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May 29, 2009

Is the study of economics too hard or too boring?

By Cindy Ivanac-Lillig

Personally, I didn’t think I would ever end up studying economics at the graduate level. It sort of happened by accident. I was interested in international development and never really gave much thought to economics. As I reviewed graduate programs, I was surprised to learn what a central role economics would play in my studies. I can now, of course, appreciate how humorous this notion was -- how did I plan to study what was in essence economic development without economics?! However, I have come to really enjoy what some people call the “dismal science” and appreciate how it has helped train my mind to think through any number of issues.

I tell my class that “thinking like an economist” is not about being able to interpret charts and graphs -fortunately for them. Rather, it’s about being able to use some imperfect tools to weigh an issue’s costs versus its benefits in order to make informed decisions – be it about the minimum wage, the value of public parks, subsidized lending, or personal financial decisions. And to be frank, I have actually come to the opinion that it’s critical for our students to walk out of college with this knowledge.

But why are students ignoring or avoiding this crucial field of study? I recently read an interesting piece in the Journal of Economic Education called “The Overconfident Principles of Economics Student....” It discussed research comparing what students thought they knew before an exam with how they actually performed on the exam. The research showed that many more students felt they knew the material than really did and thus felt disappointment after they received a lower-than-expected grade. The researcher, Paul Grimes, suggests that such disappointment at this introductory level could be a reason why more students don’t explore economics as a major. Grimes states:

For years, academic economists have lamented their courses’ reputations and their relative inability to attract and maintain majors. The experiment results suggest that the dissatisfaction students often express about their introductory economics courses may be rooted in overconfidence and unmet performance expectations. / …academic economists should begin to ask themselves if the traditional “talk and chalk” (Becker and Watts 1996) approach still used in the typical large principles class contributes to overconfidence and unmet expectations. In classes that rely heavily on lectures, students are not actively involved and do not receive significant amounts of instructional feedback concerning the state of their understanding and mastery of material.

As Grimes notes, maybe we need to revisit how introductory economics is taught. The irony is that we teach the importance of expectations in economics, yet our existing teaching models often leave students unable to reliably predict how they will perform when their knowledge is tested. Economics does not have to be extremely hard, or for that matter boring, but perhaps are current teaching models are both – what do you think?

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Posted by Cindy at 11:19 PM | Comments (11) | TrackBack

May 22, 2009

Leading Indicators Send Message; Next Up Chicago Fed National Activity Index

By Cindy Ivanac-Lillig

The Conference Board’s Leading Indicator Index (LEI) came out yesterday and was in positive territory for the first time in 10 months (up 1%). The same report also includes the Coincident Index, which reflects the indicators that are closely tied to what is currently going on, and the Lagging Index, which reflects indicators that are historical in nature. Click here to see the report.

The LEI probably grabbed most of the headlines for two reasons: first, it was positive, which points to a recovery; and second, the expansion of monetary supply was not a contributing factor to its positive result, which indicates that there may be some signs of more stable/longer-term growth. For a complete list of the ten (10) indicators included in the LEI click here.

On Tuesday, the Chicago Fed’s National Activity Index (CFNAI) will be released. The CFNAI is a weighted average of 85 indicators of national economic activity. The CFNAI measures how far above, or how far below, our historical long-term growth rate we are performing. It has an impressive track record of correlating to quarterly real GDP growth (which makes it something of a coincident indicator-- an indicator that shows the current temperature of the economy). The CFNAI’s 3-month moving average turned slightly less negative in the last report, and it will be some additional good news if that continues on Tuesday. Check it out here.

If the CFNAI is showing a stabilized and perhaps improving situation on Tuesday, the question will increasingly become, when will the recovery start? Many analysts say that the LEI has a 2- to 10-month lag in terms of the time it would take before you would see actual GDP growth, which is a pretty big window.

Beyond looking at the trends of these indices, have our drastic economic changes rendered benchmarks for time lags, inflation periods, etc. less helpful this time around. What do you all think?

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Posted by Cindy at 10:41 PM | Comments (1) | TrackBack

May 18, 2009

Wade’s on a Leave Of Absence

Recently, I’ve received a couple of emails inquiring why my frequency of blog postings has subsided. No, I’m not sick, and I’ve certainly not lost my passion for economics.

The answer is pretty straight forward. Most of last month, I was out of the office. And currently, I’m on a leave of absence – conducting research. I’m scheduled to return to the Fed in mid-September. Until then, I leave you in good hands with Ms. Cindy.

Enjoy her postings. I’ll be in contact later this year.

Take Care,
Wade Rousse

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Posted by Wade at 4:03 PM | Comments (1) | TrackBack

May 12, 2009

Global Indicators and Macroeconomics

By Cindy Ivanac-Lillig

I recently wrote a short blog entitled, “Students of Global Finance,” in which I asked if the economic indicators the Fed and other central banks use are still relevant and whether or not this financial crisis has shown them to be insufficient. A reader responded to the entry and briefly discussed adding indicators that would relate to more broad/global credit levels as well as asset price levels.

There is an interesting commentary out today from a former deputy governor of the Bank of England, John Grieve, entitled, “Central Banks Need to Avoid Fighting the Last War.” The article basically states that monetary policy orthodoxy – that focusing on output gaps and price stability will lead to macroeconomic stability – not only has been insufficient but has been proven ineffective during this crisis. Mr. Grieve states, “Neither inflation nor the estimated output gaps in Europe and the U.S. in 2006-2007 suggested we were on the verge of economic meltdown.” Read Mr. Grieve’s comments.

What do all think? Do you agree with Mr. Grieve? Have modern macro models scored an ‘F’ and therefore not worth saving or do they just need to be tweaked?

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Posted by Cindy at 8:45 PM | Comments (0) | TrackBack

May 8, 2009

Reflection on Economic and Financial Literacy: From Bananas to Stress Tests

By Cindy Ivanac-Lillig

During the month of April, I spent lots of time on the road for Money Smart Week, a successful and growing financial literacy campaign coordinated by the Chicago Fed. As I traveled and spoke words of welcome – or closed sessions thanking partners and residents for coming – it dawned on me that although I have spent years as a financial analyst, financial consultant, and economics instructor, my personal finance choices/plans are mediocre.

I had the pleasure or displeasure, depending on your point of view, of listening to many dry anecdotes in the last few weeks about the value of piggy banks and the importance of budgeting. And as I walked up to the lectern at my last Money Smart Week event, I realized that perhaps being financially and economically literate is not knowing that buying a banana at Starbucks is not a good financial decision because it is cheaper elsewhere. Rather, being financially and economically literate is knowing that one has to weigh costs against benefits. In this case, weighing the cost (banana is cheaper elsewhere) against the benefit (having something healthy to eat in the airport) can lead to a choice that is informed and therefore financially and economically literate. By the way, I have bought many a banana at Starbucks.

Now, why am I bringing this up on a blog where we talk economics and Fed policy? I am not sure, maybe because of how my time has been spent these last few weeks. Or perhaps, there is something deeper in human behavior and therefore economic behavior that doesn’t fit the world of economic theory. Perhaps the reason I say that I am extremely financially and economically literate (putting aside the two decades of schooling) is that I know to weigh the costs and benefits and feel pretty capable in doing so. But then why are my financial plans mediocre? I think it is probably because humans in general and me, in particular, are not very good at properly evaluating medium and long-term costs/benefits. Do I weigh how much I could save versus how healthy I would be by not purchasing the banana by year 2020 ? Not really -- because this scenario becomes very complex. Instead, I focus on the relatively short-term, as that is easier to understand.

Maybe our natural aversion to complex things and focus on the short-term contributed to our current financial situation. As world trade became more globalized and financial product innovation took off, many institutional/personal investors felt ill equipped to judge medium / long-term costs of complex products and focused on computer models and short-term costs. Evaluating long-term costs requires human analysis, transparent systems, and the knowledge that human behavior may be prone to try to avoid doing this!

This week’s bank stress tests may be a good entrée into this type of longer-term analysis for our banking sector. What do you think? Have I gone too far in tying a my Starbuck banana purchase to the stress tests ? (smile)

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Posted by Cindy at 12:13 AM | Comments (8) | TrackBack