Tuesday, May 25, 2010

Good News, with a View

The editors of Forbes have asked me to contribute to a blog on their website and, while I am willing, I admit to being a tad intimidated.  Forbes is a big name and I’m just one generation removed from the other-side-of-the-tracks.  Yet, I digress and, besides, you know this.  Rather, I’d like to talk about some good news – the National Personal Finance Challenge. 


On 20 May, I traveled to Kansas City for the first National Personal Finance Challenge, where teams of four students; from the participating states of Oklahoma, Maryland, Kentucky, Missouri, Kansas, Illinois, Delaware, Nebraska, Tennessee, Minnesota, Arkansas, and Mississippi; competed for the national championship.  Each team had come up through state-regional and statewide competitions to be able to represent their state in the event.  The competition was the creation of the Missouri Council on Economic Education, and it was held at the Kansas City Federal Reserve Bank, providing space, food, and refreshments; while travel and accommodations for the students were paid by Wells Fargo Advisors.  It was a joy to spend the day with these young people. (A recap appeared in the Kansas City Star.)


The contest is simple.  (Yet, most American could not answer the questions.)  The students take individual multiple–choice exams for two rounds: Round 1: Spending and Credit and Round 2: Saving and Investing.  The highest three team-member scores are summed as the team score for each round.  For Round 3: Income and Money Management, the team submits answers as a team.  Finally, the top two teams (Minnesota and Missouri) engaged in Round Four: Personal Finance Potpourri – Quiz Bowl, to determine the winner; Minnesota – twelve correct to Missouri’s seven. (See below for a sampling of the Quiz Bowl questions.)


Why do I write about this?  I write about this, as this is an answer.  In my opinion, we have precious few answers.  I know the kids on the Missouri team, as they are from my son’s high school.  I know their teacher and the love she has for her kids and the passion she employs teaching them the principles of personal finance, as required for graduation in Missouri schools. Moreover, my youngest son was on the second-team from the same high school.  The competition really engaged him, like the other students, to learn as much as he could about personal finance.  In fact, the leader of the Missouri team is a 2010 Presidential Scholar – with a perfect score on the ACT and SAT – and, while he plans to attend Princeton to study political economy and government, he will be able to manage his money.  As a society, we have an obligation to help others do the same and too many of our country’s parents are not up to the task.


While I was watching the competition, the windows of the Fed provided a view to the north toward downtown Kansas City, the World War I Museum, and Union Station.  I could not help but reflect on the fact that many of our ancestors moved to, or through, Kansas City with dreams of a new and prosperous life.  While I was at the National Personal Finance Challenge, I spoke with many of the kids.  They were the children of these ancestors, “salt of the earth” kids living one of their lives’ successes with dreams of a new and prosperous life.  We need to remember, however, that adults devised the competition that gave them the chance to compete, to learn more about personal finance, and to celebrate their success with a trip to Kansas City.  Adults and corporations stepped up to help them realize their dreams.  Adults also set the example at home that made learning personal finance a natural act that can lead to financial success.  Yet, adults can and must do more.  Next time it is my turn to write, we’ll talk about an example; the Top Ten Teen Financial Tips; a program our MIZZOU undergraduates will present to fifty Missouri High Schools over the next school year. 


So, what are your suggestions for the Top Ten Teen Financial Tips?  Send us your ideas or add them to our blog at http://mufinancialtip.blogspot.com .



Sample Quiz Bowl Questions with Answers

1.     Name one type of trade restriction that causes prices to consumer to increase on foreign imports. Tariff or Quota

2.     According to the IRS, what is the maximum amount you are allowed to give up to any number of people, every year, without facing any gift taxes, and without the recipient owing any income tax on the gifts? $13,000 (in 2009 and 2010)

3.     A written authorization from a stockholder that empowers someone to vote on the stockholder's behalf. A proxy

4.     A 529 Savings Plan is designed to fund what specific expense? College education expenses



Thursday, May 20, 2010

Price Gouging

Andrew Zumwalt, M.S.

Price gouging sounds like a horrible thing. The “gouge” part really carries the negative connotation. When someone hears “gouge”, usually it’s in reference to “gouging out someone’s eye” which sounds pretty gruesome. It is surprising, then, to hear Professor Mike Munger, Chair of the Political Science Department at Duke University, talk about the positive effects of price gouging. The point Dr. Munger was trying to emphasize was the valuable information that prices convey. The best way to illustrate this is with same story he told.

 On September 5, 1996, Hurricane Fran slammed into Raleigh, North Carolina. Category 3, 120 MPH winds and 10 inches of rain caused trees to fall and damage to buildings. Roads were blocked and electricity was out for several days. With the absence of electricity, refrigerators stopped working and food started to spoil. Important medications like insulin and baby formula that must be kept cold began to warm and spoil in the September heat. Stores that had ice quickly sold out or the ice melted. The price of ice quickly rose to infinity, since ice could not be bought at ANY price.

Into this ice void, several young men from a nearby town that had been untouched by the hurricane rented a refrigerated truck, bought 500 bags of ice, and headed out to bring ice to Raleigh. They realized that the demand for ice would be greatest in the center of the city, so they cut through the obstacles with chainsaws and moved blockages off the road. When they got to the center, they opened their truck and sold ice for $12 a bag.

Twelve dollars a bag!?!! Ice normally sold for $1.70, and people were outraged about the high price of ice. Those outraged still bought ice, because the alternative (no ice) was worse and more costly in terms of spoilage, but they were still unhappy. Eventually, the police were called and the young men were arrested for price gouging and the truck with ice was impounded (and turned off in the impound lot, causing a big puddle). The price gouging law in North Carolina makes it illegal to sell items at a price “unreasonably excessive under the circumstances.” According to the story, people in line clapped when the police arrested the price gougers.  The clapping is confusing because the price of ice for those still waiting in line rose from $12 back to infinity (no ice at any price).  

The high price of ice actually provides some valuable information. First, the high price signals to consumers that ice is hard to come by or scarce. Consumers should only buy ice if they really need it. Who decides if the consumer really needs ice? The consumer! The consumer makes that decision by examining the benefits and costs of using that ice. For example, if ice was $12 a bag, you may not choose to keep the diet soda cold -- the benefit of a cold diet soda is not worth the cost. However, if one had to keep insulin or baby formula cold, they might consider the ice ‘cheap’ because having to replace those items might be very expensive, especially in the wake of a hurricane.

Second, the high price of ice sends a message to suppliers: Get ice here quick! The premium for ice encourages suppliers to redirect ice from places of plenty or produce more ice. The high price more than compensates for hurdles or obstacles that the supplier might encounter. However, as more suppliers or producers provide ice, the price of ice will fall as competition intensifies.

Both of these benefits disappear with anti-gouging laws. The important message about the scarcity of ice disappears when the price remains unchanged. Consumers may buy three bags of ice to keep their diet soda cold, and, if the supplies are limited, those bags may be gone when the consumer with the insulin or baby formula arrives. Empty store shelves of bread and milk before a big snowstorm is an image you may have seen.

The message to suppliers is also lost. If a premium cannot be charged to deliver goods through obstacles or at a greater cost, then suppliers may not have enough incentive to produce or deliver the goods. This lack of incentive causes a perverse lengthening of the shortage until obstacles or challenges are removed. In this way, anti-gouging laws are similar to price controls. The best example for the effects of price controls is the rationing of gasoline during the 1973 oil crisis. By limiting the rise in price, suppliers may have little incentive to deliver. They may have other incentives (corporate goodwill?), but there will be a definite subdued response.

In summary, anti-gouging laws may cause more immediate and lasting harm by not allowing prices to send their powerful signals to both consumers and producers in the wake of a disaster. Suppliers may have little incentive to supply goods at the before disaster price, and consumers will not have a strong incentive to curtail their consumption.

Other sources for information about price gouging:

The article that inspired this tip: They Clapped: Can Price-Gouging Laws Prohibit Scarcity?

The podcast that inspired this tip: Munger on Price Gouging from EconTalk

The Price of Everything: A Parable of Possibility and Prosperity by Professor Russell Roberts; chapters 1 and 2 are available for free

Missouri Attorney General’s website on price gouging

An economist responds to his mother about price gouging from Marginal Revolution, an economics blog

Recently, a water main broke in Boston causing a scarcity of clean water. Several economics writers took the time to remark on the price gouging actions:

See the Invisible Hand is a companion blog to the textbook Modern Principles of Economics authored by Tyler Cowen and Alex Tabarrok

What’s wrong with price gouging? Is an editorial written in The Boston Globe about price gouging.

Freakonomics Blog post about the event

Andrew Zumwalt, M.S.
Director of the MoTax Education Initiative
162 Stanley Hall
University of Missouri
Columbia MO 65211


Wednesday, May 12, 2010

A Little Economics Goes a Long Way

Antoine Cournot was a 19th Century French economist, mathematician, and philosopher.  He is widely known for his theory of monopoly and duopoly but I like him because of his mathematical proof known as Cournot Aggregation.  Cournot aggregation, mathematically, is written as follows; Wxxx,x + Wyxy,x = -Wx [i].  (For those of you better versed in English, as opposed to Greek formula, you may want to skip the endnote that explains the formula.)  In plain English, it is like my high school friend Monty would have said, “If the price of suits goes up, I don’t care.  I don’t wear suits.  But if gasoline for my ’57 Chevy goes up, I’m in a world of hurt, as that 327, V-8 engine purrs on premium gas!”  Monty probably didn’t get more than 8 miles to the gallon and he drove a lot of miles. On the other hand, if the price of gasoline fell to half of what it was, Monty would have had enough money to take his girl to the drive-in movie[ii].


The following is a table of the rate of price change for broad categories of goods that we purchase (for more information: Bureau of Labor Statistics).  The second column is the percentage change in prices between March 2008 and March 2009, the third column is the percentage change in prices between March 2009 and March of this year, while the fourth column is the combined rate of inflation over the period 2008-2010.  I have taken the liberty to highlight double-digit increases in prices in blue and any decrease in prices in red.  As you can see, the change in prices is not uniform across categories.  Take, for example, prices from 2008 to 2009, across all goods, fell by 0.4%.  Yet, for most categories of goods, prices actually went up but these increases were outweighed by the decreases in prices for transportation and fuel during the 2008-2009 time period.


Category of Expenditure

Rate of Change March 2008 – March 2009

Rate of Change March 2009 – March 2010

Rate of Change March 2008 – March 2010

All Goods




Food and Beverages








Food at Home




Food away from Home




Alcoholic Beverages








Fuels and Utilities




Household furnishings












Private Transportation




Motor Fuel




Public Transportation




Medical Care








Sporting Goods




Other Recreation Goods




Recreation Services








College Tuition








Other Goods & Services








Personal Care





Now, look at what happened to fuel prices and transportation between 2009 and 2010.  You will note that while prices for fuel fell from March 2008 to 2009, to 60.4% of their March 2008 price, their price rose to 85.2% of the March 2008 price, by March 2010.  (Here’s the math: If something cost a $1 in 2008, it would fall to $0.604 in 2009, with a 39.6% decrease.  Then, if the $0.604 price increases by 41.1%, you would have $0.852.  Still, this price is below $1, but that bloke that purchased the Hummer in March of 2009, sure thinks that gasoline is more expensive!)


Look back at the Financial Tip from the last week of January 2010: Are You Middle Class?.  In it you will see the proportion of the average household budget spent on various categories of goods.  The table tells us that housing takes up the largest proportion of the average budget.  Thus, when the price of housing decreases, assuming you don’t own the now low-priced home, the total effect on you is an increase in consumption of other goods, including savings.  On the other hand, if you are working part-time while you are going to school and much of your income purchases college tuition, you notice the decrease in your consumption of everything else, as college tuition rose, on average, by 12.15% over the past two years. 


You might be wondering, “How is this a financial tip for financial success?”  The lesson is simple, yet not widely practiced.  First, be modest in your expenditures and keep them at a reasonable level, relative to your income.  If the average budget share for your income category is 20% of expenditures, try to keep yours below 20%.  If you do this for all categories of expenditures, save 10% of your income, and have an adequate reserves to provide liquidity in the case of an emergency, you are a financial success.  Moreover, you didn’t have to learn Greek, nor spend like them, to get there.


ps:  For ideas on how to save money, check out this link: 66 Ways to Save Money.


[i] The mathematical “bottom-line” states that a percentage change in the price of a good x will have a resulting percentage change in the consumption of good x (xx,x, own price elasticity of demand) and all other goods y (xy,x, cross-price elasticity of demand) that, when weighted by their respective budget shares (W), is equal to the negative of the share of the consumer’s budget that is spent on good x (-Wx) .  Thus, changes in prices have a greater effect, the greater the proportion of your budget you spend on the good with the price change.

[ii] I know that many of our student readers have never seen a drive-in movie, nor do they have the foggiest idea what is so special about a ’57 Chevy.  Take it from me, however, that magic would follow when a ’57 Chevy was paired with a date to a drive-in movie, during the 1960’s.

Thursday, May 6, 2010

Missouri Personal Finance Challenge

Yesterday at the Reynolds alumni center at the University of Missouri eight teams from high schools across Missouri got together to compete in the State Personal Finance Challenge.  Our department was invited to participate in this event as judges and scorekeepers, and we were so impressed with these bright high school students that we decided to dedicate this entire Financial Tip to them.

First – some background on the Personal Finance Challenge.  Missouri’s Personal Finance Challenge is sponsored by the Missouri Council on Economic Education (http://cas.umkc.edu/mcee/).  On their website we read:

You can't read the news without seeing why a fundamental understanding of economics and finance is so important to the future of our youth and our country.

The admonishment of Arthur Levitt, former chairman of the New York Stock Exchange, that “the American economy is the eighth wonder of the world; the ninth is the economic ignorance of the American people,” is true.

Lou Harris and Associates recently polled and documented the extent of economic illiteracy among high school students and adults. The poll revealed that:

·         Fewer than half the students surveyed can define a budget deficit

·         Fewer than half of the adults and 1/3 of students understand what it means to say that the Gross Domestic Product has increased

·         Most adults thought that economists would recommend increasing regulations to reduce pollution rather than increasing the costs to those who pollute

·         Sixty-percent of high school students did not know that if rent controls are placed on apartments that eventually there will be fewer apartments to rent


The Missouri Council on Economic Education is dedicated to improving the quality of education received in the high schools across the state and to change statistics like you see above.  Mike English, along with his very talented team, put together this year’s challenge.

All high school students were invited to first participate in an online challenge.  Up to three teams from each school went on to participate in a regional competition, and the top two teams from each region were invited to come to yesterday’s state competition.

Here are the high Schools that were represented at the state competition:

·         Parkway Central

·         Liberty

·         Savannah

·         Humansville

·         Hannibal

·         Ozark

·         Rock Bridge Team A

·         Rock Bridge Team B

The teams competed in individual and team tests consisting of questions about credit, saving/investing and income/money management.  The two highest scoring teams faced off in a quiz bowl.  In the end, Rock Bridge Team A won (in a very close game) and, along with their teacher Susan Lidholm, are headed to Kansas City on May 20 to compete in the national competition!

Despite all the negative data we usually hear about high school student’s knowledge of economics and personal finance, all of the students that competed today showed that personal finance initiatives across the state are not just working, but working well.  We have no doubt that these students will go on to be industry leaders who will help change the economic future of their families and communities.

Congratulations again, Team A from Rock Bridge High School!  We look forward to seeing you and cheering you on in Kansas City!

Ryan H. Law, MS, AFC
Department of Personal Financial Planning


Office for Financial Success Director

University of Missouri Center on Economic Education Director


239 Stanley Hall
Columbia, MO 65211-7700