• 16516_11.11_000012487089XSmall

    The Power of the Market: Part 1

    Jul 27 • Businesses, Demand, Supply, and Markets, Developing Economies, Government, Macroeconomic Measurement, Regulation, Thinking Economically • 537 Views

    Maybe the market is more powerful than the Congress.

    First, some history

    Hoping that farmers would earn a living wage, in 1933, the U.S. government decided to subsidize crop prices. The goal was “parity,” a level of purchasing power that equaled what farmers could buy during their golden age, 1909-1914. To achieve parity farmers could receive a check that elevated market price to a target price.

    Fast forward to 2011.

    Farm income is soaring. Consequently, for many commodities, target prices are way below the market price. The target price of corn is $2.63 while its market price is near $7. For soybeans, $6 is the target and $13 the market. Translated into federal spending, farm subsidy totals are down by one half, from $22 billion to $11 billion.

    Why? The power of the market. 

    The Economic Lesson

    Involving demand and supply, a market is a process that determines price and quantity.  For corn, you have ethanol, emerging economies, and China on the demand side. They are shoving corn’s demand curve to the right. No one person or government is making the decision. It is all about the interaction of many consumers and many producers.

    So, when the Congress says it wants to cut spending, maybe the market can help.

    An Economic Question: How would crop subsidies affect the quantity that the market supplies and demands?

    No Comments on The Power of the Market: Part 1

    Read More
  • An Upward Dow Helps an Incumbent President

    Interesting Debt Facts

    Jul 26 • Behavioral Economics, Economic Debates, Economic History, Government, Macroeconomic Measurement, Thinking Economically • 358 Views

    1. China and the Social Security Trust Funds have more in common than you would expect.

    • The public has purchased $9 trillion of U.S. debt. China holds $1.1 trillion of the publicly held total.
    • The U.S. government bought $4.6 trillion of its own debt. The Social Security Trust Funds hold $2.6 trillion (57%) of that amount.

    2. During wartime, the debt has increased.

    On this graph, a line representing the debt soars during the:

    • 1790s (American Revolution)
    • 1860s (Civil War)
    • 1940s (WW II)
    • 1980s and now.

    It is highest during WW II.

    3. Calling it our “fiscal exposure,” we can picture future spending:

    • “Explicit Liabilities” that include “debt held by the public {interest payments}, military and civilian pension and post-retirement health benefits, environmental and disposal liabilities.”
    • “Contingencies” aka federal insurance.
    • “Implicit Exposures” which are “future Social Security and Medicare benefits, Federal disaster relief.”

    All data is for 2010 from an excellent GAO debt primer.

    The Economic Lesson

    An MIT professor calls it BATNA (Best Alternative To a Negotiated Agreement). Economists call it opportunity cost (the best alternative that was sacrificed).

    Using one opportunity cost chart for President Obama and another one for Speaker of the House Boehner is a handy way to gain insight about the debt ceiling talks. At the top of each chart we would have “agreement” and the alternative, “no agreement.”  Professor Tom Kochan believes that the Republican Caucus in the House is in a much better negotiating position because their constituency approves of the opportunity cost (their BATNA) of having an agreement. By contrast, the “no agreement” BATNA is less attractive to President Obama.

    An Economic Question: For President Obama and Speaker Boehner, in an opportunity cost chart, list the benefits of having an agreement and the benefits of not having an agreement. Then decide whether those benefits are worth sacrificing.

    No Comments on Interesting Debt Facts

    Read More
  • 16512_6.26_000008803278XSmall

    Can the USPS Deliver?

    Jul 25 • Businesses, Economic History, Government, Labor, Macroeconomic Measurement, Thinking Economically • 456 Views

    You’ve got mail? Maybe not on Saturday. As explained in a Teaching Company lecture (#28), the U.S. Postal Service (USPS) faces competition from UPS and FedEx, from email, faxes, and texts. Their salaries average 30% higher than the private sector, they have massive pension and retirement obligations, and their productivity lags behind national averages. Hemorrhaging money, they have to cut back.

    Recently, Bloomberg Businessweek explained the plight of the USPS. Providing amazing service, the USPS delivers mail by pack mule to the Havasupai Indian Reservation in the Grand Canyon and by snow mobile in parts of Alaska. During 2010, its revenues were $67 billion. But it spent much more.

    What to do?

    Close post offices for economic reasons? Prohibited by federal regulation. Fire employees? Union contracts say no. Eliminate Saturday mail delivery? Congress has to say yes. Union concessions? A new contract with 250,000 postal workers includes a no-layoff provision, a 3.5% raise during 4 1/2 years, and 7 uncapped cost-of-living increases. Soon, 3 other postal unions will be negotiating. Innovate like Sweden (letting customers use mobile phones to create individualized postcards) and Germany and other foreign services? The USPS has resisted digital creativity.

    And finally, have any public postal systems solved the same problems? Yes, Sweden, Finland, Germany, Switzerland.

    The Economic Lesson

    While we have had postal services since the 1600s, Ben Franklin transformed the system. Appointed Deputy Postmaster for the Colonies by the British, he established our first home mail delivery system, diminished to a single day the letter delivery time between New York and Philadelphia, and to 6 days between Philadelphia and Boston. When the British fired Franklin for his rebellious political activity, the postal system was making a profit.

    An Economic Question: How might incentives for government agency leaders and private business CEOs differ?

    No Comments on Can the USPS Deliver?

    Read More
  • 16510_7.24_000005013845XSmall

    Children and Wealth

    Jul 24 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Households • 443 Views

    More wealth seems to mean fewer children. Look at a graph of fertility in the U.S from 1800-1990. The birth line plunges. Consider India, China, South Korea, Singapore. As per capita GDP rises, births plummet. See this gapminder graph for rich countries and poor countries. The number of children per woman is much less in more affluent nations.

    1977 was a turning point in the U.S. Before, a majority of Americans told Gallup pollsters that they preferred 3 or more children. After, the number declines to 2. Gallup also tells us that currently, families earning more than $75,000 annually are more likely to want smaller families than lower income households. Here, you can see the Gallup information.

    Here and here you can see most of the family size trends discussed.

    The Economic Lesson

    An economist would call a good, “normal,” if your demand for it increases when your income rises. By contrast, for “inferior” goods, our demand decreases when we earn more. Dinners at nice restaurants are normal goods. Used cars are “inferior” goods.

    Does that mean that children are “inferior” goods if more affluence means less? Here, economist Justin Wolfers explains why.

    An Economic Question: During the great recession, how did consumers’ demand curves shift for normal and inferior goods? Examples?

    No Comments on Children and Wealth

    Read More
  • 16508_6.16_000006078784XSmall

    Debt Compromises

    Jul 23 • Developing Economies, Economic Debates, Economic History, Economic Thinkers, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy • 473 Views

    This story is about a country that had massive debt. A recent war had been expensive and the economy had big problems. Still though, powerful political leaders opposed the solution that the Secretary of the Treasury proposed.

    Yes, the country is the United States but the year is 1790. Because of the Revolutionary War, the U.S. owed French and Dutch bankers $11,710,378. From citizens at home it had borrowed $42,414,085. Using calculations from historian John Steele Gordon, the U.S. Revolutionary War debt was close to $19 trillion in today’s dollars–$5 trillion more than we currently owe. Behind on interest payments, a worthless currency (“not worth a continental”), a huge national debt, rampant inflation, we faced debilitating obligations. What to do?

    To manage the debt, Alexander Hamilton first had to solve 2 problems.

    Problem 1: Who legally owns U.S. bonds?

    Revolutionary war bonds were primarily held by wealthy merchants and unscrupulous speculators who had purchased the securities when they were virtually worthless from loyal patriots. Enraged, James Madison said that the present bondholders should get a partial repayment and the original holders should get the balance. Opposed also, John Adams was said not to understand the connection between funding a national debt and economic prosperity.

    By contrast, Hamilton realized that for the economy to grow from a sound foundation, contractual obligations had to be preserved. When a bond was sold, the new owner, whether a widow or a shady speculator, had to be recognized in the eyes of the law. 

    The final vote in the House, supporting the Hamiltonian plan, was 36-13. Hamilton’s father-in-law, who owned government securities, said that the opposition’s comments “made his hair stand ‘on end as if the Indians had fired at him.'”

    Problem 2: Should the federal government assume the states’ war debts?

    Some states like Virginia had repaid their debts while others, including Massachusetts, had not. On this issue, Jefferson was Hamilton’s main adversary. Hamilton said the U.S. was responsible for all existing debts; Jefferson said Virginia should not have to pay “twice.”

    To secure a compromise, Hamilton invited Jefferson to dinner. Accompanied by Madison, Jefferson agreed to support the assumption plan if the new capital would move from New York to the “muddy and fever-ridden banks of the Potomac.” (p. 31)

    So, you can see that our Congress has always been divided on debt issues. And, when it really mattered, they voted, they compromised and they made a wise decision.

    Here, in American Heritarge Magazine, you can read more about Hamilton’s proposals, the opposition, and the resolution through which European and domestic bondholders were repaid. In Hamilton’s Blessing, historian John Steele Gordon provides a more detailed history of the U.S. debt through 1995.

    The Economic Lesson

    With good credit, for relatively low interest rates, a nation can borrow money from creditors at home and abroad. According to scholars Kenneth Rogoff and Carmen Reinhart, the tipping point at which debt becomes excessive and unmanageable for most nations appears to be 90% of GDP. In 2010, the U.S. debt was close to 90% of its GDP.

    An Economic Question: Referring to funding and how it is used, explain how sovereign debt relates to economic growth.

    No Comments on Debt Compromises

    Read More