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    A Smaller Safety Net?

    Sep 10 • Economic Debates, Government, International Trade and Finance, Labor • 214 Views

    In France, a 24 hour workers’ strike brought retirement rights back to the headlines. Saying that a 60 year old retirement age was no longer affordable, French President Sarkozy has proposed moving it up to 62. French workers disagree.

    In the U.S., a leader of the Older Women’s League (OWL) reacted angrily to a comment about Social Security from former Senator Alan Simpson. Mr. Simpson is the co-chairman of the recently created National Commission on Fiscal Responsibility and Reform. Using rather vivid language, Mr. Simpson said that Social Security would not have the future capabiity to continue its current obligations. In an email, OWL responded that Mr. Simpson displayed, “…his clear disrespect for Social Security, women and the American people…”

    You can see the dilemma. Our resources are limited. In most eurozone countries and in the U.S. federal spending is skyrocketing. To what extent should we provide support to an aging population?

    The Economic Lesson

    Social Security is a pay-as-you-go system; today’s workers pay the benefits for today’s recipients. When Social Security began in 1935, there were 42 workers for each beneficiary, life expectancy was close to 62, and benefits began at 65. Today, U.S. life expectancy averages close to 78 and minimum benefits can begin at 62. By 2027, the full benefits age will gradually have risen from 65 to 67. Currently, while there are approximately 3.3 workers for each beneficiary, for 2030 the projection is 2.2.

    In France also, and in other OECD countries, the older population is growing and birth rates have diminished. By 2050, if current labor force participation rates remain the same, in Europe, there will be one worker for every retired person.

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    The Housing Dilemma

    Sep 9 • Demand, Supply, and Markets, Economic Debates, Financial Markets, Regulation • 177 Views

    Is it time for shock therapy? Since the housing bubble popped, from tax credits to mortgage modification programs, government has tried to support housing prices. The goal was to provide support and diminish foreclosures until the market stabilized. With housing sales still sinking, some suggest a different solution: the market.

    On the one hand…Enabling overextended homeowners to keep their homes has many benefits. Neighborhoods remain occupied and home values are sustained. Children remain in the same school, emotional dislocation is minimized, the court system is not overloaded, banks can keep securities that have a higher value.

    On the other hand…Shock therapy would involve the efficiency of the market. Buyers would offer bids for houses. With so many homes for sale from banks that foreclosed and homeowners with unaffordable properties, prices would probably plummet. Buyers would be pleased and sellers would be distraught. Confidence would initially suffer. Eventually, though, prices would stabilize at a market chosen level. The balance between demand and supply would be restored.

    Which solution do you prefer? Government assistance favors sellers/owners. The market would help buyers. Neither solution though, as discussed by Gretchen Morgenson is quite as simple as it sounds. And to further complicate the issue, here is another perspective.

    The Economic Lesson

    Please imagine a demand and supply graph with price the Y-axis, quantity the X-axis, a downward sloping demand curve, and an upward sloping supply curve. If government support were eliminated, then the supply curve would shift to the right because the number of sellers increases. As a result, supply crosses demand at a lower price. How low? No one knows.

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    Kidney Markets?

    Sep 8 • Demand, Supply, and Markets, Regulation, Thinking Economically • 366 Views

    What should we be able to buy and sell? Alcohol? Land? People? Body Parts?

    In a Teaching Company lecture on organ transplants, Wake Forest economist Robert Whaples says that the answers depend on the market’s boundaries. And, he soon adds, those boundaries change. Prohibition, for example, transformed the price, demand, and supply of alcohol between 1918 and 1933.

    Dr. Whaples asks whether a similar change should happen for organ transplants. Describing current shortages, he says that the demand side of the market, with insurance covering the expense, is considerable. By contrast, on the supply side, with altruism the key incentive since selling body parts is illegal, the hearts, lungs, kidneys, intestines that certain people need, are insufficiently available.

    That returns us to the market. Whether looking at human transplants or the viability of the housing market, we seem to keep on returning to how much we want to permit unfettered supply and demand.

    Should we be able to buy and sell kidneys if it will diminish massive shortages?

    The Economic Lesson

    When demand and supply interact, they allocate resources. If they are interacting successfully, then resources are allocated efficiently. Sometimes, though, markets fail. For example, when a factory pollutes, we can say we have market failure because the cost of pollution has been ignored by the price. We also have market failure when government partially affects the market’s boundaries through subsidized housing or a minimum wage. Finally, as with organ transplants, those boundaries can completely eliminate the market.

     

     

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    Vacation Daze

    Sep 7 • Behavioral Economics, Businesses, Economic History, Economic Thinkers, Innovation, Labor • 229 Views

    In a column about Netflix, author Daniel Pink described their vacation policy for salaried employees. They have none. All who are salaried can take off as many or as few days as they want. Their rationale? Because many people do a lot of work away from the workplace, time at the workplace is increasingly irrelevent.

    Netflix vacation policy is what Pink means what he says autonomy at work motivates us.  In an econtalk discussion, he said that once we are sufficiently paid, autonomy (directing our own lives), mastery (desire to get better and better at a task), and purpose (“yearning to do what we do in a service larger than ourselves”) propel our performance. Discussing the same ideas in a TED talk, he quotes a Federal Reserve paper that suggests high compensation can even detract from job performance.

    Should we care about Pink’s ideas? Do big changes have to happen at work? Can they?

    The Economic Lesson

    During the past several centuries, management styles have changed. We could start with Adam Smith’s description of small businesses and the division of labor in a market system and conclude with Alfred Chandler and Peter Drucker’s discussions of the structure and strategy of management and the worker in the modern corporation. 

    But then, as suggested by journalist Alan Murray in an excellent WSJ article about the demise of old management models, the 21st century might require that we begin all over again.

     

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    Bendy Buses and Health Care

    Sep 6 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, Government, Regulation, Thinking Economically • 195 Views

    Have you heard of a bendy bus? The bendy bus was supposed to solve Santiago, Chile’s public transit problems. But the story relates to each of us.

    It all began during 2007 when Santiago decided to replace its private bus system with public transit. Previously, with 3,000 different bus companies, the competition had been fierce and problematic. 1) Seeing a crowded bus stop, drivers would rev up their engines and race each other to get there first. Because of the accidents, injuries and conjestion, we could say competition was destructive. 2) Pollution was uncontrolled because buses were not licensed. 3) Although bus fares were quite low, the profitability ($60 million US dollars) made certain people question the ethics of making money by satisfying a basic municipal need.

    To solve the three problems, the city took over the system. Here is where bendy buses enter the picture. Big and attractive, they safely navigated city streets.

    Each of the problems was solved (but not really). 1) Drivers were told that on time service was crucial. Result? Buses were on time but empty as drivers skipped busy stops that might have delayed them. 2) Pollution was no longer a problem with the new buses. 3) Profits were no longer a concern because the system was losing lots of money ($600 million US dollars).

    The Economic Lesson

    In many ways, Santiago’s bus issues are our health issues.

    1) Incentive: Which incentives will optimize service?

    2) Pubic or private: How can we best provide the services we require?

    3) Affordability: How can the cost of necessities be minimized?

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