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    Waste and Cost

    Jan 27 • Economic Debates, Environment, Regulation, Thinking Economically • 358 Views

    Who could possibly have disagreed with President Obama when, in his State of the Union address, he said we have to eliminate wasteful regulations? 

    Some very important people.

    Emory University economics professor, Paul Rubin, explained in a WSJ article that the key opponents are the agencies that currently oversee the rules.

    Which rules? The President referred to duplications with salmon oversight. The NY Times cited rules about highways signs and sweeteners and dry cleaning machines. For example, highway signs can have no more than one upper case letter in a word. It took 7 years for the E.P.A. to coordinate with the FDA on whether saccharin was a toxic substance.

    You can see where this is going. At each agency, once you take away a responsibility, they have less to do. Less to do means diminished power, a lower budget, fewer employees. Will regulators support their own demise?

    The Economic Lesson

    Again, it is all about opportunity cost, cost and benefit. For tax payers, the benefit will probably exceed the cost when deciding whether to eliminate redundant or seemingly minor regulations. For regulatory commission employees, the opposite is true according to Professor Rubin, who cited his Reagan administration experience at the Federal Trade Commission and the Consumer Product Safety Commission.

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    Who Should Do Drug Research?

    Jan 26 • Economic Debates, Government, Macroeconomic Measurement • 313 Views

    Yes or No? Government should pay for high school education? A court system? Roads? Lighthouses? Drug research?

    In his blog, Mike Mandel disagrees with spending plans for the National Institutes of Health. As described by the NY Times, a National Center for Advancing Translational Sciences will be established because the private sector has not been creating enough new drugs. The Center’s mission will be to do the basic research that a private firm could then take over and commercialize. Mandel says that government instead should create incentives that encourage private sector innovation. One suggestion is to make the drug approval process less expensive. 

    The Economic Lesson

    What are your criteria for government’s economic role? You could create a “continuum.” At one end would be the belief that government should only fund “public goods” that, as defined in a Planet Money podcast, are things, “…that we all need that will make our lives better, but the market will not and cannot provide.” At the other end, you could say that government has vast spending responsibilities for all things that improve our lives. Where is your “dot” on this scale?

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    CPI Concerns

    Jan 25 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 595 Views

    Should we care if China has a 5.1% annual inflation rate?  A little.

    The International Herald Tribune tells us that just 1/4 to 2/5 of the price we pay in the U.S. for an imported item reflects the cost of the good. Other slices of the price pie such as transportation, wages and salaries, profit, and electricity bills have more of an impact.

    Instead, it is the Chinese citizen that will suffer. One Chinese official said, “4 percent, China can bear it-beyond 5 percent, people will complain a lot.” And, according to this journalist, because the Chinese use an outdated list of goods and services, the actual rate could even be twice as high.

    But then, many people challenge the contents of the market basket on which we base our inflation statistics. With 8 categories of goods and services (food and beverages, housing, apparel, transportation, medical care, recreation, education & communication, other goods & services), the CPI might not be changing fast enough to reflect changes in spending. Here, we talked about the Billion Prices Project as an alternative.

    The Economic Lesson

    For the U.S. Consumer Price index (CPI) monthly, we not only hear an inflation rate but also the core rate that excludes food and energy. Some economists believe that the most accurate way to track inflation is through that “core” inflation rate. Why? Because a basic goal of inflation statistics is to convey price trends. By eliminating food and energy which tend to be more volatile than the other 6 categories of the CPI, the actual trajectory of prices might be more accurately displayed. To see trends firsthand, you might want to look here for a history of inflation rates in different countries until 2009.

    Using the rule of 70 (70 divided by the percent change), 5.1% Chinese inflation means that prices will double every 14 years. Looking at recent US inflation, $1987.70 in 2010 had the same purchasing power as $1000 in 1986 according to a Federal Reserve bank of Cleveland Inflation Calculator.

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    In A Good State

    Jan 24 • Government • 384 Views

    We know it’s not New York or California. The bottom of the list also includes New Jersey, Arizona, Florida, Nevada and others. These are the states that, having mismanaged spending and taxing, are now facing tough fiscal decisions. Their finances don’t add up and in a tough economy and the chance that growth will provide the solution is small.

    Who then did the right thing?


    Given an “A” by the Pew Governance Performance Project for “good data and strong processes,” Utah implemented performance based budgeting. This just means that they actually looked at the numbers, saw what worked and didn’t, and then eliminated non-performing programs. For example, the number of employees recruited by a $300,000 program to help businesses was minimal so it was canceled.

    Other states lauded by Pew for their approach were Virginia, Maryland, and Indiana.

    The Economic Lesson

    Three words explain performance based budgeting: margin, benefit, cost. Looking at the margin means looking at something extra. For budgeting, it just refers to the extra item being funded. That takes us to cost and benefit. Here we just compare. If the cost for the extra exceeds the benefit, then the good or service would be cut.


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    More Deficit Dilemmas

    Jan 23 • Economic Debates, Government, Labor • 358 Views

    We could say that what you solve depends on what you see. When told about ballooning state deficits, people first see big numbers. Their response? Let’s cut spending. According to polls, though, when asked yes or no about cutting specific programs, most of us say no, we can’t cut schools, or libraries, or ……just about anything.

    By contrast, our cities see potential bankruptcy and states see default (because, as sovereign entities, they cannot declare bankruptcy). A paper from The Brookings Institute suggests that our leaders look at California and the Intermountain West for insight about the “colossal challenges” facing most states.

    Presenting specific examples from California, Colorado and Nevada with more of a focus on Arizona, Brookings tells us that we have had a catastrophic convergence of politics, deficits, and demographics. The paper is unique because it displays how very different conditions from state to state could have created the same dismal results.

    1) It all began with “…a growth cycle that produces rising income tax revenues that in turn lead to tax cuts.

    2) Meanwhile we had, “…healthy revenues that convince the public to mandate spending increases…”

    3) Add to that “a growing population that needs to be served by program expansion” and you get a recipe for disaster when the boom turns to bust.

    Only one state is cited in the paper for political leadership that made wise fiscal decisions during good times and bad. More about that state and solutions, tomorrow.

    The Economic Lesson

    Economists call the recession’s impact on state budgets “cyclical” because its origin is the business cycle. A cyclical impact includes less tax revenue because of unemployment and added spending that social services require. Cyclical deficits disappear when the economy expands.

    The second type of spending is “structural.” Ongoing, structural obligations reflect a fundamental imbalance between revenue and spending whether the economy is expanding or contracting. They refer to spending that is a continuing promise such as government employees’ pensions or educational mandates.

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