• Everyday economics and seeing why parts of the Social Security program work, we can better grasp why so many government programs fail.

    Six Ways to Make Government Better

    Mar 19 • Behavioral Economics, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, Labor, Lifestyle, Macroeconomic Measurement, Regulation, Thinking Economically • 94 Views

    It has been in the news recently that 6.5 million people who are 112 years old or older still have Social Security numbers. Since fewer than 40 people in the entire world have celebrated their 112th birthday, quite a few individuals might be getting government checks they do not deserve.

    A Social Security Problem

    Trying to identify what went wrong, the media have focused on who reports who dies, staffing at the Social Security Administration and computerization. They point out that Social Security depends on varying degrees of accuracy from the states, on an inadequately small staff and on handwritten records because of delays with transferring data to their computers.

    Because I’ve been reading Why Government Fails So Often by Peter Schuck, an emeritus Yale law professor, I wanted to share a different perspective.

    Social Security Successes

    In his book, Peter Schuck presents many examples of government policy failures. Among his much shorter list of the successes is Social Security’s Old Age and Survivors Insurance. A program that manages data and disperses checks, Social Security has become a safety net that eliminated extreme poverty among the aged,

    The Social Security Administration does lots of things right. The reason might be that it has little discretionary authority and many procedures are automatic. Think about it. How much do we get? It is all about what appears to be an indisputable formula. And then, on a given day, the checks are sent (or deposited).

    Yes there are flaws like the fictitious 112 year olds and looming adaptability problems as the baby boomers age. But net/net, the program has functioned remarkably smoothly for a long time.

    Our Bottom Line: The Six Ways

    The system for receiving Old Age and Survivors benefits is one of Peter Schuck’s few examples of a policy success. Explaining why, he presents six criteria he believes are necessary for government to work:

    • Incentives: Policy makers and policy receivers need incentives that lead to appropriate behavior.
    • Rationality: Group think needs to be as rational as the ideas of the individuals that compose the group.
    • Information: Facts on which policy is based should be up-to-date, unbiased and accurate.
    • Adaptability: As the environment changes so too should the program.
    • Credibility: Those who invest in a program need to believe in it.
    • Management: Implementation systems should minimize fraud, waste and abuse.

    On the other hand, when programs do not work, government destroys its legitimacy, it constrains economic growth and it harms the people it seeks to help.

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  • Everyday economics, new iPhones and conspicuous consumption.

    Why We Want New iPhones

    Mar 18 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Government, Innovation, Labor, Lifestyle, Macroeconomic Measurement, Regulation, Thinking Economically • 86 Views

    France is trying to outlaw planned obsolescence.

    Light Bulb Obsolescence

    Since planned obsolescence is about products wearing out, let’s start with a lightbulb that has been burning for 114 years.

    Located at a fire station in Livermore California, the bulb was turned on on 1901. During several power outages and its relocation to the firehouse, the bulb went out temporarily. Otherwise it has remained lit.

    You can see the bulb in this brief video.

    A long life light bulb was precisely what its manufacturers wanted to avoid. When the world’s major light bulb manufacturers met in 1924, they not only wanted to diminish competition by determining who sold what and where but also by dimming the life of the light bulb. From 1500 to 2500 hours, they brought it down to 1,000 hours, charged more and said it was a better bulb.

    Imagine the details. Their venture into planned obsolescence involved developing a bulb that would die after 1000 hours and enforcing the rule among multiple competing manufacturers. It required technological development and a debate that continues today.

    Where are we going? To France and our new iPhones.

    French Obsolescence

    Stage One of a 2015 French regulation requires manufacturers to tell consumers how long their cell phone or TV–any appliance–is likely to last and how long spare parts will be available. Next year the law adds a free replacement or repair mandate for items that are “faulty” within two years of their purchase date. You can see that their goal is for products to last longer.

    It appears that Brazil might agree with the French approach. In 2013 Apple was sued by Brazil for planned obsolescence when it introduced an iPad 4 that they said harmed customers who owned the iPad 3. (I am trying to discover the verdict–Please let me know if you have heard what happened.)

    Our Bottom Line: Planned Obsolescence

    From a Harvard undergrad’s article, I discovered a perfect brief summary of different types of planned obsolescence. 1) We have functional obsolescence with items like a light bulb that stops working so you need a new one. 2) By contrast, systemic obsolescence takes us to new systems that nudge you to update your equipment. An example is when Apple takes us from Snow Leopard to Lion to Mountain Lion to Leopard. I discovered I had to upgrade to continue using other programs. 3) Finally, we have perceived obsolescence which just involves our taste making a perfectly functional style seem tired or dated as with changing clothing styles.

    Deciding whether all of this is good or bad reveals no easy answers. Sometimes planned obsolescence encourages innovation, creates jobs and spurs growth as new products render the old ones obsolete. At other times, it is wasteful, inefficient and might be all about conspicuous consumption.

    So, is it okay to want the iPhone 6 when your 5 is fine?

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  • Everyday economics and the cost of snow

    The Reason This Winter Was Not So Bad

    Mar 17 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Growth, Economic History, Environment, Government, Labor, Lifestyle, Macroeconomic Measurement • 75 Views

    Economically speaking, this year’s snowstorms were not very bad.

    The National Oceanic and Atmospheric Administration (NOAA) uses the Northeast Snow Impact Scale (NSIS) to gauge the economic impact of a snowstorm. Based on a storm’s intensity and the size and density of the population it affects, the rating could be extreme, crippling, major, significant or notable. During the past 60 years, a list of high impact storms was topped by #1 and #2 below which were “extreme” while #3-#5 were called crippling.

    Economic growth was affected by the five most severe snowstorms.

    From: Livescience

     

    None of the storms from the past two winters were either extreme or crippling. The worst, classified as “major” and ranked at #16 was from this year, January 29 to February 2. Below, you can see the area it hit.

    Economic growth and 2015 snowstorm

    From: NOAA

    Moving down on the NESIS list of 57 high impact snowstorms since 1956, the next recent one, also “major” at #21, lasted from February 11 to February 14, 2014.

    Economic Growth February 11 to 14 2014

    From: NOAA

     

    Then we have to go down to…

    • Major: #31 (1.29-2.04.14),
    • Significant: #42 (1.25-1.28.15), #51 (11.26-11.28.14),
    • Notable: #52 (12.09-12.14.14), #55 (2.8-2.10.15) and #56. (1.20-1.22.14).

    This is the smaller 2.8-2.10 storm from last month.

    Economic Growth and snowstorms

    From: NOAA

    Where are we going? To the economic impact of high impact snowstorms.

    Economic Impact

    NOAA reports on snowstorms that strike the Northeast because their economic impact can ripple far beyond municipal snow removal budgets and local demand to far reaching supply chains.

    Snow Removal

    More for snow removal, for hiring and purchasing snow plows, for overtime, for salt (that is up from $45 to $55 a ton) means less elsewhere in money and time. The Massachusetts state government reports that it has doubled its snow removal budget from $50 million to $125 million. Meanwhile Boston estimates its snow removal allocation two years before they need it by averaging the previous five years. For 2015, that meant they needed to double the $18.5 million they had planned on by taking the money from elsewhere in the budget.

    Businesses and Demand

    The picture is mixed. Key variables relate to whether the purchase can be postponed or done online. Restaurants, as you might expect, are big victims while supermarkets enjoy higher sales. As for other retail purchases, in Boston, furniture and home furnishing were down the most but I wonder whether the statistics reflect a delay rather than canceled buying.

    Businesses and Supply

    Productivity is probably affected by longer commutes. We have shut down transit systems and people who are forced to stay home. Some wages are sacrificed and some businesses diminish production. We could have air freight that never lands and canceled business and vacation flights. But will they make it up? And are people working at home?

    One MIT paper says the snow has to last for two days to create a negative economic impact. But it also points out that areas used to snow experience little if any shock. What “paralyzes” one state is “minimally disruptive” elsewhere.

    Last year the polar vortex was thought to have depressed first quarter real GDP by 2.1 percent. But then it bounced back 4.6 percent and 5 percent during the next two quarters.

    Bottom Line: Economic Growth

    There is much not to be sure of. In 2015, the Northeast could have experienced a shift from the office to the home, delayed sales, online businesses seeing more activity and a regional shift. What is definitely hit? Wage workers, plane cancellations, restaurants, and air freight. Boston cites at least $1 billion in lost wages and profit.

    But how bad was the weather? Overall, thinking economically, probably not that bad. But with a record breaking 108.2 inches of snow, I am sure Boston would disagree.

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  • Everyday economics and fiscal policy and the debt ceiling

    The Problem With Hitting the Debt Ceiling Again

    Mar 16 • Economic Debates, Economic History, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy • 81 Views

    Today, we’ve hit the debt ceiling for the 44th time since 1980.

    Illustrating debt ceiling history from 1980 to February 11, 2013, this graphic predates #43.

    Debt ceiling history since 1980.

    From: The Washington Post

    An Explanation

    Discussing the debt ceiling, we should first take a look at the debt. Whenever the U.S. borrows, someone, somewhere buys a Treasury security such as a bond. The U.S. gets the money. The lender gets the bond–an IOU– and the promise that it will be repaid with interest (for most types of securities).

    So who has close to $18 trillion in government securities?

    Actually, we do. We owe approximately two-thirds of the debt to ourselves. The U.S. government lends to itself, for example, when the Social Security trust fund swaps its cash for bonds. In addition, individuals, businesses, state governments, local governments, pension funds–the list is long–buy U.S. Treasury securities.

    The rest of the U.S. debt is held by foreign governments, businesses and citizens, with China and then Japan at the top of the list. Next is Belgium (surprising), Caribbean Banking Centers, Oil Exporters, Brazil and then a long list with Uruguay at the bottom for December 2014.

    History

    We have a debt ceiling because of a 1917 law. At the time, the Congress decided it was losing control of the volume of borrowing. To regain power over the federal purse and fiscal policy, they said, “We will decide the maximum amount the U.S. can borrow.” And, from that day onward, whenever necessary, they voted to raise the debt ceiling.

    It sounds rather simple. But the politics have been unbelievable (actually believable). Repeatedly, different law makers have tried to attach conditions to debt ceiling legislation such as Social Security changes, bombing Cambodia, voluntary school prayer and even a nuclear freeze.

    What Happens Now?

    And that takes us to February 2014. Having hit the debt ceiling, lawmakers decided on a new approach. Rather than selecting an amount, they avoided a political showdown by creating what they called an “extension.” Actually a sliding ceiling that would move upward, the extension stopped its ascent yesterday, March 15, 2015. The new debt ceiling is whatever we owe this morning.

    For that reason, Secretary of the Treasury Jack Lew sent a letter to House Speaker Boehner saying, “I respectfully ask the Congress to raise the debt limit as soon as possible.” Awaiting their action, he has temporarily stopped issuing some bonds. The Congressional Budget Office said that without a new debt ceiling we could run out of cash next fall.

    Our Bottom Line: The Debt and the GDP

    If you are concerned with the size of the debt, it is helpful to compare it to the GDP–sort of like deciding whether your mortgage is too big by comparing it to your income. When the debt and the GDP are equal, many people become concerned.

    Debt ceiling equals GDP

    So, the problem with hitting the debt ceiling again is that this time our debt (+/-$18.2 trillion) has surpassed the 4th quarter 2014 GDP ($17.7 trillion).

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  • Everyday economics and airline flight decisions

    3 Myths About Flight Cancellations

    Mar 15 • Businesses, Demand, Supply, and Markets, Economic History, Labor, Regulation, Thinking Economically • 92 Views

    Have you ever arrived at the airport, looked for your flight on the overhead board and seen Canceled? Like me, do you assume the reason was a half empty plane?  We were probably wrong.

    It is actually about tradeoffs.

    The Swap

    According the WSJ’s “The Middle Seat,” you might have been canceled because of a swap. If a plane loaded with business travelers had mechanical troubles and your flight was occupied primarily by low-fare leisure traffic, the airline will switch the business travelers to your plane. Not only are business refunds more expensive than the deals discretionary fliers get but the business traveler is more likely to cancel if she cannot get to her destination on time.

    The Cost

    Because cost also determines whether or not your flight gets canceled, flights on larger planes are canceled less frequently. There is more food on widebodies that would be discarded (worth more than $12,000 on an international run), they have crews that would be paid unless they moved to another flight, and remaining stationary, planes require a parking fee.

    Below you can see the cancellation cost difference between widebodies and small regional jets. Uncontrollable events are cheaper because there is less the airlines are required to give passengers in return for the cancellation.

    A higher opportunity cost means more expensive flights will not be canceled.

    From: airwaysnews.com

     

    Rebooking

    Rebooking can be costly for the airline. The passengers that are moved to another flight take the seats of last minute fliers who would have paid the highest fares. The alternative of using another airline could be equally unattractive since they have to pay for that seat.

    So here we have our three myths:

    • Myth #1 Unfilled planes are the primary reason for a cancellation. (No, it relates to keeping the flights that generate the most revenue in the air.)
    • Myth #2 Canceling saves money. (No, And, the higher the cost of canceling, the more likely the people on that flight will take off.)
    • Myth #3 Rebooking is not a problem. (It is. The revenue sacrifice can be high.)

    And here we have a recent history of cancellations:

    Tradeoffs determine flight cancellations

    From: masflight.com

     

    Our Bottom Line: Tradeoffs

    Thinking economically, flight cancellations are all about tradeoffs. Deciding which flights go and which stay, airlines have to consider crew, maintenance, catering, airport and handling fees, passenger accommodation obligations and passenger cancellation implications. Cost and benefit depend on the airplane size, the route, the passenger mix.

    Even when the cause is uncontrollable, much more than the number of filled seats determines who gets canceled.

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