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    Deflation Worries

    Sep 13 • Businesses, Demand, Supply, and Markets, Economic Debates, Macroeconomic Measurement, Money and Monetary Policy • 298 Views

    We have something else to worry about: deflation.

    If you had $100 in 2000, you would need $126.60 in 2010 to make the same kinds of purchases. Called inflation, prices tend to go up each year. Most consumers and businesses are happy with a little inflation, maybe 2% annually.  

    Recently though, the inflation rate has been sinking which means that prices are rising more slowly. Then, when prices actually decline, as they did during April, May, and June, we have deflation. As you might expect, businesses respond poorly to falling prices. Predicting lower profits, they postpone expansion, lay off workers, and decrease wages. At .3%, the July inflation rate was slightly up again. 

    During the Great Depression, deflation was a serious problem. Between the fall of 1929 and 1933, prices dropped almost 13%. An expert on the 1930s, our Fed Chair Ben Bernanke has said that we will never let that happen again. But others wonder whether we have sufficient economic knowledge to know what to do.

    How would deflation affect you? Will you spend more or less if you expect prices to fall? Will you borrow money? 

    The Economic Lesson 

    Inflation has 3 basic causes: 1) Demand pulls prices up because too many buyers are chasing too few goods. 2) Costs push prices up because land, labor or capital becomes more expensive. 3) Prices generally can rise when one group with monopoly power raises the price of an important commodity such as oil.

    The basic cause of deflation is a severe plunge in spending from consumers, businesses, and/or government. In response, to attract buyers, producers lower their prices and a deflation spiral can begin.

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  • Sporting Decisions

    Sep 13 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Thinking Economically • 210 Views

    http://www.nytimes.com/2010/09/08/sports/08stadium.html

    Why have you heard of Green Bay, Wisconsin? The Green Bay Packers.

    The location of a sports team and their stadium affects a community. Some say, though, that the affect is negative. New Jersey currently has a big problem with a stadium that without a team. Now empty, the arena still needs tax payers to pay its bills. Sports economist Zimbalist says that the added business created by a sports arena never really existed. Salaries leave town. Sales that shifted near the stadium were lost elsewhere.

    Still though, told that a city will get a sports franchise if it just pays the bills, most cities say yes. Told that the Super Bowl is coming to town, most are delighted.

    That leaves us discussing cost and benefit. If the dollar benefit couldnindeed be absent, then why are we so plased?

    The Economic Lesson

    I suggest using an opportunity cost grid to decide the benefits ands benefits foregone from events and teams selecting your locale.

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    Harvard Endowment: Underperformance or a Solid Return?

    Sep 12 • Financial Markets • 233 Views

    I thought you might want to see how The Wall Street Journal and the NY Times had different interpretations of the same facts on the same day about Harvard’s endowment fund performance:

    From The Wall Street Journal: “Harvard Endowment Gets Middling Grade”

    Harvard University’s endowment posted an 11% return for the 12 months ended June 30, underperforming markets but reversing a big decline in the year-ago period.”

    From the NY Times: “Harvard Endowment Reports 11% Return for Year”

    “A year after a disastrous 27 percent decline that prompted layoffs, salary freezes and a halt to some campus expansion, the Harvard endowment on Thursday reported a solid 11 percent increase in its $27.4 billion portfolio for the fiscal year ended June 30.”

    Comments?

    The Economic Lesson

    The group that oversees Harvard’s endowment funds is called an institutional investor. Associated, for example, with pension, hedge, and mutual funds, institutional investors manage large pools of money for firms and groups of individuals.

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    High, Low, or No Cigarette Tax?

    Sep 11 • Behavioral Economics, Demand, Supply, and Markets, Government, Thinking Economically • 237 Views

    Recently, Connecticut legislators were pleasantly surprised because an increase in the cigarette tax generated more revenue than they expected. You might say that the results were predictable. However, if a state increases taxes, it is possible that consumers will stop buying the item or go somewhere else to get it.

    If a person who smokes lives in New York where the cigarette tax is $4.35, would he travel to Pennsylvania to pay $1.60 or further to Virginia where the tax is $.30? According to a 2008 study from Harvard’s Kennedy School, to save $1.00 on a cigarette purchase, a person will travel 2.7 miles when each extra mile costs that consumer $.37.

    The Economic Lesson

    All of this is about much more than cigarettes. It relates to recession generated diminishing state tax revenue. States need to pay for roads and teachers and police. They have current salaries and pension payments for retired workers. 

    Income taxes and sales (excise) taxes are primary sources of most states’ revenue. However, with tax revenue down because of the recession, states are trying to figure out how to raise more money (or to spend less). Arizona has even tried to sell its state capitol building. Other possibilities are “sin” taxes on cigarettes, soda, and alcohol. The question, though, is how high can taxes go before they backfire. Too high and people avoid them; too low and they miss potential revenue.

    An economist would say the sales tax debate is about the price elasticity of demand. If price changes a lot and the quantity we buy remains the same, as with medication and gasoline, then our demand is inelastic. By contrast, if price swings have an impact on buying, then our response is elastic. With soda, within a certain price range our demand is inelastic. Once we reach a 35% increase, though, we switch to an elastic response. Connecticut’s revenue increase implies that cigarette demand is inelastic.

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    A Smaller Safety Net?

    Sep 10 • Economic Debates, Government, International Trade and Finance, Labor • 254 Views

    In France, a 24 hour workers’ strike brought retirement rights back to the headlines. Saying that a 60 year old retirement age was no longer affordable, French President Sarkozy has proposed moving it up to 62. French workers disagree.

    In the U.S., a leader of the Older Women’s League (OWL) reacted angrily to a comment about Social Security from former Senator Alan Simpson. Mr. Simpson is the co-chairman of the recently created National Commission on Fiscal Responsibility and Reform. Using rather vivid language, Mr. Simpson said that Social Security would not have the future capabiity to continue its current obligations. In an email, OWL responded that Mr. Simpson displayed, “…his clear disrespect for Social Security, women and the American people…”

    You can see the dilemma. Our resources are limited. In most eurozone countries and in the U.S. federal spending is skyrocketing. To what extent should we provide support to an aging population?

    The Economic Lesson

    Social Security is a pay-as-you-go system; today’s workers pay the benefits for today’s recipients. When Social Security began in 1935, there were 42 workers for each beneficiary, life expectancy was close to 62, and benefits began at 65. Today, U.S. life expectancy averages close to 78 and minimum benefits can begin at 62. By 2027, the full benefits age will gradually have risen from 65 to 67. Currently, while there are approximately 3.3 workers for each beneficiary, for 2030 the projection is 2.2.

    In France also, and in other OECD countries, the older population is growing and birth rates have diminished. By 2050, if current labor force participation rates remain the same, in Europe, there will be one worker for every retired person.

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