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    Paying Less For a House

    Feb 21 • Demand, Supply, and Markets, Economic Debates, Government, Households, Money and Monetary Policy • 460 Views

    In an interesting Politico opinion column, journalist Michael Kinsley wonders why everyone seems to assume that climbing home prices are good. He points out that most people are happy when the prices of essentials like gas go down. So why the opposite for homes? 

    After all, the young couple first buying a home wants a low price. The family that is trading up might not want their new home to be priced higher. Only, he says, the retiring couple that intends to downsize or leave the market entirely clearly benefits from higher prices.

    Yes, he admits he is oversimplifying. Still, he asks why the media uses pejorative terms for declining prices and affirming adjectives and verbs for rising prices.

    Your opinion?

    The Economic Lesson

    Certain economists might say that the market is the solution and that prices have to fall until the demand side of the market has enough to buy. Other economists, worried about foreclosures, diminished perceptions of wealth, and higher home prices fueling economic recovery believe that government should subsidize the housing market and/or keep mortgage rates low.

    You can go to an excellent S&P/Case-Shiller graph here to see where home prices have gone between 1988 and 2010.

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    A Debt Tour

    Feb 20 • Economic History, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy • 491 Views

    Calling it “financial disaster travel journalism,” author Michael Lewis (The Blind Side and The Big Short) takes us to Iceland, Ireland, and Greece in 3 Vanity Fair articles that are wonderful.

    Comparing Iceland to Ireland, he tells us, “But while Icelandic males used foreign money to conquer foreign places–trophy companies in Britain, chunks of Scandinavia–the Irish male used foreign money to conquer Ireland.” Meanwhile, the Greek government was just spending, hiring, paying salaries and borrowing.

    His Iceland stories include a fisherman who says, “I think it is easier to take someone in the fishing industry and teach him about currency trading than to take someone from the banking industry and teach them how to fish.”

    For Ireland Lewis asks why, “For the first time in history, people and money longed to get into Ireland rather than out of it.”

    And for Greece, the debt story took him to a monastery.

    Summarizing it all in a Planet Money podcast, Lewis says that in Greece, “the country sunk the banks” while in Iceland and Ireland, the banks “sunk” the country.

    The next stop for his financial disaster journey is California.

    The Economic Lesson

    Sovereign debt is the money owed or guaranteed by a country to investors who purchase its bonds. It is just another name for government debt. 

    Alexander Hamilton believed that sovereign debt, as long as it was manageable, was beneficial. Reading about his plan to fund and refinance the United States’ revolutionary war debt reveals his commitment to establishing our good credit. His approach was varied, including issuing new bonds to pay for those outstanding and servicing the interest promptly on the foreign debt. It worked. Even those in Holland, then the financial capital of the world, displayed confidence in our public credit. Adhering to the Hamiltonian philosophy, the United States has never defaulted on its debt.

    For Portugal, Ireland, Italy, and Greece, investor worries about default lead to the creation of a euro zone emergency fund.


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  • Prices convey information.

    Giving Life a Price

    Feb 19 • Demand, Supply, and Markets, Regulation, Thinking Economically • 460 Views

    The people at OSHA (Occupational Safety and Health Administration) have been watching “Spider-Man.” Because of actors’ injuries during performances, the federal agency that monitors workplace safety went to Broadway.

    Should they?

    It is all about benefit and cost. Frequently, though, benefit and cost are tough to measure. For “Spider-Man,” on the benefit side, actors and audiences will be safer. Maybe the spillover is more attention to safety at other performances. Maybe an actor’s mother will not worry. Perhaps future medical expenses will be less. And perhaps they will be saving a life. On the cost side, there is the expense of running OSHA. For “Spider-Man’s” producers, compliance could involve the dollars spent to revise procedures. Also, the cost takes us to the intangibles like a less entertaining performance.

    You might want to look here for comments from Conan O’Brien and Steve Martin about “Spider-Man’s” problems.

    The Economic Lesson

    Because many regulations are supposed to save lives, we have to compare the cost of implementing them to the good they will do. We have to place a money value on both sides of the equation even if one side is a life. Then, by knowing the value of statistical life (VSL), we can assess the opportunity cost of saving a life.

    What is a life is worth? One expert says $7 to $12 million.

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  • Uncertainty can slow economic growth.

    Watson Wins

    Feb 18 • Innovation, Macroeconomic Measurement • 409 Views

    Playing against Jeopardy champs Ken Jennings and Brad Rutter, Watson, the IBM computer won.

    Imagine three podiums. One is labeled Ken, the middle one Watson, and the third one, Brad. IBM assured everyone that Watson had no internet access and all three players had to use their mechanical buzzers. Host Alex Trebek ran the game as he always had. Categories? For this round the contestants could choose from: Literary Character APB, Beatles Names, Olympic Oddities, Name the Decade, Final Frontiers, Alternate Meanings.

    The game soon revealed Watson’s strengths:

    Memory: Having “gobbled” up information from books, movie scripts, encyclopedias, dictionaries, countless sources, Watson knew it all and won’t forget anything.

    Reaction time: Watson was fast. (And he was programmed to buzz only when he had the answer while the humans sometimes buzzed just before they thought of it.)

    Decision-making: With wagering a part of the game, Watson had to decide what to bet. He had sufficient information about the facts and past games to know how much would be appropriate.

    You might enjoy this TED talk about Watson.

    The Economic Lesson

    With countless business, medical, and consumer applications where Watson’s skills are valuable, “he” can affect all of us.  Physicians, for example, could consult Watson for speedy medical diagnoses that could include a “confidence” number indicating whether the statistics are convincing.

    As economists, Watson takes us to spillovers and positive externalities.  Originally involving 2 entities, Watson’s impact will ripple outward to benefit many.

    So really, everyone, not just Watson, has won.


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    Shrinking Packages

    Feb 17 • Businesses, Demand, Supply, and Markets, Households, Macroeconomic Measurement • 543 Views

    Have you noticed that the 64-ounce Tropicana Orange Juice container now holds 59 ounces of juice? Or, that Scott Toilet Tissue is 104.8 sq. ft. instead of 115.2 sq. ft.?

    Other shrinking packages include…

    The 24-slice package of Kraft American Cheese has 22 slices.

    The 16 oz. Haagen-Dazs ice cream container has 14 oz.

    At 24 oz., Ivory Dish Detergent is now 6 oz. smaller.

    The 12 oz. package of Hebrew National Franks has become 11 oz.

    According to Consumer Reports, many everyday goods are getting smaller. When cotton, wheat, oil, sugar, oilseeds (e.g. soybeans and sesame seeds) and other commodities become more expensive, then suppliers have decisions. Absorb higher production costs? Increase prices? Shrink product size? Many have chosen to preserve profit margins by downsizing.

    The Economic Lesson

    According to the Bureau of Economic Analysis (BEA), the Consumer Price Index (CPI) recalibrates when package size changes. They explain it here. However, I do wonder whether the CPI adequately reflects the inflationary implications of smaller packages.

    The December-to-December, 2009-2010 inflation rate is 1.5%.


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