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    Replacing Broken Windows

    Mar 24 • Businesses, Economic Debates, Economic History, Economic Thinkers, Macroeconomic Measurement • 342 Views

    During a CNBC interview, former Treasury Secretary Lawrence Summers said that Japan’s massive earthquake “…may lead to some temporary increments, ironically, to GDP, as a process of rebuilding takes place.”

    Commenting on the interview, the WSJ reminds us that 19th century economist Frederic Bastiat (1801-1850) said “destruction is not profitable,” because disaster recovery replaces what was lost. So, although GDP could surge, national wealth is not necessarily any more and could indeed be less than it was before disaster struck.

    The Economic Lesson

    Calling it “the fallacy of the broken window,” economist Bastiat questions the assumption that a broken window can be an economic blessing. He agrees that a glazier would receive, for example, 6 francs to fix it. However, he then says, “…if…you conclude…that it is good to break windows, that it helps to circulate money…I am obliged to cry out: That will never do! Your theory stops at what is seen. It does not take account of what is not seen.”

    Bastiat then points out that the money given to the glazier would otherwise have been spent on new shoes or a book. And, having been able to spend the 6 francs on a new pair of shoes, their owner would have had new shoes and the old, unbroken window.

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    The Opportunity Cost of Presidential Relaxation

    Mar 23 • Economic History, Thinking Economically • 308 Views

    Talking about presidential relaxation, financial historian John Steele Gordon reminds us that not so long ago, a President could have been unreachable. When the financial panic of 1907 struck, because Theodore Roosevelt was off hunting bears in the Louisiana wilderness, he heard nothing until he returned.

    Relaxation for President Franklin Roosevelt took him to his stamp collection and poker. On the rare occasion when he lost a game, FDR gave his opponent a check that he knew would never be cashed because of its souvenir value.

    The Economic Lesson

    As economists, we can look at presidential relaxation through the lens of opportunity cost. When the President decides to relax, the opportunity cost is working 24/7. Choosing one means forgoing the benefits of the other.

    Believing the benefits of relaxation make a better decision-maker, John Steele Gordon suggests that the press not criticize a president who plays golf or basketball or goes to Hawaii or Texas or Martha’s Vineyard.

     

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    Salad Bar Economics

    Mar 22 • Businesses, Demand, Supply, and Markets • 484 Views

    Sometimes a salad bar is about much more than lunch. According to the NY Times Magazine, it can also be about value when you compare the salad bar to the produce aisle.

    If, as at the Whole Foods in Manhattan, you pay $7.99/lb. for your salad, you should avoid romaine, cucumber, carrots, beets and grape tomatoes. Why? At the same market, you can buy a cucumber for $1.49/lb. or carrots for $1.60/lb. in the produce section.

    On the other hand, lots of bacon bits would be ideal because they typically sell for $21.28/lb. (Interestingly, the Times found no bacon bits at the salad bad.) Add some sun-dried tomatoes and maybe crumbled Gorgonzola and almonds? The first is $9.99/lb. on the store’s shelves, the second, $8.67/lb. and the almonds are $9.99/lb. As for lettuce, mesclun would be your best bet ($7.99/lb.) The result is a value-laden salad composed of sun-dried tomatoes, Gorgonzola, almonds, mesclun and maybe bacon bits.

    If calories matter more than value, though, you might have to recalculate.

    The Economic Lesson

    Periodically, certain competitive market structure become more concentrated when businesses combine and less concentrated when subsidiaries are sold. In 1901, as the first billion dollar corporation, a combination of steel related businesses became U.S. Steel. In 2001, Sarah Lee “spun off” a division that, as an independent business, became Coach.

    When does it make sense to combine or divest?

    The answer is SOTP, Sum of the Parts. If the whole will be worth more than the sum of the parts, then a business should buy the extra enterprise. But, when the sum of the parts together is less than the total separately, then sell.

    And, this returns us to our sun-dried tomato, almond, Gorgonzola, bacon bit salad.

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    Energy Policy Decisions

    Mar 21 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Environment, Regulation, Thinking Economically • 417 Views

    Comparing the safety of nuclear power, oil, and coal, Slate columnist William Saletan helps us make some energy policy decisions.

    His focus is fatalities. In the oil supply chain, from 1969-2000, he cites 20,000 deaths. For coal, the number is 15,000 (although he does not state the time period). By contrast, except for Chernobyl, deaths from nuclear power accidents total zero. In the article, he does not talk about natural gas.

    His conclusion? Nuclear power is relatively safe. Yes, Congress should look at how to make it safer but then, we should not prohibit construction.

    The Economic Lesson

    Totaling close to 80% of all energy sources in 2009, oil, coal, and natural gas provide most of the energy supply that we consume in the U.S. On this graph, nuclear power has an 8.3% slice.

    What are the “demand sectors?” Transportation, industrial, residential and commercial, electric power.

     

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    We Are Living Longer

    Mar 20 • Gender Issues, Government, Households • 369 Views

    Using data for 2009 from death certificates in all 50 states, the national Centers for Disease Control has concluded that we are living longer. A male infant’s projected life span has risen .2 years to 75.7 while a female infant’s life expectancy is up .1 years to 80.6. An interesting chart in the report notes projected longevity for ages 0-100. Females at age 100 are estimated as having 2.2 years left. 65-year old males have a projected life span of 82.3.

    Living longer, though, means that Social Security will need more money unless changes are made. Proposals from the deficit commission appointed by President Obama include the following (pp. 48-53):

    • Gradually increase the age that we start to receive Social Security benefits.
    • Gradually increase Social Security taxes.
    • Decrease what higher earners receive.
    • Encourage more personal retirement saving.

    The Economic Lesson

    The future of Social Security takes us to two basic concerns.

    1. Life expectancy: When Social Security was created in 1935, the average lifespan was 64 and benefits could begin at age 65. Now, life expectancy can extend beyond 80.
    2. Ratio of workers to beneficiaries: Called pay-as-you-go, the Social Security system has current workers funding retirees’ benefits. Because of the baby boomers, the worker/retiree ratio is plunging. In 1950 there were 16 workers for every beneficiary and now it is 3:1. The projection for 2025 is a ratio of 2.3 workers for every retiree.

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