• Deficit D

    Feb 20 • Thinking Economically • 168 Views

    Facing a $1.6 trillion deficit, President Obama creates the National Commission on Fiscal Responsibility and Reform.

    Facing a $260 billion deficit, President Clinton appoints a Bipartisan Commission on Entitlement and Tax Reform.
    The commission’s recommendations (which were not implemented):

    From the Washington Post (August 12):
    “Olympic Antidote for Government Gridlock” (by David S. Broder)
    The Olympics were in Michigan and the gridlock was primarily about diminishing the deficit.

    Worried about a deficit that exceeded $200 billion, Congress passes the Balanced Budget and Emergency Control Act of 1985. Also called the Gramm-Rudman-Hollings Act, this law targeted FY 1993 as the year the deficit would be eliminated.

    For a more complete list of deficit related commissions:

    The Economic Life
    The turning point was probably the mid 1930s when politicians and economists starting thinking about balancing the economy instead of balancing the budget. Validation was presented by economist John Maynard Keynes whose General Theory of Employment, Interest, and Money was published in 1936. In his book, disagreeing with Adam Smith, Keynes said that because an economy in decline could remain there, the government should use deficit spending to “prime the pump”.

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  • Impossible But Funny Congressional Testimony

    Feb 19 • Thinking Economically • 247 Views

    You might enjoy looking at the Onion’s parody of Ben Bernanke’s congressional testimony. It never can or will happen this way. And yet, while the testimony is fictitious, the statements about money are based on its actual definition.

    The article describes Dr. Bernanke initially talking about interest rates and then pausing while appearing to realize that a dollar bill is just a rectangular piece of paper. Then the Onion “quotes” him saying…
    “‘You know what? It doesn’t matter. None of this—this so-called ‘money’—really matters at all.
    It’s just an illusion,’ a wide-eyed Bernanke added as he removed bills from his wallet and slowly spread them out before him…According to witnesses, Finance Committee members sat in thunderstruck silence for several moments…”
    The article concludes with the nation returning to barter:
    “’It’s back to basics for me,’ Bernard Polk of Waverly, OH said. ‘I’m going to till the soil for my own sustenance and get anything else I need by bartering. If I want milk, I’ll pay for it in tomatoes. If need a new hoe, I’ll pay for it in lettuce.’

    When asked, hypothetically, how he would pay for complicated life-saving surgery for a loved one, Polk seemed uncertain.’That’s a lot of vegetables, isn’t it?’ he said.”

    The Economic Life
    Any commodity is defined as money if it has three basic characteristics.
    1. A medium of exchange: People use it to purchase goods and services.
    2. A unit of value: People know how much it is worth.
    3. A store of value: When people return to the commodity in the future, it retains a relatively similar value.
    Consequently, gold, rectangular pieces of paper, tobacco leaves, beaver pelts, and seashells all have been money at some time.

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  • Is Law School A Good Investment?

    Feb 18 • Thinking Economically • 208 Views

    Looking at a paper by law school professor Herwig Schlunk reminded me that attending law school is similar to inventing a new machine. Both require an initial investment, both take several years to complete, and both will generate a private and social return. Also, they both result in capital creation.

    Dr. Schlunk’s paper focused on three hypothetical law students: Also Ran, Solid Performer, and Hot Prospect. Looking at ROI (return on investment) with opportunity cost, borrowing costs, and future income as important considerations for each prototype, the professor concluded that law school for most might not be a wise investment.

    Wearing economic lenses, Dr. Schlunk sees evidence of costs all students applying to all schools might consider.

    The Economic Life
    Rather like a recipe, land, labor and capital are the ingredients we use to make all of our goods and services. While all three are important, capital plays a special role. In his recent book, The Wealth and Poverty of Nations, Harvard professor David Landes explained why certain nations have experienced an increasingly better standard of living while others have stagnated. Looking at the variables he cites, physical capital which includes tools and machines, and human capital which involves education, entrepreneurship, and health, are most crucial for economic growth. Physical and human capital provide the highest ROIs.

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  • The Impact of the Vammas

    Feb 17 • Thinking Economically • 149 Views

    What is 68 feet long, has a giant blade in front for plowing, massive sweeper brushes in the middle, and a 452 MPH wind blowing capacity in the rear?

    A Vammas.

    Imported from Finland, the Vammas is used by Logan Airport for snow removal. A caravan of ten Vammas can clear a snow covered runway in as little as ten minutes (depending on the snow).

    Wearing your economic lenses, you could see that the Vammas generates a private and a social return. The positive social return of snow removal is considerable. However, is there also a negative side?

    The Economic Life
    The private rate of return–the net amount a business gets from an investment–tends to vary considerably and can ultimately be nonexistent because of competition. Moving beyond its origin, as the impact of the innovation ripples through society positively and negatively, it creates a social return. Both are tough to calculate. Edwin Mansfield, a University of Pennsylvania economist (1930-1997) who studied the impact of innovation concluded that smaller innovations such as new industrial thread had a much greater social rate of return than products and processes that sound more dramatic.

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  • The Ethical Economy

    Feb 16 • Thinking Economically • 166 Views

    During a recent discussion at Trinity Church (near the NYSE) Susan Lee, an economist, and The Archbishop of Canterbury spoke. Both sought a better society. Both wanted a wealthier society. Then though, they diverged.

    Summing up each one’s perspective, Dr. Lee said that, “Economists are interested in how to make the pie larger. Theologians are interested in how to divide the pie…”
    (In his grave nearby, Alexander Hamilton surely had an opinion.)

    The Economic Life
    Our dilemma as a society is locating the most ethical point on a continuum of wealth redistribution. On this continuum, imagine no redistribution on the right and total sharing of that a person earns on the left. At the beginning of the 20th century, we could say that we were at the right end. Then, with the passage of social security in 1935 and Medicare in 1965, we moved leftward. Now, should we move left or right?

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