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    Stagnation or Education?

    Nov 19 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Innovation, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 579 Views

    Is the problem stagnation or education?

    For George Mason economist Tyler Cowen, it was all about his grandmother. Debating MIT economist Erik Brynjolfsson, Cowen reminded us that a long list of innovations including cars, antibiotics and refrigerators revolutionized his grandmother’s life. More recently? As he says in his book, The Great Stagnation, relatively little has changed. His conclusion? Stagnation is our problem.

    Disagreeing, Brynjolfsson specifically cites his brother’s heart transplant and the digital technologies that are transforming the workplace. In his book, Race Against The Machine, he takes us to the 3 gaps that are leaving many people behind: 1) higher skilled/lower-skilled workers; 2) superstars/everyone else; 3) capital/labor. His conclusion? Education is our problem.

    The Cowen/Brynjolfsson half hour debate is great to watch and for $3.99 each, you can download their books here and here.

    The Economic Lesson

    As a factor of production, capital can be divided into 2 categories.

    • Physical capital: The machines, buildings, and inventory that make labor more productive.
    • Human capital: The education that make labor more productive

    While both economists’ ideas intersect, we could conclude that Cowen is saying we need more innovative physical capital while Brynjolfsson is emphasizing how human capital needs to change.

    An Economic Question: How does the following relate to the Cowen/Brynjolfsson debate and economic growth? Defining the problem shapes the solution.

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    Health Insurance Dilemmas

    Nov 18 • Behavioral Economics, Businesses, Government, Households, Labor, Macroeconomic Measurement, Regulation, Thinking Economically • 526 Views

    Assume for a moment that you are slim, love broccoli and run 4 miles each day. Should your health insurance premium be lower than the amount paid by someone with an unhealthy lifestyle? Wal-Mart, PepsiCo and Safeway say, “Yes.”

    One Wal-Mart employee pays a $40 monthly smoking surcharge. PepsiCo charges $600 annually unless a smoker completes a smoking cessation program.

    But here are the dilemmas:

    • A regressive fee, the smoker’s surcharge represents a larger proportion of lower earners’ incomes.
    • Low earners have less access to health clubs.
    • An asthmatic might not be able to participate in a mandatory exercise program.
    • Health checks invade privacy.
    • Nicotine addiction is tough to overcome.
    • Obesity could be genetic.
    • Unaffordable surcharges might lead to less insurance coverage for certain people.

    And finally, our health is shaped by countless lifestyle decisions. Is it fair to focus on smoking and weight?

    Reuters and the NY Times discuss the health-care issues here and here.

    The Economic Lesson

    An externality is the impact of a behavior or contract that is experienced by a third uninvolved party. When the impact on third parties is undesirable, we call the result a negative externality.

    Smoking and obesity create a negative externality because higher health costs smokers raise everyone’s insurance premiums.

    A benevolent impact on an uninvolved third party is called a positive externality. A community experiences the positive externality of flu vaccinations.

    An Economic Question: Explain how charging higher health insurance premiums for people with unhealthy lifestyles could create unintended consequences.

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    Ben Franklin’s Turkey

    Nov 17 • Behavioral Economics, Economic Debates, Economic History, Economic Thinkers, Macroeconomic Measurement, Thinking Economically • 558 Views

    The bald eagle is our national bird but, according to Ben Franklin, the turkey should have been. In a letter to his daughter, he explains why.

    “True original natives,” turkeys are American birds. “…Though a little vain and silly, [the turkey is] a bird of courage…” that does the right thing…” By contrast, the bald eagle has “bad moral character…[and] looks “flashy” but steals instead of working hard for his food.”

    In a wonderful New Yorker article, discussing Franklin’s letter, Adam Gopnik explains how the turkey relates to hard work, honesty, respect for education and all that we need for a healthy economy. He even connects the bird to globalization through the turkey curry and tacos that we make with our Thanksgiving leftovers.

    I recommend looking at the original Franklin letter. You can get a good picture of his insight.

    The Economic Lesson

    The turkey also takes us to food inflation. At $49.20, a Thanksgiving dinner for 10 will cost us 13% more than last year. The biggest increase? The price of a turkey went up 22%.

    By contrast, the CPI, from December to December rose 3.5%. For food, it was up 4.7%.

    An Economic Question: Thinking of rising commodity prices, draw a supply/demand graph showing why turkeys are more expensive.

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    The Supreme Court and the Health-Care Law

    Nov 16 • Businesses, Economic Debates, Economic History, Government, Households, Labor, Regulation, Thinking Economically • 489 Views

    How to understand what the Supreme Court will look at when they decide whether parts of the health-care act are constitutional?

    In an excellent interactive graphic, the Washington Post identifies the issues that Supreme Court will consider:

    • Individual mandate: Requiring most Americans to buy insurance or pay a penalty.
    • Medicaid expansion: Mandating extra state Medicaid spending for expanded coverage.

    Formally called Florida v. Dept. of Health and Human Services, No. 11-400, the case is also known as the multi-state suit because 26 states are involved with challenging the Patient Protection and Affordable Care Act.  March oral arguments have a 5 1/2 hour Supreme Court slot rather than the traditional single hour.

    These health-care law issues have also been challenged in the courts but will not be considered this year by the Supreme Court:

    • Employer mandate: Requiring firms employing 50 or more to provide health insurance or pay a penalty.
    • Health benefits exchanges: Requiring states to establish their own insurance markets or to let the federal government set one up for them in order to supplement existing markets.

    The Economic Lesson

    Hoping to promote a single national economy, the framers of the Constitution said that the Congress has the power to, “regulate Commerce with foreign nations and among the several states, and with the Indian Tribes.” However, since 1824, the Supreme Court has had to define “commerce.”

    Now again, for health care, the commerce clause has played a leading role in determining Congressional power. So far, lower courts’ opinions have varied about whether the “commerce clause” facilitates or prohibits Congressional health-care legislation.

    Here, in an econlife post, you can see historic definitions of the “commerce clause.”

    An Economic Question: How can opponents and supporters of the Patient Protection and Affordable Care Act each use the “commerce clause” to support their position?

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    Sounds Like Bell Labs

    Nov 15 • Businesses, Demand, Supply, and Markets, Government, Innovation, Labor, Thinking Economically • 581 Views

    Google has a “secret” lab. Called Google X by the NY Times, it sounds like the old Bell Labs.

    Before 1984, when AT&T was a monopoly, their research subsidiary Bell Labs employed a battalion of scientists. For some, the assignment was just to “think.” As a result, between 1925 and 1983, Bell Labs created the first fax machine, the original laser, the solar battery cell, light emitting diodes, the UNIX operating system on which the internet is based, digital cell phone technology, and maybe they “heard” the Big Bang.” The transistor, which led to computer microchips, touchtone phones, hi-def TVs and so many other technologies, came from Bell Labs.

    Google X might embody some of the same creativity. The NY Times says that they are developing the technology for a driverless car, artificial intelligence, and contemplating a space elevator. Instead of applied research with specific goals to expand existing technology, it appears that Google X is moving beyond.

    The Economic Lesson

    Research and Development can be divided into 3 categories:

    • Basic research involves no articulated goals. You could throw plates in the air and watch their trajectory.
    • Applied research is more goal oriented. Parameters are constrained by a pre-determined objective.
    • Development, the final stage, involves the practical implementation of the research concept.

    An Economic Question: Some say AT&T could support Bell Labs because it was a monopoly. Today, who do you believe can afford to fund seemingly “unproductive” research?

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