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    Inequality and Movie Stars

    Nov 22 • Behavioral Economics, Government, Regulation • 199 Views

    Did you know that Academy Award winners live longer than losers? Much more than a trivia fact, Academy Award winner longevity provided researchers with data about inequality.

    As reported in the May 15, 2001 issue of The Annals of Internal Medicine, researchers gathered mortality statistics for 1649 people. They looked at all “actors and actresses ever nominated for a leading or supporting role…For each, another cast member of the same sex who was in the same film and was born in the same era was identified…” Their goal was to determine whether relative success correlated with a person’s lifespan. Their answer was, “Yes.” They concluded that winners had approximately 4 extra years of life and that “…movie stars who have won multiple Academy Awards have a survival advantage of 6.0 years over performers with multiple films but no victories.”

    I know that you might have many questions. The researchers did also. But our key here is to think about whether inequality among all of us in the U.S. warrants remedial action from our government.

    This takes me to a recent NY Times column from economist Robert Frank. Comparing 1976 and 2007, he tells us that the top 1% of earners moved from an 8.9% share of total income to 23.5%. Then, he also points out that counties with rising income inequality experience higher divorce rates, more bankruptcies, and longer commute time. His point? Because “…greater inequality causes real harm…” more income equality through higher taxes is a valid goal for our leaders.

    During an Econtalk podcast, George Mason University economist Russ Roberts disagreed with Dr. Frank’s conclusions. Dr. Roberts said that economic growth was constrained by income redistribution and a “bigger pie” will help everyone.

    The Economic Lesson

    Taxes are all about income redistribution. If we promote equality, we will have more income redistribution through taxes, more fairness, and a common living standard. However, economic efficiency will suffer and our economic pie will grow more slowly. By contrast, economic competition leads to more efficiency, more entrepreneurial energy, more economic growth and a bigger pie. And, is it fairer to be able to keep more of what you earn?

    You might want to look at economist Arthur Okun’s Equality and Efficiency: The Big Tradeoff.

     

     

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    What If A State Defaulted?

    Nov 21 • Economic Debates, Government, Macroeconomic Measurement, Money and Monetary Policy • 751 Views

    What would happen if a state defaulted on its debt? It is unlikely. It has not happened since 1933. But…what if?

    In a fascinating simulation at The Economist’s Buttonwood Conference, an auspicious group of role players simulates a state debt crisis. As they debate the facts, unexpected events are announced that influence their discussion. (I really enjoyed watching the simulation for close to 1 hour.)

    The facts: The fictitious state of New Jefferson is the 3rd largest state in the U.S. Economically diverse, it has considerable unemployment, underfunded pensions, and residents who prefer low taxes and high spending.  Its senior senator chairs the Senate Banking Committee.

    The dilemma: A panel of “advisors” debates what the federal government should do. Should there be a bailout? If so, who? The Treasury? The Fed? Another way? In addition, exacerbating the crisis, periodic news flashes interrupt their deliberations. For example, as they speak, the advisors learn that if the state does not get $1.5 billion by Wednesday, it will default.

    The roles include the (fictitious) Chairman of the Fed, the Secretary of the Treasury, and the White House Chief of Staff. All role players such as Robert Rubin, former Secretary of the Treasury, have actually had these types of positions. Predictably, their deliberations include insight and humor about relevant domestic and international implications.

    When California really did ask the Obama administration for guarantees during 2009 in order to borrow more money, they said no. As a result, during July, 2009, California had to issue IOUs temporarily to pay some of its obligations.  And now, just this week, a Yahoo Finance article cited California’s delay of a $10 billion bond issue because of investor disinterest. 

    The Economic Lesson

    Can a state declare bankruptcy? According to a very good Slate.com “explainer” article the answer is no because of the state’s sovereign status. Without the bankruptcy option, what happens to the state’s financial obligations? You might enjoy looking at the Slate article. 

     

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    Growth Stories

    Nov 20 • Economic History, Government, Innovation, Macroeconomic Measurement • 265 Views

    Height is about more than how tall you are. When affluence grows, so too do people. Why? Height seems to correspond to economic growth. 

    Connecting height and economic growth, a wonderful New Yorker article from 2004 tells us that Americans grew taller more than 50 years ago. Based on military records, a typical male was 67 inches during the mid-1800s, close to 70 inches in 1955, and since then, stayed there. In 1939, an average forward on the University of Wisconsin’s basketball team was 6’1″. In 1999, he was 7 inches taller. 

    I started thinking about height after reading a recent NY Times column by David Leonhardt on economic growth. At first, when he discusses cutting spending and raising taxes, the column appears to be a traditional attack on the deficit. Soon, though, reminding us that economic growth is the best way to diminish the deficit, he urges us to evaluate deficit cutting strategies in terms of their ability to stimulate growth. 

    If we follow Leonhardt’s wisdom, maybe then we will surpass the Dutch who are now among the tallest in the world with men averaging 6’1″ and women, 5’8″.

    The Economic Lesson

    Called anthropometric history, the history of human height has become an economic field of study. Economists use height data to form hypotheses about GDP.

     

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    Demand, Supply, and College Admissions

    Nov 19 • Demand, Supply, and Markets, Households, Thinking Economically • 335 Views

    You might pay $1.50 to get a cup of coffee or $30 for a blouse. But what do students “pay” to get admitted to a college? And, at what “prices” will colleges accept people?  Several researchers developed a supply and demand model of the college admissions process. I found their approach fascinating. 

    First we should identify the different components of their demand and supply graph. They defined price, their y-axis, as “admissions standards.”  You know what they meant. Grades, extracurricular activities, and test scores. Quantity, the x-axis, was the spaces in the freshman class. As for the curves, the applicants were on the demand side. Observing the law of demand, as “price” rose, applications decreased. Meanwhile, the college was on the supply side because those who could “pay” higher “prices” would have more available freshman class slots.

    The researchers’ model assumed there were only 2 colleges. With one known as “better” than the other, the colleges should have attracted students with different credentials. But it did not quite work out that way.

    The Yale Economic Review summarized the 42 page academic paper. Referring to the “noise” of the college admissions process, they said that misinformation, uncertainty, and the “hype of the marketplace” resulted in certain better students selecting the lower quality school. Furthermore, “…higher admissions standards might not correspond to the better college, as long as the worse college is either comparatively good enough or small enough, or if the application process is noisy enough.”

    I do recommend looking at the paper to see the variables that determine who applies where and why.

    The Economic Lesson

    All of this returns us to the function of a market. Through a price mechanism that conveys information, markets allocate goods and services. Perhaps like oil and cotton and bananas, for the college admissions process a rather complicated market determines allocation.

     

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    Yuan Opinions

    Nov 18 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 266 Views

    Can you imagine 43 million pairs of socks a year, 5,000 an hour, some saying Dora the Explorer, being produced by one Chinese manufacturer? When you pay $2.99 for a pair of those socks at Wal-Mart, they probably cost that Chinese manufacturer, Shuangjin Knitting and Textile, 25 cents to make. The Chinese firm then sells its socks to U.S. distributors like PS Brands, the largest importer of Chinese socks. Finally, retailers like Wal-Mart, Disney and Adidas buy the socks from PS Brands.

    Moving in the opposite direction, complex electronic components are sent from the U.S. to China. Staco Systems, a small California firm, exports its aerospace components to Chinese factories. On the retail side, Apple considers China a market for its iPods and iPads as do General Motors and Ford for their cars.

    The Economic Lesson

    This takes us to the pressure the U.S. is placing on China to stop undervaluing its currency. Whether looking at Wal-Mart and Apple or you and me, China’s response will have very real consequences. But the consequences vary.

    A more expensive yuan in relation to the dollar could narrow PS Brands’ profit margins and make retail sock prices rise. But also, it could increase business for Staco Systems and other U.S. exporters. We might find manufacturers transferring businesses from China to other, more cost effective developing nations. Large firms could locate in China to avoid foreign exchange. And all of that is only the beginning of a worldwide ripple responding to the yuan’s ascending value. 

    To what extent is the yuan undervalued? You can look at the Big Mac Index.

     

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