The Twelve Days of Christmas for Our Weak Economy

With apologies to Christmas carol purists, my latest Christian Science Monitor column offers up the twelve days of Christmas for our weak economy. I am no Jeff Foxworthy, so please forgive the poetic license and imprecise scanning. Oh, and kudos to my editor for letting me keep in the reference to Festivus.

As the folks in the streets of Oakland and the halls of Congress remind us, we don’t lack for challenges this holiday season.

Despite glimmers of improvement, the US economy remains lackluster and Washington seems unable to get anything passed to help, even a payroll tax extension that all sides want. Things are worse in Europe. Japan still struggles to recover from two decades of weak growth and the shock of this year’s earthquake, tsunami, and nuclear disaster. Even highflying China and Brazil find their economies slowing.

But it is the season of hope. So rather than gather around the Festivus pole to air grievances, let’s visualize a better world. Here are the gifts I would bestow on the world economy for the 12 days of Christmas:

12 AAA nations. At this writing, 12 European nations have a triple-A credit rating from Standard & Poor’s, but those top-notch ratings are in jeopardy. Thanks to the European financial crisis, S&P put 15 eurozone nations on credit watch, with a real risk of downgrades. It would be a remarkable gift if a year from now, all 12 AAA nations remain so.

11 percent Dow gain. A so-called Santa rally would buoy investor spirits globally.

10 more Steve Jobses. In October, America lost its most iconic entrepreneur. We could use many more of him to drive new economic activity.

9 percent BRIC growth. As late as April, forecasters were calling for Brazil and Russia (the first two of the BRIC nations) to grow by about 4 percent through 2014, while India was to speed ahead at slightly over 8 percent and China at 9.5 percent. That forecast now looks optimistic, but these emerging economies have the size and dynamism to reenergize the world economy.

8 percent EU jobless. The unemployment rate is already above 10 percent in the European Union (compared with 8.6 percent in the United States). Europe’s financial crisis and economic contraction threaten to push it higher still. The faster its job growth, the easier its debt problems can be solved.

7 Fed governors. In the face of political gridlock, the Federal Reserve has been the one Washington institution able to take action to contain crises. But it has been understaffed throughout the financial crisis. Only five of seven governors are in place. The president and the Senate should fill the vacancies.

6 million home sales. Existing home sales have been running at a 5 million annual clip* with new sales around 300,000. Once the housing market hits bottom, perhaps combined sales can move back to a healthier combined level of 6 million.

5 percent growth. Growth is essential for creating jobs and easing Washington’s budget strains. But the tepid 2 percent growth of recent quarters isn’t enough to trim the rolls of the unemployed.

4 million jobs. A stretch goal to be sure – the US hasn’t created 4 million jobs in a single year since 1994. But even that miraculous growth would leave payroll employment more than 2 million below its peak before the worst of the financial crisis.

$3 trillion cuts. Despite all the hype, the super committee failed to make any headway on America’s fiscal challenges. Budget experts, myself included, had encouraged the panel to “go big” with $4 trillion in budget cuts over the next decade. That proved a bridge too far. With $1 trillion in budget cuts already baked in the cake, let’s hope that the presidential candidates offer plans to get to at least $3 trillion more.

2 new currencies. The euro doesn’t make sense for Greece – and probably at least one other debt-laden nation on Europe’s periphery.

And a fundamental tax reform.

* The home sales goal has gotten much harder. Yesterday, the National Association of Realtors revised down the annual pace of existing home sales by almost a million units. Oops.

The Behavioral Economics of Leftover Pizza

Jared would be proud of me. Whenever I grab lunch to eat in my office, I head over to Subway for a six-inch Veggie Delite with provolone. Just 280 calories. Yum.

Depending on my mood and workload, I usually gobble down my Subway lunch between 12:15 and 1:00pm.

On Monday, though, I started eating at 11:22.

Like any good economist, I asked myself why. What inspired me to eat an hour early? Did I face some new incentive or new constraint that caused me to eat sooner?

No, I didn’t. Monday was a normal day. No new incentives, no new constraints, no other changes.

Except for one other thing: I brought lunch from home. Two slices of leftover BBQ chicken pizza. Also yum.

Small slices - this pizza will go far

If you are a well-trained neoclassical economist, your initial inclination will be to search for a subtle link between these facts. Perhaps cold pizza tastes better at 11:22 than an hour later. But that’s not true. Perhaps I ate early because I saved on travel time to Subway. No dice; Subway is only 90 seconds away.

Perhaps these facts are unrelated, a mere happenstance. No again. From long experience I can tell you that I always eat lunch earlier when I bring it from home than when I get it at Subway. It’s a law of nature. Indeed, I have sometimes eaten lunch as early as 10:30 on days I brought it to work with me. This is particularly likely if I put the lunch in my desk, rather than in the refrigerator down the hall.

The explanation for this behavior is, of course, psychological or, in the lingo of economics, behavioral. My lizard brain excels at knowing when food is near. And in getting me to eat it. Millions of years of natural selection didn’t favor creatures that wait an extra hour or two before they grab lunch. If the food is at hand, eat it now.

So every time I bring lunch to work, I set off a battle of wills. My rational, patient, busy self who likes to eat around 12:30, and my primordial brain that wants to eat when the eating is good.

That old brain has, if you will, the upper hand. It knows how to get what it wants. All it needs to do is remind me that food is near. I often feel as though lunch is calling to me from my desk drawer or, slightly more faintly, from the refrigerator. But that’s really the lizard brain doing its thing.

Ignoring that voice takes willpower. But that saps the mental energy I need to focus on my work. To shut my lizard brain up, I have only one choice – to get lunch over with. So on Monday I happily started in on my six slices of pizza at 11:22, washed them down with some iced green tea, and got back to work.

Perfectly rational behavior, I should note, given my urges, yet irrational as well measured against my “real” eating preferences. So it goes in the battle between our inner selves.

But wait. Didn’t I say I brought two slices of BBQ chicken pizza from home? How did I end up eating six?

Don’t worry, I didn’t steal a co-worker’s pizza from the refrigerator (if such thefts are a problem for you, please see this post).

Instead, I played along with another feature of my lizard brain. Eating six slices of pizza is much more filling than eating two. So I divided each of the two large pizza slices into three smaller ones. I then got to enjoy eating six slices, not just two.

I realize that sounds kind of insane. My rational, neoclassical side agrees. But it works. Perfectly rational given my urges, yet irrational as well. Such is life.

Note: Pizza photo from Chocolate on my Cranium.

Avoiding Road Kill in Ghana

In Washington’s economic circles, the only animals we usually have to worry about are hawks and doves. (And the occasional raccoon or vole.)

If you’re doing development research in Ghana, however, things are more complicated.  Zipping from village to village on her motorcycle, my friend Liz has become intimately familiar with the behavior — often stochastic — of different animals when confronted with a moto rider:

Goats are the ideal animal to encounter on the road in Northern Ghana. Street smart and properly aware of their place in the road hierarchy, they will run away and off the road at the approach of a vehicle. …

While goats are the ideal animal to encounter on the road, sheep are bane of Ghanaian drivers. Dismally stupid, they will invariably run directly into traffic. … The difference in behavior between sheep and goats makes distinguishing the two a key survival skill in Tamale. Remember: tail up, goat; tail down, sheep.
If only it were that easy to distinguish the real budget hawks and doves.
 
 

Preparedness 101: Zombie Apocalypse

The Centers for Disease Control offers emergency preparedness tips with a sense of humor:

So what do you need to do before zombies…or hurricanes or pandemics for example, actually happen? First of all, you should have an emergency kit in your house. This includes things like water, food, and other supplies to get you through the first couple of days before you can locate a zombie-free refugee camp (or in the event of a natural disaster, it will buy you some time until you are able to make your way to an evacuation shelter or utility lines are restored). Below are a few items you should include in your kit, for a full list visit the CDC Emergency page.

     

  • Water (1 gallon per person per day)
  • Food (stock up on non-perishable items that you eat regularly)
  • Medications (this includes prescription and non-prescription meds)
  • Tools and Supplies (utility knife, duct tape, battery powered radio, etc.)
  • Sanitation and Hygiene (household bleach, soap, towels, etc.)
  • Clothing and Bedding (a change of clothes for each family member and blankets)
  • Important documents (copies of your driver’s license, passport, and birth certificate to name a few)
  • First Aid supplies (although you’re a goner if a zombie bites you, you can use these supplies to treat basic cuts and lacerations that you might get during a tornado or hurricane)

Once you’ve made your emergency kit, you should sit down with your family and come up with an emergency plan. This includes where you would go and who you would call if zombies started appearing outside your door step. You can also implement this plan if there is a flood, earthquake, or other emergency.

ht: Alex Tabarrok

Chain, Chain, Chain, Chain CPI

Over at the Moment of Truth project (a continuation of the president’s fiscal commission), Adam Rosenberg and Marc Goldwein make a compelling case that the government should use a different inflation measure when calculating cost of living increases and indexing the tax code:

Maintaining purchasing power in spending programs and indexing various parts of the tax code is an important policy goal. However, policymakers should ensure that the most accurate measure of inflation is being used.

To correct the problem of over-indexation, many have proposed switching to the chained CPI [consumer price index] to provide a more accurate measure of inflation for indexed provisions in the federal budget. This switch was recommended by the National Commission on Fiscal Responsibility and Reform (“Fiscal Commission”) and the Bipartisan Policy Center ‘s Debt Reduction Task Force (“Domenici-Rivlin”). It has been incorporated into a large number of other plans, including from the Heritage Foundation on the right and the Center for American Progress on the left. An overwhelming majority of economists from both parties agree that the chained CPI is far more accurate measure of inflation than the CPI measurements currently in use.

In addition to improving technical accuracy, switching to chained CPI would have the secondary benefit of reducing the deficit – by about $300 billion over the next decade alone.

For the reasons they mention, I endorse this change and predict it will be part of any “grand bargain” on America’s budget.

With apologies to Aretha Franklin (and any of you with sensitive music sensibiities), let me suggest a theme song for the effort:

Chain, Chain, Chain, Chain CPI

Chain, chain, chain, chain, chain, chain

Chain, chain, chain, chain CPI

For these long years, we have indexed all wrong

We pay too much, that leads to fiscal pain

And now money’s getting tight

But we have no need to cry

We know what to do, oh a better measure we can try

Chain, chain, chain, chain CPI

P.S. To my readers who believe that the regular CPI understates inflation, rather than overstating it: Yes, Aretha’s song is “Chain of Fools”. And yes, that makes it easy for you to make up lyrics that mock the chain CPI rather than endorse it. Have fun.