Phoenix Area Economics Book Club

Article one is really the history of Adam Smith.

Article two, "The division of labor is limited by the extent of the market."

This is key and rarely covered in an econ class. Division of labor relies on the size of the market. The larger the market, the more you can specialize and be profitable. You can sell more of your product because there are more people to buy your stuff. You can hire more qualified people because there are more qualified people to choose from.

Article three, further explanation of how the size of the market matters greatly for division of labor.

Last of the Adam Smith.

http://www.econlib.org/library/Enc/DivisionofLabor.html

Division of Labor: The Concise Encyclopedia of Economics | Library of Economics and Liberty Though the scientific understanding of the importance of division of labor is comparatively recent, the effects can be seen in most of human history. It would seem that exchange can arise only from differences in taste or circumstance. But division of labor implies that this is not true. In fact, ev...

More reading from the seminar

http://www.econlib.org/library/Columns/y2007/Mungerpins.html

Michael Munger, I'll Stick With These: Some Sharp Observations on the Division of Labor | Library of Economics and Liberty "Why do you have 35 kinds of energy bars, but only one brand of straight pins? And why are those made in China? Why aren't your pins made in America?"

Last week I went to a Socratic seminar. Included with the seminar was a list of required reading.

http://www.econlib.org/library/Enc/bios/Smith.html

Adam Smith: The Concise Encyclopedia of Economics | Library of Economics and Liberty Adam Smith was born in a small village in Kirkcaldy, Scotland, where his widowed mother raised him. At age fourteen, as was the usual practice, he entered the University of Glasgow on scholarship. He later attended Balliol College at Oxford, graduating with an extensive knowledge of European literat...

Text copy of the previous article.

Milton Friedman’s Morals
As Trump and Clinton bang the drums for tariffs and renegotiated deals, where’s the popular voice for trade?
By WILLIAM MCGURN
Whether it’s Donald Trump complaining “we don’t win on trade” or Hillary Clinton vowing to appoint a “chief trade prosecutor,” our two main candidates for president are both campaigning on the idea that government needs to protect us from any foreigner who would sell us something at a better price than we could get at home.
Where’s Milton Friedman when you need him?
In 1980, the Nobel Prize-winning economist brought the message of free markets and free trade into the homes of ordinary Americans via an extraordinary public television series called “Free to Choose.” He did so without apology, without a prepared script and in plain language—moral as well as practical—that you didn’t have to be an economist to understand.
He also did it against the prevailing mood that while free markets might be nice in theory, in reality what America needed was a healthy shot of protectionism: e.g., “voluntary” restrictions on Japanese cars, stronger anti-dumping statutes and greater enforcement of state “buy American” laws.
Is it so much different today? In an age when the global economy has helped lift billions out of abject poverty and put in the pockets of our children iPhones with more processing power than the computers NASA used to put a man on the moon, trade has become a dirty word.
The negatives of trade seemed to be confirmed by a now-famous 2012 graphic by economist Branko Milanovic, which plots how much real income has grown between 1988 and 2008 by income percentiles of the global population. Called the “elephant chart” because of its shape, it appears to prove the Trump-Clinton critique: that the winners from trade are foreigners and our top 1%, while the losers are the working and middle class in the developed West, including the U.S.
But the London-based Resolution Foundation has now recrunched the numbers to adjust for factors including population growth and the collapse of the U.S.S.R. When it did, it found that though income growth for the U.S. working and middle classes was smaller than for their peers in other Western economies, it was not stagnant.
In a recent Financial Times story, Resolution Foundation director Torsten Bell sounded a distinctly Friedmanite note: “Although globalisation brings a range of challenges for lower income families, we need to be clear that weak income growth generally is rooted in domestic policy, and blaming globalisation takes the pressure off governments.”
What might such pressure look like? Well, Harvard economist Edward Glaeser suggests we might, for example, consider the way well-intentioned government programs can boomerang by discouraging work—everything from minimum-wage hikes that make low-skilled young men more expensive to hire to the huge marginal tax rates that kick in when, say, a single mom using some government benefit gets a job.
No one denies that Americans can lose jobs when an industry abroad is selling a good or service at a better price. But the high-employment, mass-manufacturing economy of the postwar years is not coming back no matter how high tariffs are or what we do to countries who manipulate their currencies. Even more interesting, the Resolution Foundation study reports average real income growth for lower- and middle-class workers in the U.K. was much higher than for their American counterparts, even though the U.K. has an economy that is more, not less, dependent on trade.
For his part, Friedman would ask by what right should an American be prevented from buying a lawful good or service if he found a better price from someone overseas? Where’s the morality of keeping a worker from selling the product of his labor to someone who happens to live in another country? And the following was Friedman’s response on “Free to Choose” when a union official challenged him on his bid to eliminate all tariffs over five years:
“The social and moral issues are all on the side of free trade. And it is you, and people like you, who introduce protection who are the ones who are violating fundamental moral and social issues.
“Tell me, what trade union represents the workers who are displaced because high tariffs reduce exports from this country, because high tariffs make steel and other goods more expensive, and as a result, those industries that use steel have to charge higher prices, they have fewer employees, the export industries that would grow up to balance the imports, tell me what union represents them? What moral and ethical view do you have about their interests?”
It’s still a good question. Because here we are, seven weeks out from an election in which the Republican and the Democratic nominee are trying to outdo each other in their opposition to trade. And neither appreciates the irony that the very definition of a bad trade deal is one that inserts the heavy hand of government between a voluntary exchange that leaves both Citizen of Country A and Citizen of Country B better off.
Write to [email protected].

An old American song asked, "Where have you gone Joe DiMaggio?" I would like to ask the same of Milton Friedman. Where are the men and women who can clearly explain why trade benefits all. Alas no one could do that better than Friedman.

http://www.wsj.com/articles/milton-friedmans-morals-1474329068

Milton Friedman’s Morals Main Street columnist William McGurn writes that as Trump and Clinton bang the drums for tariffs and renegotiated deals, where’s the popular voice for trade?

From two years ago. Stanford University discussing the trends that are pushing sports.

Here is Phoenix the Arizona Coyotes are talking about a new area in the east side of the valley. The Arizona Diamondbacks are in a debate with Maricopa County on repairs to the facility. My suspicion is that data is playing a role in both conversations. As the analysis of data becomes more important for a team, the facilities must keep up. I doubt that either facility is equipped to generate the data needed.

That's not that data is the only problem that both these teams have but I guarantee you its important.

https://www.gsb.stanford.edu/insights/five-key-trends-are-driving-business-sports

Five Key Trends That Are Driving the Business of Sports Some of the sports world’s top business leaders shared their insights at Stanford GSB’s inaugural Sports Innovation Conference.

Index funds.

http://www.aei.org/publication/happy-fact-of-the-day-a-private-sector-wealth-transfer-machine-has-saved-average-investors-1-trillion/

Happy fact of the day: A private-sector wealth-transfer machine has saved average investors $1 trillion - AEI Happy Fact: A private-sector wealth-transfer machine has saved average investors $1 trillion. That machine is Vanguard, and its model is worth highlighting. That’s from the opening paragraph of the Bloomberg article “How the Vanguard Effect Adds Up to $1 Trillion” by Eric Balchunas: Let me explain t...

Text only from the WSJ

Bank of Japan’s Kuroda Sees the Other Side of Negative Rates
Central bank governor signals cautious approach to further reductions

TOKYO—Bank of Japan Gov. Haruhiko Kuroda on Monday acknowledged the downsides of his negative-interest-rate policy, suggesting caution about further reductions.
Coming amid a global debate about the efficacy of extreme monetary easing, Mr. Kuroda’s unusual emphasis on the potential damage from negative rates pointed to a growing sense even among backers that easing can go too far.
The BOJ governor, speaking at a seminar in Tokyo, said negative rates particularly hit the profit of financial institutions, while low long-term yields hurt some other businesses by forcing them to put aside more money for long-term pension obligations.
The central bank must consider “that such developments can affect people’s confidence by causing concerns over the sustainability of the financial function in a broad sense, thereby negatively affecting economic activity,” Mr. Kuroda said.
The yen rose after the speech as investors dialed back expectations for further monetary easing. The yen was trading at 103.38 to the dollar late Monday in Tokyo, compared with 103.96 yen to the dollar just before the speech.
In February, the BOJ began applying a rate of minus 0.1% on certain deposits held by commercial banks after the BOJ’s purchases of Japanese government bonds—its main tool to fight deflation—began to run out of room. Yields on government bonds of up to 40 years fell sharply in the following months.
But capital investment and consumer spending failed to take off. Core consumer prices, including energy, fell for the fifth straight month in July, according to government data. And leading bankers criticized the policy, saying it would hit their profit, make lending harder and add to uncertainty—an argument that Mr. Kuroda effectively conceded on Monday.
The speech suggested he is “basically cautious” about lowering the negative rate further, unless a sharp rise in the yen threatens exports, said Yasunari Ueno, chief market economist at Mizuho Securities.
Mr. Kuroda was more optimistic about negative rate effects when he spoke just over a week ago during the Federal Reserve’s annual meeting at Jackson Hole, Wyo.
Still, Mr. Kuroda’s speech also included his customary declarations that he would do whatever it took to achieve his 2% inflation target. He said he would take additional action if necessary and said there would be “enormous” benefits from 2% inflation. “There may be a situation where drastic measures are warranted even though they could entail costs,” he said.
He reiterated that the BOJ had “ample room” to expand its target for raising the monetary base, currently at ¥80 trillion ($770 billion) a year, and could try “other new ideas.”
Norinchukin Research Institute chief economist Takeshi Minami said he suspected that Mr. Kuroda, by frankly speaking of policy side effects, might be trying to win over the public before delivering further easing. “He probably wanted to say that negative rates entail costs but they will give you greater benefits,” Mr. Minami said.
Mr. Kuroda’s words are under close scrutiny from investors waiting for the results of the central bank’s “comprehensive assessment” of its 3½-year campaign to end deflation. The BOJ announced the assessment in July and said it would be released at the end of the BOJ’s Sept. 20-21 policy meeting.
Write to Takashi Nakamichi at [email protected] and Megumi Fujikawa at [email protected]

Fascinating article. The Bank of Japan Governor explaining why negative rates haven't given the results they had hoped for.

Negatively effected the profits of financial institutions. (Not surprising as funds held on reserve at the central bank are charge fee. So institutions who are sound and have reserves are charged to be sound.)

The negative rates hurt firms who have to set aside more funds to meet pension obligations. (This affects the average person who also saves for the future, as they also do not get the savings rate they need in order to retire, buy homes, start businesses, etc.)

And the unintended consequence of negative rates, "that such developments can affect people's confidence by causing concerns over the sustainability of the financial function in a broad sense, thereby negatively affecting economic activity." (I'm not surprised at all. In Europe with the advent of negative rates savings rates actually increased and economic activity decreased. This is the exact opposite that the European Central Bank had hoped for.)

These negative rates and their consequences should be reminders the to Fed as it determines whether to increase rates in the coming months.

http://www.wsj.com/articles/kuroda-rules-out-stimulus-reduction-1473047549

Bank of Japan’s Kuroda Sees the Other Side of Negative Rates Bank of Japan Gov. Haruhiko Kuroda on Monday acknowledged the downsides of his negative-interest-rate policy, but ruled out a stimulus reduction.

Text only article from the WSJ

Everything You Need to Know About Negative Rates
The Bank of Japan, the European Central Bank and several smaller European authorities have ventured into the once-uncharted territory of negative interest rates. But what are negative rates, and how do they come about?
By CHARLES FORELLE
Updated Aug. 8, 2016 6:54 p.m. ET
The Bank of Japan, the European Central Bank and several smaller European authorities have ventured into the once-uncharted territory of negative interest rates. But what are negative rates, and how do they come about? Here are some questions and answers.
How do central banks work?
All are a bit different, but as a rule the central bank is the bank for a country’s (or monetary union’s) banks. Commercial banks have accounts with the central bank, just as households and businesses have accounts with commercial banks. A commercial bank’s account at the central bank is part of what makes it a bank: It allows it to go about the daily business of moving money.
What is a negative interest rate?
It’s like a normal interest rate, except the lender pays the borrower.
Back to central banks…
The most basic rate in a financial economy is the rate one commercial bank will pay another for the simplest, shortest loan: a loan of electronic cash overnight. Since commercial banks use the central bank as their bank, such a loan moves money from one bank’s central-bank account to another’s. The funds in these accounts are called reserves.
So how does the central bank influence that rate, called the overnight rate, or the Fed-funds rate in the U.S.?
First, it can directly set some boundaries.
The central bank can lend to commercial banks, simply by creating new reserves. Perhaps the commercial bank that is borrowing is doing so because it needs the reserves to make a transfer to another bank—in which case the new reserves would be moved to the central-bank account of that second bank.
The central bank can charge interest on the loan it made to the first bank, and it can pay interest on the deposit it is taking from the second bank. Those rates provide a ceiling and floor on the overnight rate: One bank wouldn’t borrow reserves from another bank if it could get the same loan cheaper from the central bank. Likewise, one bank wouldn’t lend reserves to another if it could get a better rate simply by leaving them on deposit.
Historically, central banks have kept broad space between the floor and the ceiling, and have manipulated the overnight rate by stepping in to the market for reserves. But that technique is less powerful in the era of quantitative easing, and central banks are now directly making use of the boundaries (or at least of the floor.)
What rate is now negative in Japan and the eurozone?
The deposit rate—the floor. Instead of getting paid for depositing with the central bank, the commercial bank now pays the central bank when it does.
Does this mean “interest rates” are negative?
Some, but by no means all. The ECB’s chief interest rate is its “main refinancing” rate—a rate paid by banks when they borrow from the ECB for longer terms than overnight. That rate is 0%. The Bank of England uses a deposit rate as its principal rate. (It is positive, at 0.25%.) To most people, “interest rates” means the rates paid on things like mortgages or car loans or credit cards. With rare exceptions, those rates are still positive.
How does a central bank actually impose a negative rate on deposit accounts?
It makes the electronic balances in those accounts shrink.
What does a commercial bank do when deposit rates are negative?
In theory, it should want to get rid of its extra reserves, because those have to go in a central-bank deposit account and will be shrunk. (Most central-bank regimes provide a way to avoid at least some of the negative-rate penalty: Banks are only charged for reserve balances above a certain amount, for example. But holding additional reserves carries a cost when rates are negative.)
Can’t commercial banks lend excess reserves to customers?
No. Reserves can only be held by institutions that have reserve accounts—generally other banks and possibly the government. It’s a closed loop. (Well, almost closed: Electronic reserves can be exchanged for bank notes.) Banks lend and borrow reserves among themselves. They can also buy stuff, like bonds, with their reserves, but such transactions just move reserves around among banks.
Why would a bank need to borrow reserves from another bank?
For starters, the bank might need to meet a minimum threshold for reserves set by the central bank or regulators.
But banks also need reserves to handle electronic transactions across the banking system. A customer’s deposit at a bank is just a loan to the bank. The funds aren’t kept in a vault. So a transfer of electronic money from a customer of Bank A to a customer of Bank B is a transfer of Bank A’s debt to Bank B. And Bank B needs to be compensated by Bank A for taking on the obligation. That compensation comes in reserves: Bank A transfers reserves to Bank B.
Where did the excess reserves come from in the first place?
The central bank created them. In normal times (and it has been a long time since we’ve seen normal times,) banks collectively more or less hold just the reserves they need, and they borrow and lend reserves among themselves. The ECB’s deposit facility, the one now subject to negative rates, had practically nothing in it until late 2008.
In these abnormal times, central banks have created huge volumes of extra reserves amid their emergency action: During the eurozone crisis, banks were too scared to lend to each other, so the ECB allowed needy banks to borrow cheap money in huge volumes directly from the central bank. And when a commercial bank borrows from the central bank, the central bank credits the commercial bank’s account: more reserves are created.
The Federal Reserve, the Bank of Japan, the ECB and the Bank of England have undertaken bond-buying quantitative-easing programs since the financial crisis. Each time the central bank buys a bond, it credits the reserve account of the bank whose customer was the seller. Yet more reserves.
Central banks created the extra reserves for which they are charging banks?
Yes. That’s why negative rates are often seen as a tax on banks.
So that does a negative deposit rate at the central bank accomplish?
It pushes down short-term rates on other types of lending. In theory, that is supposed to provide an economic boost. And, also in theory, it weakens the country’s currency.
How exactly does it make other lending cheaper?
Banks keep their excess reserves in a central bank deposit account. There are a lot of excess reserves, so there are a lot of banks trying to get rid of them by lending them to other banks. That competition pushes the overnight rate down, until it’s close to the deposit rate.
Those overnight rates drag down other rates: the rate one bank will pay another for a one-month loan, for instance, and a three-month loan and a one-year loan and so on. And those rates influence business and consumer rates, such as mortgages.
Negative rates also spur banks and other investors to buy things that are very much like money—short-term debt of ultrasafe governments.
Rates for financing in the capital markets—that is, the interest rate a company gets if it sells bonds to investors—are linked to the yields on government debt. All other things being equal, they go down when government-debt yields go down.
How does it weaken the currency?
Low rates should make euro investors try to move to places where interest rates are higher, such as the U.S. When they do so, they sell euros and buy dollars. (The same principle applies with positive rates.)
This can cause a cycle of rate-cutting.
The Swiss National Bank, for instance, wants to keep the Swiss franc from strengthening against the euro. So when the ECB goes negative, the SNB must go more negative.
Does it actually help the economy?
It’s hard to say. There haven’t been sharp turnarounds in the countries that have tried negative rates.
It remains to be seen whether stronger benefits come at more-negative rates. And it’s impossible to know whether things might have been much worse had the countries not tried negative rates.
Isn’t this bad for banks?
It is. Banks do lots of things, but the very core of banking is lending money at higher rates than you pay to depositors: Lending at 6% and paying depositors 2% is a nice business. But banks are now lending at extremely low rates, yet they have a hard time pushing the rates they pay depositors much below zero.
Why?
Depositors, especially smaller ones, can hold cash instead of facing negative rates. Cash is like a deposit with an interest rate of 0%. It doesn’t shrink: €10,000 in cash will be €10,000 tomorrow. Might want to buy a safe.
Commercial banks get the cash they give to their customers from the central bank: The central bank gives them bank notes and reduces their reserve balances. (That’s how reserves escape the closed loop.)
That’s good for banks, then—don’t they want to get rid of excess reserves?
To a degree. But banks don’t want customers to yank their deposits en masse. It would be better for banks if they could find a way to keep customers but charge them negative rates.
For central banks, it defeats the purpose of negative rates: If customers suddenly pulled huge amounts of deposits, commercial banks might start needing reserves—and that demand would push the interbank lending rate up, exactly the opposite of what central banks are trying to do.
How negative could negative deposit rates get?
No one knows. At a modestly negative deposit rate, cash probably isn’t worth the hassle: You need vaults and guards, and it’s difficult to use in large transactions. But at some point, that calculation changes.
What about the Fed? Can it go negative?
Possibly. Fed Chairwoman Janet Yellen has suggested as much. There are some wrinkles. Here’s one: The Fed’s version of a deposit rate, called interest on excess reserves, is now at 0.5%. But there are some government-linked institutions with accounts at the Fed, such as the Federal Home Loan Banks, that aren’t eligible to receive that interest payment—they get 0%. So those institutions have an incentive to lend reserves at less than 0.5%. And they do. As a consequence, the federal-funds rate—the overnight rate in the U.S.—is a bit below the floor established by the deposit rate.
If the deposit rate went negative, those institutions wouldn’t have an incentive to lend. The drop in supply might press the overnight rate up—against the grain of what the Fed would be trying to do.
—Colin Barr contributed to this article.

The death of Sears has been prophesied for quite some time. It appears the death is close at hand. Cash bleed last year was $1.5 billion. More than $100 million a month! They currently have $276 million on hand, with another $300 million loan from the CEOs hedge fund. That might get them through the Christmas shopping season. Supposedly Kenmore, Diehard, and Craftsman are for sale. Appliance sales are down 19% at Sears. If people aren't buying appliances at Sears, what are they buying? Nothing. Since 2007 half of Sears and Kmart stores have closed. This is creative destruction at work. It isn't pretty and creative destruction rarely is. Amazon, Target, Walmart, and poor management and ownership have played in Sears/Kmart's downfall. As a consumer I have benefited.

(Side note, I did a quick check there are five Kmarts in the Phoenix area. A million people and five Kmarts, none with a rating higher than 2 stars. Asking my students if they've ever been to a Kmart, to a student they say, "No." Whether it's true or not is indicative of Kmart's problem).

http://www.businessinsider.com/sears-workers-reveal-bad-workplace-2016-8?r=UK&IR=T

Sears workers reveal why the company is bleeding cash The stores are severely understaffed, with some operating on less than half of the employees they need, according to workers who spoke to Business Insider.