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    From China to Iowa

    Mar 5 • Demand, Supply, and Markets, Developing Economies, Environment, Money and Monetary Policy, Thinking Economically • 375 Views

    We can travel very quickly from China to Iowa.

    In an excellent report from The Economist on feeding the world, you can see how an increasingly affluent Chinese urban consumer affects many of us. One example connects more Chinese meat consumption to soaring prices for corn, wheat, and soybeans because of a growing demand for animal feed.  

    This takes us to Iowa where the price of farmland is skyrocketing. With escalating worldwide crop prices, low interest rates, diminishing lending standards, and investors who say the only direction is up, the price of Iowa farmland is nearing a 1979 high.

    Covering issues that range from population, technology and water to land and climate, the February 24th issue of The Economist ideally discusses “How Much is Enough?” It also returns us to the Reverend Malthus who might be saying, “I share your concern.”

    The Economic Lesson

    Perhaps one of the first environmentalists, Reverend Thomas Malthus (1766-1834) told us in 1798 that population grows geometrically while resource production expands arithmetically. Consequently, resource prices will rise and supply will become increasingly inadequate.

     

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    Oil Dilemmas

    Mar 4 • Demand, Supply, and Markets, Environment, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 409 Views

    The good news? We are driving more again–more miles than any year since 2007.

    The bad news? We are driving more again–more miles than any year since 2007..

    Here are the facts from a WSJ article.

    With the recession and higher gas prices, mileage dropped by 3.6%.

    But then, the recovery began, unemployment slightly decreased, and confidence built. The result? We drove more. More driving means more demand for gasoline that will contribute to escalating gas prices.

    The solution? 3 possibilities.

    1. Increase the federal gasoline tax. It has been 18.4 cents since 1993. A higher tax means less driving and less dependence on Middle East oil.

    2. Release extra oil from U.S. emergency fuel reserves. Extra oil means cheaper gas, more driving and sustained recovery.

    3. Do nothing.

    The Economic Lesson

    This is classic demand and supply. During 2007-2008, skyrocketing gas prices decreased quantity demanded, the recession (that began during December, 2007) shifted the demand curve to the left and equilibrium price dropped. Now, with demand reversing and Middle East concerns affecting (perceptions of) supply, the equilibrium gas price is rising.

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    What is Best For Growth?

    Mar 3 • Businesses, Economic Debates, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 308 Views

    What if the Congress decides to slash spending by $60 billion right now? Prominent economists are again disagreeing.

    According to Stanford economist John Taylor, we would have a resurgence of business confidence, renewed investment spending and new jobs. Assured that taxes and regulation will not increase, businesses will expand.

    On the other hand, economist Mark Zandi (Moody’s Analytics) says that we will lose 700,000 jobs because of spending cuts. He is against “too much too soon.” Referring to “fiscal drag,” economist Alec Phillips (Goldman Sachs) cites the rippling impact of less federal spending that will retard GDP growth.

    Who is right?

    The Economic Lesson

    Looking back and looking forward, the economic debate about fiscal policy is a traditional one. Looking back at stimulus spending since 2008, opponents point out that the stimulus will not only ignite inflation but also was not really necessary. Meanwhile, advocates say we are much better off because of it. Looking forward they differ on how businesses and unemployment will respond.

    Also, we should not forget about monetary policy. A similar debate surrounds Dr. Bernanke’s QE2.

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    Smog-Eaters

    Mar 2 • Economic Debates, Environment, Government, Regulation, Thinking Economically • 572 Views

    What if someone had invented “smog-eating” concrete roof tiles? And, what if these tiles consumed enough smog to offset one car’s nitrous oxide emissions during one year (10,800 miles of driving)?

    Telling us that a firm in California has them for sale, Harvard professor Greg Mankiw asks, “What should government policy be regarding these roof tiles?” Similarly, do you believe that government should mandate posting calorie counts in restaurants? Or subsidizing ethanol? Hybrid cars? Broccoli consumption? (so that medical care is cheaper) Mowing the lawn? (because, with house sales plunging, a nicer neighborhood could attract buyers)

    The Economic Lesson

    In his 1759 book, The Theory of Moral Sentiments, Adam Smith (1723-1790) tried to identify the origins of a just and virtuous society. Concluding that no one is wise enough to know what is best for most, he recommended less government for all.

    And yet, through tax and regulatory policy, should government encourage positive externalities–transactions between two parties that affect a third individual or group in some beneficial way?

    Your opinion?

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    Part 2: The Basics of a Shutdown

    Mar 1 • Government, Regulation • 357 Views

    On Friday, we might have a funding gap. With no up-to-date appropriations, agencies providing nonessential services from the federal government will have to stop. But what is “nonessential?”

    A recent congressional research paper says we can look back to 1995 for an answer. In the health category, the National Institutes of Health did not accept new patients for clinical research. Many application reviews, ranging from firearm requests to passports and visas were postponed. National parks and monuments were closed. Federal contractors might be unpaid.

    On the other hand, national security, benefits that are not annually funded, emergency medical care, disaster response, border protection…you see the basic idea…these continue.

    Finally, who is explicitly “excepted?” The list includes the President and members of Congress.

    And, we are prepared. Each year, federal agencies are asked to submit shutdown plans.

    The Economic Lesson

    The spending, taxing, and borrowing overseen by the President and the Congress is called fiscal policy.

    While a funding gap might be the immediate fiscal controversy, within weeks, the Congress will also have to raise the debt ceiling.

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