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    An Economic Lesson From Marie Antoinette’s Fashion Designer

    Aug 9 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Thinkers, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 557 Views

    Rose Bertin was the 18th century Alexander McQueen. As Marie Antoinette’s personal fashion guru, she designed massively skirted ornate gowns and 3-foot high poufy hair styles. More than clothing, though, her designs embodied power, presence and opulence.

    In This Time It’s Different, economists Kenneth Rogoff and Carmen Reinhart quote Rose Bertin’s reminder that, “There is nothing new except what is forgotten.” (p. 275)

    The Economic Lesson

    According to Reinhart and Rogoff, our current financial plight is indeed “nothing new.”

    Categories for financial crises (p. xxvi):

    • Sovereign debt defaults
    • Banking
    • Exchange rate
    • High Inflation

    Typical pre-crisis warning signs (p. 223):

    • “asset price inflation” (U.S./housing)
    • “rising leverage” (U.S./borrowing)
    • “large sustained current account deficits” (U.S/more imports)
    • “a slowing trajectory of economic growth”

    Typical post crisis “aftermath” (p. 224):

    • 6 years for real housing prices to bottom
    • A 3 1/2 year duration for “equity price collapses”
    • Soaring government debt
    • Declining tax revenues
    • Rising sovereign debt interest rates

    An Economic Question: Do you believe that government is the problem or the solution when considering a financial crisis?

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    Take Me Out to the Ball Game?

    Aug 8 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Macroeconomic Measurement, Thinking Economically • 414 Views

    Fewer people are going to baseball games. Even with a new stadium and a winning season, the Yankees are luring fewer fans. According to Forbes, as of the end of June, stadium revenue was sinking for the Chicago Cubs, St Louis Cardinals and Atlanta Braves, and attendance at LA Dodgers games has plunged.

    Responding, owners maintained higher ticket prices but then gave discounts. For a month, the Baltimore Orioles sold $1 tickets for games against all teams except the Yankees and Red Sox. Still, attendance remained low.

    On the other hand, some teams are okay. 12 of 30 MLB teams have not seen their attendance sag. The San Francisco Giants and the Texas Rangers are in good shape. And, Forbes tells us that the Cincinnati Reds are enjoying “a bump.”

    Trying to explain how the economics of baseball is shifting, sports economists John Siegfried and Tim Peterson concluded that more affluent households went to games during the 1980s and 90s but now, not as much. Meanwhile, online resellers like Stubhub have facilitated bargain hunting. People seem to be waiting for a cheap deal before committing.

    The bottom line? It is tougher for teams to earn revenue by filling up a stadium. The Great Recession may be a cause but not the only one.

    To see more about sports economics, you can look here at a previous post on unaffordable stadiums.

    The Economic Lesson

    The Great Recession affected many households’ willingness to spend on discretionary items like baseball tickets. Called the income elasticity of demand, when our income drops by a certain percent, purchases fall even more for certain types of items.

    An Economic Question: When income falls and home values decline, on which items will consumers initially cut back?

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    Double Dips

    Aug 7 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Government, Households, Labor, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 463 Views

    We do not know whether a double dip has begun. Cascading during 2008 and the first half of 2009, the GDP then began to climb. Only if it drops again will we have a double dip. In the NY Times, financial journalist Floyd Norris does a beautiful job of comparing the 1980/82 double dip with now.

    1980-82:

    In 1980, inflation was the culprit. But then, attempts to control rising prices by restraining consumer credit so diminished economic activity that policy makers reversed course. Growth resumed but so too did inflation.

    Responding, the new Fed chair, Paul Volcker, tried some politically unattractive economic discipline. Strangling lending, percent by percent, the Fed raised interest rates until the prime touched 21.5%. By 1982, we had a new recession. Still though, with inflation his target, Volker’s interest rate arsenal took aim until he was successful. By 1984, inflation was down to 4.1% from 13.6% and GDP was growing at a 7.2% rate.

    2011:

    Now, like 1980, government’s initial policies are not curing our economic ailments. We still face a housing problem, we still lack robust expansion, we still have high unemployment. Perhaps, like 1980, government might need to resort to more unattractive economic discipline because it has used up the more appealing weapons in its economic arsenal.

    Maybe, also like 1980, we face the threat of a double dip. Here, you can listen to Merle Hazard sing “Double Dippin.”

    The Economic Lesson

    A recession is the period between a peak in economic production and its trough. Imagining a “u”, it is the left side, the trip downward. In economic terms, as we travel down the left side of the “u”, the GDP is either growing more slowly or actually diminishing. While most of us say that a recession is defined as two consecutive quarters of declining GDP, the NBER tells us that the quarters do not have to be next to each other.

    An Economic Question: Looking at the data in Table B-4, here, in The Economic Report of the President 2011, since 1980, how many recessions has the U.S. experienced?

     

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    Unintended Tax Consequences

    Aug 6 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Government, Labor, Macroeconomic Measurement, Thinking Economically • 403 Views

    Protesting a proposed luxury tax for pet grooming, Chicago’s Soggy Paws canine clients wore signs saying “…please don’t tax my haircut.” The politicians who were hoping for more revenue might have been disappointed.

    Some history…

    The Omnibus Reconciliation Budget Act of 1990 included a luxury tax on yachts, aircraft, and more expensive furs, jewelry, and autos. It was supposed to be a relatively painless way to add $31 million to federal revenue.

    But it did not work out that way. With higher prices depressing quantity demanded, the government actually lost money. Job cuts in each of the impacted industries meant elevated federal spending for unemployment benefits. Diminished sales decreased government revenue. The net result? A loss of $7.6 million rather than a $31 million gain.

    Current proposals to eliminate tax breaks on corporate jets sound remarkably similar to past luxury taxes. Yes, the affluent who can afford it will pay more. But also, a domestic industry employing close to 120,000 will be adversely affected.

    The Economic Lesson

    It is all about supply and demand. When a tax increases price, it shifts the supply curve to the left. Correspondingly, because supply crosses the demand curve at a higher price, a lower quantity is demanded.

    An Economic Question: What are the pros and cons of higher taxes for the most affluent in a society?

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    Understanding Unemployment

    Aug 5 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Labor, Macroeconomic Measurement • 366 Views

    A Washington Post article provided some insight about unemployment by suggesting that we place all US jobs into 2 buckets:

    One bucket contains firms participating in a global market. Some export goods and services. Others face competition from imports. Examples include:

    • most manufacturing
    • agricultural goods
    • minerals
    • energy
    • a “healthy chunk” of business and financial services

    The other is filled with purely domestic jobs such as:

    • construction
    • transportation
    • health care
    • government
    • retailing

    This takes us to income and jobs. Between 1990 and 2008, the global bucket generated more income for Americans at home because of worldwide competition and outsourcing. However, the second bucket had no income growth–only job growth.

    Now, with cutbacks in construction, government, and consumer spending, the problem of stagnant wage growth and benefits in the second bucket is compounded by lay-offs.

    The Washington Post article is based on a paper by Nobel Laureate Michael Spence. You also might look here for an analysis of the July jobs report.

    An Economic Lesson

    During May 2007, the unemployment rate was 4.4%. 2 1/2 years later (10/09), it peaked at 10.1%. Economists continue debating whether the cause is structural or cyclical. Perhaps our buckets provide another perspective.

    An Economic Question: Cyclical unemployment refers to jobs lost because of less demand when the GDP grows more slowly or declines. Structural unemployment is typically caused by technological change. Which examples might you note that relate to current unemployment?

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