflicted while reading the document. While his ideas sound great in theory, I feel they might not be practical. I will attach a link to the document below. Feel free to offer your insights and let me know what you think in the comments!

http://us.history.wisc.edu/hist102/pdocs/carnegie_wealth.pdf

Franchise vs Chain Businesses

Any store you're familiar with will probably fall under one of two categories- a franchised business or a chain-owned business.
Franchised stores such as Hardrock Cafe, IHOP, Burger King, Hot Topic, and Jenny Craig license their good, services, and business-model. Anybody (Including you and I) can pay an amount to run these types of store. After paying this fee, the person setting up the store pays a fixed percentage of sales to corporate as long as the contract stands. Why would somebody want to pay a fee when they could just start-up their own business? Well, let's say you want to start a breakfast place but have little experience with doing so. Given this circumstance, you can turn to IHOP. They will tell you exactly how to run the business and maximize profits. The best part is that they have a steak in the business's successes- the more you make, the more they make.
In contrary, company owned chain stores such as Starbucks, J.C. Penney, and Gap are all owned by the main organization. The organization itself goes through the trouble of seeking capital, finding locations, etc. Nobody can simply own a Starbucks.
I intend to elaborate more about this in a future post; however, I hope this gives you a basic understanding about the difference.

Price Ending Effect (there's a big difference between $8.99 and $9)

Even though you and I clearly know the difference between $8.99 and $9, even a slight modification to a numbers can affect our buying habits. According to Manoj Thomas and Vicki Morwitz from New York University, your perception of the price generally changes not because of the "ending [of] the price," but rather because of the "change in the left-most digit" (Manoj). Essentially, the reduction of the left most digit gives the appearance of a significantly lower price. However, as found by one researcher, H. G. Parsa, the .99 ending is not always a good idea. Mr. Parsa found that "many believe that just-below prices (another term for the .99 ending) connote good value and round-number prices connote high quality." Perhaps this is because of the number of zeros in the price. Parsa continued to explain the other reasons a person might not want to use just-below prices. In addition to lowering perceived quality, the .99 price will "give an impression of not being fully honest or straightforward, and involve inconvenience in calculating or communicating the price or in making change." (Parsa) As a result, higher-end brands may not want to use this. Numbers are clearly manipulated in many ways depending on what effect a stores wants to have.
There are probably psychological effects for all the digits between 00 and 99 as well, so keep a look out and think about this next time you're shopping!

Water: An Industry of Marketing Geniuses and Con-Artists Alike

Above are two images of water. The one on the left costs approximately $2-2.50, while the one on the right costs pennies. This difference is accounted for by one thing: the power of advertising. Even though the finished product on the left also costs producers just pennies, it is sold to many at an incredibly high mark-up. Some people insist that they are paying for quality, but unfortunately, they are falling to the power of advertising. As one argument I will link to explains, the quality of both types of water are actually the same (if not worse in the case of bottled water). A company that can make a person pay 200 percent more than they could is no doubt successful. I have written an article on the power of advertising before, and these principles especially hold true in the case of water. In the case of other comparisons (such as Dunkin Donuts vs Starbucks), the argument can be made that one actually does have a superior quality. However, the aforementioned argument cannot even be made in the case of water.

For anybody who has caught themselves arguing the superior quality of bottled water, I would definitely suggest reading the following article
I would suggest jumping to the section titled "Walmart and giant brands no different than tap water."
http://www.ewg.org/reports/BottledWater/Bottled-Water-Quality-Investigation

CNN says 60% of workers have less than $25,000 saved... Isn't this concerning?

Earlier today, I read an extremely interesting article on CNN.com that is titled "60% of workers have less than $25,000 saved". Upon reading this, I became very frightened. I have read about the declining quality of life for retired workers, the trend of older age retirement, and medical costs scares. In fact, through my extensive reading I have also started to become curious about what retired life will be like for people of our generation. The more I researched, the more I started to realize that my generation will have to start saving for retirement ASAP! Retirement plans will absolutely become less-and-less of a 'crutch'- many speculate that by the time that I will be looking to retire, social security (retirement insurance) will be in major jeopardy. The quicker teens are educated, the better it will be for our future. It would be a terrible wake-up call if we were to start thinking about these issues only when it is absolutely necessary.

http://money.cnn.com/2012/03/13/retirement/workers-confidence/index.htm?iid=HP_LN

Guerrilla Marketing

As defined by Wikipedia, guerrilla marketing "is an advertising strategy in which low-cost unconventional means are utilized, often in a localized fashion or large network of individual cells, to convey or promote a product or an idea." In my opinion, Guerrilla marketing is the most effective form of advertising because it is often the most memorable and enjoyable to spread. Rather than using an extensive explanation to communicate my point, I will use pictures to show why guerilla marketing is so successful.

Let's Leave the Middle-East: The Importance of Alternative-fuel Vehicles

Alternative-fuel vehicles (biodiesel, ethanol, propane, etc) have been emphasized through political and social discussions for a few years now. The public has heard it all; however, the media focuses on the "eco-friendly" aspect of the vehicles. That is absolutely important, however I think the more important effect of alternative fuel vehicles is that America can gain independence from the Middle-East. I am by no means the first one to state this, but I would still like to take the time to explain the significance of independence.

For a long time, we have relied on the Middle-east for our supply of gasoline. The large majority of cars in the United States rely on it, and it's a basic necessity for everybody's daily routines. However, some Economists would agree that there is a hidden danger in all of this. By changing the price of gasoline even a few cents, the Middle-east can easily manipulate the economy as they please. As Fadel Gheit, analyst at Oppenheimer & Co, stated; “Higher gasoline prices; lower consumer confidence. Lower consumer confidence; very bad news for our economy.” By switching to alternative-fuel vehicles, America could solve this issue of dependance.

My proposition is that media should appeal to the American patriotism in us all. We should focus on strengthening our own economy, and alternative-fuel vehicles can be the first step in this process.

As a final note, I'd also like to say that I've written posts about gasoline prices before- I find it such a fascinating issue. I would encourage everybody interested to look back at those to get a better sense of how the market works.

Alexander Hamilton Could Have Fixed Our Economy

I am embarrassed to admit how little I knew about Alexander Hamilton before taking US History with my teacher, Mr. Crowley-Delman. However, now that I've researched Hamilton, I believe America's financial and economic institutions owe much credit to him. Out of all his work, one of his most famous and respected policies include establishing the First Bank of the United States. He is famous for many other policies as well; however today I would like to explain the significance of the bank.

At the time of Hamilton's proposition, America had just broken off from England and formed the United States (McDonald, 1979). Prior to this point, America had been thirteen different colonies with their own systems of banking and their own ideas on how to handle finance (McDonald, 1979). Why was this dangerous? The most important reason must have that different currencies would cause disunity both internally and internationally. Just imagine if New Jersey, Texas, and Massachusetts all had different currencies. Each state would be looking out for their own interests, resulting in internal division. In addition, each state would have a different value to their currency. Other countries would have to distinguish between the different types, and America would quickly fall apart. In Hamilton's belief, establishing the first bank of the United States would solve this problem which would result in tremendous economic growth (in addition to paying of the debt America had incurred through the American Revolution) (McDonald, 1979). Establishing this bank would set up a standardized system that would serve as a model for future banks, and set a precedent for fixed currency. Hamilton had the incredible foresight to predict that unless the country could systematize economic trade, disorder would spread across the United States.

As great as the system seems to many today, there was much opposition to Hamilton in his day. Figures such as Jefferson argued that because 80% of the bank was public, other countries who would invest in it could control America's institutions and corrupt our system (Friedman, 1963) However, this was not the case. The buyers of the public shares had no link to the overseers of the national bank (Markham, 2001).

Without a visionary such as Hamilton, where would America's economy been today? He gave the United States some of the greatest tools for setting up a great financial system. World economists should look back at Hamilton's accomplishments (First Bank of the United States, the system of tarriffs, founding of the US mint, Revenue Cutter Service) and think about how we can recreate his successes to strengthen their perspective economies.

McDonald, Forrest (1979). Alexander Hamilton: A Biography. W.W. North & Co.. pp. 194.
Milton Friedman and Anna Jacobson Schwartz (1963). A Monetary History of the United States, 1867-1960
Markham, Jerry (2001). A Financial History of the United States. Armonk: M.E. Sharpe. ISBN 0765607301.

In Time: An Impressive Statement on Capitalism

Aside from being one of the most entertaining movies I've seen, the film In Time with Justin Timberlake and Amanda Seyfried also makes a brilliant statement about America's state of capitalism. In short, the movie takes us to a time where money is the currency; the poor work a day to get another day, the rich live forever, and a cup of coffee costs three minutes. As I watched, one scene specifically caught my attention. A character who had abundant time stated that although one can temporarily change the balance of the wealth, the long-term distribution will return to a state of extreme unbalance.
This was not the first time I heard the argument, and I absolutely agree with it. I strongly believe that even if we were to distribute wealth evenly, the balance would not last long. Although I believe this theory does not apply to every single person, some people are naturally more drawn to use their resources more shrewdly, while others are innately more lavish in their spending (or unaware of how to invest wisely). I would say that it is essentially the mindset which separates one type of person from the other. We have all heard stories of millionaires who lose all their money just to gain it back later. Contacts and experience definitely help the second time, but there must also be some kind of belief system that factors into this process.

Clearly, I am an advocate of this distribution theory. However, there are some aspects of it which leave me confused. For example, how long does it take to restore unbalance? Are we talking months, years, or generations? 'In the future' is a very vague term.

Regardless of your opinion on this theory, In Time is absolutely a worthwhile movie to watch. It will inevitably generate discussion and leave you with lots to think about.

Minimum Wage: Eliminate it!

In theory, minimum wage could be a great thing. It helps ensure employees are fairly compensated for the work they offer, right? Well, not always. I would actually argue that the minimum wage value of labor is over-estimated, and this miscalculation has many negative consequences to the economy. For example, let's take a a company that is forced to implement a new minimum wage above what the company was previously paying. The company has absolutely allocated some amount of money to pay employees, so then what are the employer's options? First, they could fire a few people in order to remain within the parameters of the allocated budget. This option has self-evident negative affects, especially considering people were willing to work for a lower price. According to supply and demand, if you raise the price of a product or service, less of the aforementioned good or service will be purchased. Labor is not exempt from this theory. In fact, a rapidly decreasing rate of unemployment is a significant contributing factor in a recession. Not to mention that many jobs would be outsourced to countries that do not implement the same law. [And Isn't this what we're seeing right now? It IS our fault that China gets all our business] The second option that the employer has is to increase the budget for employment. This higher cost has to be payed for somehow, though. The costs to the company would be translated into a higher price of the product or service. In addition, the people who were either fired, as in the case of a new minimum wage law, or not hired, has in the case of an existing minimum wage law, are statistically not highly educated either (comparatively). This makes it even more difficult fro them to find a new job.

My proposition on how to fix this? Eliminate minimum wage! Or at least lower it significantly. This would create countless job opportunities. More importantly, it would establish America as more self-sustaining , because goods would be cheaper to buy and produce in America!

In fact, the negative effects of minimum wage were effectively illustrated in 2009. After increasing the monthly minimum wage by a little over double, 15,000 people were layed off in addition to increased violence and a grudge against the system. Clearly, minimum wage is simply ineffective.

Tragedy of the Commons: We're All Innately Economists

The idea behind the tragedy of the commons is simple: common resources will be abused because the people using them lack of sense of ownership. Library books are not treated with the same care as personal books are; people fishing do so abundantly because it comes at minimal cost to them; and finally, although nobody would put a factory near their house because of its air pollution, large corporations don't think twice about doing so.
The flaw in the human thought, though, is that these consequences are peripheral. While some people may understand that these habits are taxed in one way or another; the principle of incentives prevents many from taking action. For example, lets say we live in a place, "town Y" where fishing is prominent. Further, lets say each person in the town is taxed x dollars for what is called the "fish tax". While many of us understand that if we fished less, amount X would be reduced, we would feel robbed if we reduced the amount we fish. Many of us believe that if we are being taxed, we should take full advantage.
In fact, I believe (and real life examples have shown) that taxes can actually encourage the habit it was trying to discourage. Before, the people of town Y weren't paying for a service. Now, they're paying for the service, so they feel that they must utilize it.
Unfortunately, our innately competitive nature to gain the most "bang for the buck" ultimately creates a dangerous outcome.
The tragedy of the commons is a great example of incentives, and this theory has been proven numerous times. The first paragraph of the following Forbes.com article effectively reenforces this concept. Below is the link.
http://www.forbes.com/asap/2001/0910/061.html

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