Listen as authors Glenn Hubbard and Tony O’Brien have a wide-ranging discussion with Jadrian Wooten, an economics professor at Penn State University. Jadrian discusses some pedagogical approaches in his online classes, his use of a standing desk in zoom teaching his large classes, as well as the unclear impact of missing college football to the local college economies.
Over the next several weeks, we will be gearing up this podcast to become an essential listen during your week. Whether your interest is teaching or policy, you will learn from this discussion.
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Authors Glenn Hubbard and Tony O’Brien revisit some of the policy responses to the Pandemic to discuss unemployment payments and other government fiscal responses. They also consider some of the longer-term impacts on business – like supply-chains – and the role that Economics can play in these issues. Glenn and Tony discuss how tourism is impacted in places like Orlando or college towns without college football as an economic engine.
Over the next several weeks, we will be gearing up this podcast to become an essential listen during your week. Whether your interest is teaching or policy, you will learn from this discussion.
Just search Hubbard O’Brien Economics on Apple iTunes and subscribe!
Glenn Hubbard and Tony O’Brien talk about the effects of the Covid-19 pandemic as we head into fall classes. They discuss the impact on teaching and learning as well as a fresh look at the impact of government policies over the past few months. The challenges facing the US economy are discussed as well as how the Nike swoosh or V-downturn is now looking somewhat differently in August 2020. We will begin doing WEEKLY podcasts as we head into Fall of 20202. Please look for new episodes at the end of each week and please subscribe to our Podcast feed via your preferred Podcast app – including iTunes Podcasts!
Just search Hubbard O’Brien Economics and subscribe!
Glenn Hubbard and Tony O’Brien talk with Eva Dziadula of the University of Notre Dame. In the podcast, they discuss economics, teaching, and the impact of the pandemic on the classroom. Eva discusses teaching Microeconomics in the middle of a pandemic and teaching Immigration in the midst of our national immigration debate.
Also, these podcasts are now on iTunes or your regular podcast feed! Just search Hubbard O’Brien Economics and subscribe!
Glenn Hubbard and Tony O’Brien talk with Kim Holder of the University of West Georgia. Kim discusses many best practices in preparing for her fall courses that are so flexible they can easily adapt to in-person, hybrid, or online. Listen to her observations about the delicate nature of discussing COVID-19 in classes this fall as well as her passion for personal financial literacy in the wake of the traumatic event. Both instructors and students will learn from what Kim has to say!
Links for podcast of June 12th, 2020 with Kim Holder of the University of West Georgia:
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Supports: Econ (Chapter 1, Section 1.3- in All Volumes)
Here’s the key point: To forecast the effects of a government policy, it’s important for economists to take into account how people will change their behavior in response to the policy.
In forecasting the effects of a government policy, economists take into account how people will respond to the policy. In general, when people’s circumstances change, including when the government enacts a new policy, people change how they act. It’s easy to fall into an error if you fail to take into account how people’s actions might change—their behavioral response—as their circumstances change. Let’s consider two examples.
First consider an example from the Covid-19 pandemic. In May 2020, the federal Centers for Disease Control and Prevention (CDC) noted that few people were contracting the disease as a result of touching surfaces contaminated by the virus and that most people became ill by breathing in the virus while near an infected person. Some media outlets interpreted the CDC’s announcement as meaning, in the words of one headline: “CDC Now Says Coronavirus Isn’t Easily Spread by Touching Surfaces.” But is this conclusion correct? Consider two scenarios:
Scenario 1: Despite the spread of the coronavirus, people and businesses don’t adjust their behavior. People are unconcerned if they touch a surface, such as a doorknob, that may contain the virus. After touching a surface, they don’t immediately wash their hands or use hand sanitizer. No one wears gloves. Businesses don’t make a special effort to clean surfaces.
Scenario 2: Most people react to the spread of the coronavirus by avoiding touching surfaces whenever they can. If they do touch a surface, they wash their hands or use hand sanitizer. Some people wear gloves. Businesses disinfect surfaces much more frequently than they did before the virus became widespread.
If Scenario 1 accurately described the situation in the United States in May 2020, we could reasonably draw the conclusion contained in the media headline we quoted: You are unlikely to catch Covid-19 by touching a contaminated surface. In fact, of course, Scenario 2 more accurately describes the situation in the United States at that time. As a result, the fact that few people caught the virus from touching a contaminated surface does not allow us to conclude that you are unlikely to catch Covid-19 that way because people adjusted their behavior to make that outcome less likely.
Now consider an economic example. Suppose that a city decides to tax colas and other sweetened beverages. If stores in the city are currently selling 100 million ounces of soda and the city imposes a tax of 2 cents per ounce, will it collect $2 million (= $0.02 per ounce × 100,000,000 ounces) in revenue from the tax per year? We can expect that because of the tax, stores will increase the prices they charge for soda. Those price increases will cause consumers to change their behavior. Some people will buy less soda and, if the city’s suburbs don’t also enact a tax, some people will drive to stores outside the city to buy their soda. As a result, sales of sweetened beverages in the city will fall below 100 million ounces and the city will collect less than $2 million per year from the tax.
In both these cases, we would draw an incorrect conclusion if we failed to take into account the behavioral response of people to changes in their circumstances, whether the change is from the arrival of a new disease or an increase in a tax. Economist sometimes call the error of failing to take into account the effect of behavioral responses to policy changes the Lucas critique, named after Nobel laureate Robert Lucas of the University of Chicago.
Question: An article in the Seattle Times published in late May 2020 noted that: “Half of new coronavirus infections in Washington [state] are now occurring in people under the age of 40….” Yet an opinion column in the New York Times published in March 2020 near the beginning of the pandemic noted that the coronavirus was disproportionately infecting older people. Is one of these accounts of which age group is most likely to be infected necessarily incorrect? Briefly explain.
For instructors that would like the solutions to these questions, please email your name, course number, and affiliation to christopher.dejohn@pearson.com and we’ll send along a solutions manual.
Sources: Sandi Doughton, “Half of Newly Diagnosed Coronavirus Cases in Washington Are in People under 40,” Seattle Times, May 28, 2020; and Louise Aronson, “‘Covid-19 Kills Only Old People.’ Only?” New York Times, March 22, 2020.
Solved Problem: When to Re-Open Disney World during a Pandemic
In mid-March 2020, during the Covid-19 pandemic, the Walt Disney Company closed its Walt Disney World theme park in Orlando, Florida. In late May, the company announced that with the approval of the Florida government it would reopen Disney World in mid-July. An article in the Wall Street Journal noted that the company’s costs would increase because employees would need to reduce the likelihood of visitors contracting the virus while in the park by taking measures such as additional cleaning of the parks and checking the temperatures of customers. At the same time, the company’s revenue would likely fall because fewer people were expected to buy tickets to the park or to stay in the company’s hotels. When asked about these issues, Disney CEO Bob Chapek stated that, “We would not open up until we could cover our variable costs ….” If Disney covers its variable costs of operating Disney World, can the company be certain that it will earn an economic profit? If not, why would the company open the park?
Source: Erich Schwartzel, “Disney World to Reopen Gradually Starting July,” Wall Street Journal, May 27, 2020.
Solving the Problem
Step 1: Review the chapter material. This problem is about the break-even price for a firm in the short run and in the long run, so you may want to review Chapter 12, Section 12.4 “Deciding Whether to Produce or to Shut Down in the Short Run.”
Step 2: Answer the first question by explaining the circumstances under which a firm earns an economic profit. To earn an economic profit, a firm’s revenue must be greater than all of its costs—both its fixed costs and its variable costs. So, Disney covering its variable costs is not enough for the company to earn an economic profit if it is not also covering its fixed cost.
Step 3: Answer the second question by explaining why Disney is better off opening Disney World even if it is only covering its variable cost. With the park closed, Disney is earning no revenue but still has to pay the fixed costs of the park. These fixed costs include the opportunity cost of the funds the company’s shareholders have invested in the park, fire and other insurance premiums, and the cost of the electricity necessary to power lights and security systems. If the park remains closed, Disney will suffer an economic loss equal to its fixed cost. If the park is opened and Disney earns enough revenue to cover the variable costs of operating the park—including the salaries of employees operating rides and working in restaurants, the higher utility costs, and the costs of increased cleaning necessitated by the virus—Disney will reduce its loss to an amount smaller than the value of its fixed costs, even though the company will not be earning an economic profit. In this circumstance, Disney will be better off opening the park than keeping it closed. In general, as we’ve seen in the chapter, firms will be willing to operate in the short run if they can earn revenue at least equal to their variable costs. Note, though, that in the long run, Disney would need to cover all of its costs of operating the park to keep it open.
Glenn Hubbard and Tony O’Brien continue their podcast series hosting guest – Professor Bill Goff of Penn State University. In talking with Bill, we discuss the challenges of teaching online during the Pandemic this past spring. We talk some about unemployment as well as hearing how Bill how he developed his passion for photography in his travels around the world. The image on this post was a picture of the Milky Way taken by Bill in North Central Pennsylvania!
Links for podcast of May 29, 2020 with Bill Goffe of Penn State
Apply the Concept: If the Economy Is Down, Why Is the Stock Market Up?
Here’s the Key Point: In determining a firm’s stock price, the firm’s current profitability is less important than its expected future profitability.
The price of a share of stock reflects the profitability of the firm that issued it. During economic recessions, firms experience declining sales and profits and the prices of their stocks fall. We saw such a decline at the beginning of the downturn caused by the Covid-19 pandemic in 2020. As the following figure shows, the S&P 500 stock market price index reached a high the week ending on February 14. By the week ending on March 20, this index had declined by 29 percent.
On the figure, the shaded area shows the weeks during this period when the economy was in a recession. We are dating the beginning of the recession using the Weekly Economic Index published by the New York Federal Reserve and compiled by James Stock of Harvard, Daniel Lewis of the New York Federal Reserve, and Karel Mertens of the Dallas Federal Reserve. The index is comprised of 10 economic variables including sales in retail stores, claims by laid off workers for government unemployment insurance payments, steel production, and railroad freight traffic.
Notice two things about the figure:
Stock prices began to fall in mid-February 2020, about a month before the recession began in mid-March. This result is not surprising because the stock market is often a leading indicator, that is, stock prices tend to decline before production and employment fall. The incomes of professional stock traders and managers of mutual funds and exchange-traded funds (ETFs) depend in part on their ability to sell stocks before their prices decline and buy them before their prices increase. So these finance professionals have a strong incentive to attempt to anticipate changes in the economy before they occur.
Stock prices began to rise in mid-March while the economy was still in recession. In fact, the S&P 500 stock index increased more than 20 percent between mid-March and early May even though, as measured by the WEI, the economic recession was becoming worse as production and employment were rapidly declining. This result surprised many people who had trouble understanding how, as the headline of an article in the New York Times put it: “The Bad News Won’t Stop, but Markets Keep Rising.”
Both these points reflect the same key fact about the stock market: Although a firm’s stock price depends on the firm’s profitability, the firm’s current profitability is less important than its expected future profitability. You wouldn’t pay much for the stock of a firm that was making a profit today but that you expect will be driven out of business in the future by another firm about to introduce a superior competing product. Even though the profitability of most firms in the United States had yet to decline in mid-February, many investors were beginning to fear that Covid-19 would have a major effect on the U.S. economy, so stock prices began to decline.
Why then did stock prices turnaround and begin to rise only a month later, and why did they rise and fall significantly on many days? Those swings in stock prices reflected a key result of investors interacting in financial markets: Buying and selling of financial assets like stocks results in the prices of those assets fully reflecting all the available information relevant to the value of the assets. In the case of the stock market, buying and selling stock results in stock prices reflecting all available information on the future profitability of the firms issuing the stock. New information that is favorable to the future profitability of a firm—for instance, Apple announces that iPhone sales have been higher than investors expected—will lead investors to increase demand for the firm’s stock, raising its price. The opposite happens when new information becomes available that is unfavorable to the future profitability of a firm.
Because new information becomes available continually, we would expect stock prices to change day-to-day, hour-to-hour, and minute-to-minute. Stock prices for the market as a whole, as reflected in stock price indexes like the S&P 500, will rise and fall as new information becomes available on the future strength of the economy. During the Covid-19 pandemic, investors were particularly concerned with the following four issues:
The development of new medical treatments for the disease, particularly vaccines.
The effectiveness of government programs, such as loans to businesses, that were intended to help the economy recover from the effects of the lockdowns used to reduce the spread of the virus.
The ability of the economy to adjust to the possibility that the virus might persist in some form for years.
The willingness of consumers to resume buying goods and services, such as restaurant meals and movie tickets, that seemed particularly affected by the virus.
Optimistic news about these factors, such as successful early trials of a vaccine for use against Covid-19, caused sharp increases in stock prices and pessimistic news caused prices to fall. For example, here are the percentage changes in the S&P 500 stock price index for consecutive trading days in mid-March (the stock market is closed on Saturdays and Sundays):
Stock prices are rarely this volatile. Wall Street investment professionals spend a great deal of effort gathering all possible information about the future profitability of firms, but in this period they had difficulty interpreting the importance of new information. No investor had experienced a pandemic as severe as Covid-19, so it was particularly challenging for them to determine the implications of new information for the likely future strength of the economy and, therefore, to the profitability of firms.
The large fluctuations in stock prices were another indication of how unusual an event the Covid-19 pandemic was and the difficulty that investors had in understanding its likely long-run effects on the U.S. economy.
Sources: Matt Phillips, “The Bad News Won’t Stop, but Markets Keep Rising,” New York Times, April 29, 2020; and Federal Reserve Bank of St. Louis.
Question:
In May 2020, an article in New York Magazine noted that, “The stock market zoomed on Monday in response to very preliminary positive news about a vaccine” being tested by the pharmaceutical firm Moderna. Positive news about one of its products might be expected to increase Moderna’s future profits and the price of its stock, but why would prices of many other stocks increase on this news?
For Economics Instructors that would like the approved answers to the above questions, please email Christopher DeJohn from Pearson at christopher.dejohn@pearson.com and list your Institution and Course Number.
Glenn Hubbard and Tony O’Brien continue their podcast series hosting guest – Professor Mike Ryan of Western Michigan University. During the conversation, we learn about Mike’s experiences working with faculty from Western Michigan School of Business taking their courses online. He also offers his thoughts on the current trade situation as well as personal insights from a January visit to Japan.
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