econlife - Celebrating Alexander Hamilton’s Economic Independence by Elaine Schwartz

The United States declared independence from Great Britain on July 4, 1776 and won the American Revolutionary War. But still, we were not truly independent. Our agrarian economy depended on Great Britain. They had the banking system, they had the factories, they had the knowhow.

But we had Alexander Hamilton.

Alexander Hamilton’s Development Plan

As Secretary of theTreasury, Alexander Hamilton’s goal was to expand the U.S. banking system, our transportation infrastructure, and technological innovation. He wanted factories that would process what our farms and plantations grew. So, he explained to the Congress what they had to do.

1. Establish Public Credit

• Hamilton said a national debt is a blessing if it’s not too large. Borrowed money had helped the U.S. finance the Revolutionary War. Also, though, those lenders had to know we would pay them back. With European creditors, the U.S. had to pay back the money that was due them while domestic creditors needed to know we had a viable plan. Only then could Hamilton establish the good credit that was necessary for a government to borrow the money it needed.
• Since then, the U.S. has been borrowing money and paying it back. However, some of us are worried that the debt is becoming too large. Just like your own income determines the wise amount for you to borrow, so too does the GDP for our nation. Below you can see that recently the debt is a bigger proportion of the GDP:

 

2. Create a Banking System

• Composed of financial intermediaries that connect savers to borrowers, a banking system “pumps” money around the economy. Banks loan money to business start-ups and help firms finance inventory. They expand and contract the money supply and purchase the bonds that nations sell to raise money. By establishing the First Bank of the United States, Hamilton generated the beginning of a banking system that pumped money around the U.S. economy.
• Now, while there are close to 5000 banks in the U.S., the large ones dominate. Below, you can see how the system has consolidated. The four with the most assets are Citi, JP Morgan Chase, BOA and Wells Fargo.

Consolidation of U.S. banks:



Declining number of U.S. commercial banks:

3. Encourage Economic Diversity

• Economic growth through diversity was the third leg of Alexander Hamilton’s plan for independence. Recognizing that the U.S. in 1790 was a farming economy, he sought tariffs and subsidies to protect a young manufacturing sector. He supported a system of tariffs to encourage innovation. Correct again, Hamilton knew that the combination of agriculture, manufacturing, and invention could form an economic foundation from which we could build.
• Looking back, we can say that Hamilton created our springboard. About a different kind of independence, Hamilton’s foundation facilitated the leap beyond our borders to globalization. It let us evolve from an agricultural economy to a productive behemoth that participates in the world markets and global supply chains that feed our growth.

You can see that the U.S. is very much a part of the world economy:

Exporters



Importers

Our Bottom Line: Déjà Vu

Hamilton’s goals are timeless. We still need to manage sovereign debt wisely, support a vibrant banking system, and encourage economic growth.

My sources and more: This Fortune article sums up the Hamiltonian legacy ideally.
Please note that this post is an updated version of what we have published on past Independence Days.


Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Solving McDonald’s Soggy French Fries Problem by Elaine Schwartz

Several months ago, McDonald’s said it had solved its soggy French fry problem. The firm assured a reporter that delivered fries would be crunchy. They just had to depart the restaurant when hot and fresh and arrive at our homes within 30 minutes.

For deliveries though, it might not be so easy.

We’ll start with McDonald’s first French fry problem…

A Consistent Crunch

Ray Kroc

One day in 1954, a curious milk shake maker salesman appeared at the McDonald’s restaurant near Pasadena, California. No one restaurant had ever before ordered ten of his Multi-mixers (simultaneously, each one could make five shakes). He personally wanted to see what hamburger restaurant could possibly require so many milk shakes.

The salesman’s name was Ray Kroc and he was amazed at what he observed. “Like ants at a picnic,” McDonald’s workers began their day carrying the meat and potatoes from a shed to the restaurant in a perfectly regimented fashion. They were dressed meticulously in trousers, white shirts, and hats. Close to opening time, lines of customers formed. When asked, many said they returned daily. Some left with bags full of the fifteen-cent hamburgers.

Immediately Ray Kroc grasped the potential of the McDonald’s operation. He asked the brothers if he could have the exclusive right to develop a national chain of McDonald’s franchises. “Yes,” was the answer (with much more negotiation) and the rest is history.

The French Fries

One of Kroc’s first problems was developing a consistent crunch for his French fries.  Although suppliers were providing the same russet potatoes and using precisely the same soaking and cooking techniques, still the franchises’ fries varied. Some would be perfect while others were too soggy.

After spending millions of dollars and hundreds of hours, McDonald’s researchers concluded that their storage and frying procedures needed tweaking. Storage time had to be three weeks—long enough for the sugars to turn to starches. Frying them, they had to be sure that the oil temperature did not rise more than three degrees above its lowest point. Then, with an electrical sensor maintaining the three-degree difference, they achieved a consistent McDonald’s crunch.

The Current Crunch

Maybe we should say déjà vu.

Now, McDonald’s seems to have an equally tough French fry problem.  Describing his French fries, an eater.com reporter wrote that the delivery had arrived within a half hour. However, only half were crispy and all were lukewarm.

Two days ago, the NY Times explained the solution in a lengthy article. Its focus was Lamb Weston, a McDonald’s French fry supplier. At one of its farms, Lamb Weston has been trying to figure out the kind of potato that would make a less limp fry. Concluding that water is the enemy, they’ve been using minimal irrigation through computers that monitor potatoes’ nutrient levels.

But that was only the beginning.

At the frying stage, they developed a new batter that, when combined with the new potatoes, will remain crunchy for almost an hour. (The current state-of-the-art is 12 minutes.) As you might imagine though, the fries’ journey from the restaurant to our homes could undo all. If that fry is placed next to a milk shake, both will wither. Appropriate ventilation and a moisture free environment are crucial. Ideally, they just need to put the French fries in a lightly folded paper bag.

Our Bottom Line: Monopolistic Competition

Last year, McDonald’s tested its delivery service in Florida. The next step was to offer it at 5,000 U.S. locations. Because they project a $100 billion market, you can see why a crispy French fry is so important.

French fries are their #1 delivery product:



As economists we can say that McDonald’s is trying to achieve product differentiation. Especially because they compete in a monopolistically competitive market, they have to make themselves better than other restaurants. As a market structure with many smaller firms that can easily enter and exit, monopolistic competition means that McDonald’s needs to stand out.




Having crunchy French fry deliveries would help.

My sources and more: Thanks to the NY Times for alerting me to the leap forward in French fry crunch technology. Then, Bloomberg and Eater had the McDonald’s facts as did excerpts from my Econ 101 1/2 about Ray Kroc.

Please note that today’s featured picture is from Eater.com.


Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Why Superstar Salaries Are So High by Elaine Schwartz

During a Sunday evening, in a brief news release, we learned that LeBron James was going to the LA Lakers. His price was $154 million.

Why so much money?

Superstar Qualities

Two sports economists tell us that NBA (National Basketball Association) superstars have certain characteristics. As a top draft pick, the player needs to have been touted by the league from the beginning. Reflected by countless achievements, the person has to be considered a premier talent. And looking at a career, that excellence should have lasted for many years.

On the table below, you can see the credentials of five NBA superstars. (VORP is Value Over Replacement Player):

Large Audience

A second ingredient in the recipe for a superstar salary is the size of your audience. To get more of a feel for what that means, let’s start with the nineteenth century diva economists like to cite. As the Luciano Pavarotti of her era, Elizabeth Billington was a superstar. Yes, she earned a whopping £10,000 to £15,000 in 1801. But still, her income was limited by the size of her audience at Covent Garden or Drury Lane.

Not LeBron’s.

Through TV and radio, online and at the stadium, his audience and its positive externalities are almost unlimited. Modern technology has vastly inflated what big stars can earn.

Talent and/or Popularity

Finally, we can contemplate a debate between two academics. One says the key to the superstar salary is talent while the other says it is a combination of talent and popularity. After all, you can have people with equal talent but then popularity kicks in to create the superstar status.

Discussing each side, one paper suggest it depends on the person. Larry Bird, they say, is a superstar because of his talent. But with LeBron, they say his popularity helped to fuel his salary.

Our Bottom Line: Supply and Demand

So, with limited supply and the huge (adulatory) audience that technology facilitates, 21st century markets for superstar basketball players generate salaries as high as a four-year deal for $154 million.

My sources and more: First, thanks to Sophie B. for reminding me that it was time to return to superstar salaries. Naturally, our first stop was the NY Times discussion of James’s salary and his accomplishments. Then, although this paper from the Peterson Institute provides insight, the classic study has been around since 1981. And finally, for the best detail and analysis, I suggest this recent paper on superstars and attendance and an interesting rationale for not calling Charles Barkely, Shaquille O’Neal, Kareem Abdul-Jabbar, or Kobe Bryant superstars.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - Who Will Care About the Starbucks Price Hike? by Elaine Schwartz

Starbucks just announced that a cup of brewed coffee will cost 10 to 20 cents more. While the price increase depends on where you live, a “tall” (their smallest size except for the “short”) probably is somewhere between 1.95 and $2.15 before tax.


Who agrees with Leah?

It could relate to Dunkin’ Donuts and McDonald’s, a Frappuccino, and a rubber band.

Substitute Products: Dunkin’ Donuts and McDonald’s

Thinking of the recent price hike, we need to ask if we have substitute products. I suspect the answer depends on the coffee drinker. Some have said that there is a coffee war among Dunkin’ Donuts, McDonald’s and Starbucks. If you agree, then the first battle started in 2002 when Dunkin’ Donuts announced a new line of espressos, cappuccinos, and lattes. As for McDonald’s, it entered the fray with McCafé in 2009. Lower priced than Starbucks, it offered its version of the latte, the cappuccino and the mocha to which it recently added a caramel macchiato, a vanilla cappuccino, and an americano.

If the three brands are interchangeable, then the price increase will make Starbucks less attractive. On a Starbucks graph, an economist would shift the demand curve to the left to display less demand because people were switching to cheaper substitutes.

Reference Points: Frappuccinos

Higher Starbucks prices can also take us to reference points. Tall, grande, and vente cups of coffee have always been the cheapest drinks at Starbucks. Because I buy the coffee that is custom made in their Clover machine, my price is closer to $3.00. As a reference point, that clover makes the price of a basic cup of coffee, even after an increase, look inexpensive. Similarly, compared to a Frappuccino, a higher priced plain coffee is still pretty cheap.

Our Bottom Line: Elasticity

Maybe though it all comes down to your elasticity. And that is where the rubber band enters the picture.

If price changes a lot and the quantity we buy remains almost the same, then our demand is inelastic. By contrast, if price swings have a big impact on buying, then our response is elastic. With elastic demand, like a rubber band, the quantity we demand stretches when price drops and contracts when its rises.

At Starbucks, we see inelastic demand from those consumers who believe Dunkin’ Donuts and McDonald’s are not substitutes. Similarly, pricey Frappuccinos that are reference points only reinforce inelastic demand. No matter what, consumers with inelastic demand buy their Starbucks coffees.

However, there is price point for all of us when our inelasticity becomes elastic. And that returns us to Leah’s Tweet.

My sources and more: After seeing the increase at WSJ, I went to Eater which is always good for food and drink insight. Meanwhile Refinery29 told a bit more and Money looked at the coffee wars. Finally, I even discovered the coffee war academic perspective here.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

From the Homeschool Front … Learning to Drive by Colleen Hroncich

My husband didn’t get his driver’s license until he was 19. One of my favorite stories from his childhood is when his family rented mopeds in Florida and he had to ride in the sidecar of his mom’s bike. As a 19 year old. “Go faster!” he kept urging her. That experience inspired him to get his license that summer.


When we had kids, my husband always said he didn’t want them to get their licenses until they were 18. I was willing to wait until 17, but I thought 18 was ridiculous. I wanted them to have more experience before heading to college … and I wanted someone who could help with errands. As the kids got older and were involved in more activities, my husband sometimes had to be the runner. Suddenly he supported our kids getting their licenses at age 16.


I took our daughter to get her permit on her 16th birthday. She had prepped for the test, largely on her own, for several weeks; she passed with flying colors. We started practicing in an empty parking lot and soon graduated to local roads. Since I don’t really like to drive, my daughter got plenty of practice. After just three months with her permit, she drove five hours home from New Jersey while I “relaxed” (not quite!) in the seat next to her.

What a blessing it has been to have a teenage driver in our house! I mentioned in a previous post that I was in a fellowship program over the summer and wasn’t living at home. There’s no way I could have done that without my daughter being able to drive. Moreover, as homeschoolers, we have to get our kids to all of their activities without school buses. Having another driver makes that much easier. It also helps that I don’t have to get my daughter to and from her part-time job.


I’m shocked at how many kids have no interest in getting their licenses – and how many parents don’t want their children driving. While motor vehicle accidents are the leading cause of death for teens, most teens will not have an accident and most accidents are preventable. Moreover, there is something to be said for having your child learn to drive while he or she has several years left of living at home under your guidance.


Learning to drive is a great way to teach responsibility, too. Kids can pay all or a portion of their car insurance and gas, which can help them understand and appreciate the costs involved in driving. Upkeep of the car can also be part of the deal. The threat of losing driving privileges is a powerful incentive for good behavior.



Having our oldest child learn to drive has been an educational experience for all of us. We know we need to remind her about safety and the risks of driving – especially as she becomes more confident in her abilities. That increased confidence is often what leads to teenage accidents. But all in all, it’s been a huge benefit for our family.

Colleen Hroncich loves that homeschooling allows her to learn right alongside her children. A published author and former policy analyst, Colleen’s favorite subjects are economics/public policy and history. She has been active in several homeschool co-ops and is a speech and debate coach.

econlife - Do We Really Have a Student Loan Crisis? by Elaine Schwartz

The Wall Street Journal recently introduced us to an orthodontist who had not yet repaid $1 million of his student debt…and probably never will.

You can see below that becoming a dentist is expensive:



Not quite typical, this orthodontist was one of 101 people whose outstanding federal student loan exceeds $1 million. At the $100,000 level, there are approximately 2.5 million individuals. As for the average, it is a more down-to-earth $17,000.

Should we be concerned?

These are some of the facts…

Where?

Based on four-year state institutions, the Midwest and Northeast have the most student debt. If you live in New Hampshire, Maine, or Pennsylvania it is likely that you owe more than someone who comes from New Mexico, California or Wyoming. But you probably owe more because tuition is higher.

Below, the darkest states have the highest proportion of student loans:

Who?

The AAUW (American Association of University Women) tells us that women hold two-thirds of all student debt. They point out that yes, there are more female students. But still, women’s average debt exceeds men’s. And the burden is compounded by the amount of interest women owe because they repay debt more slowly, .

You can see how the AAUW uses two graphs to connect the gender pay gap to the college loan problem:

How Many?

Fifty-three percent of all adults with a bachelor’s degree or more education have outstanding student debt. Furthermore, comparing 2011-2012 to 1989-1990, we’ve moved from half to two-thirds of all college seniors using loans for their education.

How Much?

Now at $1.3 trillion, the amount of student debt owed by U.S. households has tripled from 2001-2016. However, unlike other forms of household debt, delinquencies have been rising:




So, should we worry?

Our Bottom Line: Economic Growth

In their “Feds Notes,” the Federal Reserve does not sound very concerned. Attributing the surge in loans to higher college enrollment and rising tuition, they don’t believe the debt will constrain the consumption that is close to 70% of the GDP. Furthermore, because 90% of outstanding student loan debt is guaranteed by the federal government, financial institutions are not “highly exposed.”

They do express concern that household spending could be crowded out by debt service but then conclude a minimal drag on GDP growth. Similarly, they point out that at risk borrowers could jeopardize other credit markets but again conclude the risk is not considerable.

Instead, the Fed reminds us that the loans are adding to the human capital that fuels consumption. And that returns us to our orthodontist who owns a $400,000 house, drives a Tesla, and earns more than $255,000 a year.

My sources and more: Having just seen a WSJ  article about the largest loan careers, this Brookings commentary was especially relevant. From there, this CNN  student loan discussion provided a new perspective as did the AAUW report. But if you want more data, Pew, the Urban Institute, these “Fed’s Notes,” and a 2018 Federal Reserve Report have it.

Please note that the numbers I use from WSJ differ slightly from a 2018 Federal Reserve Report.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.