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    The PIIG’s Progress

    Nov 3 • Economic Debates, Government, International Trade and Finance, Macroeconomic Measurement • 232 Views

    Almost everyone seems to be debating the same issues. Spend less, tax more, or both?

    Now perhaps Portugal has made some progress. Hoping to bring its budget deficit down to 4.6% of GDP in 2011, their VAT will ascend to 23%. But will they cut public sector pay 5%? They vote in several days. Last spring, Italy announced a civil servant wage freeze. Meanwhile Ireland, with the highest budget deficit in the EU (Luxembourg was the least indebted in the EU) announced that its spending cuts and refusal to pay into a pension reserve fund were achieving some success. Interestingly, Spain said it has made progress but, the areas it will not cut include pensions and unemployment benefits. Finally, Greece. Maybe some progress with spending cuts but tax revenue is a challenge.

    What does all of this mean? Markets are not optimistic. The price of insurance, a credit default swap, on PIIG’s debt has risen.

    The Economic Lesson

    A credit default swap is like an insurance policy. Instead of diminishing the impact of a house fire or a jewelry loss, this kind of insurance lowers the risk of a financial investment. Yes, credit default swaps were central to AIG’s financial debacle because AIG sold much more “insurance” than they could possibly cover. Managed appropriately, as described in this econtalk discussion, credit default swaps perform a valid financial role.

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    Environmental Dilemmas

    Nov 2 • Developing Economies, Economic Debates, Environment, Macroeconomic Measurement, Thinking Economically • 240 Views

    It’s the same question. Economic development or conservation?

    During April, the headline said, “Uganda Seeks to Reconcile Oil-Nature.” Now, in Tanzania, “Proposed Serengeti Highway Is Lined With Prospects and Fears.” The places differ but the issues are the same. In Uganda, the debate concerns oil drilling. In Tanzania, it is road building. Privately and publicly, oil will generate revenue for Uganda. Similarly, northern Tanzania will benefit from a new road that will bisect the Serengeti Park. It will facilitate medical care, carry much-needed goods, enable the spread of electricity and cell phone service. And, both projects, will irreparably harm priceless wildlife.

    What to do? An economist would suggest assessing the externalities.

    The Economic Lesson

    Economists see positive externalities wherever a transaction between two parties affects a third individual or group in some beneficial way. They see negative externalities when the impact on a third party is harmful. Vaccines usually have positive externalities while pollution is the typical example of a negative externality.

    Taking externalities an economic step further, we can look at cost. On a demand and supply graph, the equilibrium price of a decision that has a positive externality is too high because of the benefits experienced by society. Correspondingly, the equilibrium price of a decision with negative externalities is too cheap because of the associated costs that result.

     

     

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    Why Was Malthus a Reverend?

    Nov 1 • Economic History, Economic Thinkers, Innovation • 230 Views

    Have you ever wondered why Malthus was a reverend?

    The surprising answer is in Bill Bryson’s wonderful new book, At Home A Short History of Private Life (which I just started reading). 18th and 19th century rectors and vicars tended to be affluent and bored. As Bryson explains, rather generous rents and tithes, during good times and bad, funded their pay. Their preparation typically was a university degree in any area. With little training in human sustenance and a book of sermons to refer to each week, they had considerable time on their hands.

    What to do? The Reverend Malthus thought and wrote about economics and the future of the world. Other clergy with similar inclinations include Edmund Cartwright, the inventor of the power loom; George Garrett, who invented the submarine; William Buckland, an expert on fossilized feces; and Jack Russell, a terrier breeder. (The Jack Russell terrier is today’s picture.)

    The Economic Lesson

    Perhaps one of the first environmentalists, Reverend Thomas Malthus told us in 1798 that population grows geometrically while resource production expands arithmetically. Consequently, resource prices will rise and supply will become increasingly inadequate.

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    Silver Job Fairs

    Oct 31 • Developing Economies, Economic Debates, Government • 229 Views

    It is more likely that a 75 year-old South Korean will be working than a 60 year old Frenchman. According to OECD (Organization of Economic Cooperation and development) statistics cited by Floyd Norris, workers in South Korea and Japan remain in the labor force longer than their French counterparts.

    Is this good or bad? It might depend on how you answer the following questions:

    1. Is grandpa taking junior’s job?

    2. Can government afford to take care of grandpa?

    3. Does grandpa like his job?

    The Economic Lesson

    While France is hit by demonstrations against raising the retirement age to 62, South Korea is scheduling “silver job fairs” to help older workers find jobs. Understanding the different approaches takes us to the political, economic, and social implications of fiscal policy–government spending, taxing, and borrowing.

     

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    Banana Machines

    Oct 30 • Businesses, Economic Thinkers, Innovation • 259 Views

    It is tough to design a vending machine that will handle a banana gently. The temperature needs to be 57 degrees, a 4 foot fall to the consumer should be gentle, and they have to remain ripe for as long as possible. It gets even trickier when celery, which requires 34 degrees, is nearby. (It must have been even more difficult to make this vending machine for live crabs.)

    The first Post-It Note also was a developmental challenge. The problem was the adhesive. But when Art Fry, in new product development at 3M, heard about a temporary adhesive, the “sticky” was born.

     

    The Economic Lesson

    The private rate of return–the net amount a business gets from an investment–tends to vary considerably and can ultimately be nonexistent because of competition. Moving beyond its origin, as the impact of the innovation ripples through society positively and negatively, it creates a social return. Both are tough to calculate. Edwin Mansfield, a University of Pennsylvania economist (1930-1967) who studied the impact of innovation concluded that smaller innovations such as new industrial thread had a much greater social rate of return than products and processes that sound more dramatic.

    Maybe the banana vending machine will have more of an impact than we suspect?

     

     

     

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