Wednesday, March 21, 2012

Bernanke's college lecture series

link to 1rst lecture
link to 2nd lecture

The PowerPoints for these lectures will eventually be available at the following link:

Link to Fed Board of Governors' web page on lecture series

A brief summary of this lecture can be found in the following articles (and many others)

WSJ (2-21-2012 Bernanke Goes Back to School by JON HILSENRATH and KRISTINA PETERSON


Washington Post (3-21-2012) Bernanke revisits college delivering first of 4 lectures on Federal Reserve at GW University

Despite having read quite a few books and articles about the Fed, I still learned something from Bernanke's lecture. Bernanke, after all, was an academic master of the economic history of the Great Depression and the Fed before assuming his current role as Chairman of the Fed. One tidbit that I learned was why Walter Bagehot (1826-1877) merits having a standing column in the Economist magazine named after him. In addition to an early being editor-in-chief of the magazine, Bagehot was one of the first to analyze and write about the benefits of a central bank. I also finally learned how to pronounce his name; it sounds like badge-it.

Class, your challenges are:
1. list the advantages of a central bank outlined by Bagehot.
2. list three reasons Bernanke is not in favor of a gold standard. He gave MANY reasons.

What do you think about the gold standard, and why do you think it periodically pops up in politicians' wish lists?

Friday, March 16, 2012

The case for corporate tax reform
In this video clip, Dr Madsen Pirie, President of the Adam Smith Institute, is attempting to prove that economics is fun. Even more challenging, he is trying to make the economics of taxation fun.

In addition to telling stories about the lengths to which people will go to avoid paying taxes, he summarizes Adam Smith's advice to the government official trying to design a good tax:

1. keep collection costs low
2. publicly announce rates and collection methods (minimize corruption)
3. make paying taxes convenient for tax payor (ex. taxes due on payday)
4. levy taxes according to ability to pay (that's where the money is)

Dr. Pirie suggests a 5th rule is needed if productive entities are mobile.

5. the tax should not kill the goose that lays the golden egg
 (ex. corporate tax rates should not be so high that corporations move abroad)

In the following WSJ opinion piece, Hassett and Hubbard discuss the nuts and bolts of various corporate tax reform proposals currently floating around Washington. They also emphasize that we can no longer consider the U.S. a closed economy, and that we must recognize that corporations are mobile. They discuss several recent studies that suggest the true burden of high corporate tax rates falls on workers, who garner lower wages and/or lose their jobs.

Thursday, March 1, 2012

Dow Jones Industrial Average Peaks Again
Short 2 min summary - one of many great intro videos from Investopedia

WSJ News Hub discussion on the importance of the Dow reaching 13,000 points again:

As in the videos, this post from correspondents from the Economist, , argues that there is nothing magical about a nice round number like 13,000.  It also lets finance newbies master a few facts to impress an interviewer:

1. The Dow Jones Industrial Average (DJIA) only tracks the stock prices of 30 stocks (which change over time).

2. The DJIA uses a silly method to compute the average stock price (with no weighting for market value), just to be consistent with how it was first computed back in the 1890's by WSJ editor Charles Dow and his business associate Edward Jones. To keep the index steady over time in spite of stock splits, dividends, and changes in composition, the DJIA is not simply the average of 30 stock prices.

3. The limitations of the DJIA aren't really important. The DJIA closely follows the trends of better stock price indexes (like the S&P 500). However the DJIA is widely followed by those who don't know as much as you do now, and therefore has a big impact on market psychology.

A quick search of the BLS website reveals that the CPI (all urban consumers, all goods) was 208.936 in October 2007 and 226.665 in January 2012. Using these CPI values to adjust for inflation, the Dow would have had to reach 15,366.44 = 14164.53x(226.665/208.936) by the end of Jan 2012 to be equivalent to 14164.53 in Oct 2007. As nice and round as 13,000 sounds, the market still has a long way to go to reach its previous heights.

In case you are curious, the current 30 companies represented in the DJIA are listed below. Note that many of these companies, such as Disney and Microsoft, are no longer heavy industrial companies.