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    Military Business

    Feb 5 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic History, Labor, Macroeconomic Measurement, Thinking Economically • 424 Views

    Choosing between “guns and butter” (or missiles and margarine), national leaders think of the military for guns and the private sector for “butter.” Not Egypt, though.

    As far back as the 1970s, when peace with Israel meant less to do for the Egyptian army, they redefined their role. According to an NPR report, the military decided to manufacture pots, process food, and make bottles for natural gas. A wikileaks 2008 diplomatic cable explained further that retired Egyptian generals ran “water, olive oil, cement, construction, hotel and gasoline” firms. The document said that the military built the road to Red Sea resorts while officers owned “large amounts of land…in the Nile Delta and on the Red Sea Coast.” (#j5)

    Will the military’s economic stake affect their political decisions? Thinking of their opportunity cost, will they favor stability over turmoil? The wikileaks document says yes.

    The Economic Lesson

    Every economics text reminds us that scarcity necessitates choices. One traditional choice is between producing for the consumer and producing for the military. Whenever land, labor, and capital are allocated toward one, there is less for the other one. Choosing guns instead of butter was one reason that the former Soviet Union collapsed.

    Economic growth, though, can enable us to produce more guns and more butter. One mid 1990s report suggests that fueling economic growth was the reason for the expanded role of the Egyptian military.

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    What’s Cooking?

    Feb 4 • Economic History, Households, Innovation • 348 Views

    The kitchen that my mother used 50 years ago is really not that different from the one we use today. Electricity, a mechanical refrigerator, and hot and cold running water have been here for a long time. But 60 years before that, the kitchen was a very different place.

    According to Princeton’s Stanley Lebergott (1918-2009), in Pursuing Happiness, in 1890, 24% (the majority in cities) of all homes had running water. In 1900, no one had a mechanical refrigerator and only 3% of all U.S. kitchens had iceboxes and horse drawn wagon deliveries of ice blocks. A freezer? No.

    Looking at those two kitchens, economist Tyler Cowen expresses concern. He relates the lack of meaningful technological change in the home to a stagnant standard of living and ineffectually rising health care and education spending.

    The bottom line? Nationally, we have to live within our means until the next technological revolution.

    The Economic Lesson

    What kind of technological revolution is meaningful? Sometimes less is more. Research from Edwin Mansfield (1930-1997) indicates something as simple as a new kind of industrial thread can make a big difference.

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    Getting the Most From Our Money

    Feb 3 • Developing Economies, Economic Debates, Economic Thinkers, Environment, Regulation, Thinking Economically • 362 Views

    In 2020, according to the World Health Organization, traffic fatalities will be the second leading cause of deaths in the world. Moreover, in the U.S. alone, approximately 57 million birds are killed by cars annually. (from Cool It, p. 154)

    So, asks Bjorn Lomborg, would you be willing to use existing technology to solve the problem? Probably not since the solution is a 5 MPH speed limit.

    Lomborg’s example relates to his support of a micronutrient program for the developing world. Getting swept up by emotions, we tend to ignore the cost of a solution. As a result, we “feel good” rather than “doing good.” Here, he tells us that adding crucial nutrients, Vitamin A and zinc, to a child’s diet in Kolkata, India would cost $2.20 a year. He estimates that $10 spent on Vitamin A would reap a $170 benefit in “health and long-term prosperity.” By contrast, he believes that $10 spent on carbon offsets would result in a $3.00 benefit.

    The Economic Lesson

    We might not agree with Dr. Lomborg’s numbers. But, as economists, we should agree with his approach. Thinking at the margin, he compares the extra benefit ($170) to the extra cost ($10.00) in order to make a decision.

    His approach also reminds us of scarcity. Because resources are limited, we have to make choices. Doing more of one thing means less of something else.

    Correction: More recent WHO data indicates that by 2030, traffic fatalities will rank five among the causes of death in the world.

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    When is 60 a Good Grade?

    Feb 2 • Developing Economies, Economic Thinkers, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 366 Views

    At 60.8 percent, the Institute for Supply Management’s (ISM) measure of manufacturing activity was way up, far more than anyone expected. Reflecting expansion, any number above 50 is good.

    So robust a number takes us to a question. If production is healthy and the U.S is  the world’s biggest manufacturer, then why do so many people say we just don’t make things anymore?

    Actually we do. It’s just not what we used to make. A Planet Money podcast said it perfectly when they went to a failing button factory and a thriving electronics connector company. The former was replaced by plants in China while the latter, requiring innovation and technology, is perfect for the U.S.

    Similarly, according to “Made in the U.S.A. Still Means Something,” we no longer make inexpensive dress shirts and microwave ovens. However, we do produce health care technology, chemicals, aircraft and space-related equipment. 

    You see where this is going. We do not produce what low cost labor can do better. Instead, we use technology to make more technology. The result is fewer people making more goods. These graphs perfectly show the inverse relationship between jobs and productivity.

    The Economic Lesson

    Both David Ricardo (1772-1823) and Joseph Schumpeter (1883-1950) would be saying, “I told you so.” Referring to comparative advantage, Ricardo would say trade, trade, trade, because each nation then can do what it does best and the whole world benefits through greater efficiency. Meanwhile Schumpeter would remind us that progress necessitates creative destruction through which outdated industries are replaced by new firms.

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    The Economic Response to Riots

    Feb 1 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 311 Views

    When the rioting starts, where does economic activity stop?

    In Egypt, gas and food were immediately affected. One owner of an Alexandria Mobil Station said he had not gotten a gas delivery for 2 days. The price of certain foods soared. One kilogram (close to 2 pounds) of beans moved from 35 cents to $1.70. Government subsidized bakers were also affected. No subsidies, no bread.

    Meanwhile, large containers remained unloaded at major ports. Evacuating their employees, Coca-Cola and other multinationals, including banks, temporarily closed their offices. Volkswagen canceled deliveries and tour groups canceled their plans. Trying to prevent further declines, officials closed the Egyptian stock market while the country’s credit rating has been downgraded.

    Still though, the one impact that could reverberate around the world has not happened. The Suez Canal remains open. A closed canal would add 10 days and 6000 miles to the length of oil shipments and further fuel an increase in its price. But, as one Forbes article points out, “floating storage,” the oil that is “sitting in tankers in the high seas,” would initially compensate for late deliveries.

    The Economic Lesson

    To get a picture of the government’s impact on the Egyptian economy before the riots began you might want to look at the Index of Economic Freedom where Egypt ranks 96 out of 179 countries. Here, the World Bank’s “Ease of Doing Business” index places Egypt at #94 from 183 nations. Last year though, it was #99.


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