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    Social Security Thoughts

    Sep 17 • Economic Debates, Economic Thinkers, Government, Households, Thinking Economically • 230 Views

    Having just passed the French lower legislative branch, a gradual increase in the French retirement age from 60 to 62 during the next 8 years will probably be enacted. In the US, we are gradually ascending to 67 in 2027.

    It all sounds so logical. It is just too expensive for so many people to be receiving earlier benefits.  After all, when Social Security was established in the U.S. in 1935, the average life span was LESS THAN the retirement age.  

    But then I read about a 58 year old worker at an Ohio tire plant. Referring to the physical labor that his job requires, he said, “Dessert with lunch is ibuprofen.” This gentleman said that, “he does not think he can last until 66″.

    This takes me to a question. When debating fiscal dilemmas, how much should we consider individual stories? Our legislators do it all the time. With the healthcare debate, we heard about individuals without insurance. For the Social Security debate, we see the reality of a higher retirement age through one worker.

    What should we care about most? The statistical reality or the real stories?

    The Economic Lesson

    Decision making through an economic lens always takes us back to cost/benefit considerations. Here, though, cost and benefit conclusions could depend on you. Are you a tax payer? A laborer who will not make it to 66? A person without health insurance? Someone with excellent health coverage? A politican hoping to get re-elected? The list can go on and on.

    Perhaps, all of these considerations return us to yesterday’s post about the work of James M. Buchanan. James M. Buchanan won the 1986 Nobel Prize in Economics for his work on “public choice theory“. Stated very briefly, his focus has been the importance of fixed political rules to thwart politicians’ self-interest.

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    Tax Payers and Entitlement Receivers

    Sep 16 • Economic Debates, Economic Thinkers, Government, Households, Macroeconomic Measurement • 211 Views

    I wonder if we should be concerned.

    Lecture 32 of “Thinking About Capitalism” from the Teaching Company looks at John Stuart Mill (1806-1873), James M. Buchanan (1919-  ), and Mancur Olson (1932-1998). Concerned with the impact of democracy on capitalism, these economic thinkers focused on self-interested voters and politicians. Although their perspectives differed, they shared the view that self-interested politicians could favor voters who contributed little to economic growth. As a result, to perpetuate their power, politicians would support legislation that harmed the economy.

    Fast forward to September 15, 2010. A front page Wall Street Journal article, “Obstacle to Deficit Cutting: A Nation on Entitlements,” explains that an estimated 45% of American households will not pay 2010 federal income taxes. Why? Because they do not earn enough or their credits and deductions eliminate their tax liability. Meanwhile though, close to 50% of all American households receive federal benefits. The article concludes that an increasingly smaller proportion of the American population is paying for the entitlements received by an increasingly larger number of Americans.

    Will politicans be influenced more by those who pay or those who receive?

    The Economic Lesson

    Considered a liberal 19th century economist who firmly believed in individual freedom, Mill thought that those who were more educated should have greater voting power than the working classes who might outnumber them.

    James M. Buchanan won the 1986 Nobel Prize in Economics for his work on “public choice theory“. Stated very briefly, his focus has been the importance of fixed political rules to thwart politicians’ self-interest.

    Mancur Olson, in The Logic of Collective Action, explains that small groups can be more powerful than huge numbers of unorganized individuals who disagree with them. 

     

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    Starbucks and the Clover

    Sep 15 • Businesses, Demand, Supply, and Markets, Thinking Economically • 231 Views

    I just had a Starbucks grande coffee from their $11,000 Clover coffee machine. It was very good. Because the Clover makes individual cups, Starbucks can let the customer choose the bean. More choice, elite beans, and you have a recipe for higher prices. Interesting.

    According to a Wired article, when Starbucks’ founder, Howard Schultz experienced the Clover, he said it was, “the best cup of brewed coffee I have ever tasted.” So he bought the company that makes the machine.

    How are competitors responding?

    The Economic Lesson

    I suspect Starbucks is very good at thinking at the margin. They start with their basic tall cup of coffee for the frugal customer. Then though, extras are pricey. Order a red eye (a shot of espresso in the coffee), an extra flavor, or a Clover, and the price pops.

     

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    Time Matters

    Sep 14 • Businesses, Economic History, Innovation, International Trade and Finance, Macroeconomic Measurement • 240 Views

    In a brief and wonderful 2003 article called “Clocks and the Wealth of Nations“, economic historian David Landes explained the importance of accurate timekeeping. China missed navigational opportunities because they did not develop the precise clocks needed for latitude and longitude calculations. The result? The West did the exploration. In manufacturing, Henry Ford needed accurate clocks to measure progress with his moving assembly line. In Sandusky, Ohio, they needed accurate timekeeping when the Baltimore & Ohio Railroad came to town.

     

    You can see where this is going. Just knowing the time has played a crucial role in our economic development.

    Is economic progress the reason we will soon have an atomic clock that is so accurate that it loses 1 second every 3 billion years?

    The Economic Lesson

    In a 1790 report to Congress, Thomas Jefferson submitted his “Plan For Establishing Uniformity in the Coinage, Weights, and Measures of the United States.” Continuing the principle that the federal government is responsibile for uniformity, the National Bureau of Standards, now known as the National Institute of Standards and Technology (NIST) was established in 1901. We look to NIST for the official time and our new atomic clock.

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    Deflation Worries

    Sep 13 • Businesses, Demand, Supply, and Markets, Economic Debates, Macroeconomic Measurement, Money and Monetary Policy • 272 Views

    We have something else to worry about: deflation.

    If you had $100 in 2000, you would need $126.60 in 2010 to make the same kinds of purchases. Called inflation, prices tend to go up each year. Most consumers and businesses are happy with a little inflation, maybe 2% annually.  

    Recently though, the inflation rate has been sinking which means that prices are rising more slowly. Then, when prices actually decline, as they did during April, May, and June, we have deflation. As you might expect, businesses respond poorly to falling prices. Predicting lower profits, they postpone expansion, lay off workers, and decrease wages. At .3%, the July inflation rate was slightly up again. 

    During the Great Depression, deflation was a serious problem. Between the fall of 1929 and 1933, prices dropped almost 13%. An expert on the 1930s, our Fed Chair Ben Bernanke has said that we will never let that happen again. But others wonder whether we have sufficient economic knowledge to know what to do.

    How would deflation affect you? Will you spend more or less if you expect prices to fall? Will you borrow money? 

    The Economic Lesson 

    Inflation has 3 basic causes: 1) Demand pulls prices up because too many buyers are chasing too few goods. 2) Costs push prices up because land, labor or capital becomes more expensive. 3) Prices generally can rise when one group with monopoly power raises the price of an important commodity such as oil.

    The basic cause of deflation is a severe plunge in spending from consumers, businesses, and/or government. In response, to attract buyers, producers lower their prices and a deflation spiral can begin.

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