Thursday, December 31, 2009

Will High Pork Prices Ruin the Holidays?

The supply and demand model is the core of microeconomics. You can never have too many examples in your classroom. Here is a simple example that will help students distinguish between shifts in demand and shifts in supply. As a bonus, the case also illustrates import restrictions, if you want to use it in conjunction with your international trade lectures. The attached PowerPoint slides can either be used as part of a classroom discussion, or printed out (with the answers deleted), and used as a quick quiz.

Pork is a popular dish in Malaysia among those who celebrate the Chinese New Year holidays. (About a quarter of Malaysia’s 28 million people are of Chinese descent.) This year, though, consumers are grumbling at high pork prices, which have reached 7.65 Malaysian ringgits per kilo at the wholesale level (about $1 per pound) . They are blaming anyone they can think of—pork producers, the government, whoever.

What is behind the high prices? Beh Kim Hee, chief of the pork section of the Federation of Livestock Farmers Associations of Malaysia, says it's normal supply and demand. Demand is up because of the holidays. At the same time, the need to upgrade production facilities to meet sanitary standards is raising the cost of production.

Those who blame the government seem to be on to something, as well. The government bans the import of fresh pork from neighboring countries like Vietnam, China, and Thailand, where it is a third or more cheaper. National Pork Sellers Association president Goh Chui Lai has urged the government to end the ban. Not surprisingly, Mr. Beh, the pig farmers’ representative, objects to removal of the ban.

To download your free PowerPoint slides for this item, click here. Source: Based on information from Meat Trade News Daily, December 31, 2009, supplemented by other sources. To view the original news item, follow this link.

Tuesday, December 22, 2009

Carbon Prices Fall on Copenhagen Results

The principle of revealed preference, a cornerstone of economic thinking, tells us that if you want to know what something is worth, look at how much people are actually willing to pay for it. The cap-and-trade approach illustrates revealed preference in action. It is based on the idea that a tight cap on emissions will induce polluters to pay a relatively high price for carbon permits, thus giving them a substantial incentive to clean up. A more lenient cap, or uncertainty as to how tight the cap will be, will lead to low permit prices and weak incentives to control pollution.

Following this reasoning, the price of carbon permits under the European Union's cap-and-trade system for greenhouse gasses should provide a better measure of the success or failure of the recent Copenhagen conference on climate change (COP-15) than any number of newspaper editorials or political press conferences. Permit prices peaked at about 15 euros per ton as the conference started on December 7, reflecting optimism that the 193 participating countries would reach a relatively strong agreement to follow up on the expiring Kyoto Protocol. However, when the conference ended on December 20 with only the broadest agreement on general principles, permit prices dropped to under 13 euros per ton.

Commenting on the outcome of the conference, business executives most of all deplored the lack of certainty about the future direction of climate change policy. Until they have some indication of how serious governments are about climate change policy, they are likely to delay the huge investments that will be necessary to slow greenhouse gas emissions anywhere close to the targets environmentalists see as necessary.

To download a free set of PowerPoint slides summarizing the results of the Copenhagen conference and their effect on carbon prices, click on this link. If you find the slides useful, please post a comment or send me an e-mail.

Saturday, December 19, 2009

How Healthy are US Banks?

December has seen a spate of good news about US banks. Many banks report a return to profitability, with record earnings in some cases. The largest banks have repaid, or are in the process of repaying, the money that they borrowed from the government's Troubled Asset Relief Program (TARP). The Treasury even claims to have earned a profit on TARP funds repaid so far. Does all this mean that the banking system has returned to health?

Not so fast. There is some bad news, too. On balance, it appears that the US banking system has a long way to go to be fully healthy. Here are some of the negatives:
  • Bank lending activity has not increased since the inception of TARP in October, 2008. In fact, by some measures lending has declined.
  • Bank profits are coming from trading activities, not from lending. This limits the positive spillover from Wall Street to Main Street.
  • Banks point out that one reason they are not lending more is that lending remains risky in a weak economy. This argument seems justified at least in part. For example, the percentage of nonperforming loans continues to rise, especially at the largest banks.
  • The Federal Deposit Insurance Corporation (FDIC) reports that the number and size of problem banks continues to increase. "Problem banks" are those that have received low marks on regulatory reviews, even though they remain solvent for the time being.
Even the Treasury's claim to have profited from TARP repayments is subject to question. As part of a deal on terms of repayment, some banks have received lenient rulings on carry-forward of past losses. These rulings will cost the Treasury billions of dollars in future tax revenues, offsetting any TARP profits from interest payments and sale of warrants. Furthermore, although the largest banks have repaid their TARP funds, many smaller banks have not, and some may never succeed in doing so.

Some critics believe that banks should not have been allowed to repay TARP funds so soon. They say that the primary motive for early repayments is the desire to escape government limits on bonuses for top executives and traders. Early repayment may come at the expense of shareholder value, and failure to rebuild capital could lead to the need for more bailouts in the future.

To download a free set of PowerPoint slides summarizing these points, click on this link. If you find the slides useful for your course, please post a comment!

Thursday, December 17, 2009

Microsoft Settles EU Antitrust Case

On December 16, the European Union announced a settlement in its long-running antitrust case against Microsoft. The settlement responded to a complaint that Microsoft's practice of bundling its Internet Explorer web browser with the Windows operating system constituted unfair competition.

In contrast to the 2007 settlement of an EU complaint regarding media players, which cost Microsoft more than $2 billion dollars, this time no money will change hands. Microsoft agrees to provide European users with a pop-up "ballot" that will allow users to "vote" on their choice of web browser. (Microsoft points out that users already had such a choice.)

To download a free set of PowerPoint slides describing the settlement and reviewing the history of Microsoft's antitrust troubles in the US and the EU, follow this link.

Wednesday, December 16, 2009

Has Unemployment Turned the Corner?

Monthly employment data for November, 2009, finally showed a glimmer of good news. The unemployment rate fell to 10.0 percent from 10.2 percent in October, which represented the peak rate for the current recession.

Although by many measures the current recession is the worst since the Great Depression, that may not be the case for peak unemployment. It now appears unlikely that the unemployment rate during the current business cycle with exceed the 10.8 percent rate reached in November-December 1982.

As sometimes happens, data from the BLS household survey payroll employment survey pointed in different directions. The payroll survey showed a net loss of 11,000 jobs in the month, but the household survey showed an increase of 227,000 jobs. The difference can be attributed to one of two sources. First, the household survey is much smaller--just 60,000 households vs. 400,000 business firms for the payroll survey. As a result, the household survey is more volatile and is subject to greater sampling errorl Second, the household survey counts several kinds of employment that are not included in the payroll survey. The most important of these are farm jobs, self employment, unpaid workers in family businesses, and workers who have jobs but are temporarily absent from them without pay because of weather or other factors.

Follow this link to download a free set of PowerPoint slides with highlights of the November employment data.