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    Israeli Cottage Cheese Boycott

    Jun 21 • Demand, Supply, and Markets, Households, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically • 499 Views

    News articles say that the Israelis are “cheesed off” and “curdled.” Angered by the soaring price of cottage cheese, a Facebook consumer group of 70,000 friends has agreed to stop buying it on July 1. The headline on the boycott page said, “Let it stay in the stores and spoil until the price comes down.”

    This “tempest in a tub” began when cottage cheese price caps were removed. You can guess the result. The price of a 250 gram (9 ounce) container soared from 4.82 to 8 shekels ($2.30).  A national breakfast staple, Israeli cottage cheese (just like Coca-Cola) has a secret small curd formula.

    The Israeli Facebook group appears to want a cottage cheese price cap.

    The Economics Lesson

    During the early 1970s, to control inflation, U.S. President Richard Nixon implemented wage and price controls. Like taking the cover off a pressure cooker, when the controls were lifted, prices immediately jumped.

    As economists, we can explain why with a demand and supply graph. With the demand curve sloping downward, the supply curve sloping upward, the Y-axis price and the X-axis quantity, the curves meet at an equilibrium price and quantity. The market pushes toward equilibrium. Above equilibrium? There is a surplus. Below equilibrium? There is a shortage.

    An Economic Question: Why are price controls called a ceiling?

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    A Social Security Collision

    Jun 20 • Economic Debates, Economic History, Government, Households, Macroeconomic Measurement, Thinking Economically • 532 Views

    Ask a 56-year old and a 26-year old about Social Security and you will probably get very different answers. 

    In the NY Times, an unemployed 56 year old woman said: “My investments took a bath, then being out of work for a few years–I’m sorry but there’s not that much left. I’m going to need Social Security and Medicare.” However, in order to get the amount of Social Security she expects, a 26 year old could expect to pay a higher payroll tax.

    When? In 2030, she will be 75 and the 26 year old will be 45.

    Almost doubling since 1990, the number of retirees is surging. However, the number of taxpayers is up by much less. As a result, by 2036, Social Security will be unable to fulfill its promised obligations. The “old” worry about their benefits. Because Social Security is “pay-as-you-go,” the “young” are concerned about paying for them. The NY Times called it “Between Young and Old, a Political Collision.”

    The Economic Lesson

    Cut benefits? These are several approaches:

    • Reduce what upper income earners would receive.
    • Increase the retirement age.
    • Reduce cost-of-living increases in benefits.

    Increase Taxes? These are possibilities:

    • Tax all that people earn instead of the cap on taxable income that now exists.
    • Select a much higher cap on taxable income than now exists.
    • Increase the payroll tax rate from 12.4% to 14.4%.

    Or, just wait and see if economic growth solves the problem?

    Using this interactive WSJ graphic, you can see the impact of different policy alternatives.

    An Economic Question: If Republicans reject tax increases and Democrats refuse to cut benefits, how would you get the Congress to act?

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    Preschool Education Matters

    Jun 19 • Behavioral Economics, Economic Debates, Government, Thinking Economically • 409 Views

    Did you have to care for a hamster in your preschool class? Line-up? Clean up? Share?

    According to this NPR Planet Money podcast preschool probably provides irreplaceable job training.  Taking place during a developmental window that does not reappear, the “soft learning” we get as 3 and 4-year olds shapes our success as adults. This academic study provides the specifics.

    And yet, here and here, you can see the budget cuts for government funded pre-school programs.

    The Economic Lesson

    It is all about cost. The cost of any decision is the alternative you rejected. Choosing is refusing.

    An Economic Question: Why might cutting a preschool program have a lower cost for a politician than for society? 

     

     

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    The Vitamin Police

    Jun 18 • Businesses, Demand, Supply, and Markets, Economic Debates, Regulation, Thinking Economically • 399 Views

    Most of the corn flakes that we eat in the U.S. are illegal in Denmark because they have vitamin supplements. Consequently, the NY Times tells us that large food companies like Kellogg’s and small stores stocking Marmite, have to undergo an expensive and time consuming approval process if they want to sell a food with added vitamins and minerals.

    Why do the Danes disapprove of supplements? Because they believe their diets are sufficiently healthy.

    As economists, Danish vitamin regulation takes us to the role of government. Should government be able to tell Kellogg’s that they cannot sell corn flakes with Vitamin D?

    Or, in the U.S., knowing that we have an obesity epidemic, should government tax unhealthy food? Especially because unhealthy calories are cheaper than the good ones, maybe a McDouble should be taxed. One academic study indicates that a tax on less healthy food discourages people from buying it. By contrast, making healthy food cheaper did not have the same beneficial impact.

    The Economic Lesson

    Concerned that government could not possibly know what is best for each of us, economic philosopher Adam Smith (1723-1790) suggested that a “just” society required less government involvement. By contrast, contemporary Nobel laureate Paul Krugman believes that more government leads to a better world.

    An Economic Question: Citing cost and benefit, explain why you approve or disapprove of Denmark’s ban on vitamin supplements.

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    Euro-Zone Rates

    Jun 17 • Demand, Supply, and Markets, Financial Markets, Government, International Trade and Finance, Money and Monetary Policy • 494 Views

    Please match each of the following countries with its unemployment rate and borrowing rate:

    Countries: Germany, Greece, Ireland; and the U.S. and the U.K.

    Unemployment rates: 9.1%, 7.7%, 7%, 15.9%, 14.8%

    2-year bond rates: .5%, 4.5%, 1.75%, 29.69%, 12.95%

    The answers are below.

    The Economic Lesson

    As an I.O.U., a bond is a loan. If a loan is risky, it pays a higher rate of interest to entice people to make their money available. By contrast, investors looking for safety and security are happy to accept a low return–less interest–when they purchase a bond.

    An Economic Question: What story do the unemployment rate and 2-year bond numbers tell?

    Answers:

    Unemployment: Germany: 7%; Greece: 15.9%; Ireland: 14.8%; U.S. 9.1%; U.K. 7.7%

    2-year bond: Germany: 1.75%; Greece 29.69%; Ireland: 12.95; U.S. .5%; U.K. 4.5%

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