• 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 • 657 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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    Population Futures

    Feb 13 • Developing Economies, Economic History, Government, Households, Labor, Macroeconomic Measurement, Thinking Economically, Uncategorized • 832 Views

    Imagine for a moment 3 groups of countries, each with a different population pyramid. The first has a huge bulge at the bottom, the second is wider in the middle and the third is relatively broad at top.

    If this represents the world in 2025, what can we expect?

    This Congressional Budget Office (CBO) report tells some of the story:

    3 Groups: We can start by dividing the world into the more developed, less developed and least developed nations. The more developed world would include most of Western and Eastern Europe, New Zealand, Canada, Japan.  In the middle group, we could list many Latin American countries like Brazil and Argentina and then traveling to Africa, Kenya would be one, in Asia, India of course, and in the Pacific, Indonesia. For the least developed countries, Ethiopia, Uganda, many other African nations, and Haiti and Samoa are examples. (In the CBO report, the U.S. and China were presented separately.)

    3 Demographic Stages: Next, we can assume that each group undergoes 3 demographic stages after centuries of high mortality and fertility rates. 1) Benefiting from modern technology and health care advances, at first, they experience higher birth rates and more children survive.  2) Then, as these larger numbers of children become young adults, they have fewer children than the previous generation. 3) Finally, as the larger cohort ages, they inflate the elderly population. Here, depending on the country, you can see how timing might vary.

    3 Population Pyramids: This takes us to 3 population pyramids. For stage 1, the population bulge is at the bottom of the pyramid, stage 2, in the bottom and middle, and stage 3 at the top. Illustrated in this World Economic Forum report (p. 29), you can see the projected placement of the bulge for the 3 groups during 2025.

    The Economic Lesson

    3 Economic Implications: During Stage 1, countries experience less economic growth because more resources are used for their children. They are concerned with “youth dependency.” When those children survive, during Stage 2, they compose a larger group that works, saves and contributes to economic growth. Stage 3, though, creates new challenges when the bulge in the population no longer is in the labor force, consumes more than they produce, lives longer, and has to be sustained by a relatively smaller labor force. We could say that countries at the third stage  have an elevated “old age dependency” rate to manage.

    An Economic Question: For the United States, as the baby boomers age and rise to the top of the population pyramid, how will Social Security, Medicare and Medicaid be affected?

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    Valentines From the Fed

    Feb 12 • Economic Humor, Money and Monetary Policy, Uncategorized • 621 Views

    What a fantastic idea! When University of Pennsylvania economist Justin Wolpers suggested Federal Reserve Valentines, the Fed and others responded.

    The San Francisco Fed:

    • “I’m going to extraordinary measures to increase your stimulus.”
    • “My love is elastic; my commitment too big to fail.”

    The Atlanta Fed:

    • “Being with you hikes my pulse by several basis points.”

    The Philadelphia Fed:

    • “Love me Tender. I have no cents when it comes to you!”
    • “My initial projections never forecast someone like you would be in my next quarter.”

    Richmond Fed:

    • “Your equation is deriving me crazy.”

    Justin Wolfers:

    • “Like fiat money, our love is built on trust.”
    • “I’ll be your lover of last resort.”
    • “You’re my gold standard.”

    Others:

    • “There’s nothing irrational about my exuberance for you.”
    • “I’d like to borrow you overnight and then hold you to maturity.”

    You can see lots more at #FedValentines.

    The Economic Lesson

    An independent agency, the Federal Reserve oversees monetary policy. Through its basic tools that recently have expanded considerably, it expands and contracts the supply of money and credit in the U.S. economy.

    An Economic Question: You might enjoy visiting this Fed website to determine your own monetary response to different economic scenarios.

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    An Economic Risk List

    Feb 11 • Behavioral Economics, Developing Economies, Economic Debates, Economic History, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy, Regulation, Thinking Economically, Uncategorized • 1380 Views

    Asked to indicate the major economic risks facing the world, World Economic Forum survey participants were given 10 concerns. Before reading their priorities, you might like to form your own economic risk list. Just reorder the following challenges in terms of what you believe our national leaders should consider their top policy priorities.

    • government debt
    • high and sustained unemployment
    • extremely volatile energy and agriculture prices
    • a sudden decline of a leading emerging economy
    • major systemic financial or currency failure that ripples across national borders
    • prolonged infrastructure neglect
    • liquidity crises caused by financial institutions with inadequate resources
    • widening income disparity
    • unforeseen negative impact of regulation
    • unmanageable inflation or deflation

     

    The actual survey had 5 categories (economic, environmental, geopolitical, societal, technological), each with 10 components and 4 questions. These were the 2 basic questions:

    1. In your opinion, how likely is each of the following global risks to occur over the next 10 years? (scale of 1/very unlikely to 5/almost certain)
    2. If they were to occur in the next 10 years, please provide your best estimate of the total global impact that each of these risks would have. (scale of 1/low to 5/high)

     

    The Economic Lesson

    In the 2012 report, respondents indicated that income disparity and government debt were most likely but that systemic financial failure and government debt would have the greatest impact. Looking back, although the questionnaires asked for long-term concerns, the lists changed each year. For example, concern with the decline of a developing economy, China, was close to the top of 2008’s priorities and an oil price shock was high for 2007.

    Discussed by economist Timothy Taylor, perhaps the changing priorities reflect the absence of pro-activity. Instead these “leaders” are responding to existing crises.

    An Economic Question: How would you hope that fiscal and monetary policy would respond to one of the top economic risks you cite?

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  • The US is again hitting its debt ceiling.

    Greek Austerity Facts

    Feb 10 • Financial Markets, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically, Uncategorized • 1052 Views

    With a March 20 deadline approaching, new European bailout negotiations continue to emphasize austerity. Curious about what austerity specifically meant, I looked at a Greek newspaper.

    In the sports section, they discussed the plight of Greece and the Olympics.  Athens Olympic Park, home of the 2004 games, is in a state of decay. Greek gymnasts, weightlifters and the water polo and sailing teams have not been able to afford the trip to qualifying competitions. Half the size of its 2008 Beijing counterpart, the Greek Olympic team is coping with funding that has diminished “to a trickle.”

    Articles focusing on labor describe a 20% unemployment rate that is close to 50% for people under 25.  Mandating a 22% decline in the minimum wage, a new bailout package would initiate a ripple of wage decreases. Social security contributions would be less and unemployment benefits would have to sink below the new minimum wage to preserve the incentive to work.  At state-owned firms, long-term employment would no longer be guaranteed.

    Meanwhile, consumers, businesses and banks have been affected by the effort to increase tax revenue and diminish tax evasion.  Yes, property tax revenue did triple when the obligation was included on electricity bills. However, the attempt to collect unpaid taxes has had a 1% success rate. To generate more revenue, other bailout proposals suggest eliminating the special tax status of people living in the eastern Aegean Islands and those who live on islands with fewer than 3100 residents. Also, a single value added tax (VAT) rate of approximately 20% might be imposed that would result in higher prices for such items as food, drugs, electricity and taxi rides. As for the impact on the banking system, more taxes have meant lower bank deposits as the money travels to state coffers.

    I did discover that the Greek government is actually expanding hiring in one area by doubling the number of tax auditors to a total of 2,000.

    The Economic Lesson

    Governments borrow money by selling bonds. Called sovereign debt, government bonds can be purchased by national and local governments, by businesses (including banks) and by individuals.

    An Economic Question: If Greece cannot repay its bonds (loans) that are due on March 20, how might banks be affected?

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