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    Savers or Borrowers?

    Apr 5 • Businesses, Economic Debates, Financial Markets, Government, Households, Money and Monetary Policy, Thinking Economically • 497 Views

    In 1987, a $100 savings account would have earned close to $9 in interest. In 2005, $3.75 or so. Now, maybe 47 cents?

    The WSJ, had a good article describing how savers are suffering. The retirees who expected to depend on interest income until they died have much less. As one retiree said, “At one point we thought we’d have a little money to leave our kids. That ain’t gonna happen.”

    The Economic Lesson

    Monetary policy decisions force us to make trade-offs.

    When the Fed started targeting lower interest rates, its goal was to jump-start the economy. With a 0-.25% fed funds rate, banks could borrow from each other for almost nothing and then have inexpensive money to lend. Lower interest rates, they hoped, would encourage businesses to borrow, expand and hire.

    If the opportunity cost (the sacrificed alternative), though, was higher rates for retirees who live on their savings, then should the Congress implement deficit reduction through Social Security and Medicare?  

     

     

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    SAT Questions

    Apr 4 • Behavioral Economics, Businesses, Macroeconomic Measurement • 375 Views

    NFL draft candidates, supermarket cashiers, and college applicants all share one characteristic:

    A short-term test.

    To judge a draft candidate, the NFL might clock a 40-yard run. To decide the productivity of a cashier, researchers have timed how fast items were scanned. And, we all know that many colleges use SAT scores to assess student ability.

    According to science journalist Jonah Lehrer, short-term tests only tell you how well people do on short-term tests. They do not convey someone’s willingness to persevere, to overcome setbacks, to perform when no one is watching. Or as Lehrer said, they do not illustrate “grit.”  With cashiers, for example, scanning speed during a short test correlated minimally with optimal job performance.  

    The Economic Lesson

    Economic yardsticks tell us where we are and where we need to go. Predicting productivity, we might look at scanning speed; for athletic talent, at a 40-yard dash; and for academic prowess, at SAT scores. But then, identifying our goals, don’t we need to ask whether our yardsticks are measuring the right things?

    This takes us to the GDP. Counting investment in equipment, tools, inventory and housing; consumer spending; government spending; and net exports, is the GDP the appropriate way to represent and perpetuate our economic success?

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    Corporate Tax Matters

    Apr 3 • Businesses, Developing Economies, Economic Debates, Government, Macroeconomic Measurement • 480 Views

    CBS’s 60 minutes, the NY Times, Forbes, all seem to be talking about how large corporations avoid paying U.S. income taxes. GE, for example, has one of the biggest tax returns (24,000 pages) and the smallest payments. How? For many multinationals, a presence in different countries enables them to “put costs in high-tax countries and profits in low-tax countries.”

    Other articles have looked at the disparity among corporations. According to a study from NYU professor Aswath Damodaran, biotechnology firms average a 4.5% federal tax rate while trucking companies paid 30.9%.

    However, is what you pay really the bottom line? Instead, maybe we care more about the impact of taxes on business activity.

    The Economic Lesson

    Comparing 183 economies, “Paying Taxes 2011 The Global Picture,” conveyed the impact of taxes on doing business. In the Maldives, Qatar, Singapore and Hong Kong, paying taxes was the easiest. At the other end of the list where the tax approach was most burdensome, were Jamaica, Panama, the Gambia, Bolivia and Venezuela.

    More specifically, the report looked at income taxes, labor taxes, property taxes, value added taxes, and sales taxes. It cited countries that taxed women more than men (Burkina Faso, Indonesia, Lebanon) and men more than women (Israel, Korea, Singapore). It considered tax trends and compared statutory rates to actual amounts that firms paid. It looked at how much time and labor businesses needed to comply with tax laws.

    Their bottom line and the reason they plowed through all of that data was to compare the impact of business tax strategies among 183 nations. When doing business is easier, then people start businesses, they produce more, and they expand more readily.

    What do you think? Should corporate taxes encourage job creation? Revenue? Innovation? Productivity?

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    “Free” Kidney Treatment

    Apr 2 • Demand, Supply, and Markets, Economic Debates, Government, Households, Thinking Economically • 306 Views

    In October 1972, Congress decided that the federal government should pay for treating chronic kidney disease. Concerned that care went primarily to those who could afford it, Congress proclaimed dialysis and transplants an entitlement for almost all of us. They expected, though, that most patients would be younger than 54 and relatively healthy.

    It did not work out that way.

    Now, almost 40 years later, many more people, including the elderly, receive treatment. Accounting for 42% of the cost of the program, older patients on dialysis tend to have a plethora of other health problems including diabetes, heart disease, stroke, and dementia. For people with multiple chronic conditions, dialysis has been found not to be a life saver. Still though, treatment is provided for all who request it because it is an entitlement. And, as an entitilement, it is free.

    Free???

    The federal government pays between $40 and $50 billion dollars annually treating end-stage kidney disease.

    The Economic Lesson

    Here is where we have a dilemma. The cost for society to treat kidney disease is very different from the cost for the sick individual.

    As a society, we have a limited supply of the land, labor, and capital that we use to make goods and services. For that reason, producing more of one good or service means less of another one. Allocating an unlimited supply of land, labor, and capital for treating kidney disease means having less elsewhere.

    Our question: Would you support the current cost (defined as sacrifice) of treating kidney disease?

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    Altitude and Attitude

    Apr 1 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Thinkers, Thinking Economically • 343 Views

    A recent article in Scientific American cited a correlation between altitude and attitude. Describing four different experiments, researchers concluded that physical elevation seemed to connect to generosity, kindness, and cooperation.

    This is what they found:

    1. At a mall, shoppers who had gone up an escalator gave more to the Salvation Army than those who traveled down.

    2. In a theater, people who went up to the stage were more likely to volunteer to fill in a questionnaire than those taken down to the orchestra pit.

    3. Asked how much “painfully” hot sauce to give participants in a supposed food tasting study, people up on a stage gave less than those distributing the sauce in the orchestra pit.

    4. For a computer game involving cooperation, people who had just watched scenes from an airplane were more agreeable than those who had looked through a car window.

    The Economic Lesson

    The popular books written by Duke economist Dan Ariely and the work of Princeton psychologist Daniel Kahneman who won the Nobel Prize in economics remind us that economics and psychology intertwine.

    Similarly, by relating self-interest to altitude and attitude, we can again see the psychological territory that economics can occupy.

     

     

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