• The US is again hitting its debt ceiling.

    Greek Austerity Facts

    Feb 10 • Financial Markets, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically, Uncategorized • 1080 Views

    With a March 20 deadline approaching, new European bailout negotiations continue to emphasize austerity. Curious about what austerity specifically meant, I looked at a Greek newspaper.

    In the sports section, they discussed the plight of Greece and the Olympics.  Athens Olympic Park, home of the 2004 games, is in a state of decay. Greek gymnasts, weightlifters and the water polo and sailing teams have not been able to afford the trip to qualifying competitions. Half the size of its 2008 Beijing counterpart, the Greek Olympic team is coping with funding that has diminished “to a trickle.”

    Articles focusing on labor describe a 20% unemployment rate that is close to 50% for people under 25.  Mandating a 22% decline in the minimum wage, a new bailout package would initiate a ripple of wage decreases. Social security contributions would be less and unemployment benefits would have to sink below the new minimum wage to preserve the incentive to work.  At state-owned firms, long-term employment would no longer be guaranteed.

    Meanwhile, consumers, businesses and banks have been affected by the effort to increase tax revenue and diminish tax evasion.  Yes, property tax revenue did triple when the obligation was included on electricity bills. However, the attempt to collect unpaid taxes has had a 1% success rate. To generate more revenue, other bailout proposals suggest eliminating the special tax status of people living in the eastern Aegean Islands and those who live on islands with fewer than 3100 residents. Also, a single value added tax (VAT) rate of approximately 20% might be imposed that would result in higher prices for such items as food, drugs, electricity and taxi rides. As for the impact on the banking system, more taxes have meant lower bank deposits as the money travels to state coffers.

    I did discover that the Greek government is actually expanding hiring in one area by doubling the number of tax auditors to a total of 2,000.

    The Economic Lesson

    Governments borrow money by selling bonds. Called sovereign debt, government bonds can be purchased by national and local governments, by businesses (including banks) and by individuals.

    An Economic Question: If Greece cannot repay its bonds (loans) that are due on March 20, how might banks be affected?

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    Naming the Weather

    Feb 9 • Businesses, Demand, Supply, and Markets, Government • 656 Views

    BMW had to apologize for bad weather.  It all began when their advertising agency decided to buy naming rights to a high-pressure area. Like hurricanes are named alphabetically in the U.S., high- and low-pressure weather areas that approach Central Europe have human names. Here, though, rather than a meteorologist, you can decide what the weather will be called. You just have to buy a letter from a German weather institute.

    It cost BMW $394 to get “C.”  Hoping to remind people of their Mini Cooper, they selected Cooper. However, instead of cool, crisp wintry weather, the “Cooper front” was disastrous. With hazardous conditions, extreme cold, and temperatures sinking way below zero, more than 100 people died. BMW even had to issue a statement explaining, “It was not intentional, and you cannot tell in advance what a weather system will do.”

    Responsible for naming weather areas since 1954, the Berlin Institute for Meteorology created its “Adopt a Vortex” program in 2002 when it needed funding for a student weather observation program. You can look here to see the letters that are still available for 2012. High-pressure systems cost more than lows because they last longer.

    Similarly, U.S. municipalities are using naming opportunities to fund their depleted coffers. In Philadelphia you can board the subway at an AT&T stop and in Brooklyn, NY, Nestle named the Juicy Juice Park.

    The Economic Lesson

    An economic lens takes us to the opportunity cost for a municipality when evaluating naming rights. The opportunity cost of a decision is the next best alternative. It is the alternative that is sacrificed.

    On an opportunity cost chart, the alternative choices for a train stop could be “The Broad Street Stop” or the “Pizza Hut Stop.” The benefit of Broad Street is locational information. The benefit of the Pizza Hut name is municipal revenue. Which are you willing to sacrifice?

    An Economic Question: As a municipal official, what naming rights might generate the most revenue?

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    The Value of Sound

    Feb 8 • Behavioral Economics, Demand, Supply, and Markets, Thinking Economically • 538 Views

    By Mira Korber, guest blogger.

    What comes to mind when you hear the name “Stradivarius?” It’s iconic, sacrosanct, “the best.” Even non-musicians know that.

    Strads have long been considered among the greatest of all violins, holy artifacts from the golden age of instrument making (1600-1700s). With hopes of shedding light on the longstanding debate that Strads are truly better, a group of researchers from Université Pierre conducted a “double-blind” violin test.

    A team of about 20 competent players compared two Strads, one Guarneri, and three contemporary instruments, and surprisingly indicated preferences far from consistent. (Interestingly, only three players correctly identified which were the instruments made hundreds of years ago.) However, the task at hand wasn’t exactly to decide which instruments were the old Italians, but to express partiality to one or another.

    Read a personal account of the testing experience here.

    The Economic Lesson

    Positive externalities occur when a third party (or bystander) experiences a benefit from a transaction between another two individuals. Therefore, the social value of said transaction is actually larger than the private value.

    Each sale of a masterpiece instrument creates a positive externality. Whether acquired through a syndicate, personal benefactor, or individually, more spectacular instruments on the stage means more audiences experience their greatness.

    An Economic Question: Could you graph the positive externality of selling Strads the same way as when government subsidizes something else for the social good?



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  • Stable

    Stable Economics

    Feb 7 • Businesses, Demand, Supply, and Markets, Labor, Thinking Economically • 735 Views

    By Mira Korber, guest blogger.

    What do the horse racing industry and the 2008 housing collapse have in common? More than you might think. According to this interview with Joe Drape, New York Times sports writer, over-breeding of thoroughbreds and over-borrowing to buy homes both lead to the same result: a market crash.

    But, it seems the horse racing industry might be (somewhat) on the mend. The statistics from the Keeneland auctions (where many racehorses are bought and sold), show tremendous increases over last year’s numbers. This year, nominations for the renowned Triple Crown have increased 9% over 2011. The same cannot be said, however, for the housing market, which shows continually low volume of house sales.

    Some more numbers for the Kentucky horse industry show just how much “the sport of kings” actually reaches a larger group of people than just the stereotypically aristocratic participants. A $10 billion tourist industry features horse racing as its symbol, and some 14,600 jobs relate to the racing/tourist market segment.

    Although Keeneland numbers are on the rise, there’s no doubt the industry is still rather a wobbly colt. Adding slots and gaming to racetracks is a greatly controversial issue, but it would certainly increase revenues in a struggling marketplace.

    To find out more about the horse industry — from breeding to boarding to showing — read this study on equine economics in Virginia.

    The Economic Lesson

    The market for race horses attests to the power of supply and demand. In Joe Drape’s NY Times article, he cites stallions that once commanded $100k per breeding now only bring in $10k. With a contraction of market demand comes a contraction in price (and quantity).

    The Bottom Line: Horse racing is a sport of tremendous affluence, yet the market still dictates its health as an industry.

    An Economic Question: How would the retraction of the horse industry be represented on a Kentucky supply and demand graph for tourism?

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    High and Low Energy Markets

    Feb 6 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Environment, Government, Households, Innovation, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 562 Views

    Let’s rewind to 2008 for a moment. At $13 per thousand cubic feet, the price of natural gas was soaring. Close to $91 a barrel, the price of oil was exceeding recent highs. Selling for more than $200 per kilogram, even the price of the silicon used to manufacture solar panels was very expensive.

    At the U.S. Department of Energy, people were saying that we had better figure out some better alternatives. Soon, primarily for solar projects, billions dollars of loan guarantees and subsidies poured from federal coffers to support new clean tech energy production.

    And then, everything changed. New technology emerged for natural gas production and its price declined from $13 to less than $3 per thousand cubic feet. The recession diminished the demand for oil and its price plummeted. Meanwhile, the solar panel world was radically changing. Attracting new producers, high silicon prices soon plunged when the supply side of the market was deluged.

    Our bottom line: The power of the market.

    This Wired article tells the whole story.

    The Economic Lesson

    During the 18th century and part of the 19th century, energy and illumination were all about whale oil. Comparable perhaps to Exxon Supreme or Gulf Premium, oil from the sperm whale was considered the best.  Originating in the large cavity of the sperm whale’s head, the spermaceti produced the highest quality whale oil to light the home and use in the factory.

    Always, though, the march of creative destruction continued as new resources emerged. Oil wells in Pennsylvania, Thomas Edison and electricity, new uses for coal…wind, solar, coal, nuclear, petroleum, natural gas. And consistently, the market has selected the “winner.”

    An Economic Question: Knowing “the power of the market,” how much through subsidies, taxes, and grants should government encourage the trajectory of our energy usage?

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