• 15486_greekCoinSM

    California and Greece

    Feb 23 • Thinking Economically • 106 Views

    An SAT question:
    California: US = Greece: EU.

    California and Greece are similar because…
    1. California and Greece have debt problems.
    2. Both have government employees with salaries and massive pension liabilities that they have to cover.
    3. Both would benefit from a central authority guaranteeing any future borrowing.

    When California asked the Obama administration for guarantees in order to borrow more money, they said no. As a result, last July, California had to issue IOUs temporarily to pay some of its obligations.

    Similarly, Greece would benefit from financial assistance. Most expect Greece will receive support from other EU countries.

    Saying that, “we already share: our Mediterranean climate, our spectacular wines and our Austrian-born governor,” the LA Times suggested that California try to join the EU.

    The Economic Life
    The dilemma is timeless. The questions are the same. How can we enforce central monetary power when fiscal authority is decentralized?

    In 1787, functioning under the Articles of Confederation, we had thirteen states with individual currencies and governments and taxing authority. If a state wanted to borrow more than it could afford, no one could stop it. If a state did not want to collect its federal taxes, no one could make them. If they did not want to contribute to payments on the national debt (from the Revolutionary War) they did not have to. And yet, the actions of individual states affected everyone else. Believing we needed a stronger central government, Alexander Hamilton and others like him convened a constitutional convention during a very hot summer in Philadelphia. We wound up with our Constitution and a powerful central government.
    Now when California has a major debt problem, central monetary and fiscal power can be used. As a result, on an SAT, while we probably should not equate California and Greece, the issues are similar.

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  • 15481_frisbeeSM

    The Significance of the Frisbee

    Feb 22 • Thinking Economically • 96 Views

    Last week, just after listening to the Schumpeter lecture from Dr. Timothy Taylor in a (very good) Teaching Company course on the history of economic thought, I read in the N.Y. Times that the inventor of the Frisbee had died. Joseph Schumpeter focused on the role of the entrepreneur within the evolution of capitalism. Fred Morrison, the inventor of the Frisbee was an entrepreneur.
    Morrison called his innovation the Pluto Platter and sold it at toy fairs. In 1957, when toymaker Wham-O was looking for a new generation of toys beyond the doll and toy soldier, they decided that Morrison’s flying disc seemed to be what they were looking for. Reminiscent of a flying saucer, inexpensive, a family type of toy, the Pluto Platter just needed a new name. Wham-O called it the Frisbee because it reminded them of a New England Frisbie pie.
    Schumpeter said that entrepreneurs propelled capitalism through creative destruction. New ideas destroyed the status quo but led to economic growth. The auto killed the buggy whip. The transistor replaced the vacuum tube. I am not sure what the Frisbee replaced.

    The Economic Life
    In Capitalism, Socialism, and Democracy (1942), Joseph Schumpeter (1883-1950) explained what propelled capitalism and what would destroy it. Entrepreneurs sparked capitalism’s ability to grow and provide better standards of living. Ultimately though, Schumpeter predicted capitalism would die because an affluent intellectual class would emerge that challenged its existence.
    Interesting: Joseph Schumpeter and John Maynard Keynes were born during the same year that Karl Marx died.

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    The Doomsters or the Boomsters?

    Feb 21 • Thinking Economically • 142 Views

    Thirty years ago, an environmentalist and a business professor made a bet. In The Population Bomb (1968), Paul Ehrlich predicted global ecological calamity. Saying that free markets would solve environmental problems, Julian Simon, a University of Maryland business professor, disagreed.
    The bet involved the prices of five commodities (chromium, copper, nickel, tin and tungsten). Ehrlich said prices would rise during the next ten years because of shortages and Simon said they would fall because of the market’s response. The winner would receive the total change in price from the loser. Simon won. In 1990, Paul Ehrlich gave Julian Simon $576.07.

    But, it is not over until it is over…
    A TED speaker, Paul Kedrosky, returned to “The Most Important Bet in History” to see how each would have fared more recently. The results? It all depends on the starting year. With starting dates during the 1980s, Simon wins most of the time. Using starting dates during the 1990s, then Ehrlich wins.

    The Economic Life
    Fundamentally economics is about scarcity and opportunity cost. All of our land, labor, and capital are scarce because their quantity is limited. Looking at limited quantities environmentalists suggest conservation. Others believe that because the opportunity cost of using a resource rises when shortages are imminent, innovators develop more efficient alternatives. Then the shortage is no longer a problem.

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  • Deficit D

    Feb 20 • Thinking Economically • 82 Views

    2010
    Facing a $1.6 trillion deficit, President Obama creates the National Commission on Fiscal Responsibility and Reform.

    1993:
    Facing a $260 billion deficit, President Clinton appoints a Bipartisan Commission on Entitlement and Tax Reform.
    The commission’s recommendations (which were not implemented):
    http://retirement.gov/policy/docs/ssb/v58n2/v58n2p74.pdf

    1992
    From the Washington Post (August 12):
    “Olympic Antidote for Government Gridlock” (by David S. Broder)
    The Olympics were in Michigan and the gridlock was primarily about diminishing the deficit.

    1985
    Worried about a deficit that exceeded $200 billion, Congress passes the Balanced Budget and Emergency Control Act of 1985. Also called the Gramm-Rudman-Hollings Act, this law targeted FY 1993 as the year the deficit would be eliminated.

    For a more complete list of deficit related commissions:

    The Economic Life
    The turning point was probably the mid 1930s when politicians and economists starting thinking about balancing the economy instead of balancing the budget. Validation was presented by economist John Maynard Keynes whose General Theory of Employment, Interest, and Money was published in 1936. In his book, disagreeing with Adam Smith, Keynes said that because an economy in decline could remain there, the government should use deficit spending to “prime the pump”.

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  • Impossible But Funny Congressional Testimony

    Feb 19 • Thinking Economically • 109 Views

    You might enjoy looking at the Onion’s parody of Ben Bernanke’s congressional testimony. It never can or will happen this way. And yet, while the testimony is fictitious, the statements about money are based on its actual definition.

    The article describes Dr. Bernanke initially talking about interest rates and then pausing while appearing to realize that a dollar bill is just a rectangular piece of paper. Then the Onion “quotes” him saying…
    “‘You know what? It doesn’t matter. None of this—this so-called ‘money’—really matters at all.
    It’s just an illusion,’ a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him…According to witnesses, Finance Committee members sat in thunderstruck silence for several moments…”
    The article concludes with the nation returning to barter:
    “’It’s back to basics for me,’ Bernard Polk of Waverly, OH said. ‘I’m going to till the soil for my own sustenance and get anything else I need by bartering. If I want milk, I’ll pay for it in tomatoes. If need a new hoe, I’ll pay for it in lettuce.’

    When asked, hypothetically, how he would pay for complicated life-saving surgery for a loved one, Polk seemed uncertain.’That’s a lot of vegetables, isn’t it?’ he said.”

    The Economic Life
    Any commodity is defined as money if it has three basic characteristics.
    1. A medium of exchange: People use it to purchase goods and services.
    2. A unit of value: People know how much it is worth.
    3. A store of value: When people return to the commodity in the future, it retains a relatively similar value.
    Consequently, gold, rectangular pieces of paper, tobacco leaves, beaver pelts, and seashells all have been money at some time.

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