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    BP and the Financial Crisis

    Jun 2 • Economic History, Environment, Financial Markets, Innovation • 160 Views

    I suspect that there is an inverse relationship between government’s ability to get regulation right and the length of the legislation. Glass-Steagall was 34 pages long. Recently proposed financial legislation is 3000 pages long.

    The need for appropriate regulation is where Harvard professor Richard Rogoff is heading when he compares the BP oil spill and the financial crisis. Both, he says were characterized by “the promise of innovation, unfathomable complexity, and lack of transparency.” Both also are connected to economic growth, economic catastrophe and the need for a global regulatory consensus. Quesioning whether a global financial consensus is feasible, IMF officials have said that individual nations are acting but the pieces don’t fit together. For offshore drilling, we can say the same when we consider the disparate incentives facing Brazil, the United States, and Nigeria.

    Professor Rogoff concludes his paper with, “This time we can ill afford to keep getting it wrong.” I wonder though, whether, faced with the allure of innovation and the challenge of such complexity, government can ever get it right.

    The Economic Lesson

    I recommend looking at: This Time Is Different by Richard Rogoff and Manics, Panics, and Crashes, A History of Financial Crises by Charles Kindleberger. Both present the facts. By looking at the past, you can best decide what is wisest for future regulatory policy.

     

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    A Sweet Free Trade Zone

    Jun 1 • Government, International Trade and Finance • 154 Views

    Economically speaking, Tootsie Rolls are special.

    In 2009, U.S. sugar beet prices (at 27.2 cents/lb.) were more than double the world price of cane sugar (13.8 cents/lb.)  Consequently, almost anything with sugar in it is more expensive. According to the Dallas Fed, because of the import barriers that protected the domestic sugar industry in 2002, a typical household paid $21 extra (close to $26 today because of inflation) for products that contain sugar.

    But not Tootsie Roll. With Free Trade Zone status bestowed upon them by the U.S. Congress, the sugar they use in their Chicago manufacturing plant is tariff free.

    The Economic Lesson

    It is tough to find an economist who does not like free trade. In his Teaching Company lecture on the global economy, Dr. Timothy Taylor introduces his discussion about the benefits of trade by telling us that we probably learned about the noodle from Marco Polo and have been sharing ideas ever since. Several hundred years later, in a California assembly plant, NPR’s This American Life described how Toyota taught General Motors about manufacturing cars more efficiently. Indeed, from noodles to cars, now and for hundreds of years, trade has enabled us to share ideas. Also, the specialization that trade facilitates creates more efficiency when we do what we do best. As a result, there seems to be a correlation between higher G.D.P.s and more trade.

    Those who are harmed by free trade are easy to identify. By contrast, it is tougher to support a “faceless” consumer who would save $26.00 a year. Perhaps, the invisible consumer is the reason that nations still try to erect trade barriers. A list of trade barriers would include tariffs, import quotas, licensing restrictions, antidumping laws, government subsidies, embargoes and quality control standards.

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    Threatening the Life of a T-Shirt

    May 31 • Economic Thinkers, International Trade and Finance • 158 Views

    A typical t-shirt starts as cotton in Texas. Traveling by truck or train to California, it continues moving westward until it reaches China. In China, the cotton becomes yarn which is made into cloth which is made into  a t-shirt. With a “made in China” label, the t-shirt leaves China, headed for a screen printing plant in Florida. Perhaps months later, after the t-shirt has been sold and worn, it winds up in a used clothing bin, destined once again to travel thousands of miles to a clothing bazaar in Tanzania where it is sold.

    This abbreviated tale of a t-shirt’s life is told in detail in The Travels of a T-Shirt in the Global Economy by Pietra Rivoli. Seemingly simple, its journey meets opposition everywhere. When the opposition is successful, trade is burdened by tariffs, quotas, licensing restrictions and other laws that limit entry and thereby preserve domestic textile jobs.. For Rivoli’s t-shirt, tariffs increase production costs by $.24.

    At the end of a 2002 report from the Dallas Federal Reserve Bank called “The Fruits of Free Trade,” is a chart that conveys the cost of policies that save domestic jobs. For apparel and textiles, 168,786 jobs are saved. The cost though, is $33,629,000,000 or $199,241 per job. Why is the cost so high? Because consumers are paying more when there is no competition. 

    More tomorrow on the Dallas Fed’s report and a Teaching Company lecture from Timothy Taylor on globalization.

    The Economic Lesson

    David Ricardo’s principle of comparative advantage says that worldwide productivity increases when nations specialize and export the good or service for which they sacrifice the least to make.

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    Unexpected Economic Indicators

    May 30 • Demand, Supply, and Markets, Macroeconomic Measurement • 205 Views

    Instead of the G.D.P., CPI, and assorted leading and lagging indicators, economists also look at an entirely different set of data. Sometimes hemlines, movie star preferences, and everyday purchases provide business cycle evidence.

    During a plunge in economic activity, people’s tastes have reflected a sober outlook. Since the hemline index was created in 1926, a parallel between recessions and longer lengths has been apparent. Other research has shown that during hard times, people prefer “songs that are longer, slower, with more meaningful themes” and actresses with more mature features. Also, laxative, deodorant, rice, and beans sales tend to rise as do lipstick and make-up foundation purchases. By contrast, people buy less tobacco and carbonated drinks.

    The Economic Lesson

    Buying behavior takes us to the economic topic of elasticity. If we are looking at how much our quantity demanded changes (stretches) in response to a change in price or income, then elasticity is involved. For example, if we buy lots more (or lots less) rice when our income minimally changes, then our buying behavior is elastic. If buying remains relatively constant, as with chocolate during good times and bad, then our behavior is inelastic.

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    Economic Freedom

    May 29 • Developing Economies, Regulation, Thinking Economically • 175 Views

    Composed of 179 countries, the Index of Economic Freedom ranks France 64 and the United States 8. At the top of the list, with the more free economies and the lowest numbers, are Hong Kong, Singapore, and Australia while North Korea, Zimbabwe, and Cuba are listed at the other end. On the United States pages, the authors indicate that the index number is destined to increase because of the response to the financial crisis. Citing massive government spending, they say that economic freedom has diminished.

    A Washington Post column by Michael Gerson actually started me thinking about government economic intervention. He pointed out that support for health care reform has recently diminished to 14% of the U.S. population expressing ‘”very favorable” views’. Taking us to an historical perspective, he says that the social safety net initially targeted the elderly through Social Security and Medicare, and the poor and disabled with Medicaid and Aid to Families With Dependent Children. Looking at waning enthusiasm for health care reform, he suggests that the U.S. population prefers a safety net reserved for those who need it rather than everyone. He is also saying that U.S. public opinion prefers a lower Index of Economic Freedom number.

    The Economic Lesson

    To determine the extent of government economic intervention, researchers look at such variables as the ease of starting a business, the degree to which trade is free, and the level of government spending and taxation. The list also includes the amount of corruption that permeates the business world, such labor regulations as how easy it is to dismiss an employee, and the dependability of property rights.

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