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    A QE2 Eulogy

    Jul 1 • Businesses, Labor, Money and Monetary Policy, Thinking Economically • 682 Views

    Although QE2 ended yesterday, eulogies for the Fed’s $600 billion bond buying program did not focus on the qualities of the deceased and why we will miss her. Yes, some did believe that things would have been much worse without QE2. But others were saying it was unnecessary and will fuel inflation.   

    Described in this Marketplace Whiteboard video, quantitative easing was about flooding banks with money by exchanging the securities they owned with deposits and reserves from the Fed. More money should mean lower interest rates which can encourage businesses to borrow.

    Logical. But it did not work out that way. Between November, 2010 and June, 2011, when QE2 was “alive,” we had the low interest rates. Still though, lending lagged, unemployment remained high, and growth, sluggish. 

    The Economic Lesson

    Can government make a difference? Adam Smith (1723-1790) said leave the economy alone. John Maynard Keynes (1883-1946) said prime the pump. Sadly, the economy can never provide a controlled experiment for deciding who is right.

    Even now, economists dispute the causes of the Great Depression. Was the problem insufficient government spending or inadequate monetary policy? Did the depression end because of WWII or would pent up demand have blossomed with or without a war?

    An Economic Question: Even when banks are flooded with money through quantitative easing, why might they be unwilling to lend and businesses uninterested in borrowing?

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    Are the Rich Getting Richer?

    Jun 30 • Government, Households, Labor, Macroeconomic Measurement • 463 Views

    Their conclusion was clear. A recent Federal Reserve study tells us that the rich are getting richer. A closer look, though, reveals it is a lot more complicated.

    We need to be aware of two issues.

    1. How should we define income and wealth? Calculating income, certain variables are obvious such as wages. However, should we include workplace benefits? “Psychic income” from the environment is even a possibility. You might think “psychic income” is ridiculous but think for a moment about Manhattan and Missoula. If the cost of living is much higher in Manhattan than Missoula, should we add the “psychic income” of the pleasures of Manhattan to offset its added expense? Similarly, assessing wealth involves decisions about what to include. On page 32 of the Federal Reserve study, you can see the variables they selected. 
    2. Are the same people becoming more affluent or have others replaced them? A recent report from the Treasury tells us that the “rich” consistently change. As average net worth grows, different people move into the top “slots.”

    Our point? Basing tax policy on income distribution statistics returns us to the mathematician, Benoit Mandelbrot. The closer we look, the more we see.

    The Economic Lesson

    Using Lorenz Curves, we can divide family incomes into quintiles and see the proportion of total national income possessed by each group. The answer, though, is only a starting point when we try to grasp income distribution.

    An Economic Question: Knowing that income distribution is a complex subject, still, we can decide whether our bias is toward equality or efficiency. As a voter, would you prefer the equality that results from more redistribution through higher taxes or less redistribution that encourages competitive behavior and growth.

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    How Much is $250,000?

    Jun 29 • Demand, Supply, and Markets, Economic Debates, Government, Households, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 537 Views

    Told that someone earns $250,000 a year, you should ask, “Where do you live?”

    According to CNN, you would need to earn $545,000 in Manhattan to spend what $250,000 will buy in Missoula, Montana. On this map, you can see how your cost of living compares to the national average.

    Specifically, here is a shopping list: “ground beef, tuna, milk, eggs, margarine, potatoes, bananas, bread, orange juice, coffee, sugar and cereal.” In Manhattan: $40.29; In Twin Falls, Idaho: $23.41.

    Buying a 3-4 bedroom house? $750,000 in Glendale, California; $375,000 in Twin Falls, Idaho.

    You can see where this is going. At first, it sounds simple. President Obama suggested $250,000 as a dividing line for increasing taxes. One number, one level of income. But is it?

    The Economic Lesson

    Taxes can relate to income in 3 basic ways:

    • Progressive taxation takes a higher percent from those who have higher incomes. 
    • Regressive taxation takes a higher percent from those with lower incomes. 
    • Proportional taxation takes the same percent from all.

    Our current income tax approach is progressive while a sales tax is regressive.

    An Economic Question: Using data from this map, explain how the cost of living varies.

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    Driving Costs

    Jun 28 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Environment, Regulation • 585 Views

    Describing traffic policy in several European cities, the NY Times tells of poorly synchronized green lights, congestion pricing, auto-free zones. When drivers are inconvenienced, there are fewer cars, fewer emissions, happier pedestrians and bikers.

    One question: How did cost compare to benefit?

    The Economic Lesson

    Referring to abuse of commonly owned resources, Nobel laureate Elinor Ostrom talked about a Swiss pasture. Animal owners endangered the entire pasture because it was communal.

    Called the tragedy of the commons, when a resource is shared by many rather than privately owned, it tends to be “misused” or “overused.” For a pasture, “misuse” is over grazing; in the ocean, fish populations are depleted; on roads, there are too many drivers; and in student lounges, people avoid clean-up.

    An Economic Question: Using the following facts, explain your cost/benefit analysis:

    In Traffic, Tom Vanderbilt describes the impact of tolls in Seattle on drivers with electronic devices that recorded where and when they drove. Just hearing that the cost of a trip would change, drivers left earlier, switched routes, changed plans. Then, when the tolls were imposed, their behavior changed even more. (p. 166) Researchers said the result of the tolls was a 13% drop in traffic that restored normal driving speeds.

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    More Oil Dilemmas

    Jun 27 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment, International Trade and Finance • 487 Views

    The recent International Energy Agency (IEA) announcement is about a lot more than a tank of gas. Everyday, for 30 days, 2 million barrels of oil will be released from strategic petroleum reserves (SPRs). The U.S. will be responsible for half of the 60 million barrel total while other IEA member nations will provide the rest.

    In addition to gasoline, toothpaste, food preservatives, vanilla ice cream with artificial flavoring, rose-scented perfume, plastic bags, Excedrin and golf balls all contain petrochemicals.

    That means not only might gas prices drop but also golf balls could be cheaper.

    The Economic Lesson

    Sometimes policy decisions have unintended consequences. Better unemployment insurance can lead to more unemployment. Seat belts can encourage unsafe driving. Diet snacks could make us fatter. And, will having more oil mean we will consume even more oil and soon return to higher prices?

    When price goes up, we have to sacrifice more for every barrel that we consume. Then, substitutes become increasingly attractive. (You might want to look at this pistachios econlife post.)

    Will attractive oil substitutes have a more long-lasting impact on oil prices?

    An Economic Question: How might you illustrate the IEA decision on a supply and demand graph?

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