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    Trash and Trade

    Nov 5 • Economic Thinkers, International Trade and Finance • 275 Views

    A WSJ article tells us “Memo to All Staff: Dump Your Trash.” But should they?
    According to the article, Texas state workers, Phoenix city workers, and Dartmouth college professors have all been told to take out the trash. Texas, as a result, is saving close to $825,000 on janitorial expenses. Dartmouth says its goal is to increase recycling but also it is saving money.

    As economists, we can ask the cost of taking out the trash. With cost defined as sacrifice, we have to consider how trash time would have been used. Would college professors use their time more productively on an alternative endeavor? Correspondingly will society pay because unskilled labor has less work?

    The Economic Lesson

    For every decision, there is an alternative that we decided not to do. That alternative is called the opportunity cost of the decision. Sometimes, seemingly wise decisions are less optimal when we realize we could have used our time more wisely.

    19th century economic thinker David Ricardo based his support of free trade on opportunity cost. He said that everyone will benefit when nations trade because then, by specializing, each nation can use its time and resources optimally. 


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    Outsourcing and Immigration

    Nov 4 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Labor • 228 Views

    A recent economics paper provides a surprising solution to those who believe outsourcing is a problem.

    The story, as explained by George Mason economist Tyler Cowen, involves the connection between offshore jobs and immigration. Traditionally, economists say that offshore jobs are great for efficiency because of lower costs. This new study implies that not only can we achieve lower costs here, but also we benefit because of the higher skilled jobs that new domestic facilities create.

    For example, assume a factory that assembles widgets cheaply in a developing nation can bring its work back to the U.S. because of less expensive immigrant labor. In addition, it will need management and technical support to run the plant. The result? We can enjoy lower unemployment for different types of labor while unskilled immigrants fill a gap in domestic labor markets.

    The Economic Lesson

    Combating a 9.6% unemployment rate is complicated. We need to be aware of the mismatching and delays explained by this year’s economics Nobel prize winners, of the connection between immigration and outsourcing, and of the importance of innovation. How can a fiscal stimulus target these objectives? 

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    The PIIG’s Progress

    Nov 3 • Economic Debates, Government, International Trade and Finance, Macroeconomic Measurement • 255 Views

    Almost everyone seems to be debating the same issues. Spend less, tax more, or both?

    Now perhaps Portugal has made some progress. Hoping to bring its budget deficit down to 4.6% of GDP in 2011, their VAT will ascend to 23%. But will they cut public sector pay 5%? They vote in several days. Last spring, Italy announced a civil servant wage freeze. Meanwhile Ireland, with the highest budget deficit in the EU (Luxembourg was the least indebted in the EU) announced that its spending cuts and refusal to pay into a pension reserve fund were achieving some success. Interestingly, Spain said it has made progress but, the areas it will not cut include pensions and unemployment benefits. Finally, Greece. Maybe some progress with spending cuts but tax revenue is a challenge.

    What does all of this mean? Markets are not optimistic. The price of insurance, a credit default swap, on PIIG’s debt has risen.

    The Economic Lesson

    A credit default swap is like an insurance policy. Instead of diminishing the impact of a house fire or a jewelry loss, this kind of insurance lowers the risk of a financial investment. Yes, credit default swaps were central to AIG’s financial debacle because AIG sold much more “insurance” than they could possibly cover. Managed appropriately, as described in this econtalk discussion, credit default swaps perform a valid financial role.

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    Environmental Dilemmas

    Nov 2 • Developing Economies, Economic Debates, Environment, Macroeconomic Measurement, Thinking Economically • 263 Views

    It’s the same question. Economic development or conservation?

    During April, the headline said, “Uganda Seeks to Reconcile Oil-Nature.” Now, in Tanzania, “Proposed Serengeti Highway Is Lined With Prospects and Fears.” The places differ but the issues are the same. In Uganda, the debate concerns oil drilling. In Tanzania, it is road building. Privately and publicly, oil will generate revenue for Uganda. Similarly, northern Tanzania will benefit from a new road that will bisect the Serengeti Park. It will facilitate medical care, carry much-needed goods, enable the spread of electricity and cell phone service. And, both projects, will irreparably harm priceless wildlife.

    What to do? An economist would suggest assessing the externalities.

    The Economic Lesson

    Economists see positive externalities wherever a transaction between two parties affects a third individual or group in some beneficial way. They see negative externalities when the impact on a third party is harmful. Vaccines usually have positive externalities while pollution is the typical example of a negative externality.

    Taking externalities an economic step further, we can look at cost. On a demand and supply graph, the equilibrium price of a decision that has a positive externality is too high because of the benefits experienced by society. Correspondingly, the equilibrium price of a decision with negative externalities is too cheap because of the associated costs that result.



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    Why Was Malthus a Reverend?

    Nov 1 • Economic History, Economic Thinkers, Innovation • 249 Views

    Have you ever wondered why Malthus was a reverend?

    The surprising answer is in Bill Bryson’s wonderful new book, At Home A Short History of Private Life (which I just started reading). 18th and 19th century rectors and vicars tended to be affluent and bored. As Bryson explains, rather generous rents and tithes, during good times and bad, funded their pay. Their preparation typically was a university degree in any area. With little training in human sustenance and a book of sermons to refer to each week, they had considerable time on their hands.

    What to do? The Reverend Malthus thought and wrote about economics and the future of the world. Other clergy with similar inclinations include Edmund Cartwright, the inventor of the power loom; George Garrett, who invented the submarine; William Buckland, an expert on fossilized feces; and Jack Russell, a terrier breeder. (The Jack Russell terrier is today’s picture.)

    The Economic Lesson

    Perhaps one of the first environmentalists, Reverend Thomas Malthus told us in 1798 that population grows geometrically while resource production expands arithmetically. Consequently, resource prices will rise and supply will become increasingly inadequate.

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