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    The Doomsters or the Boomsters?

    Feb 21 • Thinking Economically • 837 Views

    Thirty years ago, an environmentalist and a business professor made a bet. In The Population Bomb (1968), Paul Ehrlich predicted global ecological calamity. Saying that free markets would solve environmental problems, Julian Simon, a University of Maryland business professor, disagreed.
    The bet involved the prices of five commodities (chromium, copper, nickel, tin and tungsten). Ehrlich said prices would rise during the next ten years because of shortages and Simon said they would fall because of the market’s response. The winner would receive the total change in price from the loser. Simon won. In 1990, Paul Ehrlich gave Julian Simon $576.07.

    But, it is not over until it is over…
    A TED speaker, Paul Kedrosky, returned to “The Most Important Bet in History” to see how each would have fared more recently. The results? It all depends on the starting year. With starting dates during the 1980s, Simon wins most of the time. Using starting dates during the 1990s, then Ehrlich wins.

    The Economic Life
    Fundamentally economics is about scarcity and opportunity cost. All of our land, labor, and capital are scarce because their quantity is limited. Looking at limited quantities environmentalists suggest conservation. Others believe that because the opportunity cost of using a resource rises when shortages are imminent, innovators develop more efficient alternatives. Then the shortage is no longer a problem.

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  • Deficit D

    Feb 20 • Thinking Economically • 177 Views

    2010
    Facing a $1.6 trillion deficit, President Obama creates the National Commission on Fiscal Responsibility and Reform.

    1993:
    Facing a $260 billion deficit, President Clinton appoints a Bipartisan Commission on Entitlement and Tax Reform.
    The commission’s recommendations (which were not implemented):
    http://retirement.gov/policy/docs/ssb/v58n2/v58n2p74.pdf

    1992
    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.

    1985
    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 • 257 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 • 219 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 • 157 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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