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    A Budget Question

    Mar 14 • Economic Debates, Government, International Trade and Finance, Thinking Economically • 451 Views

    Thought to have saved many lives, a Japanese early warning system sent a media alert seconds before the earthquake struck.  The system took 12 years to implement and cost close to $500 million.

    A similar warning system for the U.S. west coast is being developed. A multi second or minute warning may seem miniscule. However, it is long enough for speeding trains to decelerate, for elevators to reach the next floor, and for technology to go into a safe mode. Meanwhile, people can “duck, cover, and hold on.”

    This takes us to a question. We know that California has been on the brink of what would be bankruptcy if a state could declare it. We know that the U.S. budget is undergoing vast cuts. Would you vote to continue work on the multi-million dollar California Integrated Seismic Network Shakealert system?

    The Economic Lesson

    The opportunity cost of a decision is the next best alternative. It is the sacrificed alternative. In other words, when you decide to do one thing, you will not do something else. Or…”Choosing is refusing.”

    The opportunity cost of an early warning system could be more spending on Medicaid or Social Security or early childhood education. The opportunity cost could also be less spending.

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    Japan’s Sovereign Debt

    Mar 13 • Economic History, International Trade and Finance, Money and Monetary Policy • 422 Views

    Hoping to sell more Japanese government bonds (JGBs), in a rather novel advertising campaign last June, the Japanese finance ministry said that, “Women have a thing for men who own JGBs.” Their message suggests that women prefer men who are “serious about money” and value “stability.”

    Then, last January, Standard & Poor’s downgraded Japanese bonds to its fourth highest credit rating, AA-minus. With debt that has soared to close to 204% of its GDP, Japan owes a lot of money. By contrast, considered high, the outstanding debt of the U.S. is 70% of its GDP.

    Seeing Japan’s debt ads and its debt size, this takes us to a concern. Now that they will surely need to borrow more for disaster expenses and reconstruction, will they increase their debt? The implications?

    The Economic Lesson

    Why compare GDP and sovereign debt? You can think of borrowing money to buy a million dollar house. For billionaire Bill Gates, it is a small obligation. For a typical wage earner it is a huge debt.

    Similarly, a rich nation with a high GDP can borrow more because it has the affluence to pay it all back. But, how much is too much, even for affluent nations like the U.S. and Japan?

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    More Education Matters

    Mar 12 • Businesses, Economic Debates, Government, Households, Innovation, Labor, Macroeconomic Measurement, Thinking Economically • 383 Views

    15-year old U.S. students ranked #24 for math in an OECD assessment program (PISA). For reading, they placed #15.

    In a Teaching Company lecture called “Underperforming Schools” Wake Forest economist Robert Whaples suggests how we might raise our scores.

    Cost/benefit analysis: Dr. Whaples started with what we spend per pupil and then what we get. We spend, on average, $10,000 annually. What do we get? Ranked #24 in math and #15 in reading. New Jersey spends a lot more than Utah but their testing results are close. Even spending more on small classes does not seem to reap consistent benefits. So, is there a connection between educational achievement and spending? Are we sufficiently productive? He concluded, “Not necessarily.”

    Incentives: The next step then is to look specifically at teachers and students. Do teachers need different incentives such as merit pay? It is tough to design appropriate criteria. Would students do better if they had to take demanding “exit exams?” Some students excel with more pressure while weaker students drop out.

    Competition: Maybe vouchers and charter schools elevate student achievement by challenging enrollment at existing schools (that are monopolies). Here, Whaples said to look at the work of Stanford economist Caroline Hoxby whose research concludes that competition can make a big difference.

    Where does all of this take us? Most economists suggest that more “consumer sovereignty” would be desirable.

    The Economic Lesson

    In addition to productivity, incentives, and competition, economists use the idea of value-added to assess school quality. While value-added typically refers to a tax (VAT), for education, it takes us to student achievement. Stanford economist Eric Hanushek with 3 colleagues sought to measure teacher “value-added” through student achievement. 


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  • Displaying different strategies, McDonald's and Starbucks call a 16 ounce cup different names.

    More Conspicuous (Coffee) Consumption

    Mar 11 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 556 Views

    The same story.

    But now it is about coffee. Increasingly affluent, the Chinese have begun to drink more coffee (in addition to using more oil, eating more meat and buying more handbags). When talking about China, the International Coffee Organization says that coffee is an aspirational commodity. For a culture of tea drinkers, coffee represents “cosmopolitan sophistication.”

    Still though, the typical Chinese person drinks lots of tea and (a tiny!) 5 cups of coffee a year. By contrast, in Japan, annual per capita coffee drinking is 300 cups. Recognizing that the Japanese also had been tea drinkers, coffee retailers like Starbucks, with 200 Chinese stores, and Nestle see huge potential in China. And, the story is the same in India and Brazil.

    Meanwhile, on the supply side, coffee yield is down. Citing rains that damaged cherries in key growing areas, Indonesia predicts 2011 production will decrease 30%. Colombian growers are talking about the massive impact of temperatures that average just 1 or 2 degrees higher. Requiring new planting techniques and bug control, yield has plummeted, price has soared, and Yuban is charging 25% more.

    Also, espresso machine orders are up.

    The Economic Lesson

    Again, we have a classic demand and supply scenario. Demand shifts to the right as people in developing nations decide to conspicuously consume coffee. Supply, perhaps temporarily, shifts to the left as rain and heat diminish productivity. When demand is up and supply is down, price has to rise.

    As economists, we know that when price rises, 2 things happen. On the demand side, eventually, people want less. On the supply side, attracted by high prices, producers grow more, new firms enter the market and price drops.


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    Would You Use the Strategic Petroleum Reserve?

    Mar 10 • Demand, Supply, and Markets, Economic Debates, Economic History, Environment, International Trade and Finance, Regulation • 310 Views

    I am not sure what a giant salt cave is and cannot quite imagine 727 million barrels of oil. But, put them together and you have our Strategic Petroleum Reserve

    Concerned with supply disruptions after an OPEC embargo during the 1970s, Congress established the Reserve at 4 sites in Texas and Louisiana. In 2005, a new Energy Policy Act directed the Department of Energy to fill the reserve to one billion barrels. Since existing salt caves have no more room, the Department of Energy is currently getting authorization for new locations.

    So far, we have twice used the Reserve for emergencies: during Operation Desert Storm in 1991 (disruption worries from abroad) and after Hurricane Katrina in 2005 (oil production facility damage in the Gulf). Other reasons for its depletion include a Clinton administration decision to keep heating oil prices down by releasing some of the oil. Described as a “swap,” private industry later had to return the oil it received.

    This takes me to 2 questions:

    1. If we decide to turn on the SPR spigots now, will lower prices result in more driving, more demand, and higher prices?

    2. Contemplating the current oil market, how can we achieve the billion barrel directive?

    The Economic Lesson

    Sometimes good ideas have unintended consequences. Better unemployment insurance can lead to more unemployment. Seat belts can encourage unsafe driving. Diet snacks could make us fatter.

    During the 19th century, William Stanley Jevons (1835-1882) observed that greater fuel efficiency could lead to more resource consumption rather than less. As he expressed it, “It is wholly a confusion to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is truth.”

    Why? Lower prices could be one reason. The phenomenon has been called the Jevons Paradox.

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