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    Doing Business in Greece

    Feb 18 • Businesses, Economic History, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 524 Views

    Sometimes getting 100 is not the best grade. In the World Bank’s Ease of Doing Business Index, 183 nations are ranked in terms of the friendliness of their regulatory environment. Greece is #100.

    One feta cheese maker complained to The Economist last year about a rule requiring him to publish his balance sheet in 3 different newspapers when he could just use the internet. Others protest the limited number of licenses in professions ranging from architecture to long haul trucking that make them almost impossible to enter.

    The NY Times Magazine tells us, though, that adversity can be inspirational. Whether looking at an all-natural mattress manufacturer, a wine entrepreneur emphasizing value, or a recently fired civil servant who started an herb business, you would see an upside to the Greek calamity.

    Similarly, the Chinese see investment opportunities in Piraeus, Greece’s main port and Qatar has started directing $5 billion toward revitalizing Greece’s tourism infrastructure. Some European investors have even begun planning upscale Florida-like retirement communities on Greek islands.

    Our bottom line: If businesses can freely function, when an economy contracts, as opportunities surface, investment will start to become more attractive.

    The Economic Lesson

    Focusing on creating and running a local business, the Ease of Doing Business Index has 10 topics. For starting a business, it looks at the number of procedures, how long it takes to accomplish them and their cost. Other topics include enforcing contracts, dealing with construction permits, and trading across borders.

    Among the 183 nations that participate in the Index, Germany is 19, Portugal is 30 and Spain, 44. At 87, Italy is much further down the list.

    An Economic Question: Looking at your country in the Ease of Doing Business Index, note examples of regulations that constrain business activity.

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    The Riskiest Movies

    Feb 17 • Businesses, Demand, Supply, and Markets, Economic History, Entertainment, Financial Markets, Uncategorized • 593 Views

    Because Bart the Bear was no ordinary bear, anytime he appeared in a movie, the cost could have been $250,000. Yes, Bart’s salary was pricey but the $250,000 was all about insurance.

    Most producers and movie studios require insurance. For stars, for delays, for injury, even for a Screen Actors Guild strike, insurance diminishes the risk. As a production cost, it can equal 1 or 2 percent of the film’s total expenses.

    Based on insurance estimates, “The Girl With the Dragon Tattoo” was the riskiest movie last year. Other very risky movies included “Salt” in which Angelina Jolie did her own stunts and “Into the Wild” because of its rough terrain and animal actors.

    Some insurance examples? When John Candy died while filming “Wagons East,” the movie makers received $10 million. Knowing that Nicole Kidman had a bad knee when she made “Cold Mountain,” insurers insisted on body doubles for any scene that would stress her knee. For actors who have been in rehab, premiums tend to be higher or unavailable.

    As for Bart, one insurance executive explained, “If you have a bear from the zoo, he’s worth whatever a bear costs, maybe $5,000. But if a bear’s trained and pretends to attack on command, then he’s worth $250,000.”

    Our bottom line? Price. Designating a specific amount gives objective value to risk.

    The Economic Lesson

    Prices convey information. Even if you had never heard of Bart, hearing his $250,000 insurance price tag would tell you that he was not your average bear.

    An Economic Question: If you could, as a student, how might you insure yourself when you take a test?

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    Is Obesity the Government’s Business?

    Feb 16 • Behavioral Economics, Businesses, Economic Debates, Government, Households, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 1355 Views

    To fight obesity, do you support government funded weight loss education? Soda taxes? Mandatory menu calorie counts? Banned bake sales?

    A recent Intelligence Squared debate provided several answers. The evening focused on the proposition,  “Obesity is the Government’s Business.”  Opposed were libertarian journalist John Stossel and The Obesity Myth author, Paul Campos. On the pro side were former U.S. surgeon general, Dr. David Satcher and a Pew Foundation scholar on nutrition and metabolism, Dr. Pamela Peeke.

    Even before the introductions were complete, Stossel compared prohibition to proactive obesity policy saying, “They mean well but they do more harm than good.” During the evening, he and Campos emphasized 5 points:

    1. When it tries to regulate private behavior, government is overextending its power.
    2. A more effective incentive, privatized health care would force people to bear the cost of unhealthy behavior.
    3. There is no clear dividing line between healthy and unhealthy food.
    4. We might be demonstrating prejudice about body size.
    5. Science has not definitively proved the correlation between between obesity and higher mortality rates.

     

    On the pro side, after starting with a story about policy makers, Dr. Satcher shared a plethora of statistics that included burgeoning obesity rates, diminished exercise and diabetes, hypertension in children and adults. The basics of the pro position included 6 ideas:

    1. “Obesity is an epidemic.”
    2. Obesity creates increased risk for cancer, heart disease and diabetes.
    3.  Obesity adds substantially to our national health costs.
    4. It is government’s responsibility to fund the fight against obesity.
    5. It is government’s responsibility to diminish the availability of unhealthy foods.
    6. When we diminish the consumption of unhealthy foods with taxes and less advertising, long-term health care costs drop.

     

    You can watch the debate here.

    An Economic Lesson

    Economically defining cost as sacrifice, whenever government helps one group, others and/or the same people experience a cost. More spent for controlling obesity means we sacrifice more spending in other areas. Or, it means we sacrifice lower taxes. Or, we sacrifice individual freedom. But, we enjoy the potential benefits of controlling obesity when the initiatives are successful.

    An Economic Question: Referring to the points cited by the pro and con sides of  “Obesity is the Government’s Business,” defend the side you support.

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  • The Congress and the Fiscal Cliff

    A Clunker Stimulus?

    Feb 15 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Economic History, Government, Households, Macroeconomic Measurement, Thinking Economically, Uncategorized • 883 Views

    It would be so nice if we could say, “Yes, the 2009 stimulus was a good idea,” or “No, it was not.” Instead, the debate continues.

    Discussing his new book, journalist Michael Grabell tells us that we are unnecessarily dividing ourselves between government believers and disbelievers when the focus should be on designing programs that work. Grabell says the problem was not the $787 billion. Stimulus planners chose the wrong “shovel ready” projects. States were unprepared for a tsunami of money.  As a whole, the initiative had inadequate “oomph” to create a sustainable recovery.

    Where did it work? He says to look at Cash for Clunkers, the program that paid us to trade in our old, emission spewing jalopies for new models. Grabell says the program successfully stimulated car production and supported car dealers.

    Not everyone agrees.

    An op-ed in the Boston Globe described why stimulus dollars made used car prices soar. On the supply side, car dealers had to destroy the old gas guzzling vehicles they received. On the demand side, with joblessness soaring, more people needed cheaper, “pre-owned” transportation. Less supply? More demand? Equilibrium price rises.

    As you can see, the facts abound to applaud or condemn the impact of the 2009 Stimulus Act . Sometimes I even wonder which comes first, the facts or the conclusion. Exhibiting “confirmation bias,” first we walk in with our bias, and then we find a slew of facts to support what we believe in.

    The Economic Lesson

    In his General Theory on Employment, Interest, and Money, British economist John Maynard Keynes said that nations should borrow during a recession. Then, by using the money to “prime the pump”, fiscal activism stimulates business expansion, the recession ends, government revenue surges, and the debt is repaid.

    An Economic Question: How might “confirmation bias” affect your economic analysis about the impact of government spending?

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  • Is It Better to Outsource or Insource T-shirts?

    A Tale of Two “T-Shirts”

    Feb 14 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically, Uncategorized • 654 Views

    What if the cost of producing a woman’s polo shirt is $29.57? Its manufacturers would sell it to retailers for $65.00 who then mark it up to a $155.00 selling price.

    According to the Wall Street Journal, the land, labor and capital for an upscale green (sort of like Crayola’s Caribbean green crayon) polo primarily take us to France and the U.S.  Using cotton/rayon cloth from Paris, the shirt  is made in Brooklyn, NY.  Its $29.57 wholesale cost includes the fabric ($7.79), 4 buttons ($.12), labor ($11.05) and other shirt ingredients like thread ($.09).

    The story of a $5.99 Walgreen’s t-shirt is very different. Told in in The Travels of a T-Shirt in the Global Economy by Pietra Rivoli,  a typical t-shirt starts as cotton in Texas. Traveling by truck or train to California, it continues moving westward until it reaches China. In China, the cotton becomes yarn which is made into cloth which is made into a t-shirt. With a “made in China” label, the t-shirt leaves China, headed for a screen printing plant in Florida. Perhaps months later, after it has been sold and worn, the shirt winds up in a used clothing bin, destined once again to travel thousands of miles to a clothing bazaar in Tanzania where it is sold.

    The price the screen printer pays for the shirt? In 1998, it was $1.42–which now would be $1.96 (using the BLS inflation calculator).

    The Economic Lesson

    And this takes us to David Ricardo’s principle of comparative advantage. Worldwide productivity increases when nations specialize and export the good or service for which they sacrifice the least to make.

    The cost can be high when we do not listen to David Ricardo’s wisdom. At the end of a 2002 report from the Dallas Federal Reserve Bank called “The Fruits of Free Trade,” is a chart that conveys the cost of policies that save domestic jobs. For apparel and textiles, 168,786 jobs are saved. The cost though, is $33,629,000,000 or $199,241 per job. Why is the cost so high? Because consumers are paying more when there is no competition.

    An Economic Question: How would you assess the cost and benefit of importing the $9.00 t-shirt from China? Of producing the $155 polo in Brooklyn?

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