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    State Finance

    Dec 6 • Government, Households, Thinking Economically • 332 Views

    Which state postponed a pension fund payment of $3.1 billion because of big budget problems and had a 2.4% decrease in its real GDP? (Still though, this state has the second highest median income.)

    The answer? New Jersey.

    New Jersey, though, is not alone. Jon Stewart told us that Arizona had to sell its statehouse (which included the governor’s office). A potential California default was the prototype for an Economist simulation. Illinois borrowed money to fund its pension obligations and then had to borrow money to repay the original loan.

    According to a Pew study on state financial problems, “Most Americans (58%) say the states should fix their own budget problems by raising taxes or cutting services.” But, “…large majorities oppose…” cutting major spending categories which include education, pubic safety (police and fire), and health care.

    Perhaps the reason for the contradiction is opportunity cost. The individual opportunity cost of cuts is far different from the statewide cost.

    The Economic Lesson

    Looking at a BEA map of state economic growth during 2009 provides a snapshot of state health. Oklahoma is at the top (+6.6%) and Nevada, the bottom (-6.4%). For the GDP of individual states, agriculture, forestry, fishing, hunting, and mining fueled growth. On the minus side, less durable goods production (goods lasting longer than 3 years) and construction diminished economic activity.

    Composed of gross investment (primarily business purchases and residential housing), consumer spending, government spending, and exports minus imports, the GDP is a yardstick of the value of goods and services production.




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    Walking Matters

    Dec 5 • Behavioral Economics, Developing Economies, Environment, Innovation, Macroeconomic Measurement • 319 Views

    A podcast on cities from WNYC’s Radiolab cited walking speed as a part of a city’s personality.

    To walk 60 feet, people averaged 10.55 seconds in Singapore,  12.37 seconds in Paris, 21 seconds in Buchanan, Liberia, and 31.60 seconds in Blantyre, Malawi. Hearing a city’s average walking speed, which was remarkably consistent when measured during different years, researchers could estimate economic data such as average income.

    The Economic Lesson

    Economists and their physics and psychology research partners are starting to perceive cities as organisms. They have said, for example, that cities, functioning as an economy of scale, “get more economical with size.” They also have observed that individuals tend to be more productive in larger cites, to earn higher wages, and to innovate more. In fact, when a city becomes so large that it might run out of resources, its response is to innovate. However, cities experience diminishing returns– less extra benefit– from each new innovation.

    Especially because more than half of the world’s population lives in cities, economists care about how cities function.


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    Who Do We Owe?

    Dec 4 • Financial Markets, Government, Money and Monetary Policy • 310 Views

    Who do you think is the biggest holder of U.S. government debt? China? No. It is the U.S. government. Why?

    Please think about extra money the government might collect for Social Security. What does it do with those funds? Retaining cash would mean no return at all. Buying stock could be risky. What is the safest investment? Government bonds. Another major holder is the Federal Reserve. The Fed has to buy and sell bonds when it implements its monetary policy.

    According to CNBC, in descending order, the largest holders of the U.S. debt, after 1) the US government, are 2) a diverse group investors such as businesses and savings bond owners, 3) China, 4) Japan, 5) Mutual funds. To learn more about the deficit and who holds it, you might want to look at Where Does The Money Go?

    Knowing who owns the debt is one consideration when you decide how worried you are about the size of the deficit.

    The Economic Lesson

    A second consideration when deciding how worried you should be about the deficit is how the size of the deficit compares to the value of the goods and services produced by the U.S. According to Teaching Company Lecture 10 from “Modern Economic Issues,” since 1929, the deficit has averaged 2.1% of GDP. You can see on this table, though, that during 2010, the deficit will be closer to 10% of G.D.P.

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    Uncommon Markets

    Dec 3 • Businesses, Demand, Supply, and Markets, Developing Economies • 270 Views

    Bets on the Royal Wedding: Bookmakers are placing wagers on the color of the Queen’s hat, whether Kate will say “obey” in her vows, the length of the bride’s train, and total BBC viewers. People are even starting to bet on the gender of the first child. You can see the whole list here.

    Human Hair: Described by the NY Times, blond women in central Russia sell their hair to itinerant merchants. Valued more highly than darker hair, a woman’s 16 inch blond braid can sell for $50. Through the supply chain, Russian hair reaches companies like Italian based Great Lengths that sell hair to the U.S. for hair extensions.

    Human Bed Warmers: Dressed in an “all-in-one fleece suit,” (with hair covered) a Holiday Inn employee will warm your bed before your arrive at your hotel room. A Holiday Inn employee (really) said this: “The new Holiday Inn bed warmers service is a bit like having a giant hot water bottle in your bed.” The bed warmer does not remain in the room.  (This article was dated January, 2010. I could not discover whether the concept was successful.)

    Manure Markets: It is all about opportunity cost according to this Atlantic article. With chemical fertilizer prices rising, natural fertilizer is becoming more attractive.

    The Economic Lesson

    A market is a process through which demand and supply establish price and quantity for a good or a service.


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    Innovation and Regulation

    Dec 2 • Demand, Supply, and Markets, Government, Innovation • 279 Views

    Is more innovation the opportunity cost of more regulation? If so, which do you prefer? To see one person’s opinion, I recommend a recent Washington Post op-ed, “Strangling innovation and job creation with red tape.”

    The Washington Post article took me to the “Doing Business” website of the World Bank. Depending on the category, the U.S. ranking for the ease of doing business varies. Out of 183 nations, for paying taxes, the U.S is #62! Our overall rank, though, is #5, we are #9 for starting a business, and #14 for closing one. You might enjoy looking at the site. It is up-to-date, easy to read and will help you decide where innovation could thrive. Some of the facts are surprising.

    The Economic Lesson

    I am reminded of 1986 tax legislation. “Simplify” is the one word associated with it. The Tax Reform Act of 1986 had 2 principle marginal tax rates: 15 percent and 28 percent.

    By contrast, in 1985, depending on your taxable income, you would have paid between 11 and 50 percent of it to the federal government through some or all of 15 marginal tax rates. That wasn’t the whole story, though. There were lots of permissible deductions.




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