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    A Plastic Penny?

    May 12 • Government, Money and Monetary Policy • 195 Views

    How do you feel about the penny and the nickel? If you care about the federal budget, you might want to mint them more inexpensively. But, if you own a laundromat, you disagree.   

    Pennies are actually copper coated pieces of zinc while nickels are nickel (but mostly copper). It costs close to two cents to mint a penny and sometmes as much as nine cents for a nickel. Making them more cheaply could mean replacing the copper in a penny with an aluminum alloy. The nickel and the penny could both be made of plastic.

    However, just switching from copper to zinc in the penny was controversial when President Reagan proposed it in 1981. A recent WSJ article described the uproar.  Some said we should not become dependent on foreign zinc suppliers (Canadian). Others said tradition was crucial. Vendors wanted to avoid retooling their coin machines. Plastic coins stir up even more emotion.

    Do care if your penny is plastic?

    The Economic Lesson

    Anything can be money, a piece of paper, a circle of zinc, or a seashell, if it has three basic attributes:

    1. It is accepted as a medium of exchange. For example, you and I are willing to use the commodity in a supermarket. A peso or a tie is not a medium of exchange in the United States. The nickel is a medium of exchange.
    2. It is a unit of value. We all know how much purchasing power a nickel represents but not necessarily the yen.
    3. It is a store of value. We all like our money to retain its purchasing power if we do not spend it immediately.

     

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    Choosing Means Refusing

    May 11 • Economic Debates, Government, Thinking Economically • 194 Views

    In yesterday’s Washington Post, Robert Samuelson reminded us that most developed nations will have a growing proportion of senior citizens. Comparing 2005 and 2030, for Greece, the 65 and older group will increase from 18% to 25%, for Spain, from 17% to 25%. According to 2000 US census projections, between 2010 and 2030, the 65 and older population will pop from 12.97% to 19.3%.  

    Calling it a “welfare state death spiral,” Samuelson believes that this simultaneous aging across borders eliminates the chance that one nation can extricate itself from a “bind” through help from a healthier country. Because, he says, of everyone’s unemployment insurance, health insurance, and old age assistance, governments will have excessive expenses that will be difficult to fund.

    The Economic Lesson

    Also, the causes relate to opportunity cost. Let’s assume that a politician can vote for or against an old age benefit. Therefore, the opportunity cost would be the best alternative that was not selected: choosing means refusing. One benefit of voting “yes” is reelection. Another benefit is giving money to a very needy person. By contrast, the benefits of voting “no” could include creating less debt for grandchildren and slowing economic growth. Each alternative has a high opportunity cost.

    Your choice?

     

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    Grading a Country

    May 10 • Businesses, Government • 154 Views

    We could say that the graders of sovereign debt use a “rubric” to decide whether a country has a high or a low score. In the classroom, students are given rubrics which specifically describe how a test is graded. A rubric is a list of facts and ideas that compose a high grade or a low one.

    When NPR’s Planet Money visited Standard & Poor’s to find out their “rubric”, they described a two step process. First S & P checks a variety of topics that include the country’s debt, monetary policy, exports, imports, budget, and election results. They look at objective and subjective data, even including what the media is saying. Next, all information is given to a 5 person committee that decides what the rating should be. 

    Recently, The Guardian described what the three major ratings agencies, Standard & Poor’s, Fitch, and Moody’s, do and listed the grades of nations ranging from Albania (B+) to Vietnam (BB). The grades are based on how likely a nation is to pay back its debt fully and on time. Because the United States and Canada, for example, are considered very likely to pay back all that they borrow, they received the highest rating: AAA. The lowest grade is a CCC and maybe even an R.

    Controversial during the subprime crisis, the ratings agencies generate criticism for their sovereign debt ratings also. Bill Gross, a prominent bond investor and the co-founder of PIMCO, questions how Spain, “a country with 20% unemployment… that has defaulted 13 times during the past two centuries” can have AA and AAA ratings.

    The Economic Lesson

    When countries borrow, they most typically issue bonds. Bonds are IOUs that pay interest in exchange for money from the lender for a specific period of time. A lender can be a person, a business, or another country. A country’s loans can be called sovereign debt.

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    Environmental Externalities

    May 9 • Developing Economies, Economic Debates, Environment • 257 Views

    There is oil under Murchison Falls National Park. Home to rare birds, lions, elephants, and giraffes, this Ugandan nature park is a tourist mecca. The Ugandan government, though, prefers oil to tourists as a revenue stream. 

    Thinking as economists, we can identify negative and positive externalities of the decision to let Tullow Oil, PLC explore and drill. On the negative side, wildlife in the park is being adversely affected and villagers’ revenue from tourism is diminished. However, because oil will bring in more money than tourism, Uganda’s economic growth should accelerate and generate a ripple of benefits. 

    Economics is always about cost and benefit. Environmentalists say the choice is money or wildlife. I wonder, though, whether the “money” side involves a better life for many people if the Ugandan government appropriately manages foreign investment. Still, we have an “on the one hand but then on the other” situation–the reason President Harry Truman (1945-1953) said he was searching for a one-handed economist.

    The Economic Lesson

    Whenever a transaction between two parties affects a third, uninvolved individual or group, economists see an externality.

    Comments? Other externalities?

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    A Water Dilemma

    May 8 • Demand, Supply, and Markets • 200 Views

    Last week, the Boston area had undrinkable water for several days. Predictably, bottled water sales soared as did bottled water prices in certain stores.  Equally predictably, politicians condemned the increases. Most economists, though, disagreed.

    As explained by a Boston Globe journalist, price boosters best served the public interest because they had the incentive to supply more water. Yes, price could even double but, as he describes, “…sales of water are slower [than at the cheaper vendor] and there is a lot of grumbling about the high price. But even late arriving customers are able to buy the water they need…” By contrast, the lower priced vendor had “his entire stock cleaned out.”

    The riddle: How can high prices make people happy? 

    The answer: When they preserve the supply of a necessity.

    The Economic Lesson

    Picture a supply curve sloping upward crossed by a demand curve sloping downward. Price is the y-axis and quantity is the x-axis. As price rises, producers are willing and able to create and sell more. Why? Because higher prices mean higher profits. Whenever government steps in and prevents price from naturally rising as the market dictates, shortages result. Do you prefer high or low water prices for Boston?

    Comments? 

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