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    Indian Protests Fueled By Gas Price Hike

    Jul 11 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 272 Views

    A government decision to stop subsidizing gasoline prices in India fueled protests last week. The subsidy cost the indian government 2.5% of its budget ($5.5 billion). Now, with prices responding to the market, the record high deficit can drop. However, a liter at the pump will increase by 3.5 rupees or 8 cents (6.7%)–the equivalent of almost 30 cents a gallon. Protesters also claim that expensive gas will send the Indian inflation rate beyond a 10% rate.

    Events in India took me to gasbuddy to see where the price of gasoline has been in the United States. A five year chart reveals that a gallon of unleaded regular averaged between $2.11 and $3.11 in 2005, touched $4.12 in July, 2008, and dropped to $1.61 soon after. Now, we are at about $2.70.

    The Economic Lesson

    When economists discuss gas prices, sooner or later the topic turns to elasticity. If price changes a lot and the quantity we buy remains relatively stable, then our price elasticity of demand is inelastic. By contrast, if price swings have an impact on buying, then our response is elastic. Economists believe that our demand for gas tends toward inelastic. Consequently, to encourage less fuel consumption, we could not depend on moderate price hikes at the pump. Instead we would need big price jumps, income drops, and more hybrids. 




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    A Federal Workers Cost Cutting Contest

    Jul 10 • Government • 207 Views

    Last year’s winning idea for the second annual federal worker’s cost cutting contest (SAVE) was from A Department of Veterans Affairs employee. Scheduled for the fiscal 2012 budget, the suggestion will save a projected $14.5 million by 2014 by enabling patients to take medication and bandages home with them after being discharged.

    Total spending for 2011 is projected to be close to $4,000 billion. $124,000 million ($124,000,000,000) is for the Department of Veterans Affairs. And, the most we could save was $14.5 million during a two year period–$7 million a year? 

    The Economic Lesson

    The federal budget is composed of mandatory and discretionary spending. Mandatory spending (required by law) for Medicare, Medicaid, and Social Security totals close to half of the budget. Then, if we add defense and interest that is due for money borrowed by the government, that takes us to more than 75% of all spending. Discretionary items cover a multitude of categories including agriculture, foreign affairs, justice, transportation, education, NASA and the EPA. You can see where this going. If we want to control the budget, suggestions for freezing discretionary items will have a minimal impact.

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    Will the US Postal Service Think Outside the Box?

    Jul 9 • Demand, Supply, and Markets, Government • 169 Views

    Do you care about Saturday mail delivery? Amazon does. Hallmark does. Catalog companies and and mail service pharmacies do. By contrast, Netflix has said it could accept the elimination of Saturday mail.

    Trying to decide what to do about the huge financial difficulties facing the postal service, Congress is holding hearings. Their stated alternatives are to raise rates, cut Saturday delivery, and diminish labor and facility costs. While opinions vary about Saturday delivery, all who testified expressed little price elasticity. Higher postal rates would decrease their usage, further exacerbating post office problems.

    Recently, the Washington Post expressed wisdom about the postal service. Comparing creative innovation from a privatized Swiss system to tired thinking from the USPS, they said we are dealing with a hybrid entity “hamstrung by a large and heavily unionized workforce, congressional management, and an antiquated business model.”

    The Economic Lesson

    A market economy can thrive when fundamental infrastructures function well. In the U.S., a transportation infrastructure emerged during the 19th century as roads, canals, and railroads increasingly connected disparate areas of the country. Similarly, a financial infrastructure developed that moved money from those who had it to those who would use it productively. The US Postal Service is a part of a communications infrastructure. When an infrastructure is crucial, is more government or less government the appropriate approach?

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    Unemployment Benefits and A One-Handed Economist

    Jul 8 • Economic Debates, Economic Thinkers, Government, Labor • 160 Views

    Called “a compromise of a compromise of a compromise,” the Senate failed to extend unemployment benefits to the 2 million individuals scheduled to lose them on July 12.  

    Thinking economically, it is tough to definitively assess the decision. On the one hand, as a $34 billion bill, the deficit will grow and some economists wonder whether more generous benefits actually encourage “jobless workers to be pickier in their searches.” But on the other hand, one economist estimates that every dollar of jobless benefits adds $1.61 of stimulus. (This sounds like Harry Truman’s search for a one-handed economist!)

    Extended U.S. benefits originated in the $787 billion stimulus bill that was passed during February, 2009 when the number of weeks and their dollar size were increased. Since then, the path in Congress to extending benefits further has been complicated.

    The Economic Lesson

    Looking at unemployment, economist Arthur Okun takes us to the GDP. Okun’s Law states that for every 3% rise in the GDP, after the GDP has sustained a trend level for a year, the unemployment rate will drop by 1%.

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    A Pencil, An Apple, and a Price System

    Jul 7 • Demand, Supply, and Markets, Economic Thinkers • 310 Views

    I suspect we take prices for granted. Please think for a moment about a $10 pair of shoes. As a consumer, that $10 price tag tells you that they are inexpensive and you won’t have to sacrifice very much to buy them. Correspondingly, seeing the same price, a shoe manufacturer might decide not to make them because profits would be minimal. 

    Saying prices are the reason, in Free To Choose, economist Milton Friedman (1912-2006) tells us that thousands of people, who might hate each other if they ever met, cooperate to make a pencil. Its wood, he says, probably comes from the state of Washington where they must have used a saw which required steel, which needed iron ore. The lead is actually graphite which probably came from mines in South America. With rubber from Malaya, they made an eraser and still, yellow paint and glue were necessary.

    Telling a similar story about the iPhone4, the NY Times described the worldwide cooperation that created it. While the phone is assembled in Shenzhen, China, according to a “teardown” analysis, its chips come from Germany, South Korea, and the U.S., a touch-screen module is from Taiwan, and the phone’s gyroscope is made by a Geneva based company. Also involved are Japanese, Italian, and French firms and every one of them probably has production facilities around the world.

    Why do they cooperate? Dr. Friedman would have said that the reason is the price system.

    The Economic Lesson

    In a market economy, prices that freely respond to demand and supply provide information and motivation to buyers and sellers. The up and down movement of prices is called the price system.

    By contrast, in the former Soviet Union, prices were set by government created committees. As a result, they did not convey information about efficiency on the supply side nor about quality on the demand side. Different suppliers were not encouraged by prices to interact nor to cater to consumers. Lacking a price system, the Soviet economy collapsed.

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