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    Euro Deal Primer

    Oct 28 • Developing Economies, Financial Markets, Innovation, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 547 Views

    To understand euro zone bailout plans, just think BBB.

    Bonds, Banks, Bailout

    • The Bonds: If you own Greek debt, then you would be asked to accept a 50% haircut. That means you will get new Greek bonds worth half the old ones. The catch? It’s voluntary. A bondholder could say, “No.”
    • The Banks: If banks are going to accept a 50% decrease in the Greek bonds that they own, then the value of their assets plunges. To prevent a ripple of bank failures, 70 Greek and Spanish banks would get an injection of new funds. The catch? Contagion. What about the other PIIGs’ debt?
    • The Bailout fund: The Bonds and the Banks part of the deal require lots of money. At least $750 billion more. Where to get the money? One major source is the EFSF (European Financial Stability Facility). The plan is to make the stability fund 4 times larger. The catch? Who will loan it the money? NPR’s Planet Money perfectly describes “the catch” in this podcast.

    For a fascinating chart that illustrates a much more complicated version of BBB you could go here.  And here is the NY Times interactive series of graphics that summaizes the euro crisis.

    Our Bottom Line: How can the euro zone enforce central monetary power when fiscal authority is decentralized?

    And finally, even if none of the plans materialize, we can still remember BBB.

    The Economic Lesson

    In 1787, functioning under the Articles of Confederation, we had thirteen states with individual currencies and governments and taxing authority. If a state wanted to borrow more than it could afford, no one could stop it. If a state did not want to collect its federal taxes, no one could make them. If they did not want to contribute to payments on the national debt (from the Revolutionary War) they did not have to. And yet, the actions of individual states affected everyone else. Believing we needed a stronger central government, Alexander Hamilton and others like him convened a constitutional convention during a very hot summer in Philadelphia. We wound up with our Constitution and a powerful central government.

    An Economic Question: Is it valid to compare the euro zone to the United States in 1787?

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    Innovation and (Steve) Jobs

    Oct 27 • Demand, Supply, and Markets, Economic History, Environment, Households, Innovation, Tech, Thinking Economically • 747 Views

    From the iPhone and iPod to a…thermostat?

    At a Silicone Valley start-up, a former Apple design leader has switched his focus to diminishing carbon emissions, decreasing electric bills, and moderating energy usage. He has changed from iPhones and iPods to thermostats.

    Described in the NY Times, his firm, Nest Labs, has developed a “cool” thermostat. It looks great, has motion sensors that track you, can self-program, and with a click or two, does what you want. Knowing that existing digital thermostats are complex and/or boring, he wants to transform the experience.

    Our bottom line? Incentive. Yes, even when we care about the environment, it takes the appropriate incentives to modify our behavior.

    The Economic Lesson

    Noted during a 60 Minutes segment, for personal computers, animated movies, music, telephone, retail stores, tablet computing and digital publishing, Steve Jobs made the past obsolete.

    Now, maybe, it’s the thermostat? Like his former employer, Nest Labs founder is hoping for some of Joseph Schumpeter’s (1883-1950) creative destruction.

    An Economic Question: Explain the following equation: incentive + green technology + creative destruction =  Nest Labs’s thermostat

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    Innovation and Jobs

    Oct 26 • Businesses, Innovation, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 4337 Views

    Just say, “More productivity, R & D and economies of scale,” and you are talking about large firms. New Yorker financial columnist James Surowiecki reminds us that too often we glorify small businesses and forget how A&P, Walmart and their large siblings stimulated economic growth.

    On the other hand, economist Michael Mandel characterizes the small business as a job creation machine. Citing a 2009 Kauffman Foundation paper, he tells us that young firms, less than 5 years old, generated between 60% and 70% of all new jobs. Explained as a process constantly in motion, young firms are created, some fail, some grow and those that are the most innovative tend to be acquired by larger firms. For Mandel, though, the key is the innovation that began the process and the economic growth at the end.

    Our bottom line? Innovation at older, large firms and young, small firms fuels job creation and economic growth.

    The Economic Lesson

    Firms with 2-19 employees, close to 90% of all businesses, far exceed the number of large establishments. However, in most other ways–revenue, payrolls, number of employees–the large firm is dominant. Slightly more than 40% of the labor force works for only .3% of all businesses. (From this Kauffman paper, pp. 2-3, based on BLS stats.)

    An Economic Question: Do you believe that the legislation that Congress is considering, the Innovate America Act, creates the incentives that will lead to innovation, start-ups, and job creation?

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    Greece and Argentina

    Oct 25 • Demand, Supply, and Markets, Developing Economies, Economic History, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 820 Views

    Nobody wants Greece to become Argentina.

    It all began with what scholars Rogoff and Reinhart called the lending boom of the 1990s. Enjoying the influx of dollars, Argentina borrowed and grew and prospered…for awhile.  But when recession hit at the end of the decade, the good times quickly unraveled. She defaulted on $95 billion (p. 19) of sovereign debt while also undergoing banking, currency, and inflation crises.

    Some say a part of the problem was her inflexible currency. To combat 3,000% hyperinflation Argentina had tied her peso to the dollar. Yes, she got a stable currency. But also, she lost the ability to make her currency cheaper when a recession threatened and her export revenue needed a boost.

    Is Greece similar? She too has a massive debt, a damaged economy, and the inability to manipulate her own currency. And, were she to default, her connection to banks throughout the euro zone and beyond could stimulate a banking crisis.

    On the other hand, we could say that Argentina seems to be doing okay. True, she still faces a tough time borrowing. But, with control over her own currency, she was able to enjoy a booming export sector and a growing economy.

    Here, NPR’s Planet Money discusses Argentina in “The Price of Default.”

    In “Default Deja Vu” econlife looked a serial defaulters.

    The Economic Lesson

    Alexander Hamilton surely knew about sovereign debt defaults and wanted to avoid them. Reading about his plan to fund and refinance the United States’ revolutionary war debt reveals his commitment to establishing our good credit. His approach was varied, including issuing new bonds to pay for those outstanding and servicing the interest promptly on the foreign debt. It worked. Even those in Holland, then the financial capital of the world, displayed confidence in our public credit. Adhering to the Hamiltonian philosophy, the United States has never defaulted on its debt.

    An Economic Question: One debt rating agency said that congressionally gridlocked budget negotiations could affect worldwide confidence in the safety of U.S. debt. Your opinion?

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    Babies and the Elderly

    Oct 24 • Developing Economies, Environment, Government, Households, Innovation, Macroeconomic Measurement, Thinking Economically • 560 Views

    The beginning of life and the end of life are becoming more expensive.

    1. The number of premature babies in the U.S. has soared by 36% during the past 25 years. Caused partially by twins, triplets, (and more) from older mothers and by advances in “assisted reproduction,” extremely premature babies born at 28 weeks and sooner need months and sometimes a lifetime of sophisticated medical technology. However, effective neonatal care can also prevent a lifetime of illness. (Here is an excellent New Yorker Magazine article about neonatal science.)
    2. By 2050, close to 27% of the U.S. population will probably be older than 65 and the median age will be 41. Older than we are, Europe and Japan will have a median age that is close to 50 in 2050. Looking at diminished productivity and escalating health care, end of life cost can be high.

    The Economic Lesson

    Remembering that scarce resources require tradeoffs, how should we cope with the beginning and the end of life becoming more costly?

    The health care expense of pre-term babies, at $18 billion, is estimated to be half the total spent on newborn care. Here, a Peterson Institute report cites health care for aging populations as a major source of governments’ budget pressures.

    With economic cost defined as sacrifice, beyond finance, the cost of preserving life for the very young and the very old becomes even more expensive.

    An Economic Question: Knowing that all societies can allocate a limited supply of land, labor, and capital to health care, what tradeoffs would you support?



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