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    Government Failure or Market Failure?

    Sep 4 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Thinkers, Financial Markets, Government, Households, Labor, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically • 439 Views

    The illness? High unemployment and sluggish growth. The patient? The U.S. economy. And sometimes, according to Nobel Laureate Gary Becker, a stimulus pill just won’t work.

    In a WSJ opinion piece, Dr. Becker first explains that government misdiagnosed the illness. Rather than “market failure,” the problem is “government failure.” Before the recession began, the Fed’s rates were too low, Fannie Mae and Freddie Mac were quasi-government institutions that facilitated subprime mortgage lending, and regulators were ineffectual.

    The misdiagnosis led to the wrong cure. Adding to the deficit and debt, stimulus spending did not work out as predicted and Dodd-Frank became another layer of regulation when existing laws were not adequately enforced. According to Dr. Becker, because the “imperfections in government behavior were greater than those in the market” only the market is the cure.

    With Nobel Laureate Paul Krugman their leading spokesman, a second group of economists responds that the diagnosis was correct and the dose of the stimulus medicine needs to be increased.

    The Economic Lesson

    Seemingly chaotic, a market actually has an invisible hand guiding all participants. Consumers demand quality goods and services that are priced low. Proft-seeking businesses produce the goods and services that consumers, businesses, and government want. When markets function well, reasonable prices and appropriate quantities are the result. In addition, competition tends to prevent individual abuse and control individual power.

    An Economic Question: Your choice–Becker’s position or Krugman’s?

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  • Job Gains in Texas and Losses in Caifornia and Florida

    Home Work

    Sep 3 • Economic Debates, Economic History, Labor, Macroeconomic Measurement, Thinking Economically • 521 Views

    More unemployed means more people at home. One study asked, what are the unemployed doing?

    During every day’s “foregone market work hours,” unemployed people are occupied with home production, leisure, and job search. The day’s time allocation, though, is far from equal. Home production and leisure activities predominate.

    More specifically, from the most time to the least: 1) home production, 2) TV and sleep 3) other leisure activities 4) education and community activities 5) job search

    The economic significance? By comparing lost market work hours to increased home productivity, we can better determine the cost of a recession.

    The Economic Lesson

    Economically defined, cost is sacrifice. During a recession, we sacrifice the paid work that the unemployed had been doing. However, do the numbers reflect more of a sacrifice than actually occurs?

    Developed as a concept by Simon Kuznets (1901-1985) during the 1930s, the GDP is supposed to include only goods and services that have a money value. Because lots of unpaid work is done at home, should we add the home production done by the unemployed to see what our economy really is producing?

    An Economic Question: Could the GDP include unpaid production? Explain.

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    Solar Panel Problems

    Sep 2 • Businesses, Demand, Supply, and Markets, Economic Debates, Environment, Financial Markets, Government, Innovation, International Trade and Finance, Regulation, Thinking Economically • 434 Views

    We could call it a double pay-off. Subsidized by stimulus spending, Solyndra could create jobs and develop “green” technology. But it did not work out that way.

    According to the Washington Post and the NY Times, solar panel maker Solyndra got a $527 million stimulus-related loan from the US Treasury and an Energy Department loan guarantee. With total sales near $250 million at the end of 2010, the firm employed about 1000 people. Now though, they need bankruptcy protection and are stopping production.

    Inexplicably, a Department of Energy representative said, “The project that we supported succeeded. The facility was producing the product it said it would produce, and consumers were buying the product.”

    Here, an econlife post looks at how government is subsidizing electric car manufacture.

    And here is another post on solar panels.

    The Economic Lesson

    When government subsidizes business, it affects the supply curve. Upward sloping, the supply curve shifts to the right because money from government cheapens the cost of production. As a result, it crosses the downward sloping demand curve at a lower point, and equilibrium price drops.

    Even with the subsidy and supply shifting to the right, U.S. made solar panels are more expensive than China’s.

    An Economic Question: Do you believe that the US government should subsidize an industry and a technology that it wants to encourage or should it let the market system make the decision?

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  • How much should cities plan for the storm of the century?

    Stormy Issues

    Sep 1 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 455 Views

    For Hurricane Irene relief, the debate is again about the debt.

    Let’s start with the Congress.

    1. Expressed by Texas Representative Ron Paul, government should not play a role because “intrusive” bureaucracy” hinders local people and volunteers. Instead, private insurance is the key.
    2. At the other extreme is Vermont Senator Bernard Sander’s position. He has said that we should unite as a nation, absorb the cost, and help each other when faced with a disaster.
    3. The third point of view comes from Virginia Representative Eric Cantor. Yes, he says we have a responsibility to help each other. However, emergency spending has to be offset by cuts elsewhere.

    And now, the economists….

    The Economic Lesson

    While Paul Krugman and Steven Landsburg disagree, each relates his position on disaster relief to marginal benefit and marginal cost. Whether discussing corporate profit or disaster relief, the point at which Marginal Cost equals Marginal Benefit (MC=MB or MC = MR..Revenue) is the optimal point beyond which we should not continue a certain activity.

    It makes sense. We do not want to continue most things when the cost of doing something extra exceeds the benefit of that extra amount.

    However, we cannot consider the budget for Irene alone. Then, surely, MB would vastly exceed MC. Krugman and Landsburg point out that we have to look at all federal spending to assess MC and MB.

    An Economic Question: After looking here, do you believe the Landsburg prom example adequately explains why he thinks Krugman is wrong?

    The above post is a revised version of the original which included a summary of Krugman and Landsburg.

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    On Time Again

    Aug 31 • Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, Households, Innovation, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 515 Views

    Have you ever thought about the difference that a clock makes? Described in The Geography of Time, a pre-clock world meant you could not say, “I will meet you at 12:30 for lunch” or “Your workday is 9-5.”

    By the 1820s, though, technology had progressed enough that many places in the U.S. had clocks. The next problem though, was deciding the right time. How to measure? Where to measure? And why?

    The reason was the economy.

    During the 1860s, the 70 or so different time zones in the U.S. needed coordinating. Seeing an opportunity to profit, Alexander Langley sold what he called the “right time” to people in the Pittsburgh area. Using Western Union, for an annual fee of $1000, he sent the time to the Pennsylvania Railroad so that they could standardize train schedules. By 1883, the railroads had declared there were 4 time zones in the U.S. And, in 1918, the Congress agreed.

    You might want to read Keeping Watch A History of American Time for some good stories about time conflicts. Also, a previous post about The Geography of Time is here.

    The Economic Lesson

    Railroads facilitated a national market, regional specialization, and maximum productivity because each area of the U.S. could do what it did best. As our national market grew, the need to standardize train schedules became increasingly necessary.

    An Economic Question: Using the concept of a national market, how might you explain why the euro zone was created?

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