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    Baseball Salaries and Taxes

    Apr 14 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Labor • 311 Views

    There is a connection between baseball and President Obama’s budget proposals.

    Let’s start with USA Today’s baseball salary database. For 2011, at $32 million, NY Yankees’ 3rd baseman Alex Rodriguez earns the most; #2 is LA Angels’ outfielder Vernon Wells at $26,187,500 and #25 is Boston Red Sox pitcher John Lackey at $15,950,000. Much lower but still astronomical, the median salary for the NY Yankees is $2,100,000 and for the Boston Red Sox, $5,500,000.

    Historically, the numbers reflect a huge increase. In 1990, at the top were Milwaukee Brewers’ outfielder Robin Yount, and Minnesota Twins outfielder Kirby Puckett who were earning, respectively, $3,200,000 and $2,816,667.

    Comparing top baseball salaries, can we say that the rich are getting richer?

    This takes us to a University of Michigan blog from Professor Mark Perry. Disagreeing with UC Berkeley Professor Robert Reich that the rich are getting richer, Dr. Perry points out that today’s rich are different people from those with massive net worth 20 years ago. (You could look here for Dr. Reich’s position.)

    Because of “considerable” income mobility and rising incomes, there were meaningful shifts in the actual people in the different income brackets. Many households in lower income quintiles moved up while those in top groups fell. The “…share of income of the top 1 percent is higher than in prior years…” but it is a different group of households.

    So yes, the rich are richer. But, it is not the same people.

    How does this relate to the President Obama’s budget proposals? It relates to tax policy. Believing that incentives fuel economic growth, those who care most about income mobility tend to support tax cuts for the affluent.

    Your opinion?

    The Economic Lesson

    A very real issue that concerns economists is income distribution.  In the U.S., our national income comes from wages and salaries, rent, interest, dividends and profits from businesses that are not incorporated. To picture our income distribution, please think of a pie as the total national income and then individual slices as the proportion that different groups receive. That would mean that if total national income were $1,000 and a society had only five households (people living together), then if every household earned $200, distribution was equal. By contrast, if one family earned $800, then, because $200 remained for everyone else, there would be considerable inequality. Recently, the top quintile of households in the U.S. earned close to 50% of all income. This quintile approach for representing income distribution was developed by statistician Max Lorenz.

    *Original content has been minimally edited.

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    The Price of Rice

    Apr 13 • Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 334 Views

    What would make you switch what you eat every day?

    The Indonesian government is using an ad campaign to try to get people to change their daily diet. Their slogan is, “One Day No Rice.”

    With per person consumption at 275 pounds of rice a year, Indonesians are huge rice eaters. McDonald’s serves a side of rice for 35 cents. A typical Indonesian meal could be rice with a side of meat and vegetables.

    Now, with the price of rice having risen (although the UN said the price did not go up during March and that supply was considerable), the Indonesian government hopes to reverse the price trend by decreasing demand. Less rice, though, means more of something else. They are suggesting cassava. But I wonder whether that can work. You might want to look here to see how China is affecting the price of cassava.

    The Economic Lesson

    Indonesian rice policy seems to be fighting the law of demand. According to the law of demand, price and quantity demanded are inversely related. Higher price and we want less; lower price, we are willing and able to buy more.

    Let’s assume that people do eat less rice. Then, demand shifts to the left and price descends. You can predict what happens next. And, the story gets even more complicated when we look at US rice subsidies.

    Maybe the only true solution is to let price rise. Your opinion?


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    Your Budget Proposal

    Apr 12 • Government, Innovation • 281 Views

    Several months ago, the NY Times published an interactive budget exercise. The goal was for each of us to decide how we would deal with a skyrocketing deficit. Now, with President Obama scheduled to present a major speech on his budget proposals, you might enjoy going here, to decide how you would handle the same challenge.

    As for an update, the WSJ yesterday had more news about last Friday’s budget deal. Rather brief, they said it reflected, “What’s Known So Far.”

    What we do know is that the government did not partially shut down at midnight last Friday because of a short-term spending bill that was passed. That will take us to this Thursday at midnight when again, further action will be necessary.

    “What is known so far” relates to Friday’s agreement on $39 billion in cuts for the 2011 budget that never was approved by the Congress.

    • Defense spending: less of an increase in spending
    • Departments of Labor, Education and Health and Human Services: cuts
    • State Department and foreign aid programs: cuts
    • “Earmarks”: cuts
    • Future nonprofit health insurance cooperatives: cuts

    You might also want to look at the report from the fiscal commission that President Obama appointed. Called “The Moment of Truth,” you can see it here.

    The Economic Lesson

    Specifically defined, federal fiscal policy refers to taxing, spending, and borrowing. It involves the federal deficit which is the shortfall between annual spending and revenue. The federal debt is the total amount that the U.S. government owes.


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    Food or Energy?

    Apr 11 • Demand, Supply, and Markets, Developing Economies, Economic Debates, International Trade and Finance • 371 Views

    Biofuels create dilemmas. Whenever nations mandate converting corn or sugar into biofuel, their prices soar. People whose diets depend on these commodities are the first to suffer.

    What to do? Lower food prices or increase energy conservation?

    China’s answer was to ban using grains for its biofuel. Sort of like patching a leaky boat, the problem just shifted.  Now, the NY Times tells us that instead of grains, China is using cassava chips. A major Thai export, cassava chips have soared in price. Predictably, the millions in Africa for whom cassava is a dietary basic, face higher prices and shortages.

    The Economic Lesson

    Demand, supply and opportunity cost tell part of the story. Whenever demand shifts to the right for a commodity, the price increases. Then though, the supply side rethinks its planting decisions. The opportunity cost of remaining with a cheaper commodity becomes too high. As a result, growers have the incentive to switch their crops. Then, supply increases and price drops.

    The other part of the story involves the role of government. Do you agree with government mandating energy sources?

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    Restaurant Economics

    Apr 10 • Behavioral Economics, Demand, Supply, and Markets, Labor, Thinking Economically • 324 Views

    For a new restaurant in Chicago, Next, no one is sitting at the phone taking reservations. Instead, online, you can buy a ticket for a table seating 2 or 4 (not 3 or 5). According to Chicago Magazine, the tickets are nonrefundable, include the tip and tax, and extras such as wine.


    • No “underutilized” seats (capital) because a table for 4 has 4 paid for instead of the 3 people who might be dining.
    • No telephone reservationists (a labor saving approach).
    • Variable pricing, based on demand and costs. The owners plan to use peak pricing by charging more for the 7 pm Saturday reservation that everyone wants and less for 9:30 on Tuesday evening. Then, like airlines, prices can change as demand changes.
    • And finally, through the new software designed for this approach, they are changing the market structure for online booking; OpenTable, where most people book online, will have new competition.

    With a waiting list of thousands, Next restaurant tickets are being resold on Craigslist and eBay.

    The Economic Lesson

    Proving again that economics need not be the dismal science, a restaurant can provide examples of capacity utilization, demand and supply, variable pricing, technological innovation, and competition.

    Chef Achatz referred to diminishing returns in a recent interview when he said that he believed in small portions (and a 23 course meal).


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