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    Environmental Emissions

    Jun 25 • Environment, Regulation • 200 Views

    A letter in “The Mail” section of a recent New Yorker tells us about a funny error on the cover of the May 17, 2010 issue. Mainly portraying emissions from vehicles, factories, and cows, the cover focuses on our environmental problems. According to the letter writer, though, the illustrator, “..has the ‘ends’ mixed up.” The cow “releases only trace amounts of gas through its rectum [as drawn]…; the hundreds of quarts of methane it contributes to the atmosphere each day are belched.”

    Thinking about the cover, I recalled pending Congressional legislation that concerns emissions. Through the “Electric Vehicle Deployment Act of 2010,” the Congress proposes that we minimize auto emissions and oil consumption. The 77 page (pending) law includes a $10 million prize for creating a 500 mile battery and a process for establishing between 5 and 15 “deployment communities”.

    I wonder whether government R & D support should be so specific. Should federal dollars go to institutions rather than a precisely described result? Aren’t the best ideas generated when we encourage a more open ended approach?

    The Economic Lesson

    Through an opportunity cost chart, we could determine the benefits of targeting one technology and the benefits of an attractive alternative approach. Knowing that choosing is refusing, hopefully our legislators use cost/benefit analysis.

     

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    State Deficits and Jaws Charts

    Jun 24 • Government • 254 Views

    As a prospective buyer, Daily Show reporter Jason Jones went to check out the Arizona State Capitol Building when he heard it was for sale for $735 million. Once sold, the capitol would then be leased back to the state for $60 million a year. Why sell it? Because Arizona has a $3.4 billion budget gap.The problem, though, is that the solution is short term. It is a temporary fix that leaves all fundamental spending and revenue issues untouched. 

    Other states facing similar crises have devised equally short term solutions. Several are trying to sell prisons. Hawaii has shortened its school week. States have postponed paying workers until the fiscal year ends to avoid recording current spending.

    New York’s Lieutenant Governor Ravitch, appointed by Governor Paterson to deal with his state’s budget crisis, explained that while cities can declare bankruptcy, states cannot. Consequently, states lack a “triggering event” that would force businesses, labor, and political groups to compromise.

    The result is a graph that Ravitch calls a “jaws chart”. On a “jaws chart,” a line representing state revenue is rising very gradually while the line showing state spending is much steeper. The two together look like the shark in Jaws with his mouth open. 

    The Economic Lesson

    There is a difference between a debt and a deficit. The debt refers to the total amount owed by the municipality or the federal government. The deficit is the amount by which spending exceeds revenues during one fiscal year.

     

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    World Cup Soccer and Stock Markets

    Jun 23 • Financial Markets • 232 Views

    Referring to a basic investing strategy, Vanguard founder, Jack Bogle said, “Buy and hold forever”. If you disagree, though, you might want to hear about the impact of World Cup soccer on stock markets.

    In a recent academic study, researchers found that team losses cause stock market declines. With more important games precipitating steeper plunges, a team loss during a World Cup elimination stage resulted in its home stock market dropping close to .5%. The reason, the study’s authors say, is investor mood. By contrast, winning has no impact.

    Academics also have identified a correlation between rising stock markets and Ramadan, St. Patrick’s Day, and Rosh Hashanah (but not Yom Kippur). A fourth study found that morning sunshine brings a higher stock market close.

    Might I suggest a new investing strategy?

    The Economic Lesson

    While the complexities of investing lead me to question these studies, they do take me to behavioral economics. In 2002, Daniel Kahneman won the Nobel Prize in economics for his work in behavioral economics. Concluding that we were not always as rational as some economists believed, he examined a cognitive side to our behavior that created unexpected economic results.

     

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    Paying Fannie Mae’s Bills

    Jun 22 • Financial Markets, Government, Households • 193 Views

    Each of us is helping to pay a $10 million monthly grass mowing bill. Why? Because of homes that are owned by Fannie Mae and Freddie Mac. As GSE’s (government sponsored enterprises), Fannie and Freddie had purchased mortgages from financial institutions, sold the mortgages, and said they would guarantee them. When Fannie and Freddie ran out of money, tax payers became responsible for their obligations.

    This is the way it works: John decides to buy a house. John gets a mortgage from a local mortgage broker. The broker sells John’s mortgage to Fannie Mae. Combining John’s mortgage with JoAnne’s and Jesse’s mortgages, Fannie Mae sells them as a package that pays interest to investors. When an investor asks Fannie about the mortgages, Fannie says, “Don’t worry. I will guarantee each one.” So, when John loses his job, defaults on his loan, and moves out of his house, Fannie rescues the investor by guaranteeing the payments that John had been making.

    Meanwhile, Fannie got the house. As of the end of March, actually, Fannie and Freddie got 163,828 houses. Keeping insides clean and outsides neat cost them $1 billion last year. That means that it cost us $1 billion.

    The Economic Lesson

    Mowing a lawn brings to mind the “multiplier”. Assume that the contractor hired by Fannie had to purchase lawn mowers, and the lawn mower manufacturer hired extra workers, and those workers spent their paychecks on washing machines. Then the washing machine workers spent their paychecks on computers and the computer workers bought cars. Called the multiplier, this whole spending sequence happened because of the lawn mower maker. If a lawn mower cost $300 and $600 is added to the GDP because of the subsequent goods and service purchases the lawn mowers led to, then the multiplier is 2.

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  • Consumer spending

    Jun 21 • Households, Innovation, Macroeconomic Measurement • 217 Views

    In Pursuing Happiness: American Consumers in the Twentieth Century, economist Stanley Lebergott asked us to imagine that automobiles, penicillin, electric washing machines, refrigerators, disposable diapers, electricity, television, and “every economically significant good added since 1900″ all disappear.  Next, he tells us that the remaining items would include “salt pork, lard, and houses without running water.” You get the picture. Our purchases have changed a lot during the past century.

    Next, I checked a Bureau of Labor Statistics report (2008 data) too see how we spend our money today. In descending order, the average household uses close to 34% of its total spending on housing; 17%: transportation; 13%: food; 11%: personal insurance and pensions; 5.9%: healthcare; 5.6%: entertainment; and 3.6%: apparel and services.

    As you might expect, the amounts are quite different when we look specifically at income levels. For example, a family spending $34,687 annually will use $4,818 on food. At the other end of the income scale, a family spending $124,678 will allocate $13,011 to food.

    The Economic Lesson

    Just an interesting spending fact today. On July 4, 1776, Thomas Jefferson noted that he spent 27 shillings on 7 pair of women’s gloves.

     

     

     

     

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