• Like the 3 Bears, the Middle Class is Not too Rich Not too...

    Are You Middle Class?

    Dec 16 • Behavioral Economics, Economic Debates, Government, Households, Macroeconomic Measurement • 375 Views

    What is the “middle class?”

    In a recent NPR interview, a painting contractor, an employee of Healthy Montana Kids, a man who runs a hi-tech robotic firm, and a hospice worker, all earning between $25,000 and $100,000 annually, said they were middle class.

    Sort of like “Goldilocks and the Three Bears,” most Americans prefer identifying themselves as the middle class: “They don’t want to seem {too} poor, they don’t want to seem {too}rich-they want to seem like everyone else.” Why? Probably because middle class means more than income. Also, it connects to our values, our aspirations, our education, our jobs.

    In a wonderful column, David Brooks identifies “middle class” as the key to our American identity. But then, he asks, as the rest of the world becomes more like us through a gigantic global middle class, how will we perpetuate our leadership and distinct identity? The answer, he says, are our middle class values. Our middle class values fuel our achievement, our innovation, and our sense of community that everyday activities like Little League embody. While Brooks cites Ben Franklin as a model, I like to remember that John Winthrop, governor of Massachusetts Bay Colony said we can be, “A city on a hill.”

    Still though, who are politicians targeting when they say they care about tax legislation that benefits the middle class? Maybe, according to one NY Times blog… People who are “too poor to be rich; too rich to be poor.”

    The Economic Lesson

    Income is one variable consistently used to define middle class. In the U.S., our national income comes from wages and salaries, rent, interest, and dividends, and profits from businesses that are not incorporated.

    To picture our income distribution, please think of a pie as the total national income and then individual slices as the proportion that different groups receive. That would mean that if total national income were $1,000 and a society had only five households (people living together), then if every household earned $200, distribution was equal. By contrast, if one family earned $800, then, because $200 remained for everyone else, there would be considerable inequality. Recently, the top quintile of households in the U.S. earned close to 50% of all income. This quintile approach for representing income distribution was developed by statistician Max Lorenz. 

    Still though, we are left with the issue of extracting the middle class from a Lorenz curve.

     

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    Big Boxes

    Dec 15 • Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, International Trade and Finance, Macroeconomic Measurement • 388 Views

    What we ship things in makes a difference.

    Take the banana, for example. In 1876, at the Philadelphia Centennial Exposition, the banana was a delicacy (and very black). Millions of bunches could only be sent to U.S. shores if they were refrigerated. By 1901, as I describe in Econ 101 1/2, United Fruit was distributing 14 million bunches of bananas in the U.S. One reason, in addition to the railroad and the steamboat, was a banana vessel that could maintain a 53 degree temperature for its cargo.

    Just like refrigerated banana vessels transformed world trade, so too has the cargo container. Introduced in 1956, now one ship can carry 3,000 forty foot containers with 100,000 tons of shoes, electronics and clothing. Imagine the potential efficiency. Put everything in the container, arrive at a port, and just slip it onto a truck or a railroad car for it to move to its next stop. Journalist Marc Levinson says the result is more variety for consumers, lower freight bills, less shipping time, lower inventory costs and longer supply chains.

    This takes us back to yesterday’s supership post and the expansion of the Panama Canal. Larger ships mean more containers on board. The NY Times said that the newest generation of superships could hold 15,000 containers that are 20 feet long.

    The Economic Lesson

    Adam Smith would have been delighted to see his ideas about mass production and regional specialization extend around the world. Describing the productivity of factory pin production in The Wealth of Nations, he told us that one worker, functioning alone, could produce 1 pin per day. However, when that worker specialized through a division of labor in a factory, 4,800 pins per worker per day were made.

    Adam Smith used the term “distant sale” to explain the transport of goods from a factory to a distant market. He could have been describing a container ship moving from China to the U.S.

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    Supership Problems

    Dec 14 • Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, International Trade and Finance • 407 Views

    When is a supership a problem? When the water is not deep enough or the Bayonne Bridge is not high enough.

    To understand the Bayonne Bridge problem (and care about the answer), we have to look back to August 1914 and then ahead to August 2014. The Panama Canal officially opened on August 14, 1914. Connecting the Pacific and Atlantic Oceans, the canal diminished transport time and cost for worldwide shippers. Now, the canal will again enhance efficiency through a widening project that should be completed during August, 2014. For a new generation of larger container ships to use the canal, it had to become wider.

    But that was only the beginning. From the Panama Canal, huge ships will travel to U.S. ports. Now, according to the NY Times, many of these ports need to have their capacity extended. Georgia, for example, with national and local funding, is spending $625 million to deepen the Savannah River by 6 feet. For the Port Newark-Elizabeth Marine Terminal, the problem is not the water. It is the Bayonne Bridge. To accommodate the superships, the bridge needs to be 64 feet higher or replaced.

    Will New Jersey spend the money? The Bayonne Bridge blog says, “Yes.”

    The Economic Lesson

    19th century economic thinker David Ricardo stated the classic defense of free trade when he expressed the principle of comparative advantage. “Trade, trade” he said because each nation then can do what it does best (where it has the comparative advantage) and the whole world benefits through greater efficiency.

    By facilitating the worldwide movement of goods, the Panama Canal enables nations to specialize and to benefit from comparative advantage.

     

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    A Savings Lottery

    Dec 13 • Behavioral Economics, Developing Economies, Financial Markets, Money and Monetary Policy • 386 Views

    Assume you have 3 extra dollars each day. Would you use it for a lottery ticket or a savings account?

    Most people would select the lottery ticket. Economists, though, hoping to elevate our nation’s savings rate, would like to encourage the banking alternative. And, they think they have figured out how.

    First used in South Africa in 2005, Million-a-Month Accounts connected savings to a lottery. Because Million-a-Month Accounts could have low opening balances and no fees, lower income families were a target customer. The key, though, was that instead of getting interest, account holders had a chance to win a lottery. Each month, the number of lottery tickets you could receive depended on your account size. The larger the account, the more chances you got to win a lot of money. As described by Freakonomics co-author Steve Dubner, Michigan is experimenting with a similar concept through Prize-Linking-Savings Plans (PLS).

    As always, though, there is an opportunity cost. If banks can offer their own legal lotteries, then municipal lotteries which had been monopolies will lose billions in revenue. In South Africa, supporting the National Lottery Board, a court declared the Million-a-Month Account was an illegal lottery.

    The Economic Lesson

    Households and businesses have a savings and investing connection. Households are the savers. Through banks and other financial intermediaries, businesses borrow the money that households save. Businesses then use borrowed funds to buy tools, build factories and offices, expand inventories, and grow.

    You can see why saving can be good for the savers, good for businesses, and good for the economy. Lottery officials, though, are not happy.

     

     

     

     

     

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    A Different Kind of Currency Crisis

    Dec 12 • Developing Economies, Money and Monetary Policy • 363 Views

    Our story begins with the United States announcing that it would be issuing a state-of-the-art new $100 bill. Designed to thwart counterfeiters, the new bill has 3-D interactive features. Move the bill and certain shapes and colors shift.

    The bill, though, has encountered a huge glitch that delayed its production. Because it creased on the assembly line, parts were blank. Not all were defective, but no one is sure how many. With more than one billion bills being printed, a manual check could take 20 years. The goal now is to develop a mechanized check-up system. Summarizing the situation, one official said, “There is something drastically wrong here.”

    A Planet Money podcast points out that anyone abroad who does not trust the local currency tends to hold US dollars. The chairman of the Fed, Ben Bernanke, said that, “We estimate that as many as two-thirds of all $100 notes circulate outside the United States.” The Fed, though, has a “missing currency” puzzle because they can approximate how much currency should be circulating but are not exactly sure of who has it.

    According to the Federal Reserve, $100 bills typically have an 8.5 year life span. Who then will be affected at home and abroad if worn out bills cannot be replaced?

    The Economic Lesson

    A dollar bill is just a rectangle made of cotton (3/4) and linen (1/4). However, we call it money because it has three basic characteristics. 1) It is a medium of exchange. 2) It is a unit of value. 3) It provides a store of value.

    Knowing that 100 U.S. dollars will consistently be worth close to 100 dollars makes U.S currency universally desirable.

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