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    What is Best For Growth?

    Mar 3 • Businesses, Economic Debates, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 244 Views

    What if the Congress decides to slash spending by $60 billion right now? Prominent economists are again disagreeing.

    According to Stanford economist John Taylor, we would have a resurgence of business confidence, renewed investment spending and new jobs. Assured that taxes and regulation will not increase, businesses will expand.

    On the other hand, economist Mark Zandi (Moody’s Analytics) says that we will lose 700,000 jobs because of spending cuts. He is against “too much too soon.” Referring to “fiscal drag,” economist Alec Phillips (Goldman Sachs) cites the rippling impact of less federal spending that will retard GDP growth.

    Who is right?

    The Economic Lesson

    Looking back and looking forward, the economic debate about fiscal policy is a traditional one. Looking back at stimulus spending since 2008, opponents point out that the stimulus will not only ignite inflation but also was not really necessary. Meanwhile, advocates say we are much better off because of it. Looking forward they differ on how businesses and unemployment will respond.

    Also, we should not forget about monetary policy. A similar debate surrounds Dr. Bernanke’s QE2.

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    Mar 2 • Economic Debates, Environment, Government, Regulation, Thinking Economically • 484 Views

    What if someone had invented “smog-eating” concrete roof tiles? And, what if these tiles consumed enough smog to offset one car’s nitrous oxide emissions during one year (10,800 miles of driving)?

    Telling us that a firm in California has them for sale, Harvard professor Greg Mankiw asks, “What should government policy be regarding these roof tiles?” Similarly, do you believe that government should mandate posting calorie counts in restaurants? Or subsidizing ethanol? Hybrid cars? Broccoli consumption? (so that medical care is cheaper) Mowing the lawn? (because, with house sales plunging, a nicer neighborhood could attract buyers)

    The Economic Lesson

    In his 1759 book, The Theory of Moral Sentiments, Adam Smith (1723-1790) tried to identify the origins of a just and virtuous society. Concluding that no one is wise enough to know what is best for most, he recommended less government for all.

    And yet, through tax and regulatory policy, should government encourage positive externalities–transactions between two parties that affect a third individual or group in some beneficial way?

    Your opinion?

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    Part 2: The Basics of a Shutdown

    Mar 1 • Government, Regulation • 286 Views

    On Friday, we might have a funding gap. With no up-to-date appropriations, agencies providing nonessential services from the federal government will have to stop. But what is “nonessential?”

    A recent congressional research paper says we can look back to 1995 for an answer. In the health category, the National Institutes of Health did not accept new patients for clinical research. Many application reviews, ranging from firearm requests to passports and visas were postponed. National parks and monuments were closed. Federal contractors might be unpaid.

    On the other hand, national security, benefits that are not annually funded, emergency medical care, disaster response, border protection…you see the basic idea…these continue.

    Finally, who is explicitly “excepted?” The list includes the President and members of Congress.

    And, we are prepared. Each year, federal agencies are asked to submit shutdown plans.

    The Economic Lesson

    The spending, taxing, and borrowing overseen by the President and the Congress is called fiscal policy.

    While a funding gap might be the immediate fiscal controversy, within weeks, the Congress will also have to raise the debt ceiling.

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    Part 1: The Basics of a Shutdown

    Feb 28 • Economic Debates, Government, Regulation • 325 Views

    Our story begins on October 1, 2010. With a fiscal year that starts on October 1 and ends on September 30, the first day in October is crucial. Because the President and the Congress had not yet agreed on the 2011 budget, in some way, they had to approve appropriations for agencies that get yearly funding.

    Why can’t agencies just keep spending until they get their appropriations? Article I, Section 9 of the Constitution is one reason. “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” Furthermore, Congress passed the Antideficiency Act that confirms the impact of a funding gap. Nonessential government activities have to stop.

    There is a temporary solution called a Continuing Resolution (CR) which perpetuates funding until a new CR, a specific funding act, or the budget is passed. The problem is that the existing CR expires March 4th. Currently, we have neither a budget agreement nor a new CR. This 10 page Congressional Research paper provides a clear explanation.

    What is nonessential? How are we affected by a shutdown?

    More tomorrow.

    The Economic Lesson

    The budget process formally starts when the President submits a budget to Congress. The process for the 2011 budget began during February 2010 when President Obama sent his 2011 budget to the Congress.  You can look at this Washington Post interactive for an overview of the budget process.

    Between 1977 and 2010, there were 17 funding gaps. However, since 1993, we had only 2. The most memorable one ended in 1996 during the Clinton administration. It lasted 21 days, from December 16, 1995 to January 6, 1996.

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    A Warren Buffett Story

    Feb 27 • Economic History, Financial Markets, Thinking Economically • 368 Views

    If you had purchased Berkshire Hathaway stock on December 6, 1976, you paid approximately $77. At yesterday’s closing price, one share of the same firm (BRK/A) was $127,550. (Looking at the BLS CPI inflation calculator, $77 in 1976 is equal to the buying power of $298.02 today.)

    Annually, Warren Buffett, the person responsible for the astronomical increase in Berkshire Hathaway’s share price, sends his letter to shareholders. 26 pages long, it is statistical, it is folksy, it expresses general investing acumen, specific performance information, and even a letter to his uncle from his grandfather about always having a financial reserve. I recommend reading it all. For now, though, I wanted to share one story from the letter. It reveals the secret to success.

    The story involves Mr. Buffett’s first contact with GEICO, a firm that Berkshire Hathaway owns. As a business student at Columbia, 60 years ago, Mr. Buffett’s idol was Ben Graham, the co-author of a classic investing “primer.” When Buffett discovered that Graham was the chairman of the Government Employees Insurance Co (now GEICO), he decided, one Saturday, to visit the company’s headquarters in Washington, D.C. When he arrived, the door was locked because the offices were closed on Saturday. Buffett’s response? To knock and shout until a janitor appeared. Asked if anyone was there, the janitor took him to the office of Lorimer Davidson, an executive who later became GEICO’s CEO. Davidson spoke with his young visitor for 4 hours.

    Fast forward to 1996 when Mr. Davidson made a video expressing his pleasure that his firm, GEICO, would “permanently reside” with Berkshire Hathaway. He also “playfully concluded” by saying, “Next time, Warren, please make an appointment.”

    The Economic Lesson

    Both Adam Smith and John Maynard Keynes wrote about the spirit exhibited by Warren Buffet as a student. Smith might have referred simply to the business activity generated by self-interest while Keynes could have taken us to the motivational role of “animal spirits.”

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