Marginal Thoughts

Inflation Dashboard

Wed, 18 Jan 2012 15:55:07 +0000

By Cindy Ivanac-Lillig Check out the Atlanta Fed's inflation dashboard. It visually depicts where inflation is in the context of a longer term trend. As you drill down into the component parts, you get a flavor for not only which direction the indicators are moving, but how similar indicators relate to one another. In this case, a picture really does say a thousand words! Let me know what you think --

Groupthink and Economics

Fri, 13 Jan 2012 22:43:52 +0000

In today’s NY Times op-ed, “The Rise of the New Groupthink,” Susan Cain bemoans the fact that many workplaces and schools champion the idea of teamwork and group projects. The article points out that there is little scientific evidence that better ideas or greater achievements are produced in groups. It actually may be the opposite. “Privacy makes us more productive,” says Cain. This is interesting, but not terribly surprising to anyone who has sat in a corporate “brainstorming” session. Cain says that group brainstorm sessions suffer from groupthink: “People… instinctively mimic others’ opinions and lose sight of their own…” A neuroscientist, Gregory Berns, discovered that is partly chemical. We activate a small organ in our brain that is associated with the fear of rejection. However, the one exception that Cain points out is “electronic brainstorming.” On the Internet, it appears that groups outperform individuals, especially really large groups. Presumably, this is because we lose our fear and therefore can combine what is powerful about individual thought with the sheer number of ideas from large groups. Cain writes of electronic brainstorming, “It’s a place where we can be alone together – and that is precisely what gives it power.” Now, you are thinking, how does this relate to economics? After reading Cain’s piece, I was reminded of an econ blogging session I attend at last week’s American Economics Association conference here in Chicago. Panelists made the case that blogs’ more informal nature allowed current events and current policy prescriptions to be discussed with various levels of depth in a remarkably short period of time. A panelist noted that today, economic journals are of little use to economic policy-makers whereas blogs are helpful in flushing out ideas quickly and efficiently. The panelist also alluded to the fact that by virtue of the number of contributions, blogs have avoided what many academic journals have been accused of --groupthink. The idea of further democratizing journals and economic policy discussion captured my imagination and left me wondering how we could best use “electronic brainstorming” and other methods of electronic discussion. Electronic publication is one thing; finding ways to capitalize on large groups of experts’ ideas is still quite awe-inspiring and difficult. What do you think about the groupthink dynamic and electronic brainstorming? For my econ friends, what is the middle ground? What could the field do better to try and generate the best ideas and promote interdisciplinary work? And finally, if you are an educator, how has the Internet changed your group assignments? Have you found a way to encourage “a place where we can be alone together”?

Back to the Basics: Interpreting the Bond Market

Fri, 23 Dec 2011 20:13:45 +0000

By Cindy Ivanac-Lillig Investors generally have two choices in the financial market. They can purchase a piece of a company by buying what’s called a stock, or they can lend money to a company, city, state, or country by buying a bond. Under the most basic bond structure, you buy a bond, and the bond issuer pays you interest at agreed-upon intervals. And at the maturity date, the issuer pays you back the principal. Bonds are also often referred to as fixed income investments because of these regular interest payments. (By the way, there are also other types of debt investments that are securitized pools of debt with similar features, such as mortgage-backed securities, but I will leave those aside for now for the sake of simplicity.) It’s interesting to note that more than half of the bonds out there are not government ones, but rather corporate bonds. That means many large multi-national corporations find better financing options by selling bonds than by going to a bank to ask for a loan. In addition, keep in mind that bonds are not available to everyone. Many bond investors are what the industry calls institutional investors. These are typically financial firms that buy bonds as investment vehicles for pension plans, mutual funds, etc. Many of us, in fact, are bond investors through our mutual funds, pensions, and 401K accounts. However, we can’t go out on our own and buy a bond issued by, say, a large Mexican oil company. Another important point to keep in mind is that the bond market is much larger than the equity market. The global equity market is somewhere in the neighborhood of $25-55 trillion, depending on the source. Since the recession, the figures have tended to be on the lower end of this range. The bond market, in contrast, is somewhere in the range of $80-95 trillion. And unlike the equity market, the bond market is more obscure, less developed and more closely traded. So, why spend this much time discussing the bond market? Well, I have had many conversations with my Italophile friends regarding the bond market and I realized that it may be helpful to revisit some of the basics as we digest the latest headlines. I do believe the Italian bond market will be judged based on the country’s economic fundamentals, its ability to grow, its ability to service its debt, etc. However, I also believe that understanding some of the basics of this rather intricate market better prepares us to evaluate some of the policy proposals being discussed. Further, I wonder if the rather unique structure of the bond market makes it more or less sensitive than the equity market to certain policy actions. Think about that for awhile and then share your thoughts. In the meantime, when you read that Italy’s bond auction drew yields above 6%, you’ll now know that means that Italy has to make larger interest payments on its bonds to increasingly more counterparts. And you will also know that those counterparts are a global group of largely financial firms/investors. What are your thoughts on the recent slew of Italian bond market headlines? Did the walk through some of the bond market basics help? If you are an educator, please share how you have incorporated the recent EU sovereign debt troubles into your economics or finance classes. Check out this interesting private report on the structure of global financial markets from Russell Index: (http://www.russell.com/indexes/documents/research/structure-global-equity-markets-July2010.pdf) SIFMA (Securities Industry and Financial Markets Association) Statistics: http://www.sifma.org/research/statistics.aspx

An "Insanely Great" Creative Economy

Thu, 27 Oct 2011 17:07:27 +0000

By Cindy Ivanac-Lillig Steve Jobs' Apple created extraordinary products we use every day. They are extraordinary not simply because we all use them. After all, we all use toasters at home too. What’s extraordinary is that people have an emotional reaction to Jobs' products. There is something visceral and emotional in using a powerful tool that connects you to work, friends, and the community – and looks and feels like art. I think the secret of Jobs’ success was that he created a way for virtually everyone to own art – the same art that he, a billion-dollar CEO, coveted. My take on the phenomenon of Apple is probably not unique, and we may even see something similar written in an economic textbook someday under the title of Innovation. However, I’d like to raise what I think is a more important point: When Jobs' biographer, Walter Isaacson, asked him if there was any one product that he was most proud or liked best, Jobs instead answered that he was most proud of the company itself. Think about that. Maybe the products aren’t the real extraordinary innovations here. It’s true that much of the technology existed before Apple ever manipulated it. Maybe the real innovation is Apple, Inc. Maybe the company itself and how it works is an innovation, one that is still in the process of helping build the foundation of our creative economy. Consider this definition of the creative economy as described by the United Nations Development Program:

“…creative economy...has emerged as a means of focusing attention on the role of creativity as a force in contemporary economic life, embodying the proposition that economic and cultural development are not separate or unrelated phenomena but part of a larger process of sustainable development in which both economic and cultural growth can occur hand in hand.”

If you agree the role of creativity is increasingly important in our economy and our development, the question becomes how we can foster its development. Dr. Benjamin Olshin delivered a paper to the Philadelphia Academies in 2006 that discussed creativity as a process and not simply as an individual thinking “out-of-the-box”:

“In business, when a new product or service is introduced, or in academic institutions when new curricula or policies are discussed, there is often the idea that a simple roundtable discussion or a committee will generate a creative idea…. These failures come from the inability to see that the creative, innovative ideas that society needs are the result of a process…Only through a process can the input of creative people be fully understood and fully utilized.”

Apple seems to have a process that does something special: It allows the input of creative people to be fully utilized. This creative process led to a company that was worth more than Exxon Mobile last year. Let’s learn more about this process and look beyond the cool products. New paradigm shifts in business and technology inevitably require a change in paradigm in other fields, especially education and economic policy. Maybe in a few years we won’t be described as a service economy but a creative economy. And to borrow Steve Jobs’ famous phrase, if we can get this right, maybe we will have an “insanely great” creative economy. What do you think?

The Fed on your iPad

Fri, 07 Oct 2011 20:43:49 +0000

By Cindy Ivanac-Lillig Check it out! Now available for free at iTunes. For those of you that follow the Fed, you won't believe your eyes. It gathers press releases and social media activity from all 12 reserve banks and the Board of Governors....in one screen. What do you think?

Government finances are like...

Wed, 14 Sep 2011 15:57:18 +0000

By Cindy Ivanac-Lillig In speaking about the financial crisis and how it is different than other types of crises, I have often invoked the metaphor of the human body. Banking may be like the circulatory system in our body. The organs may all be in great shape but if blood isn't flowing, everything suffers. Similarly, many have invoked the metaphor of the household when speaking about the government and its finances. The government should behave like any responsible household. If a household has to live within its means, than why shouldn't the government? The problem with this is that although it is simple and memorable, it is not instructive. When a household spends less given the same level of income, it has improved its financial situation. When the government spends less in our current economic environment, it may mean that it will take in less income as well. Government spending increases the purchases of goods and services (economic activity), which increases tax revenue. Government finances are more like a dynamic function of both tax policy and the general health of the economy and less like a simple budget model from personal finance. There is balance of long term and short-term changes the government can make to improve the overall dynamic, but unfortunately this doesn't lend itself to a simple and memorable metaphor. What do you think -- do you have any ideas? Government finances are like.....

More Women = GDP Growth

Fri, 19 Aug 2011 21:23:06 +0000

By Cindy Ivanac-Lillig Long-term economic growth potential is affected by two basic things: more people (resources) and/or more productivity. However, Kathy Matsui recently gave a TEDx speech on “Womenomics” that has me thinking that we could add one more factor: more working women. In this time when most economists are bemoaning the balancing act that many countries face between cutting costs and promoting economic growth, it is interesting to hear something a bit out of the box. Mindset, daycare solutions, regulation, and explicit female participation goals are the four factors she lists as keys to solving Japanese economic malaise and adding up to 15% to their GDP! Perhaps this issue will be the great opportunity that arises out of the ashes of this great recession. What do you think?

Is there any room for morality in economics?

Thu, 28 Jul 2011 22:26:38 +0000

By Cindy Ivanac-Lillig and Laura Perez Recently, Russ Roberts of EconTalk** spoke with Duke Professor Michael Munger about the relationship between morality and economic choices. Munger makes a distinction between what we call “voluntary” in economics with what he dubs “euvoluntary.” Munger’s term, euvoluntary, describes a voluntary transaction that among other criteria has the unique characteristic of not having too great a difference between the agreement (in a voluntary transaction) and the next best alternative. Munger goes on to provide an example in which the transaction is voluntary but not euvoluntary. A man is wandering in the desert, lost with $5,000 in his pocket. Suddenly Tony’s Taco Truck comes over the hill with a sign reading: “Today’s Special: Three tacos for $5, one bottle of water for $1,000 or three bottles of water for $2,500.” The lost man tells Tony that his prices are ridiculous and watches as Tony starts up the truck to drive away. Faced with either dying or paying the exorbitant price, the man reluctantly enters into the transaction. This is not a euvoluntary transaction because the disparity in the next best alternative is enormous. In this case, the next best alternative to the negotiated agreement is death. Many black market transactions are not euvoluntary (organ sales, price gouging after a disaster, etc) due to the disparity between the agreement and the next best alternative, but the interesting question is should they be legal? And, if so, where should the line be drawn? In other words, if you made it illegal to charge $1000 for water, would better choices emerge or would we be left with no water in the desert? What do you think? **EconTalk is a weekly podcast put on by the Library of Economics and Liberty. Check it out at: http://www.econtalk.org/archives/2011/06/munger_on_excha.html

Core Training: Measure of Inflation

Fri, 15 Jul 2011 22:20:54 +0000

By Cindy Ivanac-Lillig I recently spoke at a university and when we came to the slide on core inflation, someone sighed (loudly). That’s because folks bristle at the idea of core inflation (inflation measures that strip out food and energy costs). It is like going to a doctor and saying that your arm is broken and infected and the doctor responding, "Well outside of your extremities, the core of your body looks perfectly healthy." Nothing to worry about... right? If folks are paying substantially more at the grocery store and the gas pump, they won't enjoy being told that what the Fed and other policy makers care about is the cost of everything except food and energy. It is not that the core measure is better than the headline (or overall) measure. They are just indices designed for different uses. For example, if you are interested in assessing what inflation is for the average consumer today, the headline numbers are the way to go. After all, these numbers give you a snapshot of how things are actually going in terms of our total expenditures. However, if you are responsible for policy development, you may like to know in addition to the snapshot, how telling these numbers are for what is coming down the pike. And this is where core comes into play. Many economists believe that the core has better predictive value. The notion is that by removing the more volatile items, such as food and energy, you would be left with a clearer picture -- not of today's reality but of future inflation. There are even leaner measures than traditional core measures that try to pare down even further to get to some underlying inflation signals. For example, the Dallas Fed puts out a Trimmed Mean PCE Inflation Rate. Inflation is an interesting and dynamic topic. There are folks arguing that core should be further pared down by subtracting some additional categories that have proven to be volatile and those on the other side arguing that core is not the best way to think about future inflation to begin with. What do you think? For current Personal Consumption Expenditure (PCE) information, check out BEA. (Note: The Fed prefers the Personal Consumption Expenditure (PCE) measure of inflation over the more well-known Consumer's Price Index (CPI). Both of these indices assess how much more or less it is costing people to buy what they normally buy. And both track each other fairly well. The PCE is put out by the Bureau of Economic Analysis, and unlike the CPI, accounts for consumers substituting goods as prices change. There are a few other technical differences on how things are weighted and accounted for. Here is a presentation that compares the two measures.)

NFCI in Your Toolbox

Thu, 23 Jun 2011 20:31:33 +0000

By Cindy Ivanac-Lillig When evaluating and forecasting the U.S. economy, the challenges are numerous. What information offers the most predictive value? There are many good pieces of data. Economists affectionately call these “leading indicators.” Some examples of leading indicators include number of new building permits (for the housing market) and the number of temporary workers hired (for the labor markets). These are fairly intuitive and important. However, we also have rich financial markets that tend to be forward-looking and can give us vital information to help evaluate and/or forecast economic activity. But which indicator of financial market health is best? The S&P 500 is interesting but it is weighted heavily toward certain types of instruments. No one argues about the importance of looking at capital markets’ indices, but there aren’t many good, widely available tools to evaluate the financial market conditions more broadly and easily. Now help is here. The Chicago Fed has recently introduced something called the National Financial Conditions Index (NFCI) that just might be the tool you need for your forecasting toolbox. There are some similar composite indices around, but none that represents 100 indicators and is released weekly. The volume of historical data that this index has and the breadth of instruments covered make it very interesting. The index combines 100 indicators’ worth of data. It weighs them to mirror the relative importance of the data to historical fluctuations. The indicators that are most heavily weighted are from the repo, short-term treasuries, commercial paper, and corporate bond markets. The value that is published represents how far from the historical average the current data is. So, if the NFCI is in positive territory, the index is above the historical average. A positive reading indicates tighter financial conditions or more stress in the financial market, and a negative value means better or looser financial conditions. The link between financial conditions and future economic growth is strong. Having lived through the last few years, you probably didn’t need me to tell you that. Check out this new tool and let me know what you think. How will you use it? Here's an interview with one of the economists responsible for the NFCI: To subscribe, click on the "subscribe" button option on this page.

Recovery for Whom?

Wed, 25 May 2011 16:37:47 +0000

By Cindy Ivanac-Lillig As many of you do, I often read and listen to analysts discuss the improving picture of the U.S. economy and how long it will take until we fully recover. However, there isn’t much differentiation made between what types of people are recovering and by how much. Many say that it is important to see the forest through the trees. But in this recovery, I am wondering if we should challenge ourselves to look more closely at the trees to see if something is different. The Economic Policy Institute’s briefing paper, “The State of Working America’s Wealth,” points out that 3.6% of households (income > $250,000) own 53.7% of all common stock and the top 5% of households own about 80% of common stock. The paper goes on to point out the logical conclusion that the recent stock market recovery disproportionately helped the top 5% of households, as the bottom 95% did not have many assets invested in the stock market. When you consider that most of American household wealth comes from home equity and not the stock market, it becomes clear that this recession is not just about job loss, but about the majority of American households losing some of the only wealth they ever had – with little or no recovery to date. This strikes me as a glaringly unique characteristic of this recession and recovery. As we continue to discuss recovery and the impact of gas and food prices on the “U.S. consumer”—whoever that may be— let's keep in mind the lack of recovery most American households feel in terms of their wealth. Check out the paper and let me know what you think…. If you happen to teach macroeconomics, let our readers know if and/or how you are tackling this recovery in your classroom.

Lights, Camera, Action: Monetary Policy and Communication

Thu, 12 May 2011 20:59:06 +0000

By Cindy Ivanac-Lillig The first post-FOMC presser with Bernanke, April 27, 2011: As a perpetual student of the FOMC process, I have come to appreciate the importance of communication in policy making. It is probably -- dare I say -- equally as important as the economic analysis that goes on in the FOMC boardroom. Press releases and external communication by the parties involved move markets, set expectations, and almost immediately affect how investment monies are allocated worldwide. The recent addition of the press conference to the FOMC process is not only a nod to the commitment of transparency, but also, in my opinion, another good vehicle to ensure clear communication to market players. The European Central Bank (ECB) recently put out a paper entitled, “Central Bank Communication on Financial Stability.” It looked at how central banks’ communications affect the stability of their respective financial systems. The study looked at the impact of a particular tool many central banks use, the financial stability report (FSR). The Fed does not use this tool and was therefore not part of the study. None the less, across the 37 central banks included, the paper finds that FSRs seemed to homogenize market expectations, somewhat increasing financial stability. The paper finds that governors’ speeches and interviews did not have this calming effect. Rather in the case of optimistic speeches, market volatility actually increased. The paper is an interesting read and highlights the difficulty of designing communication strategies that promote transparency and financial stability. It will be interesting to see how the new Fed press conference is viewed by capital markets and whether or not this new communication tool acts to reduce or increase market noise. What do you think?

Don't Judge a Book by its Title: "Beige Book"

Wed, 13 Apr 2011 17:32:11 +0000

By Cindy Ivanac-Lillig Published eight times a year, the Beige Book provides a unique look at the nation's economy and the nuances that exist by region. It is published by the Federal Reserve System and is comprised of information submitted by all 12 Federal Reserve Banks. The report includes anecdotal information, gathered through interviews, and data captured through various bank reporting tools. The Beige Book comes out today, April 13th! And for those readers that are teachers, the Cleveland Fed has some discussion questions/assignments designed to accompany the report for use in the classroom. Thanks all -- and let me know if this is the first time you have looked at the not-so-beige "Beige Book."

Nuclear Energy and the Classroom

Fri, 25 Mar 2011 22:37:18 +0000

By Cindy Ivanac-Lillig I am a fan of thinkfinity.org and have written about it in other posts. Today, I visited the site and wanted to share it with all of you. They have posted current events on their homepage along with related teaching ideas. I was especially struck by the write-up on nuclear energy and the recommended lesson plans. I thought these could be a great addition to any economics class. If you have done anything in your secondary or university classroom in regards to the Japanese crisis or on the topic of nuclear energy, please consider sharing it. And if you were planning on teaching about inflation this week, consider changing your plans and talking about energy and economic policy. Looking forward to your thoughts...

TED Inspiration: Education, State Budgets and Creativity

Tue, 08 Mar 2011 16:56:21 +0000

By Cindy Ivanac-Lillig In 10 minutes, Bill Gates paints a picture of the important role that state budgets play in our lives and in the future of our country. Here is his recent TED talk: And now to feed the right side of your brain... After we have reflected on the importance of education funding above, Ken Robinson asks us to give some thought as to what our educational goals should be. He points out how the educational system was created to serve the industrialization age and how it needs to be reimagined for the 21st century if we are to prepare our children for the future. Below you'll find his recent TED talk (about 20 minutes) and an animated version of a similar talk on changing the educational paradigm (11 minutes) -- take your pick as they are both fantastic: I hope this provided some food for thought -- Let me know what you think.