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    Is the Stimulus Package Working?

    Jun 14 • Economic Debates, Economic Thinkers, Government • 219 Views

    We will never know for sure whether the $787 billion stimulus package really made a difference. According to NY Times columnist David Brooks, President Obama’s economists predicted 3 million jobs would be created or saved while others suggest the impact will be much smaller.

    How are we doing so far? Is the U.S. economy faring much better than it would have without massive spending? 

    Looking at research by Harvard professor Edward Glaeser, we see the data from individual states provides no definitive answers. We cannot say for sure that unemployment numbers and the change in government spending are related. Also, even with the Recovery Act, we still have a 9.7% unemployment rate and I wonder how you can prove that government “saved” a private sector job. As Dr. Glaeser points out, because “there are too many moving parts,” we cannot identify definitive empirical evidence supporting or refuting a Keynesian approach. 

    Even for the Great Depression, economists disagree. Some say FDR’s spending was crucial. Others believe that World War II was the answer. Meanwhile a third group asks us to focus on monetary policy problems. 

    The Economic Lesson

    British economist John Maynard Keynes (1883-1946) said that government economic intervention could be beneficial during a recession. “Prime the pump” through government deficit spending. Then, when the private sector regains its strength, government can reduce its spending.

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    More Than a Mango

    Jun 13 • Developing Economies, International Trade and Finance, Thinking Economically • 207 Views

    This story is about a canal and a plastic milk crate. It takes place on a mango farm in Haiti. The farmer has 2 mango trees. The trees produce her entire crop and her income of approximately $2 a day. As described by NPR’s This American Life, to double production, this farmer just needs water from a nearby river that a short canal would deliver. For Americans to buy more of her crop, she just needs a crate to minimize bruising. To get the crate, she needs aid from an NGO. For the NGO to provide the crate, she has to participate in a farmers’ cooperative. For the cooperative to get the crate, they need property on which to store crates. To get the property, the farmers have to be willing to give it to the coop.

    I think you see where this is going. It is complicated. And, to make matters worse, Haiti is listed by the World Bank as one of the toughest places in Latin America to do business. Ranking close to last (#32) in such categories as “ease of starting a business” and “construction permits,” Haiti’s bureaucracy presents formidable business obstacles.

    The Economic Lesson

    Countless economic issues relate to Haiti’s canal and crates story. Technology (a canal), tools (crates), and transport (roads) are only several challenges facing a mango farmer who wants to double her production. Add huge transaction costs (“red tape”) to the tale and you wind up, so far, with a sad ending. You also have a production possibilities curve that will not increase.

    To hear a surprising solution, you might want to listen to the econtalk podcast on charter cities from Stanford’s Paul Romer.

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    Debating the Inheritance Tax

    Jun 12 • Economic History, Government • 237 Views

    Death usually means some money for Uncle Sam and the rest for the real relatives (and unrelated heirs). As a result, when John D. Rockefeller died in 1937, his heirs received 30% of his fortune and the U.S. government got the rest. During March, 2010, however, Dan Duncan, the 74th richest man in the world died and his family inherited everything because the estate tax had lapsed for just one year.

    Rewind to 1889.

    Supporting an inheritance tax, Andrew Carnegie said, “I would as soon leave to my son a curse as the almighty dollar…” Bequeath great wealth to charity? “No,” because a disappointed family will probably contest the decision. Instead, according to Carnegie, a man of wealth should, …”set an example of modest…living…, provide moderately [for] those dependent upon him…” and then use the money for the good of the people. How? Invest in universities, free libraries, hospitals, parks, meeting halls, and church buildings. Saying that it created liars, Carnegie opposed an income tax.

    Do you agree with Andrew Carnegie?

    The Economic Lesson

    In descending order, the individual income tax, the payroll tax (social security/Medicare), and the corporate income generate most of the U.S. government’s revenue. Typically, even though rates fluctuate with new legislation, still, revenue tends not to exceed 19% of GDP.


     

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    Grading North Korea

    Jun 11 • Developing Economies, Thinking Economically • 209 Views

    Just like teachers, the writers of the Index of Economic Freedom give grades. Instead of students, though, countries receive their grades after being “tested” on such economic issues as starting a business, tax policy, and private property. The highest grades are earned by the countries that give citizens the most freedom to produce and distribute goods and services without government interference.

    For the 2010 Index of Economic Freedom, Hong Kong, with a grade of 89.7 was first. Ranked last at #179, North Korea’s score was “1”. The United States was #8 with an average of 78.

    A recent NY Times article illustrated why North Korea fared so poorly. Demonstrating a citizen’s lack of monetary freedom, the North Korean government devalued its currency last November. Suddenly, a family’s life savings of $1560 became $30 (4,050 North Korean Won). In the business sector, with all factories run by the state, production is stagnant and workers, sometimes, are not paid. In agriculture, (as with the former Soviet Union) individual plots of land are far more productive than large state-owned collectives. The results? The North Korean economic system has produced massive poverty and inadequate food.  

    The Economic Lesson

    Countries produce and distribute goods and services through three basic economic systems: tradition, command, the market system. North Korea’s centrally commanded economic system is government controlled. While the United States primarily has a market system in which people are free to function economically, still there is some command whenever government policies affect market activity.  

     

     

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    Starbucks or McDonald’s?

    Jun 10 • Behavioral Economics, Businesses • 1690 Views

    A recent Pew Research Center survey asked 2260 adults whether they would, “prefer to live in a place with more McDonald’s or more Starbucks.” 43% said McDonald’s; 35% said Starbucks; 22% had no preference. According to the study, a key variable is your political inclination. Liberals tend to favor Starbucks over McDonald’s.

    More specifically, if you are female, politically liberal, 18-29 years old, earn more than $75,000 a year, a college graduate, or religiously unaffiliated, you probably prefer Starbucks. On the other hand, a McDonald’s loyalist tends to be male, to earn less than $30,000, to have a high school degree but not college, and/or to be Protestant or Catholic.

    The Pew survey reminded me of research about economics majors that was in the news. Discussing the connection between education and civic behavior, a New York Fed Staff Report concluded that students who majored in economics tended to be Republicans. Taking a huge analytic leap, does that means that economists prefer McDonald’s?

    The Economic Lesson

    McDonald’s and Starbucks compete in monopolistically competitive markets. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. The competitive behavior of beauty salons, supermarkets, and clothing manufacturers is also shaped by a monopolistically competitive market structure.

    From most competitive to least competitive, the four basic competitive market structures are: perfect competition, monopolistic competition, oligopoly, monopoly.

     

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