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    Comparing Central Banks

    Apr 9 • Developing Economies, Economic Debates, Financial Markets, Money and Monetary Policy • 435 Views

    Perhaps we can divide the world between inflation fighters and recession fighters.

    Right now, most of the inflation fighters are in the developing world. In Brazil, Russia, India and China (the BRICs), more expensive food and energy and growing demand are fueling price increases. In Peru and Mexico, the story is the same although the numbers differ. As a result, monetary authorities are raising borrowing rates.

    On the other hand, the U.S. Federal Reserve, the Bank of England and the Bank of Japan, are targeting economic growth by keeping rates close to zero

    Finally, we do have a third group, including the European Central Bank (ECB) and Australia that is reversing easy money policy with rate hikes

    The Economic Lesson

    Central banks are the bankers’ banks that oversee a country’s supply of money and credit. For economic growth, you need the right balance between money and production. If the balance is wrong, then the result is recession or inflation or both.

    A recession is characterized by a declining GDP and increasing unemployment. To fight it, central banks target lower interest rates that will stimulate economic activity.

    By contrast, inflation involves rising prices that can spiral out of control. To stop their ascent, central banks try to use a diminished money supply or slowly growing money supply and higher interest rates to reign in economic activity. With less demand throughout the economy, they hope that prices will stop rising.

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    Internet Distractions

    Apr 8 • Behavioral Economics, Businesses, Labor • 348 Views

    At work, we “should not be watching that excellent new video of a schnoodle howling along to its own piano playing.” Yes?

    According to New Yorker journalist James Surowiecki, the answer actually is, “No.” Citing recent academic studies, he says that people “addicted” to the Internet are more productive when permitted to indulge during business hours.

    This takes us to “willpower” studies. Presented with a platter of radishes and a platter of chocolate chip cookies, the group asked to avoid the cookies did more poorly on subsequent tasks that required self-discipline. Somewhat similarly, when a group was divided between people who could watch a funny video and those who were not allowed to see it but heard others enjoying it, the people who saw the video then performed a task more accurately then those who did not.

    The Economic Lesson

    Defined as more output per labor hour, productivity results from more inputs (land, labor and/or capital), better inputs, and/or a more effective combination of inputs.

    Surowiecki asks whether we might be more productive at work if company policy permitted us to surf the internet during “internet breaks.”

     

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  • The Congress and the Deficit

    Budget Issues

    Apr 7 • Economic Debates, Economic History, Government, Macroeconomic Measurement • 367 Views

    There are so many budget issues. How to remember them? You might think of 3 and 8.

    3 decisions:

    1) The shutdown: There might be a partial government shutdown on Friday, April 8, because Congress cannot agree on the 2011 budget. So far, where necessary, short-term measures called Continuing Resolutions (CRs) have authorized 2011 spending.

    2) The debt ceiling: May 16 is now the estimated date on which the U.S. will reach its legal debt limit. While the Treasury says that “extraordinary measures” can be taken to extend the limit to July, still the Congress has to act to avoid default. This brief article from the Concord Coalition ideally explains the debt ceiling issue.

    3) 2012 budget: And finally, there is President Obama’s 2012 budget proposal that has to be considered. This Washington Post interactive provides an overview of the federal budget process.

    8 categories: Congress’s 3 decisions primarily involve debating 8 categories (from the “Battle of the Budgets,” the WSJ (4/6, p. A7).

    1) Medicare, 2) Medicaid, 3) Social Security, 4) Defense Spending, 5) Non-defense Discretionary Spending, 6) Farm Subsidies, 7) Corporate Taxation, 8) Individual Taxation

    The Economic Lesson

    Described in John Steele Gordon’s Hamilton’s Blessing (pp. 22-25), one of the Congress’s first tasks, in 1789, was to generate revenue. The primary source, they decided, would be import duties. Meanwhile, a secondary stream of money would come from excise taxes on everyday goods ranging from carriages (which targeted the rich) to salt, which touched everyone, and whiskey (which led to the Whiskey Rebellion in 1794). Not until the First World War did the income tax become a major source of government funding.

    Meanwhile, on the other side of the ledger, John Steele Gordon tells us that in 1792, outlays were so massive that the budget deficit was 38% of revenues. Then, “except for periods of …crisis, the government would never again run up so large an annual deficit in terms of a percentage of total revenues…until 1992.” (p. 6)

     

     

     

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    PC Benefits

    Apr 6 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Innovation, Macroeconomic Measurement, Thinking Economically • 374 Views

    We know that the computer has really made a difference. It replaced typewriters, photo albums, calculators and maybe even travel agents. But still, can we precisely state its impact?

    Yes, $1700.

    Economists have calculated that each year since 1977, on average, computers have added $1700 of benefit, or “welfare gain,” to our lives “above and beyond what we paid from them.”

    Electricity also created a huge welfare gain. By contrast, the benefit of Apple-Cinnamon Cheerios was tiny (yes, they really were studied). Looking back at the 17th century, one researcher explored the welfare gain of introducing coffee, sugar, tea and tobacco to the European diet.

    Austin Goolsbee, a top economic advisor to President Obama, co-authored a study of the welfare gain from the internet. Because the monthly payment that covers most internet service is unrelated to quantity, Dr. Goolsbee and his associates concluded that they could not use dollars to determine cost. Instead, they looked at the opportunity cost of the time spent online.

    The Economic Lesson

    The benefit we derive from computers could be called our welfare gain. One way to calculate welfare gain is to subtract the actual dollar cost of something from its usefulness, or, as an economist would say, its “utility.” (If you want to see how utility becomes a concrete equation, you can look here.)

    To calculate the welfare gain from computers, researchers originally focused on two areas during a 27-year period, 1977-2004. 1) The dollar cost of that computing capacity; 2) The utility of that computing capacity. Why did they start with 1977? Because the first mass-produced computer, the Apple II, was introduced then.

    Having said all of this about welfare gain, the final question that comes to mind is why? Why do economists believe it is important to know about welfare gain? Maybe we can think about the statistics that might relate such as the CPI and GDP.

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    Savers or Borrowers?

    Apr 5 • Businesses, Economic Debates, Financial Markets, Government, Households, Money and Monetary Policy, Thinking Economically • 540 Views

    In 1987, a $100 savings account would have earned close to $9 in interest. In 2005, $3.75 or so. Now, maybe 47 cents?

    The WSJ, had a good article describing how savers are suffering. The retirees who expected to depend on interest income until they died have much less. As one retiree said, “At one point we thought we’d have a little money to leave our kids. That ain’t gonna happen.”

    The Economic Lesson

    Monetary policy decisions force us to make trade-offs.

    When the Fed started targeting lower interest rates, its goal was to jump-start the economy. With a 0-.25% fed funds rate, banks could borrow from each other for almost nothing and then have inexpensive money to lend. Lower interest rates, they hoped, would encourage businesses to borrow, expand and hire.

    If the opportunity cost (the sacrificed alternative), though, was higher rates for retirees who live on their savings, then should the Congress implement deficit reduction through Social Security and Medicare?  

     

     

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