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    A Surprising Deficit Worry

    Oct 22 • Economic History, Financial Markets, Government, International Trade and Finance, Money and Monetary Policy, Thinking Economically • 557 Views

    Who do you think is the biggest holder of U.S. government debt?

    The U.S. government.

    Whenever Social Security collects more payroll tax money than it needs, it buys U.S. securities. Retaining cash would mean no return, buying stock could be risky and, government bonds are still the safest investment. Consequently, government agencies buy U.S. treasury securities. Similarly, to affect interest rates, bank reserves and the money supply, the Federal Reserve needs to buy and sell U.S. debt.

    So, when NPR’s Planet Money secured a government document called “Life After Debt,” they discovered that, in 2000, the White House was worried about 3 years of no federal deficit. The paper asked, “What if the government no longer had to borrow money?”

    Their answer takes us back to Social Security, the Fed, and a third group.

    1. What would government agencies such as the Social Security Trust Fund do with their excess funds?
    2. Could the Federal Reserve use other securities or maybe even stock to implement monetary policy?
    3. Is there an alternative investment for the households, businesses, and countries who buy treasury securities because they can depend on the “full faith and credit” of the U.S. government?

    Our bottom line: A manageable debt and deficit can be beneficial. As Alexander Hamilton said in 1781, “A national debt, if it is not excessive, will be to us a national blessing.”

    The Economic Lesson

    Even if the deficit were ever eliminated, the U.S. would still have a massive debt. The deficit is the shortfall when spending exceeds revenue. The debt is the total amount that the U.S. owes.

    An Economic Question: Why might the U.S. have had no deficit for 1998-2001?

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  • Deficit Games

    Oct 22 • Behavioral Economics, Government, Macroeconomic Measurement, Thinking Economically • 512 Views

    http://www.nytimes.com/interactive/2011/07/22/us/politics/20110722-comparing-deficit-reduction-plans.html?ref=politics

    Superb interactive

    Time line

    Game of chicken?

    With the deadline 3 months away

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    Millionaire Inventors

    Oct 21 • Businesses, Demand, Supply, and Markets, Innovation, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 606 Views

    Assume you have $1.4 million dollars that you want to give away. Your goal is to spur the development of new technology, but just not any innovation–something that you want people to invent. Which technology would you choose?

    The people at the X Prize Foundation actually had to make that decision.

    Funded by Wendy Schmidt, wife of Google former CEO Eric Schmidt, their goal was to “…inspire a new generation of oil cleanup technologies that enable a more rapid pace of cleanup…” The winner was Elastec, a small Illinois firm that figured out how to accelerate the speed of removing oil from water from the usual 1,000 gallons of oil per minute to 5,000. Here you can see the oil skimmer recovery equipment that they developed for the competition. According to NPR, the firm is already receiving orders from around the world.

    Here (automotive energy conservation) and here (genome mapping) are other X Prize innovation challenges.

    Our bottom line? We need to encourage the innovation that fuels economic growth. The question, though, is how much the incentives should come from government.

    The Economic Lesson

    Economists can use production possibilities graphs to illustrate economic growth. On production possibilities graphs, a bowed out curve is drawn which illustrates that country’s maximum production capability. Shifting that curve to the right displays the additional productive capability created by the invention.

    An Economic Question: If you could fund an innovation contest, what type of invention would you target?

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    Top Earners

    Oct 20 • Behavioral Economics, Households • 541 Views

    A quiz:

    • Looking at the top 1% of earners, how many are in financial services?
    • Close to 75%, 50%, 25% or 10%?
    • The answer: 10% (or precisely 13.9%)

    Next…

    • How much does the top 1% earn?
    • The 1% threshold is close to $350,000. $200,000, top 5%; 150,000, top 10%; $100,000, top 25%.
    • Here, you can identify your income group. (Stats are for adjusted gross income, 2009.)

    And finally, with Occupy Wall Street expressing anger about money moguls, do most people agree? This Gallup survey concludes that more of us blame government than Wall Street for our economic difficulties.

    These Occupy Wall Street interviews from NPR’s Planet Money provide an unfiltered look at individual protestor’s goals. They let us form our own opinion of the group’s objectives.

    The Economic Lesson
    Saying that education is crucial for income mobility, a 2010 study from the OECD concludes that U.S. intergenerational mobility is relatively low. In other words, fathers and sons, mothers and daughters remain close to the same rung on a social mobility ladder.

    By contrast, this 2007 report from the U.S. Treasury indicates that there is considerable income mobility in the U.S. Describing a hotel with luxurious rooms and shabby rooms, they say that, “…those in small rooms have an opportunity to move to a better one, and that the luxurious rooms are not always occupied by the same people. The frequency with which people move between rooms is a crucial aspect of the trend in income inequality in the United States.”

    An Economic Question: Explain why you would accept income inequality as a consequence of a market system or support more government redistribution of income through taxes.

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    Defrosting the Doughnut Hole

    Oct 19 • Businesses, Demand, Supply, and Markets, Developing Economies, Environment, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 511 Views

    A global phenomenon will open up new areas for oil exploration, enable ships to take shortcuts, and provide easier access to world markets for iron ore and other minerals.

    The phenomenon? Global warming.

    Because of global warming, the polar ice sheet is shrinking. With this summer having been one of the warmest on record, ships are traveling from Murmansk, near Finland, across the top of the world to Asia in record time. Scientists predict that by 2050, this Northeast Passage will be ice-free during the summer.

    A navigable Northeast Passage means shorter travel time from Europe to Asia and competition for the Suez Canal. It means previously inaccessible resources can now be drilled and mined and transported.

    That takes us to the Arctic Ocean doughnut hole. A huge fishing area that is beyond any nation’s jurisdiction, as it melts, the doughnut hole will attract fishing vessels from around the world.

    Our bottom line? Global warming could have environmental positives that would include huge energy and mineral discoveries, and emissions reduction and cheaper transport from shorter routes.

    The Economic Lesson

    Perhaps one of the first environmentalists, Reverend Thomas Malthus told us in 1798 that population grows geometrically while resource production expands arithmetically. Consequently, resource prices will rise and supply will become increasingly inadequate.

    You can see though, that environmental predictions are tough to make. This NY Times Magazine article describes the bet between the boomsters who said we would not exhaust our resource supply and the doomsters who said we would.

    An Economic Question: Whenever a transaction between two parties affects a third, uninvolved individual or group, economists see an externality. How does global warming relate to positive and negative externalities?

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