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    State Deficits and Jaws Charts

    Jun 24 • Government • 245 Views

    As a prospective buyer, Daily Show reporter Jason Jones went to check out the Arizona State Capitol Building when he heard it was for sale for $735 million. Once sold, the capitol would then be leased back to the state for $60 million a year. Why sell it? Because Arizona has a $3.4 billion budget gap.The problem, though, is that the solution is short term. It is a temporary fix that leaves all fundamental spending and revenue issues untouched. 

    Other states facing similar crises have devised equally short term solutions. Several are trying to sell prisons. Hawaii has shortened its school week. States have postponed paying workers until the fiscal year ends to avoid recording current spending.

    New York’s Lieutenant Governor Ravitch, appointed by Governor Paterson to deal with his state’s budget crisis, explained that while cities can declare bankruptcy, states cannot. Consequently, states lack a “triggering event” that would force businesses, labor, and political groups to compromise.

    The result is a graph that Ravitch calls a “jaws chart”. On a “jaws chart,” a line representing state revenue is rising very gradually while the line showing state spending is much steeper. The two together look like the shark in Jaws with his mouth open. 

    The Economic Lesson

    There is a difference between a debt and a deficit. The debt refers to the total amount owed by the municipality or the federal government. The deficit is the amount by which spending exceeds revenues during one fiscal year.

     

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    World Cup Soccer and Stock Markets

    Jun 23 • Financial Markets • 220 Views

    Referring to a basic investing strategy, Vanguard founder, Jack Bogle said, “Buy and hold forever”. If you disagree, though, you might want to hear about the impact of World Cup soccer on stock markets.

    In a recent academic study, researchers found that team losses cause stock market declines. With more important games precipitating steeper plunges, a team loss during a World Cup elimination stage resulted in its home stock market dropping close to .5%. The reason, the study’s authors say, is investor mood. By contrast, winning has no impact.

    Academics also have identified a correlation between rising stock markets and Ramadan, St. Patrick’s Day, and Rosh Hashanah (but not Yom Kippur). A fourth study found that morning sunshine brings a higher stock market close.

    Might I suggest a new investing strategy?

    The Economic Lesson

    While the complexities of investing lead me to question these studies, they do take me to behavioral economics. In 2002, Daniel Kahneman won the Nobel Prize in economics for his work in behavioral economics. Concluding that we were not always as rational as some economists believed, he examined a cognitive side to our behavior that created unexpected economic results.

     

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    Paying Fannie Mae’s Bills

    Jun 22 • Financial Markets, Government, Households • 181 Views

    Each of us is helping to pay a $10 million monthly grass mowing bill. Why? Because of homes that are owned by Fannie Mae and Freddie Mac. As GSE’s (government sponsored enterprises), Fannie and Freddie had purchased mortgages from financial institutions, sold the mortgages, and said they would guarantee them. When Fannie and Freddie ran out of money, tax payers became responsible for their obligations.

    This is the way it works: John decides to buy a house. John gets a mortgage from a local mortgage broker. The broker sells John’s mortgage to Fannie Mae. Combining John’s mortgage with JoAnne’s and Jesse’s mortgages, Fannie Mae sells them as a package that pays interest to investors. When an investor asks Fannie about the mortgages, Fannie says, “Don’t worry. I will guarantee each one.” So, when John loses his job, defaults on his loan, and moves out of his house, Fannie rescues the investor by guaranteeing the payments that John had been making.

    Meanwhile, Fannie got the house. As of the end of March, actually, Fannie and Freddie got 163,828 houses. Keeping insides clean and outsides neat cost them $1 billion last year. That means that it cost us $1 billion.

    The Economic Lesson

    Mowing a lawn brings to mind the “multiplier”. Assume that the contractor hired by Fannie had to purchase lawn mowers, and the lawn mower manufacturer hired extra workers, and those workers spent their paychecks on washing machines. Then the washing machine workers spent their paychecks on computers and the computer workers bought cars. Called the multiplier, this whole spending sequence happened because of the lawn mower maker. If a lawn mower cost $300 and $600 is added to the GDP because of the subsequent goods and service purchases the lawn mowers led to, then the multiplier is 2.

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  • Consumer spending

    Jun 21 • Households, Innovation, Macroeconomic Measurement • 207 Views

    In Pursuing Happiness: American Consumers in the Twentieth Century, economist Stanley Lebergott asked us to imagine that automobiles, penicillin, electric washing machines, refrigerators, disposable diapers, electricity, television, and “every economically significant good added since 1900″ all disappear.  Next, he tells us that the remaining items would include “salt pork, lard, and houses without running water.” You get the picture. Our purchases have changed a lot during the past century.

    Next, I checked a Bureau of Labor Statistics report (2008 data) too see how we spend our money today. In descending order, the average household uses close to 34% of its total spending on housing; 17%: transportation; 13%: food; 11%: personal insurance and pensions; 5.9%: healthcare; 5.6%: entertainment; and 3.6%: apparel and services.

    As you might expect, the amounts are quite different when we look specifically at income levels. For example, a family spending $34,687 annually will use $4,818 on food. At the other end of the income scale, a family spending $124,678 will allocate $13,011 to food.

    The Economic Lesson

    Just an interesting spending fact today. On July 4, 1776, Thomas Jefferson noted that he spent 27 shillings on 7 pair of women’s gloves.

     

     

     

     

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    Conspicuous Consumption

    Jun 20 • Economic Thinkers, Households • 246 Views

    I once read that Thorstein Veblen let his dirty dishes accumulate until his cupboard was bare, then sprayed them with a hose and started all over again. Maybe a good idea, but unusual. This early 20th century scholar (1857-1929) was somewhat eccentric.

    We remember Veblen for his The Theory of the Leisure Class (1899) and his theory of conspicuous consumption. According to Veblen, affluent consumers try to convey their power and wealth through wasteful and unproductive behavior. The affluent can do less because their servants and employees do more. And then, to display their prestige and power, everyone else also wants to do less. As expressed by Veblen, “The members of each stratum accept as their ideal of decency the scheme of life in vogue in the next higher stratum, and bend their energies to live up to that ideal.”

    In a 2009 essay, columnist Daniel Gross asks whether Veblen is still right. Does wasteful spending convey prestige? Yes, he concludes. But, when Veblen says the affluent become unproductive, times may have changed. “Type-A” behavior has become prestigious. Maybe now, “there’s a sort of reverse prestige associated with leisure.”

    More tomorrow with specifics on what the rich buy.

    The Economic Lesson

    Using Lorenz curves developed by statistician Max Lorenz, we can look at income distribution in the U.S. Lorenz divided the total number of families into 5 equal groups as the X-axis of his graph. For the Y-axis, he looked at the total amount of income that all families received. Then, he used coordinates to show how society’s total income was distributed. For example, a dot at (20.20) would mean that 20% of all families received 20% of all income. If the line moved from (20.20) to (40.40) to (60.60) and finally to (100,100), income distribution would be equal. Displaying unequal income distribution, in the U.S., the most affluent quintile receives close to 50% of all income. 

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