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    It’s Official

    Sep 21 • Economic History, Macroeconomic Measurement • 209 Views

    We now know when the recession officially ended. But I still wonder whether we are moving along a “V”, a “U”, a “W” or an “L”.

    According to the National Bureau of Economic Research (NBER), the recession began during December, 2007 and ended June, 2009. 18 months, this recession was the longest since WW II. The 1973-75 and 1981-82 recessions lasted 16 months with the 1981-82 recession a part of a “W” which we could call a double dip. Lasting 8 months, the 2001 recession was the same length as the 1990-91 contraction.

    I thought it would be interesting to see the connection between (selected) recession years and politics. 1920: switch from incumbent Democrats to Republican Warren G. Harding; 1932: Herbert Hoover loses to Franklin Roosevelt; 1948: incumbent Harry Truman wins; 1980: Ronald Reagan beats Jimmy Carter; 1992 (after 1990-’91 recession): Bill Clinton defeats George H. W. Bush. (“It’s the economy, stupid.” was posted in Bill Clinton’s campaign headquarters as a reminder of their winning message.)

    The Economic Lesson

    The traditional definition of a recession is 2 consecutive quarters of a shrinking GDP. The NBER, though, uses additional variables such as “aggregate hours of work” and other production and employment data to identify the length of a recession. The 2001 recession, for example, did not have 2 consecutive quarterly GDP declines.

    The path of a business cycle moves through an expansion, peak, contraction, and trough. As a result, during December, 2007, we experienced the peak of the previous business cycle and the beginning of a contraction. We now know that the trough, the very bottom of the current cycle, took place during June, 2009. Since then, we have been expandng. With a sluggish expansion, I guess we can eliminate the “V”.  

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  • Opportunity Cost and the Sunday Papers

    Sep 20 • Businesses, Environment, Regulation, Thinking Economically • 153 Views

    Articles in the Sunday papers may not have referred to opportunity cost but it was everywhere.

    Do you agree that judges should know the dollar cost of a prison sentence? Is it good or bad that dishwasher detergents have become less effective because of environmental legislation? Should climate change be left to Congress or the courts? Does it matter that the FDA will not tell us at food counters that salmon has been genetically modified?  You could use opportunity cost analysis to decide.

    The Economic Lesson

    The opportunity cost of a decision is the next best alternative that was sacrificed. Doing opportunity cost analyis involves looking at the benefits of the decision and the benefits of the sacrificed alternative. Only then can we really know whether we are willing to do without the benefits of what we decided not to do.

     

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    The Afghan Votes Market

    Sep 19 • Demand, Supply, and Markets, Developing Economies • 139 Views

    In Kunduz Province, the price of a vote was $15 while in Kandahar, it was closer to $1.  Do we have a market?

    Just like shoes or shirts, it appears that the price of an Afghan vote was determined by demand and supply. For the Afghan election, according to the NY Times, the 2500 candidates were the buyers. The sellers were the voters. The price–the point where quantity demanded and quantity supplied intersected–varied. The average income of the local voting population influenced the supply curve.

    As a consistent reader of marginalrevolution.com, I was reminded of their “markets in everything” link that appears occasionally. In addition to citing Afghan votes, they have also linked to “nothing” having a price on eBay, and a proposed market in high speed driving in Nevada.

    The Economics Lesson

    Through a demand and supply graph with price the Y-axis, quantity the X-axis, a downward sloping demand curve, and an upward sloping supply curve, we can picture the price of an Afghan vote. A supply schedule would list all of the different prices that voters were willing and able to accept. On the demand side, the amounts that candidates were willing and able to spend would be listed. Hypothetically speaking, the graphs would differ from one locale to another.

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    Light Bulb Start-Ups

    Sep 18 • Businesses, Demand, Supply, and Markets, Developing Economies, Government, Innovation, International Trade and Finance, Labor • 165 Views

    Does it matter where a start-up ends up? One new energy efficient light bulb was developed in Florida, its inventor lives in Florida, and the bulbs are assembled in Florida. Soon to be sold at Home Depot, however, the state-of-the-art LED bulb is destined for a manufacturing home in Mexico or China.

    You know why. In Mexico and China, wages are a fraction of U.S. pay and firms receive financial incentves when they relocate. Although the U.S. can offer political stability, easy market access, an efficient tranportation network, and a skilled work force, the low cost abroad is just too alluring. Perhaps, the most compelling advantage of a U.S. factory is the continuing innovation that an educated work force can deliver.

    Everyone is saying that start-ups are a key source of new jobs. For manufacturing, though, the jobs might not stay in the U.S.

    The Economic Lesson

    19th century economist David Ricardo’s principle of comparative advantage says that worldwide productivity increases when nations specialize and export the good or service for which they sacrifice the least to make.

    As economists, should we be pleased that the jobs are going to their most efficient home?

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    Social Security Thoughts

    Sep 17 • Economic Debates, Economic Thinkers, Government, Households, Thinking Economically • 188 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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