Handling Hidden Costs

As we live our lives, there are tendencies to overlook the costs of our actions.  In the blog “Unsettling Economics”, the discussion of hidden costs in society is mentioned, and made me think about the costs we overlook in everyday life.

In the post, the example used was a murder by a war veteran claiming trauma.  The point made is that the costs of war didn’t account for the effects seen in this scenario.

Hidden costs in everyday life I feel many people overlook include grocery shopping.  Suppose you are looking to go to the store, and there are three choices: the local market across the street, the Albertsons 10 minutes away, and the Costco 25 minutes away.  You realize that the prices of goods at the places get cheaper as you go further from your home, but there are actually some hidden costs you and others likely forget to factor into the decision making process.  For the Albertsons and Costco, going to either of the two locations for a discounted gallon of milk and some pasta may not be worth the costs (including gas and valuable time) of getting to the store.  Furthermore, Costco puts a barrier to enter the store, and the costs must be factored in for each time one attends the bulk store.

So what do we do to attempt to counter the hidden costs? We try to buy more to make the trip more valuable.  But in doing so, Albertsons and Costco get what they want from you.  While you may not have fallen for the hidden costs that typically shape the initial journey to the market, you have exceeded to purchase products that may not have been necessary.  Instead of buying the milk and pasta, you purchase Oreos, beer, and some plastic cups.  Hidden costs surround us everywhere we turn, and if one is not careful we will fall into the same trap over and over again.

On the macroeconomic level, a hidden cost that can be pointed out and not necessarily accounted for until it is too late comes when forecasting models.  Because of the art of using ARMA, specifically trying to accurately forecast data via historical figures, the attempts to rely heavily on historical data can be overlooked.  The costs, while in the previous example were merely a few dollars, could result in heavy swings among the economy as a whole.  The recognition of the harm in improper forecasts is important for economists in order to build faith among Americans and to bring stability to the economy.

The article, while short, really opens the mind up to the hidden costs we forget about every day.  So take some time to think of something that you may overlook, and really ask yourself what we could be doing to accurately choose the right decisions, where the costs never exceed the benefits.

References:

1. “Class, Pschology, and Capitalism”. Unsettling Economics.

Self-Driven Cars, Possible and Wanted?

When one thinks of the thought of self-driven automobiles, the distant future is likely the image.  The state of Nevada says otherwise; last week Nevada established regulations to operate self-driving cars, opening up a boatload of ways to improve the economy of the United States.

Robert Bruegmann reports that these vehicles would have the technology to not only operate themselves, but would be faster, safer, and offer a more comforting ride for consumers.  Bruegmann suggested the two likely outcomes that would result in the technology: more sprawl or higher density cities.

The concept of sprawl in urban economics occurs when people are willing to live further from the city center, likely due to the actual location of their job or the low enough cost of commuting to the city center.  With increased technology from self-driven cars, people would have the capabilities to live further away from the city centers.  This option would grant people the luxury of a suburban lifestyle, one that has been painted as the “American Dream” over the years.

The other result of the cars would be higher density cities.  Bruegmann’s logic is that if technology for self-driven cars improves, so would other transportation devices.  The proposal of combining the private and public transportations in a form of a self-driven taxi would create less demand to drive a personal car into the city center (this assumes the lowered costs of improved technology, and in fact the self-driven taxis would be cheaper than the cost of owning a car).  The land that would typically be used for car spaces would then have the potential for housing or commercial use, increasing the density of the city.

Now, there are problems with both of the results.  The effect that sprawl has on the environment provides high costs in the long run.  Along with this, unless the technology is improved in other variables (gas or electric powered cars?) the costs of sprawl will be far greater than the benefits. 

Ed Glaesar’s Triumph of the City extensively states the problems with sprawl.  In most cases, cities aren’t built to cater for sprawl, and though certain cities such as Houston may prosper from self-driven cars, technology will not benefit sprawl to the necessary extent. (Glaesar)

The difficulties with high density cities are less of an economic cost than a social disruption.  In order to remove the parking lots, people must invest not only the self-driven cars, but the flexible system (self-driven taxis) Bruegmann suggests.  In New York City, taxis are a common form of transportation.  The assumed lower costs of self-driven taxis would surely increase utility of the taxis, but people would need to give up owning their own cars (which would still be more convenient in urgent measures), along with potentially destroying a service that employs numerous Americans around the country.  If people are willing to transfer these lost jobs to other work sectors and take the lowered costs of driving than perhaps the self-driven car may work, but that can’t be easily predicted.

As a whole, Bruegmann brings valid points on why self-driven cars can improve our society, but the biggest question remains whether society will accept the changes.  Increased technology improves productivity, but with the removal of jobs, and the environmental costs that may occur from sprawl, will people truly want these cars?

References:

1. Bruegmann, Robert. “Driverless Car Could Defy the Rules of Sprawl: Robert Bruegmann”.  Bloomberg. http://www.bloomberg.com/news/2012-02-21/driverless-car-could-defy-rules-of-sprawl-commentary-by-robert-bruegmann.html  
2. Glaesar, Ed. “Why Has Sprawl Spread?”. Triumph of the City. 2011. Penguin Press.

Social Norms and the Effect on Forecasting

Perception always plays a large part in how people interact with one another.  The damage or gains those perceptions or the norms developed by society play an interesting part in today’s economy.  Understanding Society writes about the layers that people place on society, and how any stereotype will affect the perception (and potentially the outcome) of the act by another person. 

The concept is simple enough.  For my behavioral economics course, I have been reading Predictably Irrational, by Dan Ariely, which discusses the tricky nature of social norms.  People build these standards that would otherwise be unheard of; however, we have programmed ourselves to believe that the certain activities are true. 

An example would be connecting the bail out of Ireland in 2010 to Angela Merkel’s statements prior to the bail out.  Merkel, the Chancellor of Germany, spoke out to the EU and investors that Ireland (who at the time was struggling economically) was going to fail if Germany and the rest of the EU didn’t bail them out.  As predicted, the Irish economy collapsed.  But was the reason because of the actual instability of the economy or the perception of the economy?

Economists post bail-out believe that the perception of a bail out was enough to push investors over the edge.  Calculations made and data show that Ireland was easily self-sustainable for at least 6 months, but was unable to recover when investors wanted out.  Combined with the words from a powerful figure, the situation is merely a reaction from an action.  Is this good for our society?  In this case, it is easy to say no.

But when we look at the situation from the other side, the recent growth in the US economy could be attributed to big talk from large access points.  Certainly hearing Clint Eastwood tell one that the US is fighting back would help convince Americans that the US economy is on the rise, and numerous reports by CNN and Bloomberg supporting job growth and unemployment decrease can convince investors that it is time to invest in the US once again.  I find that the presentation to the public on these matters is really the crux to the short term growth.

Remember that most economists and America were convinced the housing bubble wasn’t a bubble, and the effects of overinvesting in the economy.  One can be certain that the market itself can certainly be disguised by the perception and layers that society presents at a domestic and global level.

References:

1. Ariely, Dan. “The Costs of Social Norms”. Predictably Irrational. 
2. “Social Subjectives”. Understanding Society. http://understandingsociety.blogspot.com/2012/02/social-subjectivities.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Understandingsociety+%28UnderstandingSociety%29

Linsanity in China? The Plague that Could Change a Country

February 2012 may forever be known to NBA fans as the time the nation (and the world) caught the epidemic known as Linsanity.  Jeremy Lin is the perfect underdog story, to some extent: a Harvard graduate, who failed to get drafted in the NBA, was cut by 2 teams, until finally flourishing on the New York Knicks.  But what does this have to relate to economics?  The Economist blog states that the people of China, while currently rallying around Lin, may not share the same feelings from their government towards the Asian-American player.

The blog goes on to discuss the numerous reasons, but the one that stands out most is the clear cut opportunity that Lin has been given over his lifetime.  The United States system has allowed Lin to excel not only in athletics, but in academics.  His success in both fields landed him at the most prestigious university in the world, along with playing basketball at the highest level of competition.  At the current time, China doesn’t offer the ability to gain this similar experience, and it may hurt the overall perception by Chinese citizens.

If Chinese people rally around Jeremy Lin, a man who was able to accomplish to very different trades, and see the lack of opportunity in their own country, what incentive does this show to future generations when the youth attempt to pursue their dreams?  I believe that it is essential to have exposure to an array of skills, whether it is sports, academics, or music.  The feeling of becoming pigeon-holed because the opportunities are not available is something that I cannot imagine and would not hope for anyone to experience.  In fact, I could see the consequences building up beyond the individual sunk potential.  The lack of exposure could cause less economic growth and development due to losses in critical thought and interpersonal connections via cross-cultures. 

I may be going out on a limb with this thought, but the matter is that one person can truly make an impression on youth.  In America, many will see Lin and be inspired to not only become a great athlete, but to succeed in the classroom.  In China, the opportunity to reap the benefits from being successful at both of these trades may not be there due to the current position in the Chinese system.  I am highly interested to see how China as a whole reacts to the Linsanity and what effect he may have on the country in the future.

References:

1. “Stop the Linsanity?”. The Economist. http://www.economist.com/blogs/banyan/2012/02/chinas-new-sports-problem

  

And the Manufacturers Come Marching Back...

The past month has been filled with questions on the growth of the manufacturing industry in the United States.  First, corporations were making claims to bring back manufacturing.  Many economists didn’t buy this.  Then, the reports were released of the 50,000 jobs added in January.  Now, more talk by large corporations claim they plan to bring more jobs back to America. (Reuters)

CEOs from Boeing and GE told Reuters that they have witnessed overexpansion within the global economy, and the competitive labor costs in the United States matched with the required technology costs has allowed for plenty of growth in the future for the American economy.

A completely separate point was made by the Manufacturing Institute and Deloitte: 600,000 jobs exist, however, the supply of skilled workers to fill the positions is lacking.  Executives claim to be looking for students educated in the fields of science, math, technologies, and engineering.

The statement makes me wonder the truth about the barriers to hiring for the machinists positions.  Tons of students are coming out of four year universities, and I believe that the difficulty doesn’t come from the lack of qualified job seekers, but the difficulty in matching these candidates to the specific job position.

A prime example for skill matching can be seen on the campus of the University of Oregon.  There is a willingness to pay that many Oregonians feel is far too high when it comes to leaving the state of Oregon.  While there may be positions outside of the state of Oregon, students fresh out of college still want to seek positions in Portland. 

Another problem comes into play is the idea of working in a manufacturing position.  The requirements would surely require one to be working long hours in a factory, and from my personal experiences, the current generation has formed quite a bias towards this work.  With videos and educational reports over the years telling us of the terrible conditions found in factories, whether it is the accidents or the strain that these positions may place on a person, the costs do not outweigh the salary and employment. 

I believe that if these problems can be solved, there is a small amount of growth that can be seen the manufacturing industry in the United States, and the currently vacant slots will be filled up once the proper candidates are matched with the positions.  But as I have stated in the past, the uncertainty towards corporations striving for cheaper variable costs will always exist, and the long term sustainability in manufacturing will surely be tested.

References:

1. Malone, Scott.  “After ‘Lemming’ Exodus, Manufacturers Look to U.S.”. Reuters. http://www.reuters.com/article/2012/02/13/us-usa-manufacturing-onshoring-idUSTRE81C1B720120213