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    When Is A “B” Bad?

    Jan 30 • Financial Markets, Government, International Trade and Finance, Money and Monetary Policy • 303 Views

    A state would not call a “B” a good grade. The grade is a credit rating that relates to a loan. Triple-A usually means not to worry. On the other hand, a “B” says you might not get paid back.

    As you know, recently, credit ratings have been problematic because borrowers with high grades have defaulted on their loans. So, sort of like changing the rubric for a test, Moody’s is (slightly?) changing the way it judges states. As a result, New York and California are among the states that may get higher grades while Connecticut and Hawaii are two of those whose “grades” will decline.

    To assess the economic health of different states firsthand, you might want to look at these interactive maps on tax revenue, unemployment, foreclosures, and stimulus oversight from Pew’s Center on the States. You also could go to Moody’s or Standard & Poor’s website to look up a state’s grades.

    The Economic Lesson

    If not all borrowers are attractive, then why loan them money? The answer is price. The interest rate is the price of money. When a loan appears more speculative, then its price–its interest rate–goes up.  How does it go up? In money markets, we can observe supply (lenders) and demand (borrowers) at work. For a more risky loan, the supply curve shifts to te left and crosses demand at a higher “price”–interest rate. So, a lender might accept the risk because he or she is getting a higher price.

     


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    Oscar Markets

    Jan 29 • Behavioral Economics, Demand, Supply, and Markets, Financial Markets • 317 Views

    Can a crowd be smarter than an individual? In The Wisdom of Crowds, business columnist James Surowiecki, says “Sometimes, yes.” Starting with a crowd betting on the weight of an ox and ending with the crowd and democracy, Surowiecki looks at “collective intelligence.”

    At intrade or Hollywood Stock Exchange (HSX), you can decide whether the collective intelligence of the crowd is correct about probable Oscar winners. Participating in a prediction market, someone purchases a “security” that reflects an opinion about a future event. Reflecting the group’s opinion, more purchases push price upward. Currently, in the intrade and HSX futures markets, The Social Network, with the highest price among the nominees, is the front runner.

    At the Iowa Electronic Markets run by the University of Iowa Business School faculty, you can even vote on future fed funds rates.

    The Economic Lesson

    Surowiecki divides “collective intelligence” into 3 categories: cooperation problems, coordination problems, and cognition problems.

    Cooperation problems focus on how people work together. The issues they look at include legislative compromise (or gridlock) and getting a large group together for a dinner.

    Coordination problems display how many independent individuals impersonally coordinate their behavior. Examples would take us to rush hour traffic and stock markets.

    Cognition problems involve information that makes one answer more accurate than another. Predicting future monetary policy, the future weight of an ox, and who will win the Oscars are cognition problems.

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  • More on the States

    Jan 29 • Government, Households • 327 Views

    You an look that This interactive US map to see what is happening to states’ tax revenue. 4 categories of state funds: general revenue (largest category), federal funding, bonds, restricted state funds (e.g. gas tax for road maintenance) Nelson A. Rockefeller Institute of Government state tax revenue health care a major drain Medicaid, providing insurance, but Mass. in doing all of this has much more expense than predicted.

    Put together with new Moody’s assessment of states’ credit 

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    Hot Spotting Medical Care

    Jan 28 • Demand, Supply, and Markets, Economic Debates, Government, Households, Innovation, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 306 Views

    These are the statistics: 900 people; 4,000 hospital visits; $200 million in medical bills from January 2002 through June 2008. The place is Camden, N.J. where a relatively small number of people were responsible for a huge proportion of the city’s medical expenses. 

    The problem then, is to figure out how to control their needs. Surgeon and New Yorker Magazine staff writer Atul Gawande gives us some answers in “The Hot Spotters.”

    Inspiring, discouraging, and fascinating, the article focuses on 3 case studies. In Camden, the solution was one physician who statistically identified medical “hot spots.” Next, using a patient-by-patient focus with a team of doctors, nurses, and social workers, specific problems were targeted with coordinated care. Health improved, hospital visits diminished, costs dropped. It worked.

    The other 2 stories illustrated different approaches in different places but they, too, had success. The common denominator was statistical and human understanding of the high cost patient with many ailments.

    In a follow-up blog comment, Dr. Gawande characterized several responses to the national implications of his article as “defeatist, catastrophist, or triumphalist.” You might enjoy reading the exchange. 

    The Economic Lesson

    Sometimes, the law of demand can backfire. Occasionally, we do not want people to decrease quantity demanded when price goes up.

    In “Hot Spotting,” Dr. Gawande tells us about a firm that tried unsuccessfully to cut medical costs by increasing the co-pay for each medical exam. More “skin-in-the-game” was supposed to eliminate unnecessary doctor visits. Some recipients, though, eliminated necessary doctor visits and necessary prescriptions. As a result, they wound up with expensive emergency room care and chronic illness. 

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    Waste and Cost

    Jan 27 • Economic Debates, Environment, Regulation, Thinking Economically • 313 Views

    Who could possibly have disagreed with President Obama when, in his State of the Union address, he said we have to eliminate wasteful regulations? 

    Some very important people.

    Emory University economics professor, Paul Rubin, explained in a WSJ article that the key opponents are the agencies that currently oversee the rules.

    Which rules? The President referred to duplications with salmon oversight. The NY Times cited rules about highways signs and sweeteners and dry cleaning machines. For example, highway signs can have no more than one upper case letter in a word. It took 7 years for the E.P.A. to coordinate with the FDA on whether saccharin was a toxic substance.

    You can see where this is going. At each agency, once you take away a responsibility, they have less to do. Less to do means diminished power, a lower budget, fewer employees. Will regulators support their own demise?

    The Economic Lesson

    Again, it is all about opportunity cost, cost and benefit. For tax payers, the benefit will probably exceed the cost when deciding whether to eliminate redundant or seemingly minor regulations. For regulatory commission employees, the opposite is true according to Professor Rubin, who cited his Reagan administration experience at the Federal Trade Commission and the Consumer Product Safety Commission.

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