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    Raising the Ceiling

    Jan 7 • Economic History, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy • 365 Views

    Calvin Coolidge once said, “Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.”

    The national debt did decrease when Coolidge was President. But then it rose during the 1930s and soared during WW II. John Steele Gordon’s Hamilton’s Blessing The Extraordinary Life and Times of the National Debt provides a wonderful history of the federal debt. While we owed $80,359,000 in 1792, in 1834 and 1835, the debt plunged to $38,000. A lot and a little, though are relative. Just like a $1 million loan is huge to someone earning $100,000 a year and tiny to a billionaire, so too does judging the size of our national debt relate to our nation’s wealth.  

    Where are we going with all of this? To the debt ceiling. The need to authorize the maximum amount we can borrow was established by Congress in 1917 through the Second Liberty Bond Act. Since 1962, the U.S. has raised its debt ceiling 75 times.

    And now, probably by March 31, we have to do it again.

    The Economic Lesson

    Specifically defined, federal fiscal policy refers to taxing, spending, and borrowing. It involves the federal deficit which is the shortfall between annual spending and revenue. The federal debt is the total amount that the U.S. government owes.

    The federal debt is held by the government and the public. For example, the Social Security Trust Fund has excess dollars which are not held in a lock box. Instead, the government loans the money to “itself.” As you know, you and I and other governments and businesses also can purchase the debt.

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    Doomster or Boomster?

    Jan 6 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment, Innovation, International Trade and Finance, Regulation, Thinking Economically • 1887 Views

    Agree or disagree? “Both the jayhawk and the man eat chickens, but the more jayhawks, the fewer chickens, while the more men, the more chickens.”

    The quote is from 19th century economist Henry George but it relates to a report from the FAO (Food and Agriculture Organization of the United Nations). Predicting that the world will have (approximately) 2.3 billion more people in 2050, the FAO  said we will need 70% more food production.

    Can we do it? The debate continues between the doomsters and the boomsters. Saying production cannot keep up with population, doomsters like biologist Paul Ehrlich look back to Malthus. Meanwhile boomsters, like Julian Simon say that human ingenuity and the incentives of higher prices lead to more production.

    The Economic Lesson

    Where are food prices? Summarized by Bloomberg, currently sugar and oilseeds (which include soybeans, sesame seed, sunflower products, canola) have been the primary reason for a 25% climb since December, 2009. The last big jump was during 2008 when a 43% spike in the FAO Index reflected higher cereals and rice prices and led to food riots in poorer nations. A handy site for seeing the current state of food production in developing nations, country by country, is here

    As economists we have so many variables! When the price of a commodity skyrockets, the result is less supply because the cost of production increases. On the other hand, as we saw with oil, when price goes up, it creates incentives on the supply side to, 1) produce more 2) innovate;  create an alternative.

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    Auto Innovation

    Jan 5 • Economic Debates, Economic Thinkers, Government, Innovation, Macroeconomic Measurement • 406 Views

    Saying, “I believe the people who invented the auto cannot abandon it,” President Obama supported the bailout of General Motors.

    Economist Joseph Schumpeter would have been horrified. The man who explained “creative destruction,” Schumpeter believed that economic growth depends on the pain of old industries dying and new ones taking their place.

    In response, Obama might have pointed out that he preceded his supportive statement by referring to G.M.’s “bad decision-making” and the need for it to “re-tool” and “re-imagine.”

    I suspect Schumpeter would have said, “Impossible!” 

    But where does this leave us now? The government has bailed out G.M. and has recouped some of the money through G.M. once again becoming a public corporation. In China and India, G.M. is soaring. Domestically, led by full size pick-up trucks, sales rose.

    But still, as economists, we should decide whether we support creative destruction.

    The Economic Lesson

    Joseph Schumpeter was a fascinating individual. Born in 1883, in what is now the Czech Republic, he was an academic superstar, an Austrian finance minister, a professor and a writer who wound up at Harvard. Asked about his aspirations, he answered, becoming the greatest economist, horseman, and lover in the world. Reporting on his progress, he said, “Things are not going well with the horses.”

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    A New Way to See Friction

    Jan 4 • Economic Thinkers, Innovation, Labor • 388 Views

    Thinking about friction, most people picture 2 surfaces rubbing together. As economists, we should instead think of the Nobel Prize.

    Friction is one reason that Dale Mortensen won the 2010 Nobel Prize in Economics.

    Discussing unemployment, Dr. Mortensen says that “friction” is one source of 9.8% joblessness. Hunting for a job, people experience friction when they complete paperwork, make phone calls, and wait on lines. Creating delays and frustration, friction is even more cumbersome when a worker tries to switch industries if the worker and the job have to find each other.

    The Economic Lesson

    Referring to unemployment in The New Yorker, James Surowiecki discusses the debate over whether unemployment is cyclical or structural. Is it because of the business cycle which means people are losing jobs because of diminishing production. Or, does high unemployment reflect a fundamental shift in the economy which has led to a mismatch between jobs and workers? You can see that both cyclical and structural unemployment involve friction.

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    Productivity Matters

    Jan 3 • Economic History, Innovation, Labor, Macroeconomic Measurement • 431 Views

    Sometimes new technology increases productivity.

    “Sushi making robots” at Kura, a restaurant chain in Japan, have replaced chefs while conveyer belts take the food to diners. By using less labor and more capital, in a tough economy, the firm is profitable.

    In 1913, Henry Ford decided to “take ‘the work to the man’ instead of ‘the man to the work'” with a moving assembly line. Implemented during October, by December, average Model T labor time for assembling the chassis decreased from 12 hours 28 minutes to 2 hours and 38 minutes (Chandler, p. 26).  

    Sometimes, though, attempts to be more efficient just do not work out.

    Hoping to save $3 million annually, Toledo, Ohio tried to implement a high-tech garbage system. Automating the pick-up with pincer equipped trucks, the new system, as described by one resident, doesn’t “…take all the garbage, they drop it everywhere, and you have to clean it up…”

    The Economic Lesson

    Defined as more output per labor hour, productivity results from more inputs (land, labor and/or capital), better inputs, and/or a more effective combination of inputs.

    You can see why productivity matters. As described in a Teaching Company Lecture by Dr. Robert Whapples (#4), greater productivity fuels economic growth. After recessions, typically, productivity increases because output is not entirely offset by lay-offs. Recent U.S. productivity, at an average annual rate of 6.2%, surged during 2009. During 2010, though, it slowed and even contracted for one quarter.

     

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