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    CPI Concerns

    Jan 25 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Macroeconomic Measurement, Money and Monetary Policy, Thinking Economically • 677 Views

    Should we care if China has a 5.1% annual inflation rate?  A little.

    The International Herald Tribune tells us that just 1/4 to 2/5 of the price we pay in the U.S. for an imported item reflects the cost of the good. Other slices of the price pie such as transportation, wages and salaries, profit, and electricity bills have more of an impact.

    Instead, it is the Chinese citizen that will suffer. One Chinese official said, “4 percent, China can bear it-beyond 5 percent, people will complain a lot.” And, according to this journalist, because the Chinese use an outdated list of goods and services, the actual rate could even be twice as high.

    But then, many people challenge the contents of the market basket on which we base our inflation statistics. With 8 categories of goods and services (food and beverages, housing, apparel, transportation, medical care, recreation, education & communication, other goods & services), the CPI might not be changing fast enough to reflect changes in spending. Here, we talked about the Billion Prices Project as an alternative.

    The Economic Lesson

    For the U.S. Consumer Price index (CPI) monthly, we not only hear an inflation rate but also the core rate that excludes food and energy. Some economists believe that the most accurate way to track inflation is through that “core” inflation rate. Why? Because a basic goal of inflation statistics is to convey price trends. By eliminating food and energy which tend to be more volatile than the other 6 categories of the CPI, the actual trajectory of prices might be more accurately displayed. To see trends firsthand, you might want to look here for a history of inflation rates in different countries until 2009.

    Using the rule of 70 (70 divided by the percent change), 5.1% Chinese inflation means that prices will double every 14 years. Looking at recent US inflation, $1987.70 in 2010 had the same purchasing power as $1000 in 1986 according to a Federal Reserve bank of Cleveland Inflation Calculator.

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    In A Good State

    Jan 24 • Government • 414 Views

    We know it’s not New York or California. The bottom of the list also includes New Jersey, Arizona, Florida, Nevada and others. These are the states that, having mismanaged spending and taxing, are now facing tough fiscal decisions. Their finances don’t add up and in a tough economy and the chance that growth will provide the solution is small.

    Who then did the right thing?


    Given an “A” by the Pew Governance Performance Project for “good data and strong processes,” Utah implemented performance based budgeting. This just means that they actually looked at the numbers, saw what worked and didn’t, and then eliminated non-performing programs. For example, the number of employees recruited by a $300,000 program to help businesses was minimal so it was canceled.

    Other states lauded by Pew for their approach were Virginia, Maryland, and Indiana.

    The Economic Lesson

    Three words explain performance based budgeting: margin, benefit, cost. Looking at the margin means looking at something extra. For budgeting, it just refers to the extra item being funded. That takes us to cost and benefit. Here we just compare. If the cost for the extra exceeds the benefit, then the good or service would be cut.


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    More Deficit Dilemmas

    Jan 23 • Economic Debates, Government, Labor • 393 Views

    We could say that what you solve depends on what you see. When told about ballooning state deficits, people first see big numbers. Their response? Let’s cut spending. According to polls, though, when asked yes or no about cutting specific programs, most of us say no, we can’t cut schools, or libraries, or ……just about anything.

    By contrast, our cities see potential bankruptcy and states see default (because, as sovereign entities, they cannot declare bankruptcy). A paper from The Brookings Institute suggests that our leaders look at California and the Intermountain West for insight about the “colossal challenges” facing most states.

    Presenting specific examples from California, Colorado and Nevada with more of a focus on Arizona, Brookings tells us that we have had a catastrophic convergence of politics, deficits, and demographics. The paper is unique because it displays how very different conditions from state to state could have created the same dismal results.

    1) It all began with “…a growth cycle that produces rising income tax revenues that in turn lead to tax cuts.

    2) Meanwhile we had, “…healthy revenues that convince the public to mandate spending increases…”

    3) Add to that “a growing population that needs to be served by program expansion” and you get a recipe for disaster when the boom turns to bust.

    Only one state is cited in the paper for political leadership that made wise fiscal decisions during good times and bad. More about that state and solutions, tomorrow.

    The Economic Lesson

    Economists call the recession’s impact on state budgets “cyclical” because its origin is the business cycle. A cyclical impact includes less tax revenue because of unemployment and added spending that social services require. Cyclical deficits disappear when the economy expands.

    The second type of spending is “structural.” Ongoing, structural obligations reflect a fundamental imbalance between revenue and spending whether the economy is expanding or contracting. They refer to spending that is a continuing promise such as government employees’ pensions or educational mandates.

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    Greener Money

    Jan 22 • Economic History, Environment, Innovation, Money and Monetary Policy • 457 Views

    Hearing that Canada was switching to plastic money this year, I imagined…plastic. It turns out that plastic money looks and feels pretty much like the cotton-based paper currency we now use. 

    Why make the change? Money was one reason. Although it is costs close to half as much to make cotton-based currency, plastic lasts 4 times as long. Also, it is tougher to counterfeit, it carries fewer germs, and it is more ATM friendly because it clogs less easily. Some call plastic currency “greener” because, as money that lasts longer, there is less to discard or recycle.

    Still though, Thailand tried it out and then, dissatisfied with how it “handled” and discolored, went back to its original currency. Mexico still has plastic currency but its banks have had to get used to not being able to staple bills together. One journalist said that plastic money is “springier.”

    Australia, the country that developed the polymer technology for creating plastic bank notes started using them in 1988.

    The Economic Lesson

    What money is made of matters. It is most crucial that the coin or currency that circulates is composed of material that has less value than the face value of the money.

    Seignorage refers to the money a central bank can make when it issues money because it costs so little to print it. The central bank gets the currency for the amount it costs to print it and then receives a market value return when it circulates it. We could say that it costs 16 cents to print a $1 bill. Then the Fed gets paid interest on the $1 if it buys a treasury bill from a bank with millions of dollars of that newly minted money. The seignorage is the different between the printing cost and the interest it gets.

    In 2006, when metal prices soared, there was concern that people would melt their coins. At the time, the metal in a nickel was worth 6.99 cents and in a penny, 1.12 cents. So, the US government said, “No,” it is against the law to melt money. Violators could face jail and large fines.

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    A Broccoli Mandate?

    Jan 21 • Economic Debates, Economic History, Government, Regulation • 387 Views

    For one federal district judge, deciding whether parts of the new health care reform law are constitutional relates to, “What is economic?”

    Our story begins with a court hearing in Florida on December 16. States opposing the health care reform law have said that that Congress does not have the authority to make us buy health insurance or, instead, pay a $695.00 annual fine. Defending the law, (federal) government attorneys said that the insurance market was economic activity under Congress’s authority to regulate interstate commerce. 

    Here is where economics appears to enter the picture for the judge. Pondering the authority of Congress, he said,  “In the broadest sense every decision we make is economic. The decision to marry. The decision to keep a job or not has an economic effect…If they [the federal government] decided everybody needs to eat broccoli because broccoli makes us healthy, they could mandate that everybody has to eat broccoli each week?”

    You might want to go here for a Washington Post interactive description of lawsuits challenging health care legislation.

    The Economic Lesson

    Discussed here, the balance between the power of the states and the power of the federal government relates to the Commerce Clause and the Tenth Amendment.

    The Commerce Clause of the US Constitution, Article 1, Section 8, Clause 3,  states that “The Congress shall have Power…To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”

    The Tenth Amendment to the Constitution says that those powers not given to the federal government in the Constitution are reserved to the states.

    And perhaps all of this takes us back to “What is economic?”

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