Why people in the ghetto have flatscreens and millionaires go bankrupt

I always entertain new ideas for blog topics. Per special request of my favorite older brother, I decided to explore this particular topic.

How do people choose to spend their money? Consumerism is a particular interest of mine as evident by my prior posts, but I have only discussed how people can choose between comparable items, not the specific type of items to purchase.

Of course, there are always the extreme cases of shopaholics or excessive gamblers that spend every cent of their money without making “rational” decisions, but what about the “normal,” “rational” consumers?

The famous “Hierarchy of Needs” introduced by Abraham Maslow in 1943 offer a window into the human decision-making process. The foundation of the pyramid is physiological needs such as food and sleep followed by safety needs like shelter and a job. Love/belonging, esteem, and self-actualization complete the pyramid. The obvious (or at least what I would assume to be obvious) conclusion from analyzing the pyramid is that people would do their utmost to satiate their physiological needs, i.e. breathing, water, and food. The Merriam-Webster dictionary defines physiological as “characteristic of or appropriate to an organism's healthy or normal functioning.” Healthy and normal functioning is rather subjective and for most people, it includes much more than food, sleep, and breathing.

Human beings attempt to make rational decisions, but unfortunately most decisions that people make are motivated by irrational incentives and needs. That is why people living below the poverty line have cable and big screen televisions and why millionaires go bankrupt after spending too much money on cars and lavish vacations. Those types of “entertainment” and material items are, to some people, vital aspects of satisfying physiological needs. To some people, those needs are just as or even more important than living in a nice home in a safe area.

In a similar respect, depending on economic situation, individuals have different feelings toward social issues. When you have a good job, nice apartment, and plenty of food, you no longer have to worry about basic needs. People in those types of situations can divert their attention toward social causes like global warming and human rights. For the 1.4 billion (yes – BILLION) people who live below the poverty line, something like global warming is as trivial as deciding which designer sunglasses to buy.

So the answer as to why people choose to spend money that they don’t have on things that they don’t need is simply because they want to and by doing so, it makes them happy. Of course, measuring the amount of utility that someone receives from spending money on a particular item is another topic entirely.

Maslow's Hierarchy of Needs

More Coffee Please!

For those who crave the intoxicating aroma, rich flavor, and relaxing warmth of coffee, simply cutting back on consumption is not even an option. Consumer reports constantly tell of the negative impact on coffee shops due to the onset of recession, but anyone who has ever walked into a Starbucks, may think differently - there are constantly lines at coffee shops, regardless of what time of day it is. The reason behind this phenomenon also explains why the stock of coffee wholesalers and retailers is rising despite recession.

Instead of cutting back on quantity of coffee, people are cutting back on “quality” of coffee – trading the gourmet venti half caff caramel macchiato for a home-brewed cup of joe. A cup of coffee can cost anywhere from $1.25 from a street vendor to $2 at trendier shops and even as much as $3 at a sit-down restaurant. Even McDonald’s coffee prices are up – the 70 cent cup is a thing of the past. So if someone drinks two cups a day, at $1.75 per cup, that would be $1,277.50 a year! It is even more overwhelming when you factor in the price of specialty coffee drinks. A latte at Starbucks is about $4 on average, so if someone were to substitute their two high-priced gourmet lattes for just one latte and a cup of coffee, they could potentially save $821.25 or a pair of Christian Louboutin patent pumps.

If you want to cut back on coffee expenses even further, making coffee at home seems like a logical solution. For those looking for simplicity, a Keurig coffee brewer is the easiest – you just pop in a K-cup, and there is no measuring or mess. The brewers are not cheap; they run anywhere from $80 to $250, but it is an investment. The K-cups, purchased in bulk cost about 40 cents each. Some more quick math proves that 2 cups per day plus $100 for a machine results in a bill of $392, which is almost $900 less than buying coffee at a shop.

However, if you can sacrifice the extra minutes in the morning, you can prepare coffee the way I prefer – with a percolator. If you buy gourmet coffee in bulk (which is necessary for people like me), each cup averages about 25 cents, and the total bill to quench a 2 cup a day habit: $182.50.

I admit to buying coffee out when I need an afternoon pick-me-up or I am running to a morning class, but personally, I garner a certain amount of satisfaction in knowing that I saved $1.50 on my cup of coffee, but maybe that’s just me.

What do Tom Brady and Ben Bernanke have in common?

You are more likely to find me reading a book on a Sunday afternoon than watching a football game, but nonetheless I try to stay in touch with at least the major happenings in the sports world. If I had to choose my favorite sport to watch on television, I would have to pick soccer. I look forward to the minor collisions that result in grown men dramatically flinging themselves to the ground, pulling into the fetal position, with the sharp look of pain in their eyes, only to stand up, aloof, brushing off their shirts, as if nothing happened, as soon as the yellow (or red) card is given.

Unfortunately, not every athlete returns unscathed from a strategic hit during a game. I read an article in the Financial Times yesterday about the economics of sports injuries. (Not the typical article that I would usually read, but I have to admit, the picture of Tom Brady caught my eye). The article pointed out, what is to obvious to all sports fans, that certain players, like Tom Brady, are paid significantly more than the rest of the team, sometimes 10-20% of the entire salary budget. While key players can greatly influence the success and failure of a team, by hiring one expensive player, the owners are putting their eggs in one basket and hoping that their investment will pan out. Sometimes the risk is worthwhile, but one critical injury can ruin a season. In analyzing NFL drafts, some economists argue that teams with early picks should choose the #1 prospect and trade him for several other well-respected players. Statistics will tell you that it is a safer investment to choose several good players (hoping that one or more will have latent skills) than investing an enormous amount in just one player.

Deciding who earns the highest salaries in sports is relatively simple by comparison to other industries. A simple supply and demand model dictates that the most popular players, whether they be the most successful or charismatic, are the most entertaining to root for and therefore add the most value to the team.

If only matters of government were as simple. Virtually every government committee is organized as a team, with one strong individual leading the rest of the pack. However, unlike sports, which can display success or failure in the matter of hours, economic success and failures can take months to manifest. And while the public can choose some officials through elections, we really only choose our financial leaders indirectly through the elections of other, higher offices.

So how do we know that every decision that the Fed makes is the right decision? We don’t. Of course, we hope it is. We can only bank on the fact that several economic minds are thoroughly planning out the future of our economy and that we chose the right person to lead the team. However, I feel confident that the Fed will do its utmost job to remedy the state of the economy and allow everyone to return to a high state of prosperity because an improvement in the economy will benefit us all. After all, the Fed is composed of economists, and they are motivated by incentives - what better negative incentive than a job loss, lack of public support, and loss of wealth?

We just can't escape Wall Street

One cannot walk down the street without a reminder of recession. Whether it be a "for rent" sign, a going-out-of-business sale or empty tables at a once-crowded restaurant during lunchtime. The financial news is saturated with analysis of the economic state and news of debt, bankruptcy, and large-scale layoffs of employees. It only seems logical that people would look for an escape from all the vivid reminders of hardship.

Last week, the sequel to the popular movie, "Wall Street," which won Michael Douglas an Oscar, began filming in NYC. Serendipitously, I wandered onto the set today while in Chelsea following a story lead. I watched the "action" along with a few other onlookers and of course, the paparazzi hoping to catch a glimpse of the stars. Many people would stop by the area and inquire about what was happening. A few people seemed interested in watching the filming, excited about the cast, but that was not the case for most. Two young professional females asked me what was being filmed, but when I said "Wall Street 2" they turned around and went back to work. One of the girls said, "I was hopping that it was 'Sex and the City.' They are filming today too."

With an obvious interest in business and economics, I will likely see the movie, but can the same thing be said for the majority of the population? The New York Times (http://www.nytimes.com/2009/09/08/movies/08stone.html?_r=1&scp=2&sq=oliver%20stone&st=cse) lauds Oliver Stone's new script, and Michael Douglas said that the financial crisis was the main influence for his reprise role in the movie. However, I am skeptical about this movie's success - not because of the script or the acting or the cinematography, but simply for the basic storyline. Movies are meant to entertain, hence their position in the "entertainment industry," whether by making us laugh, cry, or scream. However, this movie may hit a little too close to home right now when it comes to echoing economic failures. Maybe I could be wrong and a little acerbic satire is just what we need to ease our minds about Wall Street. I guess I will just have to wait and see.

Comparing Organic Apples to Organic Oranges

As is the case whenever there are economic hard times, people tend to cut back on their spending. Whether the cut-backs include eating out less often, renting movies instead of going out to the movies or being simply more savvy when clothing shopping. One area where there is room for possible cutbacks is at the grocery store.

New York City is literally saturated with organic and gourmet foods. While cutting back on quantity of food is not typically possible for most families, there are always cheaper food options available. There has been a trend in the past few years to buy "organic," but what does organic really mean? In some cases, there is only a fine line between what is organic and what are just the everyday fruits and vegetables. Some scientists have even reported that the health benefits of eating organic foods, if any, are negligible, but yet people shell out hundreds of dollars more per year to buy organic groceries. Today, while at the grocery store, I was faced with the tough decision of whether to buy the Trader Joe's brand butter OR the Trader Joe's brand organic butter - the organic was almost twice the price. Needless to say, I did not purchase the organic. I might have to risk my health by purchasing the less healthy butter. Oh no.

The same debate on whether to buy organic transcends into purchasing the "name-brand" versus the generic. I have to admit: on the whole, I almost always buy generic. The dirty little secret that stores do not want you to know is that they are not - I repeat NOT - toiling away in a factory reproducing nearly every item that they sell in their store as their generic. Most of the time, the generic item next to the name brand in the exact same shaped bottle is in fact the same product. The only difference - it costs less. For me, of course, there are some exceptions - I always buy Hellman's mayonnaise, Heinz ketchup, and a few other random items to ensure buying the original. I am also a cheese snob, but that is an entirely different discussion.

I know that everyone has their random preferences when it comes to grocery shopping, but when you are tight on cash, isn't easier to just buy generic and only organic produce? You can save so much money over time. I know that buying generic and organic are two separate issues (one has to do with capitalism and the other with health), but are the organic black beans really that different than the regular black beans and worth $0.30 more? Why must we be completely driven by the forces of advertising to compel us to buy a particular company's item even though it tastes the same as a less expensive brand?

Personally, I think more effective than the food marketing campaigns to promote brand awareness is the societal sentiment pressure to live and eat healthy, which roughly translates to, in the minds of the public, to buying organic. Forget exercising and eating more fruit as snacks instead of candy.

The verdict (unless money is of no object) of buying only organic and name-brand: irrational.

The Beige Book

On Wednesday, the Beige Book came out. What is the beige book you may ask? No - it does not foretell Fall's hottest fashion trends, but it attempts to summarize the "current economic conditions," and look at the trends in each major U.S. city.

The results...about what I expected.

To be quite honest, I did not attempt to read the entire 48 pages. Who has time for that? However, I did read the 4 pages on New York City. The economy of NYC has "stabilized," which is Fed-speak for, the economy is not horribly out of control, but it is not going to start increasing any time soon. As for sales, the auto dealers have reported some increase, but retail sales are well below 2008 levels. The explanation: "cash for clunkers," of course. There was a great incentive to buy a new car in the recent months, but no such comparable incentive in the retail industry (I seriously think that we should adopt the European policy of tremendous sales in January and July).

As for hotels, occupancy levels were in the mid-80s the last couple months, which is not too bad considering the huge decline in business travels. Great news for leisure travelers - the rates have fallen between 25 and 30 percent. However, Broadway has not taken the same cue - in order to offset the 10% decline in attendance, the ticket prices have raised by 16%.

I think anyone who has turned on the TV or looked at a newspaper, even once, in the past 6 months could predict the current state of the housing market in NYC. The vacancies of office buildings are high because so many companies have downsized or gone out of business, rents have fallen (which is great for me), and the price of new condos have fallen sharply.

The job market is not quite as bad now as it has been. Though the unemployment rate is sky high, some companies have begun to bounce back and hire new staff, but do not expect a high salary - asking prices are about 10% below what they were a year ago. As for loans, everyone is still afraid to borrow.

The wrap up: It's a good time to visit New York City. The hotels are cheap, and the retailers will likely be offering discounts. As for a show, do not expect a good deal to see a Broadway play, so try off-Broadway. For people just moving to New York City, you can find low rent, but maybe not a job, so be wary. It's a bad time to be a retailer - low consumer confidence is never good.

The real problem: The low consumer confidence. I have always viewed consumer confidence as somewhat of a catch-22. When the economy is sluggish, consumer confidence is low, but the only real way for the economy is for consumers to spend money.

My advice: If you have money, spend it. That is the American way after all. I'm not saying that you should go on a crazy shopping spree, but right now, you can find deals and if enough people increase their confidence in the market, even just a little, the market could be on its way to recovery.

Hello

I hereby commence my blog. I took the title from one of my absolute favorite books, This Side of Paradise, by F. Scott Fitzgerald in which the main character Amory Blaine ponders the notion of being a "cynical idealist." As all students of economics, both of academic study and personal of research can attest, maintaining anything but cynicism toward human nature is nearly impossible. Thanks to my economics professors and the myriad of economics books and magazines that I have ingested, I cannot help but look at the world and the actions of all of its inhabitants in terms of incentives. However, I do attempt to look at the world somewhat optimistically, perhaps due to my youth or naiveté - hopefully the former as opposed to the latter. Though I do not have such lofty ambitions of completely changing the world to a near-Utopian society (of course, world peace would be nice), I do think that the right economic improvements can greatly enhance the well-being of society as a whole. No economic program, despite overwhelming promise and a "guarantee" of success, can hope to make drastic improvements overnight. Perhaps that is one of the most poignant points of misunderstanding among the American public regarding economic policies such as stimulus packages and changes in interest rates - nothing in economics is ever certain. Not only is there a question of when the effects will take place, but IF the effects will take place. No magic wand exisits to end recession and unemployment and inflation becuase if there were, now would be the time to use it.

Through this blog, I hope to comment on the economics that I observe in my daily life, whether it be a new healthcare plan, action of the FOMC, or even just an observation, such as the price of coffee, that I observe in my daily life. So, read and enjoy!