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    Banana Worries

    Jan 9 • Demand, Supply, and Markets, Developing Economies, Economic History, International Trade and Finance, Thinking Economically • 336 Views

    The banana could be in trouble. According to a New Yorker article and video, a devastating banana fungus has struck banana plantations in Asia, Australia and the Pacific. We should note, though, that we are referring only to the Cavendish banana.

    Did you know that while there are multiple banana varieties, virtually all bananas that are imported here are the Cavendish? And, we only have the Cavendish because its predecessor, the Gros Michel, was eradicated by a fungus. At the time, growers scrambled to find a substitute and selected the Cavendish. Less tasty but unscathed by the fungus, it became our banana of choice. Indeed, many of us eat more bananas than apples and oranges combined.

    So, what will happen? This takes us to banana R&D (Research & Development). On plantations and in labs, growers and scientists are trying to develop resistant strains of bananas so that the Cavendish can survive. So far, Latin American plantations, including Ecuador, a major Chiquita supplier, have not been affected.

    The Economic Lesson

    Banana R&D represents much more than advancing banana technology. It takes us to who does research and its importance.  For example, government funds research at universities, in the Department of Defense, and the National Institutes of Health. Through tax policy and patents, it encourages research in the private sector. Meanwhile, pursuing their self-interest, businesses ranging from pharmaceutical firms to banana growers engage in basic and applied research.

    Basic research has no direct purpose except to discover something new. Applied research is directed toward a specific objective. The development part of R&D refers to methods that move from discovery to production.

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    The Value of a Price Tag

    Jan 8 • Behavioral Economics, Demand, Supply, and Markets, Thinking Economically • 284 Views

    Asking, “Do More Expensive Wines Taste Better?” a group of researchers decided to find out. They described the results of their study in a working paper for the American Association of Wine Economists (AAWE).

    The researchers introduced their paper by citing studies that concluded people expect a “positive correlation between price and quality.” They then explained that their experiment involved “blind tasting” of wines whose prices ranged from $1.65 to $150. The results?  They differed between the non-experts and experts. For the non-experts, drinking unidentified wines, the less expensive wine was more frequently chosen as better. For experts, the opposite was true.

    (While other studies from the AAWE include a paper on wine investing and carbon and the global wine trade, one title particularly captivated me: “Can People Distinguish Pate from Dog Food?“)

    I recommend the Freakonomics podcast that described the wine tasting experiment.

    The Economic Lesson

    As economists, how might we describe the connection between a price tag and enjoyment? We can refer to utility. If a higher price increases enjoyment then we can conclude that it also increases utility.

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    Raising the Ceiling

    Jan 7 • Economic History, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy • 309 Views

    Calvin Coolidge once said, “Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.”

    The national debt did decrease when Coolidge was President. But then it rose during the 1930s and soared during WW II. John Steele Gordon’s Hamilton’s Blessing The Extraordinary Life and Times of the National Debt provides a wonderful history of the federal debt. While we owed $80,359,000 in 1792, in 1834 and 1835, the debt plunged to $38,000. A lot and a little, though are relative. Just like a $1 million loan is huge to someone earning $100,000 a year and tiny to a billionaire, so too does judging the size of our national debt relate to our nation’s wealth.  

    Where are we going with all of this? To the debt ceiling. The need to authorize the maximum amount we can borrow was established by Congress in 1917 through the Second Liberty Bond Act. Since 1962, the U.S. has raised its debt ceiling 75 times.

    And now, probably by March 31, we have to do it again.

    The Economic Lesson

    Specifically defined, federal fiscal policy refers to taxing, spending, and borrowing. It involves the federal deficit which is the shortfall between annual spending and revenue. The federal debt is the total amount that the U.S. government owes.

    The federal debt is held by the government and the public. For example, the Social Security Trust Fund has excess dollars which are not held in a lock box. Instead, the government loans the money to “itself.” As you know, you and I and other governments and businesses also can purchase the debt.

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    Doomster or Boomster?

    Jan 6 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment, Innovation, International Trade and Finance, Regulation, Thinking Economically • 1643 Views

    Agree or disagree? “Both the jayhawk and the man eat chickens, but the more jayhawks, the fewer chickens, while the more men, the more chickens.”

    The quote is from 19th century economist Henry George but it relates to a report from the FAO (Food and Agriculture Organization of the United Nations). Predicting that the world will have (approximately) 2.3 billion more people in 2050, the FAO  said we will need 70% more food production.

    Can we do it? The debate continues between the doomsters and the boomsters. Saying production cannot keep up with population, doomsters like biologist Paul Ehrlich look back to Malthus. Meanwhile boomsters, like Julian Simon say that human ingenuity and the incentives of higher prices lead to more production.

    The Economic Lesson

    Where are food prices? Summarized by Bloomberg, currently sugar and oilseeds (which include soybeans, sesame seed, sunflower products, canola) have been the primary reason for a 25% climb since December, 2009. The last big jump was during 2008 when a 43% spike in the FAO Index reflected higher cereals and rice prices and led to food riots in poorer nations. A handy site for seeing the current state of food production in developing nations, country by country, is here

    As economists we have so many variables! When the price of a commodity skyrockets, the result is less supply because the cost of production increases. On the other hand, as we saw with oil, when price goes up, it creates incentives on the supply side to, 1) produce more 2) innovate;  create an alternative.

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    Auto Innovation

    Jan 5 • Economic Debates, Economic Thinkers, Government, Innovation, Macroeconomic Measurement • 343 Views

    Saying, “I believe the people who invented the auto cannot abandon it,” President Obama supported the bailout of General Motors.

    Economist Joseph Schumpeter would have been horrified. The man who explained “creative destruction,” Schumpeter believed that economic growth depends on the pain of old industries dying and new ones taking their place.

    In response, Obama might have pointed out that he preceded his supportive statement by referring to G.M.’s “bad decision-making” and the need for it to “re-tool” and “re-imagine.”

    I suspect Schumpeter would have said, “Impossible!” 

    But where does this leave us now? The government has bailed out G.M. and has recouped some of the money through G.M. once again becoming a public corporation. In China and India, G.M. is soaring. Domestically, led by full size pick-up trucks, sales rose.

    But still, as economists, we should decide whether we support creative destruction.

    The Economic Lesson

    Joseph Schumpeter was a fascinating individual. Born in 1883, in what is now the Czech Republic, he was an academic superstar, an Austrian finance minister, a professor and a writer who wound up at Harvard. Asked about his aspirations, he answered, becoming the greatest economist, horseman, and lover in the world. Reporting on his progress, he said, “Things are not going well with the horses.”

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