Lauren M. Dobbie

Archive for 2011|Yearly archive page

Thinking outside the model

In Uncategorized on April 25, 2011 at 10:32 am

My last exam is tonight… then I’m done university, at least for a while. Aside from how long the paperwork takes and the fact that the gown-wearing and stage-crossing isn’t until June, I’ll unofficially have a degree in economics as of 9:00 tonight.

If you thought this was going to be a sanctimonious post about the wisdom I’ve accumulated over the last four years, I don’t blame you- the intro was borderline. However, I will offer you a few reflections on this course of study and where I hope it goes…

Studying economics does make one a bit of a skeptic-cynic when it comes to most facets of daily life, from the zoo-like quality of most Beer Stores when they’re busy to the recent events in Egypt and Libya. Yet, once you study, in depth, the incentives of the masses I found that after the “People are evil and selfish” wanes, an appreciation for the complexity, design, and hopefully the effectiveness of ‘the way things are’ begins to emerge.

Of course, on the other hand, studying economics does give one a major tool in today’s increasingly dynamic world: the ability to think critically. As much as thinking economically can make someone understand certain institutions and policies in the world and help accept them, economics can also expose some important short-comings or problems in major social arenas. Understanding incentives helps a person understand power, which is so important on so many levels… from friendships to the workplace to globalization.

Courses in economics do have one major draw-back that you have to watch out for, namely, context. The cynic-skeptic quality of studying economics can get way outta hand if you’re not careful to explore and understand the major perspectives surrounding the issues at hand. What I mean by that is you can study labour economics, for example, and think “Well of course there are wage and income gaps between men and women- many women are taking time off from work and leaving the labour force for extended periods of time to have and raise families so of course there are going to be income inequalities” or one could think that no matter what the reason is: taking time off work or simple prejudice, that these wage gaps will never close.Taking a non-economic and economic considerations of the factors that influence economic phenomena such as this gives a needed burst of “thinking outside the model”. Looking at the world economically is a valuable skill, I think, but looking at something just economically would be like looking around a new apartment without checking to make sure that the shower head is installed higher than 5 feet off the ground (that is the situation at my current apartment), or checking to make sure it has good cell phone reception (that was the situation in my last apartment).

The question that’s still lingering is “How can things be made better?” Health care systems… paying for education… workplace training… democratization… Retail… there are so many institutions, systems, and processes that aren’t perfectly aligned with the way people think (on average), what they want (what they think they want too), and how they want to get what they want. This might be what pushes me to do grad school one day but at least now that those questions are firmly planted in my mind I can try to improve what “institutions, systems, and processes” I come across in my own life.

Also, the man in the picture for this post is John Maynard Keynes… He’s probably the best example of an economist who turned an existing economic/political ideology on its head (at least until Friedman), plus he basically remedied the Great Depression. He had the wherewithal to make dramatic and different suggestions to policy-makers when it came to government spending in the UK which sounds like a rather “dry” accomplishment but really, that was pretty badass because it takes courage to stand up and question the status-quo, especially when you’re standing up and facing something like the government.

So I guess the moral of this story is that economics has, in a big way, set me up to think in a way that may give me ideas about how to think outside the box and maybe even suggest changes that could make the something… anything… better. University has also made me apt at cashing in on vague ideas and large words, but this is the best I’ve got: economics has made me think differently for the better and I feel set up to bring something cool to the table.

Compensated Variation

In Uncategorized on March 8, 2011 at 2:17 pm

Today I was working with one of the students that I tutor on the concept of compensated variation. In intermediate microeconomics we learn how to solve compensated variation problems that go something like this: if people buy an optimal amount of Good A and Good B at price A and price B with this amount of money, how much would we have to give them to keep them just as well off if one of those prices should increase?

Like most of the things I’ve learned in economics, this can be abstracted out quite widely. What if we asked ourselves what we would need in return if something in our lives changed or if something becomes harder to come by, do we look for something else to compensate us?

For instance, most of the people I know including myself seem to feel the inner price of their downtime going up and up and up. If I relax now, what am I giving up? Study time, cleaning time, errands time, time at work, and the list goes on and on.

Now, the decision of how to allocate time normally doesn’t include time for one’s self. When I look at my own planner all I see are my obligations to other people and projects. In fact, in microeconomics we study how individuals allocate time between “working” which we call “consumption” and “not working” which we call “leisure”. So if you have a job or a course of education that you are depending on for your earnings now (or earnings in the future as is the case with school) then the price of your leisure is very expensive.

Being conscious of this makes me ask myself two questions: Have I allocated my fixed amount of time properly? Or am I way too far to the “consumption” side? And if my time is allocated according to my preferences for money and time off then am I managing my leisure time properly? Am I doing what I want? Or am I giving that all away too?

For me now, time management doesn’t just mean ‘getting as much done as I possibly can in this scarce amount of time I have’… It is more comprehensive than that. I’m learning to think honestly about how I should be spending my time and I’m realizing that I’m too far on the consumption side. My leisure time is dropping down to a level that’s almost non-existent. In economics we call that a ‘corner solution’ where the individual is ‘all consumption’ (read: working all the time in order to consume) or ‘all leisure’.

The corners suck.

Balance is what I want so I’m trying to become more conscious about my Time Decision. When you’re time gets more and more expensive you need to make sure you’re compensating yourself for this on-going change. Making sure you have enough free time to yourself is part of all of this. So next time you feel overwhelmed by your own week, as yourself if you’re on the corner…

Love and economics are in the air in Canada

In Uncategorized on February 14, 2011 at 4:48 pm

Love is certainly in the air in the world of Canadian finance but like any relationship or marriage it’s not without its points of contention either. The Toronto Stock Exchange and the London Stock Exchange have proposed that they merge which will change the scope of stock markets in both countries.

Now, for two people to truly stay together there have to be reasons other than “the flame”. As a hardened economist I don’t believe in people being in relationships without real reasons and real incentives, so why are the TSX and the LSE coming together?

The foremost reason is that business in general is becoming more globalized practically by the day. What’s stopping a Canadian stock trading company from attracting potential shareholders overseas? Well, nothing. But it would sure be a lot easier with a partner over there, namely the LSE. Publicly traded companies in Canada will have access to British markets and vice versa, which is a huge incentive for both to merge.

Many people would probably say that facing the challenges of life together in a partnership is more desirable than facing them alone. In this way, economics and love are no different. The TSX and the LSE both face competition from other stock trading companies. Therefore, combinging both companies allows for both to capture more market share in both markets. The TSX and the LSE individually face the risk of competition over-taking more and more of the shareholder market but together they could in fact retain and even increase their market power.

The financial benefits of a partnership are also very important incentives to come together and stay together. Sharing expenses, combing incomes, and having greater access to capital markets are typical benefits of going through life in a pair rather than alone. Here again the stock trading world is in the same boat. One of the hypothesized benefits of this merger for the people who buy stocks is that the transaction costs of buying and selling stocks will decrease.

Now, there are two sides to every story and there is almost no economic or personal decision that doesn’t come with at least a few potential concerns. One of the biggest challenges of any partnership of any kind is the difficulty surrounding comprimise. “You cut one hole in the bag of milk and I cut out two… So what do we do now?”  is not the kind of comprimise to which I’m referring unfortunately. Yet, in the same breath it’s not fundamentally far off either. Whenever two economic processes come together there is going to be some overlap and some major differences too. What I’m getting at is how this new company (which is operating under the temporary name “Holdco” for “holding company”) will be run is going to take more than careful thought. The administrative thickets are going to be sharp and well, thick at the bottom. It’s not so much the broad outlook of what will happen once these companies merge that’s giving people grief– it’s the operation of the thing that’s making a few people sceptical. However, even once the merger happens (if it happens) the TSX and the LSE will still operate individually even though the companies will be joined, so it’s not like this is just a disguise for England taking over our sovereign stock exchange. Besides, big guys in the Middle East have huge stakes in both companies and will end up owning almost a quarter of “Holdco” anyway (source: The Globe and Mail).

All in all, there are lots of details to be ironed out in terms of how this company will run and on the Canadian side Ottawa’s industry minister Tony Clement is in the process of reviewing and (maybe) approving this merger, so rest assured this major deal will only go through if there’s something in it for us.

Love conquers all. So does economics.

Thoughts on the job search

In Uncategorized on January 28, 2011 at 2:37 pm

1. Start early.I figured the best way to confront the task of looking for a job was to just start looking as soon as school started and then I wouldn’t have to dread the panic of February and not having a clue what my plan was after I graduated. Starting early has the added advantage of giving you more time to think about what you’d like your job to be or what sort of company you would want to work for.

2. Treat it like a hobby. Once I started treating my job hunt like a hobby, I started thinking of it as something to be practiced and enjoyed. I spent a couple hours a few nights a week looking at career sites after doing as much homework as I could take. In fact, browsing the Internet for openings became something fun to do in the evenings because I never knew what I was going to run across.

3.Take a more casual approach to networking. I know very few people who have careers in areas I’m interested in, so one of my strategies evolved into e-mailing people who worked for companies I  respect or had careers that I was interested in. You would be very surprised who e-mails you back and what you can learn. Reading a few sentences about someone’s individual path to success can make you reconsider what you think you can do to start the career of your dreams.

4. Don’t just scroll through postings. Researching companies and then following that up with an e-mail to someone in an attractive position can give you more information then merely glazing over while you look at endless job ads. This perspective stops you from  boxing yourself in by your qualifications. If you look for jobs strictly within your education level or experience, you might not get very far.

5. Party and relax often. Just because looking for a new job can be something fun to do, don’t stay in every night and get obsessed with it. It’s easy to get overwhelmed so take lots of breaks.

6. Get a C.V. critique. Getting a second opinion on the content and layout of your resume is a really good idea. I changed my C.V. quite a bit after I looked over it with someone. If you’re a university student, you can probably get them done for free at school.

Okay that’s all I have for now, but if I think of anything else along the way, I’ll add it in.

The Recession is over: Do you know what happened?

In Uncategorized on January 12, 2011 at 9:14 pm

Communicating about economics and interpreting what I’m studying are my two favourite things about economics. The models are interesting, learning calculus has its merits, and finding out how widely applicable this way of thinking is makes the discipline worth studying too. Yet economic story telling is, at the end of the day, what I love about it and I think it’s very important for us to understand the economics going on around us.

My purpose here is to reflect and explain the most exciting business cycle movement in our recent past. The reality is that the recession ended a little over a year ago and we Canadians are well into our recovery period but the dust has not settled.

I must preface this by saying that Dr. Kosempel, my macroeconomics prof did a concise and thorough job telling The Story of the Recession in class this week, so the numbers and main thread of this story are to his credit.

First, let me put the recession into perspective. I heard and read many sensationalist statements referring to the recession as The Great Recession and this rate or that rate hasn’t been this low since… and then they trail off. But the dip in GDP was bigger in the recession of the early 1980s and the recovery period was notably faster than the recession during the early 1990s. So really… a drop in GDP of around 4.5% is big but nothing worse than over the last two business cycles and the drop in GDP during the Great Depression was 35%. So let’s get real.

Now, how did that 4.5% drop happen? Let me tell you the story…

Imagine you were shopping for a $200,000 house in the United States in the year 2000. You have enough money for a 5% down payment which is $10,000. That’s definitely not a lot, but in a culture where homeowners are the ideal, you spring for it even though you should have kept saving a little longer. But so far, no harm done.

Still, the bank owns your house after putting $190,000 into it.

Who cares? Housing prices are going up! In fact, by 2006 housing prices have doubled. Now your little $200,000 house is worth $400,000 so you can cash in right? Not quite… this is when the equity question pops up. The equity question is: how much of that doubling in the value of your house do you actually get to enjoy?

Equity = the value of your house – what the bank put in ÷ the value of your house → 400,000-190,000 ÷ 400,000 = 52.5%

That 52.5% means that you are only entitled to a little over half of that doubling in price. Seems a little sad, eh? But look on the bright side, if you sell it and use some of that money for another 5% down payment on a bigger, better dream house, things can only get better.

You might be just one American flying by the seat of his or her pants, but your neighbors are watching that they want to get in on this hot real estate market too. Why not right? Buy a little house with a minimum down payment, enjoy watching the price go up and up (see a bubble forming?) and then sell it and move on. And they did.

What’s going on at this point is people were essentially borrowing against the equity they had! Of course, this only works if housing prices keep increasing.

By now the demand for houses and mortgages is very big. And when people want something, someone else will step in to make money selling it to them. When people want money, there’s someone there to sell it to them.

This is where China enters the picture. How did China end up tied in to the American housing problem? This is how…

Chinese financial institutions were watching what was going on too. They saw the American real estate market as a good place to invest because they could make a lot of money. They started buying up mortgage backed securities. This means that the Chinese (and other foreign investors) had stakes on some of the money people were making in the real estate market. Now, like before, if demand goes up, supply goes up. If there are more foreign investors who want to buy up these MBS (mortgage backed securities) then they shall be supplied. And they were.

There was a rule in place that included limiting the number of MBS that financial institutions (mostly banks) could supply. It was called the net capital rule.  However, that rule was relaxed at the end of the first quarter of 2004 (April). The supply of MBS could go up without anything getting in its way.

So now you’ve got investment banks buying up all these mortgages so the interest payments that regular people were paying on their, let’s face it, crazy mortgages were going to these investment banks instead of the local “regular” banks. Now it’s not just you, the normal American borrowing against your equity but the investment banks using their equity to buy up more mortgages. Everyone is just borrowing against the money they’re going to make in the future (based on house prices continuing to go up). Scary.

Meanwhile, U.S. banks are borrowing more and more from Chinese financial institutions. The main consequence of this is that this makes the U.S. banks less and less able to bail themselves out if you know, this all doesn’t work out. Americans are in debt. The regular banks are in debt. AND the investment banks are in debt.

By this point in the lecture, I’m feeling nervous because this story is real and I know what’s coming…

What do all the banks do now? I mean, the normal people are in these nice big houses that they can’t afford, but they’re in too deep and they love their 3,000 square feet too much.

The madness doesn’t stop here.

This is where an extra scary word surfaces: sub prime. What does sub prime mean? It refers to a certain quality of credit standing, bad credit standing. When you’ve used up all the people with good credit and given them all their dream houses with these enormous price tags and the investors still want to milk the market some more, what do you do when you’re out of people with good credit? You start giving money to people with worse credit. And that’s what happened.

The sub prime mortgage market (the mortgages given to people with sketchy credit) doubled between 2004 and 2006. What got glossed over in all the excitement was that… duhn duhn duuuuhn: housing prices peaked in 2005. The people with the bad credit got in on the real estate investment bliss too late. Housing prices began falling in 2006. No more rising equity. For anyone.

Now we’re in trouble. People can’t refinance and they can’t even make their interest payments anymore. You can do as much investment finance borrow lend hocus pocus all you want but when there’s no money at the bottom, there’s no money!

Now the mortgages were greater than the value of the houses because the prices are dropping so much. This resulted in negative equity. Remember how great it was when your $200,000 house doubled in value? Now your $750,000 mortgage is greater than the $500,000 value of the house.

In Canada the bank would not only re-possess your house but they would take all your assets to try and pay back the money you owe them. However, in the States, they can’t do that. They can only take your house. So people were walking away from their mortgages leaving the banks to, excuse me, fall on their asses.

By May of 2008 a quarter of the sub prime mortgages were delinquent, meaning that 25% of those people with poor credit history who were offered mortgages had walked away.

To wrap this all up, let me explain how all of this drama affected Canada.

Okay so all of the mortgage problems resulted in something called a credit crunch. In a nutshell, the credit crunch meant three things:

1. Mortgage lending was too risky (duh)

2. The recession (oh yeah, by now we’re in a full blown recession because housing is such a huge part of GDP and everyone’s broke too) made business lending too risky

3. Mortgage losses made it too risky for banks to even lend money too each other

Everyone’s broke. And no one can save themselves. Not even the banks.

The Central Bank tried to lend money to the “regular” banks but the banks wouldn’t lend the funds. In fact, they ended up giving the money back.

And if no one has money there’s no demand. This implies of course that there is no demand for Canadian imports (from the Americans’ point of view).

The United States is our biggest trading partner. End of story.

Conversations about economics

In Uncategorized on January 9, 2011 at 3:18 pm

Once I met a woman who asked me what I was studying in university. I told her I was in my last year of an economics degree, to which she immediately replied: “So that’s why you’re so serious!”

If it was an msn conversation rather than a real life one, I would have inserted a one-eyebrow-raised emoticon and a “LOL” just to be safe.

At that point, I think I just tried to smile good-naturedly to disguise my not knowing what to say. Yet, it raised the question: how can I talk about economics without the “you’re so serious” sub text? More generally, what the heck do you say to something like that?

Then it occurred to me that I am faced with a few less than ideal responses to “I’m in economics”.

Sometimes I try to make economics relatable if the person sounds skeptical that I study something awesome…

Finding little pockets of day-to-day stuff and spinning them in an economic way is helpful in these instances. My Beer Store theory is one of them but there are many others too.

If I can’t think of something off the top of my head and my current projects at school are too serious, that’s when I bring out the big guns: Freakonomics. Those books are amazing economics conversation savers! Freakonomics and Super Freakonomics are anecdotal and highly engaging stories that are based on really good research!

One of the other reasons why answering the “What do you study” question is so scary is the “(guffaw) so when are we getting out of this recession?” response. A really cool but intimidating publishing guy asked me that about a year ago at a dinner party.

My bullet proof answer to that one is “As soon as we learn to live within our means and Europe gets real about debt and centralization”.  I suppose it’s a little bit saucy but honestly, that’s what most of the global financial crisis boils down to. The way I see it, it’s better than the bland “It’s hard to say” which would be right, but not exactly stimulating.

I think in real time, I mumbled something about US banks’ reserve ratio because I was only half way through third year and hadn’t learned enough about the recession, but if it ever happens again, I’ll know what to say.

When I bring up studying economics, this is the reply I brace myself for every time because it’s the most common: “(grimace) Oh my God that sounds so… like, boring”. This is most common coming from other university students; most “real” adults substitute boring for “hard” because they really do think it’s boring, they just don’t want to hurt my feelings.

However, when I get the “That sounds so boring”, I have a bit of a rolodex prepared…

If I’m feeling defensive about my program “It’s how I’ve learned to understand people” deflects the awkwardness. “There’s more to it than GDP and stuff” does the trick if I want to dispel the awkwardness. But the politest and most honest answer is “I didn’t expect to end up studying it, but now I love it“.

How Minecraft functions like the world economy

In Uncategorized on January 4, 2011 at 6:19 pm

My boyfriend and his brother have created and developed an on-line game turned society called Minecraft. The premise is simple: there are elements in the form of blocks that you mine so that you may build… whatever you want.

I have never played an on-line game or a video game in my life and I will admit, watching demonstrations of the game did not make me that much more interested in playing but I must say, the game has gained notable momentum and popularity and has taken turns that interest even the biggest gaming skeptics (like me).

My ears perked up when I heard something about the players trying to develop what sounded like commodity trading. The world of Minecraft now has a budding currency called the cap and even more interesting, a sort of central bank seems to be forming as well.

On their own, players are now interested in and using updates on the message board about the value of stone (one of the more common elements) for example. The thing that amazed me the most was not that they were just trying to establish a monetary value of stone in terms of the “world” currency but there are posts on the message board about the relative value of one element in terms of others!

To me, this just goes to show that economics is a natural process. Furthermore, Minecraft is like a free market natural experiment. I mean, the economy is new and though there is a new buying and selling of commodities market, there is no currency trading, or import export market and everyone is still “on the same side”, which is to say, they function like they are all part of one country. As soon as one of those characteristics changes, there might be some problems like declining terms of trade, unequal market power, or collusion just to name a few. The bottom line is that so far, there is no competition or profit so things seem to be pretty Utopian but I think that time in Minecraft’s history will be over very soon.

I’m waiting for someone to try and sell something.

I also can’t wait to see if people end up developing more currencies than just one or even better, currencies of their own. Maybe we’ll see something like the euro. Wouldn’t that be something? We might see something like state formation soon and if that day comes to pass, I might set up a username.

Economics at The Beer Store

In Uncategorized on January 4, 2011 at 5:49 pm

Economics is the study of human behaviour influenced by incentives. So basically economics is watching, modeling, and predicting what happens when people do what they want, often when people don’t even realize they’re doing it…

More interesting than you thought, eh?

Economics is a way of looking at situations, or even a way of thinking (it’s a way of life for me), not “the study of business”.

Let me give you an example.

Someone special in my life currently works at The Beer Store. He would tell anyone that it’s a great job when he’s actually selling beer, something he knows a lot about. On the other hand, the days where the empties are never ending and not a soul gazes up at the walls scanning the selection of beer are a little… disheartening.

“Why spend your time having fun when you could spend time waiting around in the empty line?” he often asks.

To me, it sounded like an economic problem, two actually: adverse selection and revealed preference.

The way I see it, The Beer Store attracts people whose time is not worth very much, which explains the more than occasional, uh, problematic, rude, or pushy customer he encounters on these busy days.

If the average wait time in The Beer Store to return your, say, 50 empties, is 20 minutes, then you reveal to economists and Beer Store employees alike that your time is only worth $15 an hour which isn’t much over minimum wage these days. However, if that sounds like something you would work for as an hourly rate and the wait it still worth it, then think of it this way…

What is your time value of spending time with your: friends, children, husband, wife, boyfriend, girlfriend, et cetera? $15 an hour might not be a bad hourly wage rate depending on your situation, but would you rather have $15 or an hour of time doing something fun with someone you love?

This to me is a useful and revealing question because most people don’t ever think about a dollar value of an extra hour of playtime when they’re taking back empty bottles. However, when you think of it this way, maybe you’ll let your empties accumulate longer to make the dollar return higher and spend more time having fun and less time in line at The Beer Store… or, if you are more of a “tall can every now and then” person like me, you’ll just recycle them.

Of course, if you have nothing better to do on a Saturday afternoon, your time value of money might be rather low, which doesn’t really say anything about your willingness to trade fun for a couple bucks. In this case, you can still be mindful of your own personal time value of money even in times of “low time value”. If you quickly count them up then you can still save time and be home faster than if you let a begrudged Beer Store employee do it… ’cause if he has had a hard day, he might take it out on you and count slowly diluting your rate of return on your empty bottles…