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    Flying Snakes and Economic Growth

    Nov 24 • Government, Innovation • 480 Views

    Sometimes the federal government spends a tax payer’s money in unexpected ways. According to the Washington Post, scientists funded by the Department of Defense are studying snakes that can fly. Slightly venomous, sort of air-slithering, these Southeast Asian snakes can glide through the air for as far as 780 feet. Our DOD wants to know how.

    Thinking about the DOD and flying snakes took me to the space program. For industry and consumers, there are lots of practical examples of NASA sponsored research that have been used productively in the private sector. My favorite, though, is the golf ball with “500 dimples arranged in a pattern of 60 spherical triangles.” You can guess the benefit. Ball flight is faster and more stable.

    As NY Times columnist David Leonhardt emphasized, fiscal prudence involves retaining projects that will stimulate economic growth. And as Thomas Friedman said, this takes us to “More (Steve) Jobs, Jobs, Jobs, Jobs.” To grow and diminish unemployment, we need to stimulate innovation.

    The Economic Lesson

    New technology and ideas propel economic growth. Economists can use production possibilities graphs to illustrate economic growth. On production possibilities graphs, a bowed out curve is drawn which illustrates a country’s maximum production capability. For example, when the ability to schedule thousands of overlapping activities is developed by NASA, licensed to a private company for commercial use, and manufacturing becomes more efficient, the production possibilities curve shifts to the right. 

    Maybe flying snakes research will eventually shift a production possibilities curve?

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    More of a Contagious Disease

    Nov 23 • Financial Markets, International Trade and Finance, Money and Monetary Policy • 332 Views

    From FT.com: “The Irish say they are not Greece. The Portuguese say they are not Irish. The Spanish finance minister said last week that Spain is not Portugal. There are no prizes for guessing what Italy is not.”

    Also, This BBC article does a good job of showing how the fiscal woes of the Irish, Greeks, Portuguese and Spanish differ. Finally, you might want to refer back to “A Contagious Disease” for a diagnosis of eurozone fiscal illnesses.

    The Economic Lesson

    I discovered an easy to understand academic paper on the connection between fiscal and monetary policy in the “euro area.” Called “The Euro and Fiscal Policy,” it explained the fundamental tension between the “euro area’s” centralized monetary policy and decentralized fiscal policy. Its basic point was that when fiscal policy becomes powerless, monetary policy becomes even more important for steering a nation toward economic health. However, if the economic needs of euro area nations are so different, then how can one monetary policy function appropriately for everyone?

    Most simply defined, fiscal policy refers to government spending, taxing, and borrowing while monetary policy applies to the supply of money and credit.

     

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    Inequality and Movie Stars

    Nov 22 • Behavioral Economics, Government, Regulation • 301 Views

    Did you know that Academy Award winners live longer than losers? Much more than a trivia fact, Academy Award winner longevity provided researchers with data about inequality.

    As reported in the May 15, 2001 issue of The Annals of Internal Medicine, researchers gathered mortality statistics for 1649 people. They looked at all “actors and actresses ever nominated for a leading or supporting role…For each, another cast member of the same sex who was in the same film and was born in the same era was identified…” Their goal was to determine whether relative success correlated with a person’s lifespan. Their answer was, “Yes.” They concluded that winners had approximately 4 extra years of life and that “…movie stars who have won multiple Academy Awards have a survival advantage of 6.0 years over performers with multiple films but no victories.”

    I know that you might have many questions. The researchers did also. But our key here is to think about whether inequality among all of us in the U.S. warrants remedial action from our government.

    This takes me to a recent NY Times column from economist Robert Frank. Comparing 1976 and 2007, he tells us that the top 1% of earners moved from an 8.9% share of total income to 23.5%. Then, he also points out that counties with rising income inequality experience higher divorce rates, more bankruptcies, and longer commute time. His point? Because “…greater inequality causes real harm…” more income equality through higher taxes is a valid goal for our leaders.

    During an Econtalk podcast, George Mason University economist Russ Roberts disagreed with Dr. Frank’s conclusions. Dr. Roberts said that economic growth was constrained by income redistribution and a “bigger pie” will help everyone.

    The Economic Lesson

    Taxes are all about income redistribution. If we promote equality, we will have more income redistribution through taxes, more fairness, and a common living standard. However, economic efficiency will suffer and our economic pie will grow more slowly. By contrast, economic competition leads to more efficiency, more entrepreneurial energy, more economic growth and a bigger pie. And, is it fairer to be able to keep more of what you earn?

    You might want to look at economist Arthur Okun’s Equality and Efficiency: The Big Tradeoff.

     

     

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    What If A State Defaulted?

    Nov 21 • Economic Debates, Government, Macroeconomic Measurement, Money and Monetary Policy • 872 Views

    What would happen if a state defaulted on its debt? It is unlikely. It has not happened since 1933. But…what if?

    In a fascinating simulation at The Economist’s Buttonwood Conference, an auspicious group of role players simulates a state debt crisis. As they debate the facts, unexpected events are announced that influence their discussion. (I really enjoyed watching the simulation for close to 1 hour.)

    The facts: The fictitious state of New Jefferson is the 3rd largest state in the U.S. Economically diverse, it has considerable unemployment, underfunded pensions, and residents who prefer low taxes and high spending.  Its senior senator chairs the Senate Banking Committee.

    The dilemma: A panel of “advisors” debates what the federal government should do. Should there be a bailout? If so, who? The Treasury? The Fed? Another way? In addition, exacerbating the crisis, periodic news flashes interrupt their deliberations. For example, as they speak, the advisors learn that if the state does not get $1.5 billion by Wednesday, it will default.

    The roles include the (fictitious) Chairman of the Fed, the Secretary of the Treasury, and the White House Chief of Staff. All role players such as Robert Rubin, former Secretary of the Treasury, have actually had these types of positions. Predictably, their deliberations include insight and humor about relevant domestic and international implications.

    When California really did ask the Obama administration for guarantees during 2009 in order to borrow more money, they said no. As a result, during July, 2009, California had to issue IOUs temporarily to pay some of its obligations.  And now, just this week, a Yahoo Finance article cited California’s delay of a $10 billion bond issue because of investor disinterest. 

    The Economic Lesson

    Can a state declare bankruptcy? According to a very good Slate.com “explainer” article the answer is no because of the state’s sovereign status. Without the bankruptcy option, what happens to the state’s financial obligations? You might enjoy looking at the Slate article. 

     

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    Growth Stories

    Nov 20 • Economic History, Government, Innovation, Macroeconomic Measurement • 435 Views

    Height is about more than how tall you are. When affluence grows, so too do people. Why? Height seems to correspond to economic growth. 

    Connecting height and economic growth, a wonderful New Yorker article from 2004 tells us that Americans grew taller more than 50 years ago. Based on military records, a typical male was 67 inches during the mid-1800s, close to 70 inches in 1955, and since then, stayed there. In 1939, an average forward on the University of Wisconsin’s basketball team was 6’1″. In 1999, he was 7 inches taller. 

    I started thinking about height after reading a recent NY Times column by David Leonhardt on economic growth. At first, when he discusses cutting spending and raising taxes, the column appears to be a traditional attack on the deficit. Soon, though, reminding us that economic growth is the best way to diminish the deficit, he urges us to evaluate deficit cutting strategies in terms of their ability to stimulate growth. 

    If we follow Leonhardt’s wisdom, maybe then we will surpass the Dutch who are now among the tallest in the world with men averaging 6’1″ and women, 5’8″.

    The Economic Lesson

    Called anthropometric history, the history of human height has become an economic field of study. Economists use height data to form hypotheses about GDP.

     

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