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    Oil Dilemmas

    Mar 4 • Demand, Supply, and Markets, Environment, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 371 Views

    The good news? We are driving more again–more miles than any year since 2007.

    The bad news? We are driving more again–more miles than any year since 2007..

    Here are the facts from a WSJ article.

    With the recession and higher gas prices, mileage dropped by 3.6%.

    But then, the recovery began, unemployment slightly decreased, and confidence built. The result? We drove more. More driving means more demand for gasoline that will contribute to escalating gas prices.

    The solution? 3 possibilities.

    1. Increase the federal gasoline tax. It has been 18.4 cents since 1993. A higher tax means less driving and less dependence on Middle East oil.

    2. Release extra oil from U.S. emergency fuel reserves. Extra oil means cheaper gas, more driving and sustained recovery.

    3. Do nothing.

    The Economic Lesson

    This is classic demand and supply. During 2007-2008, skyrocketing gas prices decreased quantity demanded, the recession (that began during December, 2007) shifted the demand curve to the left and equilibrium price dropped. Now, with demand reversing and Middle East concerns affecting (perceptions of) supply, the equilibrium gas price is rising.

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    What is Best For Growth?

    Mar 3 • Businesses, Economic Debates, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 278 Views

    What if the Congress decides to slash spending by $60 billion right now? Prominent economists are again disagreeing.

    According to Stanford economist John Taylor, we would have a resurgence of business confidence, renewed investment spending and new jobs. Assured that taxes and regulation will not increase, businesses will expand.

    On the other hand, economist Mark Zandi (Moody’s Analytics) says that we will lose 700,000 jobs because of spending cuts. He is against “too much too soon.” Referring to “fiscal drag,” economist Alec Phillips (Goldman Sachs) cites the rippling impact of less federal spending that will retard GDP growth.

    Who is right?

    The Economic Lesson

    Looking back and looking forward, the economic debate about fiscal policy is a traditional one. Looking back at stimulus spending since 2008, opponents point out that the stimulus will not only ignite inflation but also was not really necessary. Meanwhile, advocates say we are much better off because of it. Looking forward they differ on how businesses and unemployment will respond.

    Also, we should not forget about monetary policy. A similar debate surrounds Dr. Bernanke’s QE2.

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    Smog-Eaters

    Mar 2 • Economic Debates, Environment, Government, Regulation, Thinking Economically • 531 Views

    What if someone had invented “smog-eating” concrete roof tiles? And, what if these tiles consumed enough smog to offset one car’s nitrous oxide emissions during one year (10,800 miles of driving)?

    Telling us that a firm in California has them for sale, Harvard professor Greg Mankiw asks, “What should government policy be regarding these roof tiles?” Similarly, do you believe that government should mandate posting calorie counts in restaurants? Or subsidizing ethanol? Hybrid cars? Broccoli consumption? (so that medical care is cheaper) Mowing the lawn? (because, with house sales plunging, a nicer neighborhood could attract buyers)

    The Economic Lesson

    In his 1759 book, The Theory of Moral Sentiments, Adam Smith (1723-1790) tried to identify the origins of a just and virtuous society. Concluding that no one is wise enough to know what is best for most, he recommended less government for all.

    And yet, through tax and regulatory policy, should government encourage positive externalities–transactions between two parties that affect a third individual or group in some beneficial way?

    Your opinion?

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    Part 2: The Basics of a Shutdown

    Mar 1 • Government, Regulation • 329 Views

    On Friday, we might have a funding gap. With no up-to-date appropriations, agencies providing nonessential services from the federal government will have to stop. But what is “nonessential?”

    A recent congressional research paper says we can look back to 1995 for an answer. In the health category, the National Institutes of Health did not accept new patients for clinical research. Many application reviews, ranging from firearm requests to passports and visas were postponed. National parks and monuments were closed. Federal contractors might be unpaid.

    On the other hand, national security, benefits that are not annually funded, emergency medical care, disaster response, border protection…you see the basic idea…these continue.

    Finally, who is explicitly “excepted?” The list includes the President and members of Congress.

    And, we are prepared. Each year, federal agencies are asked to submit shutdown plans.

    The Economic Lesson

    The spending, taxing, and borrowing overseen by the President and the Congress is called fiscal policy.

    While a funding gap might be the immediate fiscal controversy, within weeks, the Congress will also have to raise the debt ceiling.

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    Part 1: The Basics of a Shutdown

    Feb 28 • Economic Debates, Government, Regulation • 356 Views

    Our story begins on October 1, 2010. With a fiscal year that starts on October 1 and ends on September 30, the first day in October is crucial. Because the President and the Congress had not yet agreed on the 2011 budget, in some way, they had to approve appropriations for agencies that get yearly funding.

    Why can’t agencies just keep spending until they get their appropriations? Article I, Section 9 of the Constitution is one reason. “No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” Furthermore, Congress passed the Antideficiency Act that confirms the impact of a funding gap. Nonessential government activities have to stop.

    There is a temporary solution called a Continuing Resolution (CR) which perpetuates funding until a new CR, a specific funding act, or the budget is passed. The problem is that the existing CR expires March 4th. Currently, we have neither a budget agreement nor a new CR. This 10 page Congressional Research paper provides a clear explanation.

    What is nonessential? How are we affected by a shutdown?

    More tomorrow.

    The Economic Lesson

    The budget process formally starts when the President submits a budget to Congress. The process for the 2011 budget began during February 2010 when President Obama sent his 2011 budget to the Congress.  You can look at this Washington Post interactive for an overview of the budget process.

    Between 1977 and 2010, there were 17 funding gaps. However, since 1993, we had only 2. The most memorable one ended in 1996 during the Clinton administration. It lasted 21 days, from December 16, 1995 to January 6, 1996.

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