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    Traffic and the Economy

    Oct 6 • Households, Innovation, Regulation, Thinking Economically • 286 Views

    Sometimes policies for economic growth can be found in the most surprising places. Seeing a new paper on peak hour travel started me thinking about the amount of time we spend commuting. And commuting took me to economic growth.

    If you have to commute, Chicago is the place to live. At 32.6 minutes each day, Chicago has the shortest commuting time when compared to 51 major U.S. metropolitan areas. By contrast, Nashville and Oklahoma City are among the worst. Much more than congestion, though, the study’s author says that distance is the cause.

    Variables that commuter researchers look at include the time spent in free flowing and congested traffic and the distance. Then, of course, gasoline enters the picture. Time and gas are economic variables. Whenever time and gas can be used more efficiently, the economy is affected.

    The solution is urban planning. If, like Chicago, more communities were closer to commercial districts, then commuting would require “about 40 billion fewer miles per year and two billion fewer gallons of fuel”.

    The Economic Lesson

    Suburban sprawl has a massive opportunity cost. With “denser metros” as the alternative, commuters would have more time and spend less on fuel. Resources not used to commute would be allocated elsewhere.


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    Supply, Demand, and Kimchi

    Oct 5 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 458 Views

    The kimchi mini-crisis is a perfect tale of supply and demand. Kimchi, “a fiery cabbage-based staple of Korea,” is typically made from “seasoned, fermented napa cabbage”.

    Farmers supply the napa cabbage for kimchi and demand comes from restaurants and consumers. Excessive rainfall has devastated napa cabbage harvests. Available for free at restaurants, sort of like salt and sugar, kimchi is a South Korean staple.

    With supply plummeting and demand at a consistent high, you can imagine where price has gone. Moving from 2500 won a month ago, to 4,000 won 2 weeks ago, to 11,500 won ($10.09 USD) now, the price of one 5.5 pound head of napa cabbage has more than tripled during the past month. At 3.6%, the South Korean inflation rate has risen to a 17 month high.

    The Economic Lesson

    An economist would ask how to affect the supply and demand curves. On the supply side, tariffs on foreign napa cabbage have been suspended and the government is buying extra napa cabbage from China. As an upward sloping curve, supply should shift to the right as imports increase. Demand appears much harder to affect since kimchi is a staple. The South Korean president has said he will use a different kind of cabbage in his kimchi but few seem to be following his lead.

    If supply shifts to the right and the downward sloping demand curve shifts to the left, then equilibrium price would start moving back to 2,500 won.

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    Health Care Insight

    Oct 4 • Demand, Supply, and Markets, Government, Households, Macroeconomic Measurement, Regulation • 384 Views

    Perhaps it all began when President Lyndon Johnson called Wilbur Mills, chairman of the House Ways and Means Committee. “Wilbur, I’ve just been looking through the polls here, and I’ve only got a few weaknesses, and the worst of them is that I’m not doing anything for the old folks. I need some help from you.” The result? During 1965 Congress passes Medicare Parts A and B.

    Fast forward to 2010 and health care spending that far exceeds what Congress originally projected. Why? Through an excellent 2 week series, The Incidental Economist concisely explains where we spend and “what makes it so expensive”. In a short period of time, you will be able to gain considerable insight.

    No, they say, obesity is not the problem. Instead, they look at inpatient and outpatient care, drugs, administration and insurance, investment in health, and health care workers. Then, areas of underspending and red herrings precede their conclusion.

    For each component, they provide 2 or 3 paragraphs with basic facts and a summary graph. Discussing inpatient care, they point out that, at the hospital, we actually spend less than other comparable countries. While each day costs more, we stay there for a shorter time period. However, once we are at home, as 41% of all health care outlays, outpatient care propels spending. Moving through big pharma, bureaucracy, and health care workers, some facts are surprising. Interestingly, goods and services that we privately pay for are the focus of their underspending discussion.

    At the end of each day’s entry they say, “None of this proves that this money is wasted or fraudulently taken. Nor am I saying that we shouldn’t spend more money than other countries. But this is money that goes above what you’d expect us to spend based on our greater wealth. We should at least be able to account for and explain this increased spending in some way.”

    The Economic Lesson

    Health care spending is close to 17% of GDP. However, the opportunity cost of health care is far more than dollars. The cost is the missed opportunities to spend some of that money elsewhere, or, instead, to save it.

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    Inflation Stories

    Oct 3 • Demand, Supply, and Markets, Economic History, Money and Monetary Policy • 474 Views

    Arrive at a supermarket at the same time everyday? Require cash instead of credit?  Stop making beer? Why?

    The answer to each question is INFLATION.

    We are told that the Fed is always worried about inflation. If you know that you should worry too but were not really sure why, I recommend a recent NPR Planet Money podcast about Brazil. 

    During the 1950s, Brazil printed a lot of money to pay for building Brazilia, their new capital. With more currency circulating, too many Cruzeiros were chasing too few goods and inflation developed. Expecting it to continue, businesses raised prices, workers wanted higher wages, and consumers made purchases sooner. The result? Price and wage hikes accelerated. Finally, by the early 1990s, according to Planet Money, the monthly inflation rate was 80%. That meant that during 1 month, the price of a $1.00 carton of eggs would become $2.00.

    Out of control inflation is like a virus that multiplies. Responding, supermarkets have to reprice items daily. Knowing that food will get new price stickers at 9:00 each day, shoppers arrive at 8:30. You can see why businesses would avoid giving credit. By the time they got paid, the purchase price would have changed substantially. Similarly, one Brazilian beer maker stopped production because the connection between his costs and pricing became impossible to calculate. 

    According to Johns Hopkins economist Steve Hanke, in Zimbabwe, with a daily inflation rate of 98% and a monthly rate of 79,600,000,000%, it took 24.7 hours for prices to double during November, 2008. However, Hungary holds the record with a daily inflation rate of 195% during July, 1946.

    The Economic Lesson

    Textbooks say that inflation has three basic causes. 1) Too many dollars chasing too few goods is called “demand pull” inflation. 2) When the cost of land, labor, and/or capital rises, we have “cost push” inflation. 3) Inflation also can result when one item that is central to an economy, such as oil, becomes more expensive.

    With an inflation rate that is now close to 5%, Brazil has been controlling its causes.

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  • More Deja Vu

    Oct 3 • Economic Debates, Economic History, Government • 315 Views

    With the NY Times saying, “…Britain Keeps Welfare For the Well-Off,” the original Social Security debate comes to mind.

    Appointed by FDR in 1934, the Social Security Task force had an Old Age Security Group. Pushed by 11 states that already had old age insurance, the Roosevelt Administration felt pressure to act. They had to decide who to cover, how to implement the program, and how to pay fo it.

    One debate focused on whether the program should be universal. Predicting that a broader program would generate more current and future support than one that solely targeted the needy, they opted for eventual universal coverage.

    In the U.K. and here we still face the same dilemma. As a society, are we drawn together if we all share the same safety net? Or, have entitements become so expensive that differentiating payers and recipients is more important than unity?

    The Economic Lesson

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