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    Independence and Printing Money

    Jul 5 • Government, Macroeconomic Measurement, Money and Monetary Policy • 276 Views

    Having just celebrated July 4th, I’ve been thinking about 1776, the American Revolution, and money. At the time, money frequently determined who won and lost wars. When countries ran out of money, they had to stop fighting. Great Britain had sufficient revenue to fight wars because they could collect taxes efficiently and fund a national debt. 

    By contrast, the credit of a new nation is anything but dependable. Just like you and me, a country establishes good credit by showing it can pay back loans. In 1776, trying to raise money to fight the war, the U.S. had no credit history. The Continental Congress was able to borrow close to $11 million from the French and the Dutch (British enemies) and through domestic bond sales but still it was not enough. As a result, Congress turned on the printing presses.

    As Benjamin Franklin said, “This currency as we manage it is a wonderful machine. It performs its Office when we issue it; it pays and clothes Troops, and provides Victuals and Ammunition.” As Franklin later pointed out, though, when too much money is printed it rapidly diminishes in value. From 1775 to 1779, the Continental Congress had issued and then spent close to $250 million. The people who received the $250 million now had lots of dollars to spend. As a result, prices skyrocketed.

    The Economic Lesson

    An economist would say that the Continental Congress had created demand pull inflation which means that too many dollars are chasing too few goods. Or, in colonial terms, “A wagon-load of money will scarcely purchase a wagon-load of provisions.”

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    Nantucket’s Traffic Lights

    Jul 4 • Economic Thinkers, Regulation • 306 Views

    Located 30 miles from Cape Cod, Massachusetts, the island of Nantucket has no traffic lights. Instead, drivers respond to stop signs, rotaries, and courtesy. More often than not, if a pedestrian, a walker, or a biker needs to cross the street, cars stop. When someone is making a left turn or leaving a parking lot on a busy street, cars stop. And, drivers usually smile and street crossers wave thank you.

    Nantucket’s lack of lights started me thinking about Adam Smith. Economic thinker (there were no economists in 1776) Adam Smith suggested that less government was better than more government. Smith believed that human nature was so diverse and policy consequences so unpredictable, that, although imperfect, less government could ultimately lead to more virtuous human behavior. For example, told their taxes will be increased to help the less fortunate, certain people express resentment. And yet voluntarily giving the same amount to charity can evoke pride and generosity.

    What are the implications for our society if what we do voluntarily makes us feel better and can make us more virtuous than when we are forced to do something?

    The Economic Lesson

    In his first major book, The Theory of Moral Sentiments (1759), Adam Smith sought to describe a just society. Displaying a thorough grasp of human nature, he said that the path to a just society started with profit seeking businesses. Building from his first book, he then wrote The Wealth of Nations (1776), through which his analysis brought order and insight to the seemingly chaotic market system that was spreading through Europe.

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    The Age of Women?

    Jul 3 • Gender Issues, Households, Labor • 238 Views

    Told you are about to meet the CEO of a major corporation, do you imagine someone in a skirt? According to a recent Washington Post article, the answer from most people is “No”. To individuals saying we have entered “the age of women,” because of Elena Kagan and more females in the U.S. work force, this journalist instead looked at “the areas where the real money and power reside.” For example, at Google and Amazon, the top paying hedge funds, and the major banks, males dominate top management. Her conclusion? She suggests that for women to claim economic power, they have to focus on amassing their own capital.

    Looking further at gender equality in OECD Nations, 2006 median income statistics indicate that women earn 18% less than men. In Japan and Korea, the gap is close to 30%, in Poland, New Zealand, and Belgium, at 10%, the gap is much less, and for the U.S. the difference is 19%. Correspondingly, women hold only 1/3 of all management positions.

    The Economic Lesson

    In the U.S., to be defined as a part of the labor force, a person has to be 16 or older and employed or unemployed but looking for a job. With 154 million people in the U.S. labor force, women total approximately 72 million.

     

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    Consumer Choices

    Jul 2 • Households • 295 Views

    If you were asked today to plan next week’s snacks, would you select fruit or chocolate? In a 1998 study, 74% of those surveyed said fruit. However, when the same people had to decide between fruit and chocolate for today’s snack, 70% chose chocolate.

    As explained by behavioral economists, those who chose chocolate for today’s snack were “overvaluing” current gratification and “undervaluing” the future benefits from fruit. Behavioral economists also believe that people tend to choose the status quo instead of other choices that require active decision-making. 

    This takes me to a question. If we tend to overvalue current gratification and stick with the status quo, then how can we make wise decisions about health care insurance, retirement planning, and mortgages? In a recent column, New Yorker columnist James Surowiecki suggests “choice architecture” through which optimal choices are the default option. For example, a fixed rate, self amortizing 30 year mortgage would be the default rather than a more risky loan. Another possibility is just having a brief explicit disclosure that buyers have to sign. For example, when getting a risky mortgage, they would have to indicate that they knew that, ” You could lose your home.” (Researchers have found that this works.) Surowiecki also recommends that government protect us and that schools mandate financial literacy courses.

    The Economic Lesson

    Behavioral economics offers some insight that legislators should recognize. Still though, we have the convergence of the profit seeking sell side and the buy side with a plethora of exploitable tendencies. Add to that congressmen with reelection concerns and you start to wonder how 2300 pages of financial reform can reflect our collective wisdom.  

     

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    Common Markets

    Jul 1 • Demand, Supply, and Markets, Developing Economies, Economic History, Economic Thinkers, International Trade and Finance • 289 Views

    Kenyan coffee exporters have a problem at the Tanzanian border. “On the Kenyan side they operate 24 hours a day, but on the Tanzanian side it’s 12 …We have had drivers standing at the border for 4 days. These things make the final price of our coffee up to 3 times that of the local product.” The solution? 5 East African nations are creating a common market. 

    In his America and the New Global Economy Teaching Company course, Professor Timothy Taylor explains why the Europeans wanted a common market. Assume for a moment that you own a factory and start exporting goods to a nearby country. You have to wait at the border and have your trucks approved by customs. You have to be sure that you comply with their product safety laws. You need to use their currency. 

    Dr. Taylor says that with a common market you could enjoy the benefits of the 4 freedoms: 1) People, 2) Goods and services, 3) Labor, 4) Capital. The benefits of a European common market initially included one set of regulations instead of 15, labor that could move more freely, and capital that was more accessible.

    It is amazing that our founding fathers created our “common market” when they replaced the Articles of Confederation with the Constitution. The European process was accelerated with the Single Market Act in 1986. And now, Burundi, Kenya, Rwanda, Tanzania and Uganda are trying to move in a similar economic direction.

    The Economic Lesson

    In an Econtalk lecture, Professor Russ Roberts talks about the connection between Adam Smith, David Ricardo, and trade. Starting with Smith and then moving to Ricardo, he points out that the optimal potential of markets is realized when they grow larger. “The more people we trade with, the greater the opportunity to specialize and innovate…” and grow.

    This returns us to the benefits of the East African Common Market, the EU and the United States. 

    At another time we will look at NAFTA.

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