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    Chinese Imports

    Oct 23 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Government, Households, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 709 Views

    Are you paying more for your clothing?

    According to NY Times financial journalist Floyd Norris, women’s shirt prices, dresses, sweaters, all that government statisticians consider female “outerwear,” have started to become more expensive. Meanwhile, the women’s “underwear” category reflects a 7.8% annual price spike since 2007.

    Explaining the price rise, Mr. Norris suggests that the era of cheap Chinese imports might be coming to an end. And, if it is, the low prices that buoyed our purchasing power during the past 20 years will no longer elevate our standard of living.

    The Economic Lesson

    Let’s assume that changes in the Chinese economy such as higher wages continue to nudge their export prices upward. And, what if the U.S. Congress successfully pressures the administration to support tariffs on Chinese goods because the yuan is undervalued? Some would say that the inflationary impact is a minus but that tariffs on Chinese goods would lead to additional jobs.

    An Economic Question: Do you agree with this 2004 paper from former Federal Reserve Vice Chairman Roger Ferguson that says even with the jobs disruption, cheap imports are much more of an economic benefit than tariffs?

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  • Another Greek Haircut

    Oct 23 • Economic Debates, Financial Markets, Government, Labor, Macroeconomic Measurement • 537 Views

    2 day strike

    Euro progress

    Planet Money?

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    A Surprising Deficit Worry

    Oct 22 • Economic History, Financial Markets, Government, International Trade and Finance, Money and Monetary Policy, Thinking Economically • 639 Views

    Who do you think is the biggest holder of U.S. government debt?

    The U.S. government.

    Whenever Social Security collects more payroll tax money than it needs, it buys U.S. securities. Retaining cash would mean no return, buying stock could be risky and, government bonds are still the safest investment. Consequently, government agencies buy U.S. treasury securities. Similarly, to affect interest rates, bank reserves and the money supply, the Federal Reserve needs to buy and sell U.S. debt.

    So, when NPR’s Planet Money secured a government document called “Life After Debt,” they discovered that, in 2000, the White House was worried about 3 years of no federal deficit. The paper asked, “What if the government no longer had to borrow money?”

    Their answer takes us back to Social Security, the Fed, and a third group.

    1. What would government agencies such as the Social Security Trust Fund do with their excess funds?
    2. Could the Federal Reserve use other securities or maybe even stock to implement monetary policy?
    3. Is there an alternative investment for the households, businesses, and countries who buy treasury securities because they can depend on the “full faith and credit” of the U.S. government?

    Our bottom line: A manageable debt and deficit can be beneficial. As Alexander Hamilton said in 1781, “A national debt, if it is not excessive, will be to us a national blessing.”

    The Economic Lesson

    Even if the deficit were ever eliminated, the U.S. would still have a massive debt. The deficit is the shortfall when spending exceeds revenue. The debt is the total amount that the U.S. owes.

    An Economic Question: Why might the U.S. have had no deficit for 1998-2001?

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  • Deficit Games

    Oct 22 • Behavioral Economics, Government, Macroeconomic Measurement, Thinking Economically • 559 Views

    http://www.nytimes.com/interactive/2011/07/22/us/politics/20110722-comparing-deficit-reduction-plans.html?ref=politics

    Superb interactive

    Time line

    Game of chicken?

    With the deadline 3 months away

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    Millionaire Inventors

    Oct 21 • Businesses, Demand, Supply, and Markets, Innovation, International Trade and Finance, Macroeconomic Measurement, Thinking Economically • 673 Views

    Assume you have $1.4 million dollars that you want to give away. Your goal is to spur the development of new technology, but just not any innovation–something that you want people to invent. Which technology would you choose?

    The people at the X Prize Foundation actually had to make that decision.

    Funded by Wendy Schmidt, wife of Google former CEO Eric Schmidt, their goal was to “…inspire a new generation of oil cleanup technologies that enable a more rapid pace of cleanup…” The winner was Elastec, a small Illinois firm that figured out how to accelerate the speed of removing oil from water from the usual 1,000 gallons of oil per minute to 5,000. Here you can see the oil skimmer recovery equipment that they developed for the competition. According to NPR, the firm is already receiving orders from around the world.

    Here (automotive energy conservation) and here (genome mapping) are other X Prize innovation challenges.

    Our bottom line? We need to encourage the innovation that fuels economic growth. The question, though, is how much the incentives should come from government.

    The Economic Lesson

    Economists can use production possibilities graphs to illustrate economic growth. On production possibilities graphs, a bowed out curve is drawn which illustrates that country’s maximum production capability. Shifting that curve to the right displays the additional productive capability created by the invention.

    An Economic Question: If you could fund an innovation contest, what type of invention would you target?

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