Join authors Glenn Hubbard & Tony O’Brien as they discuss the economic landscape of inflation, soft-landings, and the green economy. This conversation occurred on Saturday, 9/16/23, prior to the FOMC meeting on September 19th-20th.
Tag: Microeconomics
4/29/23 Podcast – Authors Glenn Hubbard & Tony O’Brien discuss a hard vs. soft landing, the debt ceiling, and an economics view of the CHIPS act passed in 2022.
Join authors Glenn Hubbard & Tony O’Brien as they discuss the state of the landing the economy will achieve – hard vs. soft – or “no landing”. Also, they address the debt ceiling and the barriers it might present to a recovery. We also delve into the Chips Act and what economics has to say about the subsidy of a particular industry. Gain insights into today’s economy through our final podcast of the 2022-2023 academic year! Our discussion covers these points but you can also check for updates on our blog post that can be found HERE .
Card, Angrist, and Imbens Win Nobel Prize in Economics
David Card of the University of California, Berkeley; Joshua Angrist of the Massachusetts Institute of Technology; and Guido Imbens of Stanford University shared the 2021 Nobel Prize in Economics (formally, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel). Card received half of the prize of 10 million Swedish kronor (about 1.14 million U.S. dollars) “for his empirical contributions to labor economics,” and Angrist and Imbens shared the other half “for their methodological contributions to the analysis of causal relationships.” (In the work for which they received the prize, all three had collaborated with the late Alan Krueger of Princeton University. Card was quoted in the Wall Street Journal as stating that: “I’m sure that if Alan was still with us that he would be sharing this prize with me.”)
The work of the three economists is related in that all have used natural experiments to address questions of economic causality. With a natural experiment, economists identify some variable of interest—say, an increase in the minimum wage—that has changed for one group of people—say, fast-food workers in one state—while remaining unchanged for another similar group of people—say, fast-food workers in a neighboring state. Researchers can draw an inference about the effects of the change by looking at the difference between the outcomes for the two groups. In this example, the difference between changes in employment at fast-food restaurants in the two states can be used to measure the effect of an increase in the minimum wage.
Using natural experiments is an alternative to the traditional approach that had dominated empirical economics from the 1940s when the increased availability of modern digital computers made it possible to apply econometric techniques to real-world data. With the traditional approach to empirical work, economists would estimate structural models to answer questions about causality. So, for instance, a labor economist might estimate a model of the demand and supply of labor to predict the effect of an increase in the minimum wage on employment.
Over the years, many economists became dissatisfied with using structural models to address questions of economic causality. They concluded that the information requirements to reliably estimate structural models were too great. For instance, structural models require assumptions about the functional form of relationships, such as the demand for labor, that are not inferable directly from economic theory. Theory also did not always identify all variables that should be included in the model. Gathering data on the relevant variables was sometimes difficult. As a result, answers to empirical questions, such as the employment effects of the minimum wage, differed substantially across studies. In such cases, policymakers began to see empirical economics as an unreliable guide to economic policy.
In a famous study of the effect of the minimum wage on employment published in 1994 in the American Economic Review, Card and Krueger pioneered the use of natural experiments. In that study, Card and Krueger analyzed the effect of the minimum wage on employment in fast-food restaurants by comparing what happened to employment in New Jersey when it raised the state minimum wage from $4.25 to $5.05 per hour with employment in eastern Pennsylvania where the minimum wage remained unchanged. They found that, contrary to the usual analysis that increases in the minimum wage lead to decreases in the employment of unskilled workers, employment of fast-food workers in New Jersey actually increased relative to employment of fast-food workers in Pennsylvania.
The following graphic from Nobel Prize website summarizes the study. (Note that not all economists have accepted the results of Card and Krueger’s study. We briefly summarize the debate over the effects of the minimum wage in Chapter 4, Section 4.3 of our textbook.)
Drawing inferences from natural experiments is not as straightforward as it might seem from our brief description. Angrist and Imbens helped develop the techniques that many economists rely on when analyzing data from natural experiments.
Taken together, the work of these three economists represent a revolution in empirical economics. They have provided economists with an approach and with analytical techniques that have been applied to a wide range of empirical questions.
For the annoucement from the Nobel website click HERE.
For the article in the Wall Street Journal on the prize click HERE (note that a subscription may be required).
For the orignal Card and Krueger paper on the minimum wage click HERE.
For David Card’s website click HERE.
For Joshua Angrist’s website click HERE.
For Guido Imbens’s website click HERE.
4/17/20 Podcast – Glenn Hubbard & Tony O’Brien discuss the Federal Reserve response and toilet paper shortages.
On April 17th, Glenn Hubbard and Tony O’Brien continued their podcast series by spending just under 30 minutes discuss varied topics such as the Federal Reserve’s monetary response, record unemployment numbers, panic buying of toilet paper as compared to bank runs, as well as recent books they’ve been reading with increased downtime from the pandemic.
COVID-19 Update – How Will the Coronavirus Pandemic Affect the Airline Industry?
Supports: Chapter 12 in Economics and Microeconomics – Firms in Perfectly Competitive Markets; Essentials Chapter 9.
SOLVED PROBLEM: HOW WILL THE CORONAVIRUS PANDEMIC AFFECT THE AIRLINE INDUSTRY?
During the coronavirus pandemic, many airlines experienced a sharp decline in ticket sales. Some airlines responded by cutting ticket prices to very low levels. For example, in early March, Frontier Airlines was offering round-trip tickets from New York City to Miami for $51 (compared to over $200 three months earlier). As one columnist in the Wall Street Journal put it, the price of many airline tickets was “cheaper than dinner or what you’ll spend on Ubers or taxis.”
- Briefly explain whether it was likely that the price Frontier was charging was high enough to cover the average total cost of a flying an airplane from New York City to Miami. Why was Frontier willing to accept such a low price? Would the airline be willing to accept such a low price in the long run?
- Some airlines believed that even after the pandemic was over, consumers might not be willing to fly on planes as crowded as they were prior to the pandemic. Accordingly, airlines were considering either flying planes with some rows kept empty or reconfiguring planes to have more space between rows—and therefore fewer seats per plane. Briefly explain what effect having fewer seats per airplane might have on the price of an airline ticket.
Sources: Jonathan Roeder, “NYC to Miami for $51: Coronavirus Slump Leads to Steep Airfare Discounts,” bloomberg.com, March 5, 2020; and Scott McCartney, “There Are Plenty of Coronavirus Flight Deals Out There, But Think Before You Buy,” Wall Street Journal, March 25, 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” and Section 12.5 “‘If Everyone Can Do It, You Can’t Make Money at It’: The Entry and Exit of Firms in the Long Run.”. In Hubbard/O’Brien, Essentials of Economics, it is Chapter 9.
Step 2: Answer part a. by explaining why even though a ticket price of $51 was unlikely to cover the average total cost of the flight, Frontier Airlines was still willing to accept such a low ticket price—but only in the short run. As we’ve seen in Section 12.5, competition among firms drives the price of a good to equal the average total cost of the typical firm. Assuming that ticket prices prior to the pandemic equaled average total cost, then the low ticket prices in the spring of 2020 must have been below average total cost. We have also seen, though, that firms will continue to produce in the short run provided they receive a price equal to or greater than average variable cost. For a particular flight, the fixed cost—primarily the cost of aviation fuel and the salaries of the flight crew—is much greater than the variable cost—additional meals served, somewhat more fuel used because more passengers make the plane heavier, and possibly an additional flight attendant needed to assist additional passengers. So, the $51 ticket price may have been enough for Frontier to cover its average variable cost. The airline would not accept such a low price in the long run, though, because in the long run it would need to cover all of its costs or it would no longer fly the route. (Note: In the short run, an airline might have another reason to continue to fly planes on a route even if it is unable to cover the average total cost of a flight. The contracts that airlines have with airports sometimes require a specified number of flights each day in order for the airline to retain the right to use certain airport gates.)
Step 3: Answer part b. by explaining the effect that having fewer seats per airplane would have on airline ticket prices. For an airline to break even on a flight, its total revenue from the flight must equal its total cost. Flying fewer seats per plane will not greatly reduce the airline’s cost of the flight because, as noted in the answer to part b., most of the cost of a flight is fixed and so the total cost of a flight doesn’t vary much with the number of passengers on the flight. But flying half as many passengers—if every other row is left empty—will significantly decrease the revenue the airline earns from the flight. To increase revenue on the flight, the airline would have to increase the price of a ticket. We can conclude that if airlines decide to fly planes equipped with fewer seats, ticket prices are likely to rise. Note that if on some routes the demand for tickets is price elastic, raising the price will reduce revenue and the airline will be unable to cover its cost of flying the route.
HubbardOBrienEconomics.com Blog 