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    Looking For A Reality Check

    Feb 15 • Economic Debates, Government • 358 Views

    Saying how the U.S. government spends our money, Washington Post columnist Ezra Klein said, “It’s an insurance conglomerate…”

    His explanation?

    Medicare, Medicaid and Social Security expenses add up to 2/5 of federal spending. With Medicare covering health insurance for people over 65, Medicaid relating to health insurance for  low income individuals and families, and Social Security primarily covering old age insurance, yes, we could say that the government is in the insurance business.

    His point?

    That the debate over the President’s 2012 budget proposal makes politicians sound fiscally responsible without focusing on the real issues.

    Meanwhile, one writer at The Atlantic says spending proposals are like a spork. “The same way a spork makes an incomplete fork and an ineffectual spoon, this compromise budget provides for both incomplete investment and ineffectual deficit reduction.”

    Paul Krugman, though, tells us to focus instead on House Republicans. Providing insight about why politicians are focusing on cuts in discretionary spending, he says it is all about the future. If, as a recent Pew Survey indicates, voters really want no cuts that affect them, then what to do? Cut “future-oriented” programs in order to slice immediate spending.

    The Economic Lesson

    For a reality check, we should return to the report from the President’s Deficit Reduction Commission. Their recommendations cover 6 categories. 1) Discretionary spending cuts 2) Comprehensive tax reform 3) Health care cost containment 4) Mandatory savings 5) Social Security reforms 6) Budget process changes. For a quick summary, you can look at pages 14-16 of their report.

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    Search Engine Competition

    Feb 14 • Businesses, Demand, Supply, and Markets • 430 Views

    Reading about Lillian Virginia Mountweasel in the 1975 edition of the New Columbia Encyclopedia, you would have discovered that she, a fountain designer and rural mailbox photographer, died in an explosion when working for Combustibles magazine. 

    But she really didn’t.

    Mountweasel was a fake entry.

    Encyclopedias, dictionaries and search engines use an occasional bogus entry to identify copycats. Columbia, for example, knew that any other encyclopedia with Mountweasel had lifted the info from them because it existed nowhere else. Similarly, Google has just accused Microsoft’s Bing of a copycat offense. Using the fake search term, “Hiybbprqag,” Google says that Bing was guilty of what we could call search engine plagiarism. In response, Microsoft pleads, “Not guilty.”

    On a different front, Google is facing competition from smaller search engines with niche specialties.

    The Economic Lesson

    As economists, we can look at how firms compete. With only a few large firms providing search answers to many millions of queries, the search engine market structure is oligopoly. One way in which oligopolies compete is product differentiation. Any copycat activity challenges their ability to differentiate.

    Along a continuum of market structures, we can list four benchmarks. At the far left is perfect competition with many firms, identical products such as potatoes and broccoli, many consumers, and a market that determines price. Next, to the right, is monopolistic competition where firms have a bit more power. Supermarkets and beauty salons are examples of firms in monopolistically competitive markets. Then comes oligopoly and firms with a lot of power to affect price. Kellogg’s Cereals, Coca-Cola, and pharmaceutical firms are oligopolies. Finally, at the far right is monopoly, where one firm controls the market.

    Are the newer, smaller search engines changing Google’s market structure?

     

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    How Do You Disconnect the Internet?

    Feb 13 • Businesses, Developing Economies, Macroeconomic Measurement, Regulation • 338 Views

    As a Vodafone New Zealand customer, events in Egypt directed affected you. With a Cairo based call center that had to be closed, Vodafone said that people needing assistance waited 7 or 8 minutes for service that was directed elsewhere. According to The New Zealand Herald, Vodafone also had been instructed by the Egyptian government to “disconnect” its 31 roaming customers in Egypt.

    How does a country disconnect? It can instruct service providers to shut down. In Egypt, that meant contacting 5 providers. For the U.S., it would be much more difficult, because in addition to the 10 firms that dominate the market (70% concentration), so many more businesses and people are involved.

    An interesting fact: The Estonian parliament and France’s highest court have declared internet connection is a basic human right.

    The Economic Lesson

    The Organization for Economic Cooperation and Development (OECD) estimated the direct and indirect impact of the 5-day internet shutdown in Egypt. Directly, they estimate $18 million a day in lost revenue. Also though, the financial implications for tourism, inoperative call centers, and multinationals’ worries about future reliability are incalculable.

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    A Budget Cut Mirage

    Feb 12 • Economic Debates, Government, Macroeconomic Measurement • 347 Views

    Reacting to concern about the federal deficit, the Republican leadership seems to be targeting $100 billion in discretionary spending cuts. Similarly, for his fiscal 2012 budget, President Obama recommends a 5-year freeze on non-security discretionary spending. Both proposals sound like a lot.

    But…

    According to NY Times columnist David Brooks it is a “mirage.” Defined as an imaginary vision, a mirage is a fantasy. Targeting non-security discretionary spending creates a fantasy because, as Brooks says, it is a mere sliver of federal spending. A discretionary spending goal enables the Congress and the President to focus on small crucial programs such as Teach for America, R & D, and foreign aid. And even then, they will not have dented a projected $1.5 trillion deficit.

    This Pew survey is one reason why.

    The Economic Lesson

    Imagine a pie. Take out 5 slices.  One slice for Health (primarily Medicare and Medicaid), one for Defense, and 3 more for Social Security, Income Security, and Interest on the existing debt. Having consumed more than 3/4 of the pie, we have not even touched the discretionary slices. And, it is those discretionary slivers of the pie that are being targeted for cuts rather than the five big slices.

    Here is a great interactive visual displaying the 2012 budget proposal.

     

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    Who Owns Deutsche Borse?

    Feb 11 • Demand, Supply, and Markets, Economic History, Financial Markets, International Trade and Finance • 346 Views

    Hearing that Deutsche Borse will probably purchase the New York Stock Exchange, commentary focused on a German firm acquiring the symbol of U.S. capitalism. But who owns the German firm? According to the WSJ, Americans are major shareholders with 41% of Deutsche Borse while Germans have 18%.

    Seemingly unrelated, the iPhone and a typical t-shirt are similar to Deutsche Borse. The iPhone supply chain winds up in China for assembly but the parts come from Germany and Korea and other countries where contract manufacturers are located. Comparably global, before a t-shirt lands in our drawer, it could have started as a cotton plant in Texas, become thread and a shirt in China, and then traveled to Florida for silk-screening.

    So, the next time you see a “made in China” label, remember that other countries should probably have been listed. And, when you hear that a German firm is buying another business, do ask, “Who owns that German firm?”

    The Economic Lesson

    A process rather than a place, a market determines prices and quantities when it brings together buyers and sellers. For the original New York Stock Exchange, in 1791, brokers met under a buttonwood tree on Wall Street. People who wanted to buy or sell shares of the First Bank of the United States knew that they could get information under that buttonwood tree.

    Now, with a global information infrastructure, markets for securities, iPhones and t-shirts can extend around the world.

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