Archives: Reg Murphy Pubs

Summer jobs important for economy, people who have them

Written by Melissa Trussell on . Posted in Melissa Trussell, Reg Murphy.

It’s an exciting week in the Golden Isles. Kids are out of school, Memorial Day has passed and vacation season is in full swing. Last week, I heard on the radio a woman in Atlanta rejoicing that traffic would be lighter now that school is out. I laughed, remembering the first summer after I moved to Brunswick from Atlanta. I quickly had to adjust to a new and opposite way of thinking about traffic patterns. Atlanta may slow down for the summer, but here in Coastal Georgia, we come alive with activity.

This is our season to shine. Folks come from all over the country to play on our beaches, relax by our pools, dine in our restaurants, shop in our stores, and reside in our homes and hotels. And we go to work to serve them with smiles, introducing them to our Isles’ most golden attribute — its people.

When I say we go to work, I mean it literally. According to the National Bureau of Labor Statistics, businesses in the Brunswick area employed 100 more people in January 2018 than in January 2017. But, in June of 2017, we had 2,000 more jobs than in January of the same year. With a total labor force around 53,000, this seasonal fluctuation in employment is no small deal. And data from previous years looks similar — each summer, we see a temporary but significant rise in employment.

I know what some of you are thinking, though. Many of these jobs are part-time and/or temporary, and a lot of them are held by high school or college students trying to make some extra cash while school is out. So, maybe they aren’t actually that big a deal after all.

If that’s what you’re thinking, you are not all wrong. Most of our seasonal jobs are temporary, and many are filled by “kids.” And, many of them are low-paying jobs. In fact, though we gained 2,000 jobs, average weekly earnings fell from $681.60 in January 2017 to $635.36 in June 2017. But, I do not believe this means these jobs are insignificant for our labor market.

In fact, I believe those low-paying, seasonal jobs are some of the most valuable jobs we have, both for the employer and for the employee, especially if that employee is a high school or college student.

The employers are the clearer winner. They get cheap labor to fill in the gaps created by our summer influx of business.

I have heard some people argue that the employees are losing — working hard for little pay. If we consider only current financial gains, this may be true. But, if you have ever worked one of these summer jobs, as I have several summers, you will likely agree with me that the experience itself is worth at least as much as the wages.

Labor economists tell us that experience increases one’s productivity and is a key determinant of one’s future wages. This is one reason the School of Business and Public Management at College of Coastal Georgia is so proud of our internship program, which requires every student in our program to graduate with work experience in their field.

Work experience — whether a summer job or internship; whether paid, unpaid, or underpaid — improves your prospects of obtaining future employment and of earning higher future wages.

So, if you have the opportunity, snag one of our 2,000 seasonal positions. Your future self and our current and future economies will thank you.

  • Melissa Trussell
  • Reg Murphy Center

Why manufacturing matters in the Isles

Written by Skip Mounts on . Posted in Reg Murphy, Skip Mounts.

On May 4, the Chamber of Commerce had its annual State of Manufacturing lunch. It was great to celebrate manufacturing in the Golden Isles and to recognize the 70 years that Georgia Pacific has been in our community. While preparing some remarks for my brief talk, I ran across some data that I would like to pass along.

One of the issues that the economists at the Murphy Center discuss among ourselves is why did southeast Georgia take so long to recover from the recent recession? To review, relative to the state and to the nation, southeast Georgia was the first to enter recession in 2008 or so. Then, relative to the state and to the nation, southeast Georgia was the last to show signs of overall recovery in late 2014 or early 2015. If you do the math, southeast Georgia was in recession the longest of possibly any area in the United States. This performance was even in the face of a port that was booming and a hospitality industry that was doing very well. To figure out reasons for this duration is important.

One of the issues we consider is the diversity of our economy. Some say we are too dependent on tourism for our own good. This may be true, but it is a wonderful advantage that we have over the rest of the world. Why not use it?

Data show that in 2000, our area had 270 firms that were identified as construction and 85 that were identified as manufacturing. By 2006 firms in construction had increased to 338 while manufacturing firms had increased to 95. It does not take a rocket scientist to argue that the housing boom was driving the number of construction-based businesses.

Then the recession hit. By 2017, the number of firms identified as construction had fallen to 213 while manufacturing firms are at 76. Overall, in the goods-producing sector of our economy, manufacturing represents 25 percent of the firms in 2017. In 2000, this was 20 percent. So, over the last business cycle, manufacturing relative to construction has become more important to us. I think this is important.

To an economist, the demand for labor and other inputs is a “derived demand.” This is to say the demand for workers and for their production is derived from the demand for the products they produce. In our case, the demand faced by construction firms is largely local, while the demand for manufacturing firms is national, if not global. In my mind, we had become so dependent on construction and local demand that we had to pull ourselves out of recession. Had we been more dependent on manufacturing, a broader market demand (regional, national, global) would have pulled us out of recession.

Consider the port, Sea Island and Jekyll Island. All three seemed to lead the recovery of the overall Golden Isles economy. Why? Think of where they sell. Clearly, all the automobile transports going past the St. Simons pier bring cars that are sold throughout the United States and not just the Golden Isles. Looking at all the jets that use McKinnon-St. Simons Island Airport, Sea Island serves an international marketplace. Lastly, a review of the license plates of vehicles on Jekyll Island indicates that a regional, if not national, demand is served.

By becoming more dependent on manufacturing and its broader marketplace we will become more resistant to the business cycle. We are diversifying where we sell. It is well worth our time to figure out ways to promote this diversification by thinking of ways we can develop manufacturing. Working on infrastructure would be a start. Maybe developing a local aviation driven training program would be another. Considering our community’s shared vision statement, a great start would be accomplished by simply Working together.

  • Reg Murphy Center
  • Skip Mounts

Downtown conference center is a troubling game

Written by Don Mathews on . Posted in Don Mathews, Reg Murphy.

The idea of the city of Brunswick building a conference center on the site of the old Oglethorpe Hotel in downtown Brunswick really worries me.

The argument for building the conference center is standard — a conference center will provide strong economic juice to downtown Brunswick by bringing in visitors who will spend money at downtown shops and restaurants and by employing local folks who will spend money at downtown shops and restaurants.

A good-looking conference center would also enhance the aesthetics of downtown, which would increase property values and attract even more locals and out-of-towners.

Aesthetics matter. The Brunswick Urban Redevelopment Agency’s plan is for the conference center to have the look and spirit of the old Oglethorpe Hotel. That’s a smart call.

But the downside risk of the conference center project is enormous.

The city has $3 million on hand to build the conference center. The conference center is estimated to cost $8.1 million. In addition, the Urban Redevelopment Agency recommends building a three-story parking deck for the conference center. That’s likely another $5 or $6 million.

Such projects routinely come in over budget. So figure about $15 million to build the conference center and parking facility.

The roughly $12 million shortfall is likely to be raised by issuing debt. $12 million is a lot of debt for a little city with many needs to throw at a single project.

The hope, of course, is that the conference center will generate so much economic juice downtown that the project more than pays for itself.

How realistic is that hope?

Research on the conference and convention center business doesn’t inspire confidence.

Urban development specialists have been promoting conference or convention centers as a means of reinvigorating downtowns for decades. More than 400 communities across the country now have a conference or convention center. Glynn voters first approved a special-purpose, local-option sales tax (SPLOST) for a conference center back in 2001, when conference centers were all the rage.

Unfortunately, conference and convention centers frequently fail to deliver. Actual conference attendance routinely falls well below estimated attendance — which means actual visitor spending routinely falls well below estimated spending — and the centers routinely lose money.

And conference and convention business is very sensitive to the business cycle.

To have any chance of even a modest return on investment, downtown Brunswick’s conference center needs an accompanying hotel. But hoteliers are showing little interest in building a hotel downtown.

That’s a gigantic red flag.

When entrepreneurs smell a profit opportunity, they pounce. None are pouncing on a hotel for downtown Brunswick.

The lack of interest suggests that hoteliers don’t think a conference center in downtown Brunswick will succeed.

Perhaps hoteliers are waiting for the conference center to be built before they pounce. Perhaps.

But what if the conference center is built and hoteliers still don’t pounce? Then what?

Then the city of Brunswick will be saddled with a lot of debt that it will only be able to pay off by forgoing many other much needed projects. Instead of spurring downtown development, the conference center could set development back for years.

The alternative to a conference center is not an empty lot. It’s a mixed use building, a residential and commercial combination.

Downtown residents spend more money downtown than conference attendees will, and residents won’t leave when the business cycle turns down.

And we have local entrepreneurs ready to pounce on just such a mixed-use building.

Residential and commercial space, financed and managed by local entrepreneurs, is a much wiser investment than a conference center.

  • Don Mathews
  • Reg Murphy Center

Children quickly change household economics

Written by Melissa Trussell on . Posted in Melissa Trussell, Reg Murphy.

I have taken and taught a lot of economics courses, and I have had opportunities to be part of a lot of really cool economics research in the last decade. But, the last month has provided me with one of the greatest economics lessons of my life. Two kids moved into my house.

This is not a permanent situation. They are just hanging out with me for a little while. But, oh my goodness! Kids change everything, not least of which is a household budget!

Groceries! So many groceries! I am very single. I am used to cooking one or two meals per week and just eating the leftovers until they are gone. But kids demand variety. And snacks. And drinks besides water. Groceries are not cheap, y’all. My household grocery budget more than doubled overnight with the addition of two kids.

And laundry. Can we talk about laundry?! My usual was one or two loads of laundry every two or three weeks. (I know — seasoned moms burst into laughter at this thought.) We are now washing one or two loads a day. My electricity usage increased from an average of 14 kWh in the week prior to the kids’ arrival to an average of 26 kWh in their first week with me.

I know this is not news to many of you. Those who have been parents for a while will probably find my experiences of the last few weeks familiar and perhaps will think it cute that I am just learning what you have known so well for so long. Bless my heart, right?

In fact, the story of my last few weeks is all too familiar and not at all cute to more than a third of Brunswick’s families, which are headed by single moms with children below age 18 according to the 2016 American Community Survey. Of those moms, 23 percent have children under age 5. Over half of single-mom families in Brunswick have incomes below the poverty level, and that statistic grows to two-thirds for single moms with children under 5.

For these moms, perhaps the most significant cost of raising children is one I have felt strongest this month — opportunity cost. Opportunity cost is the value of what we give up to do or experience something else. For me and for many single moms, the opportunity cost of parenting is a thriving career.

The kids came along two weeks before the deadline on a project I began working on four years ago. Crunch time. I had to call on family and friends to help with the kids so I could work on weekends to even have a shot at getting the thing submitted.

I had only been parenting a few days before I began to understand why mothers —particularly single mothers — often struggle to get ahead in their careers. Thank goodness I have such an amazing and supportive network of family, friends and coworkers. I was able to meet that deadline, and I have been able to adjust pretty well to the daily role switches from parent to professor and back to parent.

I cannot imagine how difficult this must be for moms without that sort of support system. Hug a single mom for me this week. Given the statistics cited above for Brunswick, it won’t be hard to find one.

  • Melissa Trussell
  • Reg Murphy Center

The entrepreneurial spirit of college students

Written by Skip Mounts on . Posted in Reg Murphy, Skip Mounts.

Spring semester is coming to a close at College of Coastal Georgia, signaling the end of another academic year. This is also a time to reflect on what happened during the recent academic season. The most important thing for me was the reintroduction of MGMT 4100 — Entrepreneurship — to the regular schedule of classes.

For 42 years — yes, 42 — I taught all sorts of economics courses. All were fun. Economists think in a very unique way and it was a special challenge in those courses to see if I could get students to think in that way too.

But now it is time to do something different, and something that will make a difference. So, entrepreneurship is it. The interesting thing is that while economists teach about the importance of entrepreneurs to our market economy, economists have done little research into what entrepreneurs actually do. So, what was I to teach?

The first thing I wanted to get across was that entrepreneurship is not small business management. Clearly, entrepreneurs end up managing businesses or nonprofits. However, management is second. The entrepreneurial act is one of creativity, not management. What need or problem will I fill or solve and what will I create to fill or answer it? This is the creative heart of entrepreneur.

In addition to problem solving, virtually all entrepreneurs have personal stories as to why they have ended up being entrepreneurial. I refer you to the video testimonies of our local entrepreneurs at www.1millioncups.com/Brunswick. All are wonderful to hear.

So, how was the course designed? How was I going to teach entrepreneurship? I decided that I would teach entrepreneurship by simply treating students how entrepreneurs are treated and judged. If you think about it for a moment, strangers — customers, judge an entrepreneur every day. If they don’t solve a customer’s problem they will not be successful. An entrepreneur may think that they have found a problem that needs solving, but if it is not a problem for a stranger then the entrepreneur will not be successful.

So, students created self-selected three-to-four person teams. Each team then had to identify a problem that strangers needed solving. They did this by canvasing strangers. Do you have this problem? They actually talked to people.

Next, they had to create a solution. However, strangers needed to tell the students that the solution they created was in fact a solution to the stranger’s problem. Again, they needed to canvass strangers.

Each team had a mentor from the local community and each week a local entrepreneur would come to class to tell their personal story.

Once they had a problem and a solution the students created six-minute presentations for judges who themselves were strangers to the class.

The course grade was based on a total of 100 points. Over the 16-week semester, students accumulated 50 points toward their grade by doing things that I would simply record in my grading spreadsheet. The remaining 50 points were determined by their end-of-the-term 6-minute presentations to the judges/strangers at the Ritz Theater. So, strangers determined student grades. No book, no tests, few lectures, and minimal requirements. All they had to do was to satisfy strangers — all they had to do was to act like an entrepreneur.

What problems did the teams address? Boredom of college students, funding for third-world water projects, cleaning the environment, convenient mobile dog grooming, finding parking places, promoting small local businesses and how to compete with the College’s bookstore.

What were their solutions? A hookah bar, video arcade, social media videos, up-charging on water bills, a well-equipped van that was used on weekends, sensors and smartphone applications in parking lots and a bamboo toothbrush (that is now sold on Amazon under Nabi Effect).

We are off to a good start. Hopefully, new entrepreneurs are on the way. At the very least, there is now a greater appreciation of the power of strangers and the creativity of entrepreneurs.

  • Reg Murphy Center
  • Skip Mounts

Collaboration does and can exist in the federal bureacracy

Written by Heather Farley on . Posted in Heather Farley, Reg Murphy.

Efficiency and collaboration are not words that most people associate with the federal bureaucracy. Many people tend to think about bureaucratic systems in the United States as obstructionist organizations designed to create roadblocks through red tape and bulky organizational structures. According to a 2015 Pew research study, only 32 percent of respondents indicated that they had a favorable view of the Federal Government versus 56 percent and 65 percent favorable ratings of state and local governments respectively.

Yet, there are interesting, effective, and truly collaborative programs that exist within this system, of which most of us are unaware. I had the pleasure of interacting with two such programs this semester through a service learning project in my course, “Managing State and Local Governments,” at College of Coastal Georgia.

The idea for this service learning class (a course designed to meet community needs while promoting student civic learning, academic enhancement and personal growth) developed from an email inquiry from the College/Underserved Community Partnership Program (CUPP) Program Manager and Senior Advisor to the EPA Regional Administrator, Michael Burns.

Michael explained that the CUPP program is designed to connect underserved communities (e.g. Brunswick) with colleges and universities (e.g. College of Coastal Georgia) to deliver technical assistance at no cost. In short, the program makes connections between the community and students to provide information, ideas and assistance. Not only does the community benefit from this assistance, but students have a unique opportunity to apply their academic knowledge to a practical issue.

Through the CUPP program, my students were able to interact directly with regional and federal organizations to gather information about the demographic, economic, and environmental status of McIntosh County, Glynn County and the City of Brunswick. They made connections with Camilla Warren from the EPA Region 4, Lupita McClenning and Allen Burns from the Regional Coastal ommission, and Gloria Huang from the Federal Economic Development Administration (EDA). These connections and the knowledge gained from these individuals are invaluable assets to budding civic leaders looking for career paths and networking opportunities.

We also learned through Ms. Huang at the EDA that as recently as 2016, her organization launched an economic development integration program. This program was formulated to create a bridge between federal agencies so that communities and nonprofits do not have to suffer from the “silo-syndrome” that is so common across agencies. The integration specialists throughout the U.S. provide grant seekers and community stakeholders with information on assistance available from all federal resources for economic development. They are attempting to create a “one-stop-shop” that will streamline the economic development process and generate high-impact projects in communities of need.

While the federal system is by no means perfect either structurally or administratively, programs like CUPP and the EDA integration specialists are helping to address a longtime issue within the federal bureaucracy: connection. The students in this class have learned that economic development issues are multifaceted issues that require collaboration among a variety of stakeholders. It is promising to see that agencies within the federal system are responding by creating bridges rather than silos.

  • Heather Farley
  • Reg Murphy Center

Democracy isn’t always ugly

Written by Don Mathews on . Posted in Don Mathews, Reg Murphy.

Last Wednesday I had a refreshing and uplifting experience. I attended a Brunswick City Commission meeting.

It was the first city commission meeting I’ve attended. In fact, it was the first political or governmental meeting of any sort that I’ve attended.

Politics makes me uncomfortable. Religion, too. Something about people boldly and aggressively proclaiming things that are unverifiable or for which there is little or no evidence rubs me the wrong way. Could be my problem, though. It often is.

I attended the city commission meeting to learn more about the conference center project in downtown Brunswick.

I have developed quite a fondness for downtown Brunswick. Downtown is quaint, pretty and unique. Friendly, too. It has the potential to be spectacular. One day it will realize its potential. Unless we mess up.

The conference center project scares me for a number of reasons. So I wanted more information. Hence, the city commission meeting.

Upon entering the commission meeting room in Old City Hall, I almost forgot why I was there. The room is simple Southern elegance. It’s old. The wood floors are beautifully worn and weathered. As are the wood benches. The ceiling must be twenty feet high. The windows appear narrow because they’re so tall. The walls are stately yet warm.

Almost everything in the meeting room creaks. The floor creaks. The benches creak. Most of the people in the room were about my age, so they creak.

I could sit in a room like that for hours. And did. I got there a little before the meeting started at 6 p.m and left at 9 p.m. The meeting wasn’t over, but I had told my wife I’d be home by 7:30 and so was already in trouble.

My hunch is that last Wednesday’s city commission meeting was quite routine. I’m sure in a couple of weeks I’ll have forgotten most of the issues that were discussed.

What I will never forget is the civility, respectfulness and good manners with which the mayor, city commissioners, other city officials and citizens in attendance addressed each other.

Politics has a way of bringing out the self-righteous blowhard in people. I am by no means immune. But I recognize that quickness to rant and quickness to denigrate are inclinations to subdue and correct, not indulge.

Civility, respectfulness and good manners are not masks that hide who we really are. They are not signs of insincerity or mendacity. They are signs of a mature person. They are signs of wisdom.

In particular, the wisdom is that it is much easier to destroy something good than build something good.

Civility, respectfulness and good manners ruled last Wednesday’s city commission meeting. There were spirited disagreements, to be sure — it’s democracy, after all. The Glynn Avenue zoning proposal is especially contentious.

But the city officials, as well as the citizens who object to the zoning proposal, never wavered in civility, respectfulness and good manners.

During that long city commission meeting, I thought of Alexis de Tocqueville’s “Democracy in America,” one of the greatest books on America ever written. Tocqueville argued that the strength of American democracy is found in towns and town government. For, he wrote, “the strength of free peoples resides in the local community.”

Democracy is always loud, usually rancorous and often ugly. But when its participants are civil and respectful, it’s nice to behold.

Well done, mayor, city commissioners and city officials and citizens in attendance. Tocqueville would be pleased. Me, too.

  • Don Mathews
  • Reg Murphy Center

Why the trade deficit isn’t bad

Written by Don Mathews on . Posted in Don Mathews, Reg Murphy.

Listening to certain politicians and their advisors, you might think that trade deficits are very bad for an economy.

You might also think that trade deficits are the consequence of bad trade deals, unfair trade practices or countries just not being nice to us.

But if you decided not to think such things, good for you. Because they’re wrong.

How international trade works is widely misunderstood. Most people who get international trade wrong simply start wrong. They begin with the notion that a country in the global economy is “just like” a company competing in the global marketplace.

If one thinks that a country is “just like” a company, then it’s only natural to think that exports are “just like” sales and imports are “just like” expenses. Thus, if exports (sales) exceed imports (expenses), hurray! But if imports exceed exports, oh no, we’re losing!

That, however, is all wrong.

The analogy is wrong. A country in the global economy is nothing like a company competing in the global marketplace.

A company has a bottom line. A company strives for profits, and if it suffers persistent losses, it goes out of business.

A country has no bottom line. For a country, there are no such things as profits or losses. And there’s no such thing as a country going out of business.

For a country, the whole point of international trade is not to export but to import. It’s to get goods that we don’t have and can get at less cost through trade than by making them ourselves.

That’s the point of any trade. Why do we go to the grocery store? To get goods we don’t have and can get at less cost by buying them at the grocery store than by making them ourselves.

Of course, the people we import from want something in return. That’s what exports are for. Exports pay for imports.

To repeat: The purpose of international trade is to import. The purpose of exports is to pay for the imports.

So, you ask, where does the U.S. trade deficit come from?

Foreigners really like our goods and services. In 2017, U.S. exports of goods and services totaled $2.2 trillion. The U.S. exported more goods and services in 2017 than all but seven countries in the world produced in 2017.

But foreigners also really like our financial assets, our stocks and bonds. They also like to build offices and factories here.

Much ado is made about American companies moving production abroad, but there’s much more foreign production that moves to the U.S. than U.S. production that moves abroad. The world’s leading destination of foreign direct investment is the U.S., by far.

Foreigners like our assets more than we like theirs. In 2017, foreigners bought $620 billion more of our assets than we bought of theirs.

How did foreigners pay for all those U.S. goods, services and assets? With exports of goods, services and assets of their own, of course.

But since they bought $620 billion more of our assets than we bought of theirs, they had to pay us $620 billion more of their goods and services than we paid them of our goods and services.

And that’s where the U.S. trade deficit comes from.

So, what’s the problem? There isn’t one.

  • Don Mathews
  • Reg Murphy Center

An idea to combat our local brain drain

Written by Melissa Trussell on . Posted in Melissa Trussell, Reg Murphy.

I recently ran across an article on Cincinnati.com describing a new policy adopted in the town of Hamilton, Ohio, that will repay up to $5,000 of a recent college graduate’s student loan debt if that graduate will move to Hamilton. Hamilton is 35 miles north of Cincinnati and has adopted this policy to improve its competitiveness with the big city in attracting young talent. I have since read that other places in the U.S. are trying similar programs.

This article was of particular interest to me since, as my colleague Dr. Don Mathews wrote last week, a consistent complaint of businesses in our area is an inability to recruit talented and dependable workers. I agree with Dr. Mathews’ sound counsel that higher wages would correct this imbalance in the labor market.

I suggest, further, that we as a region could be more creative in our efforts to attract and retain talent.

Each year, high schools in our six-county region graduate many bright and capable young men and women. In 2015, for example, according to the Georgia Department of Education, each of our counties had a high school graduation rate at or above the state average. And 60 percent of those graduates enrolled in college by fall 2016. This means over half of our young people are graduating high school and going straight to college. But, in 2017, only 20 percent of residents of our region who were over 25 years old had a college degree.

Our problem is not that we do not have access to an educated and motivated workforce, but that we do not offer sufficient incentives for those workers to settle here. Many of our brightest students go away for college, and if they return, it’s to retire.

In developing countries, this pattern of behavior has a name — brain drain. Brain drain occurs when those best suited to help lead an area out of a developmental funk instead leave to pursue greater opportunity for personal gain elsewhere.

So, how do we reverse our local brain drain?

First, as Dr. Mathews wrote, local employers absolutely must offer wages worth working for. Second, I think an offer like that of Hamilton, Ohio, could be a simple, fairly inexpensive way to convince educated young people to settle in Southeast Georgia.

I know from personal experience that student loan debt cuts significantly into a new graduate’s take-home pay for several years and makes an otherwise attractive wage offer infeasible. Helping these individuals pay toward their loans is a short-term commitment on the part of the community or employer but could have significant long-term advantages if it encourages educated young men and women to live, work, and raise families in our region.

The Georgia Board for Physician Workforce has offered a similar loan repayment plan to physicians who practice in underserved areas of Georgia, and the board reports great success under the program. In 2016, 53 percent of graduates from Georgia’s medical schools reported they had intentions of practicing in underserved areas.

If it works for recruiting doctors, who have some of the largest student loan balances, I think it’s an interesting idea for recruiting educated workers in other fields as well. Hamilton may be onto something.

Dr. Melissa Trussell is a professor in the School of Business and Public Management at College of Coastal Georgia and works with the college’s Reg Murphy Center for Economic and Policy Studies. Contact her at mtrussell@ccga.edu.

  • Melissa Trussell
  • Reg Murphy Center

Emotion of humans is stabilizing force

Written by Skip Mounts on . Posted in Reg Murphy, Skip Mounts.

Over the past few weeks stock markets have been very volatile. With the election of President Trump and continuing until the signing of tax reform, it seemed like the only direction that stock markets knew was up. Then, thousand point drops, large volumes and apparent instability. What is going on?

In economics, we teach that markets are places that process information and that market-determined prices reflect that information. Changes in information lead to changes in demand and/or supply and then, as the market seeks equilibrium, prices change. Another way to think of this is to consider that every market participant, whether buyer or seller, is pursuing their own unique interests using the information that they think matters most. More importantly, not everyone in the market uses or has the same set of information. In fact, it is safe to assume that everyone in a market has different sets of information that drive their actions. So, in a sense, the market knows everything while no one person in the market knows everything. In the end, market prices reflect all the information that is known.

For quite a long time, the financial market price generating process involved actual human beings interacting with other human beings. With a group of MBA students, I was privileged to watch the public outcry auction process where gasoline futures were priced. (This place no longer exists.) Here, buyers and sellers circled a pit hollering bids and asks at each other. Once a cry to sell was accepted by a cry to buy the traders would go over to another area of the arena and record the transaction on a paper card. This card was then tossed into the middle of the pit where another human caught it and formally recorded the trade. In the meantime, the traders would go back at it.

This trading was really fun to watch. Successful traders were risk loving, animated, emotional people. In the pit, circled by very large televisions loudly broadcasting business and news channels, there was plenty of screaming and flailing of arms. Few, if any, of these folks had more than a high school education. The price-making that occurred in the pit was done in a crazy and emotional pit that only humans could create. I met a trader who wore Depends because he did not want to go to the bathroom and miss a profitable transaction during the trading day that did not stop for lunch!

Yet not that long ago, smart people at Lehman Brothers, Goldman Sachs and other houses figured out a way to do away with the humans. Now programmed computers trade. See, human-based transactions took time. Time was money. More money could be made the faster that trades could occur and be recorded.

Fundamental to this was someone, or a group of people, had to write the algorithms that drove the actions of the computers. Memory banks now contain commands when to sell and when to buy based largely on price changes? However, when some machines start to sell, other machines see this and start to sell too. Prices drop which, within the algorithms, cause more selling. Prices fall even more. When prices drop enough a new equation kicks in and says buy. Price recovers which causes more computers to buy and prices raise rapidly. Thus, the swings we have observed recently are probably the result of over exuberant trading by computers and not new information of impending doom.

Price fluctuations have always been part of the landscape of financial markets. Yet, back in the day, if the volatility of the market became too great the humans could talk to each and simply stop trading and try to figure out where all the craziness was coming from. Emotional humans could stop the process by simply being human. By removing the emotion we have removed, what some think, is stabilizing information. We may have reached the point where we have to decide if we want fast trades or human trades. I love the crazy pit of public outcry exchange. The pit was great. I vote for the humans. Break out the Depends!

Dr. Skip Mounts is the Dean of the School of Business and Public Management at the College of Coastal Georgia. Dr. Mounts is also a professor of economics and an associate of the Reg Murphy Center for Economic and Policy Studies.

  • Reg Murphy Center
  • Skip Mounts