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    Placing the Poverty Line

    Sep 15 • Economic Debates, Government, Households, Labor, Macroeconomic Measurement, Thinking Economically • 481 Views

    Any family that earns less than 3 times the annual cost of a nutritionally adequate diet is below the poverty line.

    But should we agree with the placement of the line?

    If we say that poverty is “relative deprivation, ” then a definition could take us to those who have less than the average household. In 2010, the U.S. average household had 2.3 cell phone subscriptions and 2.9 TVs.

    Other considerations could raise or lower household income totals. Maybe we should include in the annual income total such lower income entitlements as housing subsidies, tax credits, and food stamps. Or, we could subtract childcare. In addition, how do we recognize income mobility and the temporary character of poverty for most households? According to a measure from the late 1990s, 2% of the population was poor for 2 years or more.

    The Economic Lesson

    The highest since the early 1990s, according to the US Census Bureau, during 2010, 46.2 million people lived in poverty. A family of 4 earning less than $22,314 was below the poverty line while for a family with 3 children under 18, the number was $26,023. Looking at someone over 65 living alone in 2010, the poverty line was $10,458.

    Slicing the US income pie, the bottom 40% earned 11.8% of all pretax income. By contrast, the top 20% had a 50.2% share of the nation’s pretax income. Is income inequality good or bad? You might look at this article.

    An Economic Question: Why is it important for the United States to identify a poverty line?

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    A Tale of Two Euro Zone Countries

    Sep 14 • Economic Debates, Economic History, International Trade and Finance, Money and Monetary Policy, Thinking Economically • 532 Views

    Saying, “It is a small step for the euro zone and a big step for Estonia…” the Estonian prime minister celebrated his country’s formal entry into the Western economic world. On January 1, 2011, Estonia switched from the kroon to the euro (and many bought new wallets because the size of their currency had changed). Looking forward to more trade and greater national security, Estonia very much wanted euro zone membership.

    The lowest in the euro zone, Estonia’s debt to GDP ratio during 2010 was 6.6%–far below the euro zone rule that national debt could not exceed 60% of GDP. According to this NPR Planet Money podcast, when Estonia experienced a severe recession during 2009, even the president, who grew up in New Jersey, took a 10% salary cut.

    And then we have Greece. Switching from the drachma to the euro in 2001, Greece knew, according to this BBC article, that she would have to display more fiscal discipline as a euro zone member. You know what happened. Her 2010 debt to GDP ratio was 142.8%. The story of Greece’s response since 2009 is here.

    The Economic Lesson

    Monetary policy involves the supply of money and credit. A country’s fiscal policy relates to taxes, spending and borrowing. Estonia and Greece share the same monetary policy while each has its own fiscal policy. And therein lies the problem.

    When countries borrow, they are implementing fiscal policy. But who buys their debt? Banks–the same banks that participate in monetary policy. So, because banks link fiscal and monetary policy, if one goes awry, the other is affected.

    An Economic Question: How might Estonia experience the impact of Greece’s fiscal policy?

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    Too Safe?

    Sep 13 • Behavioral Economics, Economic Debates, Government, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 571 Views

    Assume for a moment that you have to decide whether to install body scanners at every airport in the U.S. Knowing a decision to proceed will make everyone safer, you say, “Yes.”

    But, what if you first were told that there was a 1 in 3.5 million chance that an act of terrorism will kill you or someone you know? However, installing the scanners will make everyone safer by reducing that probability. Your decision?

    Here, here, and here, a thought-provoking 3-part series in Slate discusses why we need more cost/benefit analysis when we decide how much to spend on homeland security.

    Perhaps this Daily Beast article displays how some municipalities are inadvertently engaging in their own cost/benefit risk assessment.

    The Economic Lesson

    When you are very hungry, the first chocolate chip cookie you eat is delicious. After that, though, each additional cookie provides less and less extra pleasure. Getting less extra satisfaction from each additional unit is called diminishing marginal utility.

    Similarly, initially implementing a security infrastructure at airports would have provided a considerable increase in safety. The question, though, is where diminishing marginal utility sets in.

    An Economic Question: Slate tells us that homeland security is a $690 billion federal budget item. Citing opportunity cost, what is the additional expense?

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    Can We Afford to Change the US Postal Service?

    Sep 12 • Government, Households, Labor, Thinking Economically • 569 Views

    There are so many reasons not to change the US Postal Service. For tough to reach rural communities, post offices are conveniently located. For homebound elderly, 6-day dependable prescription delivery is crucial. USPS workers have been promised generous pension dollars. The USPS employs more than 600,000 people. Amazon would like us to receive books on Saturday. Or, maybe checking the mailbox almost everyday is just what we are used to.

    But, on the other hand…

    The USPS is hemorrhaging money. Mail volume is plunging and expenses are soaring. Supposedly supporting itself through stamp money and other services, by the end of 2011, the USPS will have a $10 billion loss. A USPS paper says that were it a private business, it would already have filed for bankruptcy.

    The bottom line?

    Should the USPS offer fewer services and if so, what? Or should its expense be further added to an already astronomical federal deficit?

    The Economic Lesson

    Every decision has an opportunity cost. Choosing is refusing.

    If we choose less spending, then what USPS service are we willing to sacrifice? Change contractual retiree benefits? Increase the price of stamps? Close less-used post offices and distribution facilities? Sell real estate? Charge more for Saturday delivery? Slower service?

    An Economic Question: If you were solving the USPS financial crisis what opportunity cost would you accept as a tradeoff?

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    Healthcare and Baumol’s Disease

    Sep 11 • Businesses, Demand, Supply, and Markets, Developing Economies, Government, Households, Innovation, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 569 Views

    Asked why healthcare is relatively expensive while cell phones are not, you could answer, “Baumol’s Disease.”

    Described by New Yorker columnist James Surowiecki, to play Mozart’s String Quartet in G minor in 1787 and now, we need 2 violinists, 2 violists, and a cellist. And therein lies our predicament. Because we always need the same amount of land, labor and capital, we cannot increase our productivity.

    Like Mozart’s String Quartet in G minor, for medicine and higher education, we need human input that remains relatively constant. In addition, as economist Tyler Cowen explains in The Great Stagnation, with certain tasks, our productivity is even tough to measure. For medical care–is it doctor visits? Cures? Treatments?

    Meanwhile, other goods and services are not afflicted by Baumol’s Disease. Cell phones, food, clothing, cars…an endless list of items made around the world are being produced more efficiently.

    The bottom line?

    We are experiencing a productivity divergence. For many goods and services, through global competition, we enjoy the benefits of productivity growth. Afflicted with Baumol’s Disease and other ailments, government, healthcare and higher education, though, will require more jobs, become increasingly costly and experience less productivity growth.

    The Economic Lesson

    Defined as more output per labor hour, productivity growth results from more inputs (land, labor and/or capital), better inputs, and/or a more effective combination of inputs.

    You can see why productivity matters. As described in a Teaching Company Lecture by Dr. Robert Whapples (#4), greater productivity can fuel economic growth and enhance our purchasing power.

    An Economic Question: How might current economic sluggishness relate to a productivity divergence?

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