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    Debt Ceiling 101

    Jul 15 • Economic Debates, Economic History, Financial Markets, Government, Households, International Trade and Finance, Macroeconomic Measurement, Regulation • 459 Views

    During the month of August, if the U.S. hits its debt ceiling of $14.3 trillion and the Congress says, “No, you cannot borrow anymore,” then what will happen?

    During August, the U.S. will have $172B (billion) in federal revenues and $307B in authorized spending. If it cannot borrow more money, it will have a shortfall.

    Specifically, each day, the U.S. Treasury has a certain amount of cash on hand. On August 1, the cash on hand at the U.S. Treasury will total $73.8B. 2 days later, when it will need to send out $23B for Social Security, it will have enough. The next day when Medicare and Medicaid payments are due, and on August 5, when it owes federal salaries totaling $3.4B, it should have enough.

    But not for long. This video and these articles provide all of the specifics. And this Washington Post interactive exercise let you decide what to do.

    The bottom line? During August, we could cover Social Security, Medicare, Medicaid, paying the troops, paying interest on the debt. But what about food stamps? Defense vendors? IRS refunds? You can see the whole list here. Unless we can borrow some more, unless the debt ceiling is raised, we, or actually, the Treasury, will have to make some choices about what to pay and what not to pay.

    An interesting fact: During the 1996 budget crisis, Treasury Secretary Robert Rubin told the Congress that Social Security recipients would not receive their March payments. The Congress immediately passed a law exempting Social Security from the debt limit.

    The Economic Lesson

    In 1917, Congress decided it could not keep track of every U.S. loan. So, to maintain some control over national finance, they said, “We will decide the maximum amount the U.S. can borrow.” And, from that day onward, whenever necessary, they voted to increase how much the U.S. could borrow. Since 1962, the U.S. has raised its debt ceiling 75 times.

    How does the U.S. borrow money? The U.S. borrows money by selling securities to other countries, to itself (when Social Security has extra money, it buys U.S. bonds.), to you, to me, to banks, to businesses, to anyone who wants to buy its bonds. 

    You can read more about debt ceiling history here.

    An Economic Question: In the Washington Post interactive, which spending did you suspend?

     

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    Which College Majors Earn More?

    Jul 14 • Behavioral Economics, Economic Debates, Labor, Macroeconomic Measurement • 306 Views

    Although the unemployment rate is 9.2% for the entire labor force, it is 4.4% for college grads (and 10% for high school graduates, no college).

    But which college graduates earn more? It depends on your undergraduate major. Counseling psychology or petroleum engineering? The difference is $91,000 a year. The median income for a counseling psychologist is $29,000 while for a petroleum engineer, $120,000. Divided by group, engineering, computers and mathematics are at the top while education, psychology and social work are at the bottom.

    And finally, will more money make you happy? At the Aspen Institute, where happiness researchers have gathered, the money can make us happy group seems to have the most convincing research. (Here, you can watch the debate.)

    The Economic Lesson

    Happiness researchers frequently cite the Easterlin Paradox which implies that once we reach a certain level of wealth, more wealth does not lead to more happiness because of our quest to outdo our neighbors. On the other hand, economist Justin Wolfers used data to prove that people in rich countries are happier than those in poor countries and the rich are happier than the poor.

    An Economic Question: Do you believe that “happiness” or “satisfaction” research is valid? Explain.

     

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    Unaffordable Sports Stadiums

    Jul 13 • Behavioral Economics, Businesses, Economic Debates, Economic History, Environment, Government, Households, Labor, Macroeconomic Measurement, Thinking Economically • 495 Views

    The year is 1996. The place is Hamilton County, Ohio. You are standing in a voting booth deciding whether to approve a .5% sales tax increase to help build and maintain 2 new sports stadiums. Although the spending will exceed $500 million, you have been assured that property taxes will fall, school funding will rise, the Bengals will stay, and economic activity will soar. Convinced, you vote yes. Described by the WSJ, so, too, do a majority of Hamilton County’s voters.

    That was only the first step. Completed in 2000, the Reds’ stadium cost taxpayers $314 million. 3 years later, for the Bengals’ home, $408 million. Totaling close to $1 billion, municipal bond issues have paid the bills.  But bonds mature. Bonds require interest payments. And that is the problem.

    But not the only problem. This year, 16.4% of the Hamilton County municipal budget is paying for stadium obligations. New jobs and spending and even winning teams have not materialized. Public programs have been cut. According to this academic study, the one and perhaps only predictable benefit of new stadiums is psychosocial pleasure.

    The Economic Lesson

    The tragedy of the commons relates to stadium public finance. When a pool of public funds is created, initially, no one individually bears the cost–except perhaps the politician who might not be re-elected if he/she votes no. So, the pool is abused, overused, and later all of us pay.

    We also could cite cost and benefit. Here, the psychosocial benefit is short- and long- term. However, the cost is long term, paid in the future.

    Finally, fiscal policy is directly involved. Stadiums can be privately or publicly financed or paid for through a combination of the 2 approaches. You can see recent stadium financing decisions for the NFL in this graphic. In this research paper, you can see the history of stadium finance during the past century.

    An Economic Question: Many economists say human beings are rational thinkers. Why do we continue to build sports stadiums?

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    Productivity: Working Weekends

    Jul 12 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Financial Markets, Households, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically • 347 Views

    Israel has to decide when to have a weekend. The Israeli Sabbath, Friday sunset through Saturday sunset will be a part of it. The second day? Sunday and Friday are possibilities. Knowing that productivity is a major consideration, Israel’s prime minister asked an economist to chair the “weekend” committee.

    Selecting Sunday means a day to shop, go to the beach, and enjoy leisure activities from which the GDP would benefit. Also though, the weekend would last 2 1/2 days because work closes down at noon on Friday to prepare for the Sabbath. To compensate, the plan’s advocates suggest a longer 4-day workweek.

    Looking beyond Israel, the West takes Saturday and Sunday off. Jordan used to call Thursday and Friday their weekend but now, like Egypt, they observe Friday and Saturday. For Christians, Sunday is significant, to Jews, it is Saturday, and with Muslims, the day is Friday. From a religious perspective, that means the weekend could be one of 4 2-day pairs.

    The Economic Lesson

    The 5-day work week dates back to the 1920s when Henry Ford became one of the first U.S. employers to implement it. 5 days became viable only after work hours declined from a 60 to 70 hour average during the 19th century to 50 hours by the 1920s.

    To see the history of work hours and the workweek in the U.S., this article by Wake Forest econ professor Robert Whaples is excellent. Citing demand and supply, productivity and economic growth, Whaples concludes his article with the economics of the work week. In 1900, for example, we had to work much longer than now to earn enough for our necessities. In 1918, we had to work close to 1 hour to pay for a dozen eggs; now, we just need a few minutes. (p.114 from The Price of Everything)

    An Economic Question: Would you agree that a shorter workweek can fuel economic growth? Explain.

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    Raising (or Ignoring) the Debt Ceiling

    Jul 11 • Economic Debates, Economic History, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy • 393 Views

    Washington Post cartoonist Tom Toles summarizes all we need to know about the politics of debt ceiling negotiations in these 33 political drawings. The first one starts with a Democrat/Republican card game in which each raises the ante. Others refer to the debt ceiling as a time bomb (#2), voters saying “Don’t touch my sacred cow,” and finally, in #33, we see a government shutdown in a coffin saying, “It would be just for a little while to make a point.”

    Covering the topic further, in this NY Times Op-Ed, Harvard Law Professor Lawrence Tribe concludes that the Constitution will not save us. While some say Section 4 of the 14th Amendment, the public debt clause, can be used to nullify the ceiling and thereby let President Obama ignore it, Tribe disagrees.

    Finally, some reality. If, by the beginning of August, the U.S. cannot borrow additional money by selling new U.S. Treasury securities, then we will not have enough money to cover all of our fiscal obligations. Just like a family with inadequate income, we will have to decide what to pay and what not to pay. The Economist summarizes it this way: “Delayed payments may hurt pensioners and cause political damage, but a default on Treasury debt would unleash global financial chaos. Either outcome would be deeply unpleasant…”

    More specifically? Interest payments on outstanding debt, Social Security payments, military salaries, the President’s salary, each could be cut. Or, the U.S. might postpone interest payments on government bonds that businesses, individuals, countries, and the U.S. government own.

    The Economic Lesson

    The need to authorize the maximum amount we can borrow was established by Congress in 1917 through the Second Liberty Bond Act. Its goal was to maintain Congress’s “macro” control over total U.S. borrowing even though it had decided it would no longer directly oversee the “micro” details for specific borrowing decisions. Since 1962, the U.S. has raised its debt ceiling 75 times.

    An Economic Question: How might debt ceiling negotiations be about more than money?

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