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    Look For the Silver Lining

    May 4 • Businesses, Demand, Supply, and Markets, Households, Thinking Economically • 473 Views

    You might want to decide whether to set the table with Granny’s silver, sell it, or melt it. To see why, you just need to look at a graph of the price of silver. Representing a 162% increase between January and now, the line is almost vertical.

    When silver was $49.845 an ounce on April 25, people recalled its 1980 high of just over $50.00. (Within 4 months, the price dropped 78%.) If we adjust for inflation, silver would need to be $135.00 an ounce today to equal its 1980 high.

    Still though, silver’s current price is making a difference. Silver jewelry has gained  “cachet.” But, on the other hand, jewelers are looking for cheaper metals. Similarly, if the price goes high enough, industrial users will look for substitutes. And predictably, with price soaring, silver is attracting new investors.

    The Economic Lesson

    According to this silver value chart for coins, a Washington Quarter minted from 1932-1962 contains $7.53 of silver (May 3 prices). This takes us to one basic rule. The value of the metal in a coin should not exceed the value of the coin. For that reason, coin can be called nominal money. It has little intrinsic value.

    An Economic Question: If the value of U.S. coins and paper currency are worth no more than whatever they are made of, then why does money have value?

    You can look here for an answer.




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    Yak Herders

    May 3 • Demand, Supply, and Markets, Developing Economies, Innovation, Thinking Economically • 651 Views

    Demand is soaring for yartsa gunbu, a “nutty tasting fungus” from China’s Tibetan Plateau and similar Himalayan regions in Nepal and Bhutan. Reputed to have cancer fighting capability, aging retardants, and libidinal qualities, the fungus invades the dead bodies of caterpillar larvae and then “shoots up like grass out of their heads.”

    The reported benefits of yartsa gunbu remind me of the early days of Coca-Cola in Atlanta. Described in Mark Pendergrast’s excellent For God, Country and Coca-Cola, Coke was originally sold as a “nerve tonic.” This excerpt is from a June, 1887 Coca-Cola label (p. 33):

    “…This Intellectual Beverage and Temperance Drink…makes not only a delicious, exhilarating Beverage, but a valuable Brain Tonic and a cure for all nervous afflictions–Sick Head-Ache, Neuralgia, Hysteria, Melancholy, etc…”

    The Economic Lesson

    On the demand side, according to National Geographic, residents of Beijing and Shanghai are pushing price increasingly higher. One report claims that price rose 900% between 1997 and 2008.

    With more demand creating skyrocketing prices for yartsa gunbu, yak herders are earning record levels of cash income. Perhaps doing less yak herding, more people are gathering the fungus during the 4 weeks of the spring harvesting season. Still though, supply is said to have remained relatively constant.

    An Economic Question: How would you graph the market for yartsa gunbu?

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    Sales Tax Decisions

    May 2 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 530 Views

    A buttered bagel is a sandwich but not an unsliced bagel–unless you eat it in the store. Subject to the New York State sandwich tax, so too are burritos, wraps, BLTs and buttered rolls. 

    Plan to buy fudge? You will pay a sales tax in New York. Chocolate for baking? No tax. Potato chips and plain nuts are also tax-free but not honey-roasted nuts.

    Other tax decisions? According to the WSJ, in the U.K., for example, as of April, 2010, “dog food for ‘sheepdog breeds’ is taxed, but dog food for ‘working sheep dogs of any breed’ is not; food for greyhounds is taxed, food for ‘racing greyhounds’ is not.”

    And, in the U.K., sailors’ lifejackets are taxed because they are defined as adult clothing but “buoyancy aids” are not taxed.

    The Economic Lesson

    In the U.S., the personal income tax and social insurance taxes together total close to 85% of all taxes collected by the U.S. government. Corporate income taxes are a distant third at 8% while federal sales taxes are 3%.

    An Economic Question: Who do you think bears the incidence (pays for) the NYS buttered bagel tax? The seller, the buyer or both?

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    Medicare Math

    May 1 • Demand, Supply, and Markets, Economic Debates, Economic History, Government, Households, Macroeconomic Measurement, Thinking Economically • 583 Views

    The ratio is 3 to 1. The “3” is how much Medicare recipients are receiving. The “1” is what they paid.

    Still though, you can see from this NPR report why most people call Medicare an entitlement.

    According to a study from the Urban Institute, an average worker starting Medicare in 2010 paid close to $55,000 in Medicare taxes. That same person’s lifetime Medicare benefit (from age 65 until death) is projected to total $161,000. You can see here how taxes and benefits for Medicare and Social Security vary between 1960 and 2030.

    Rather similar to other pay-as-you go systems, taxes from current wage earners pay for current Medicare recipients. And therein lies the problem. Baby boomers, who far outnumber all other generations, have just started turning 65. Meanwhile, birth rates are falling and longevity is rising.

    Solutions? Higher taxes? Lower benefits? Cost control? Privatization? More borrowing through U.S. bond sales to China and Japan?

    The Economic Lesson

    During 1965, President Lyndon Johnson called Wilbur Mills, chairman of the House Ways and Means Committee, and said, “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? Congress passes Medicare Parts A and B.

    An Economic Question: Which new incentives would you suggest for the Congress, for Medicare recipients, and for healthcare providers to solve the Medicare problem?


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    Doha Deadlock

    Apr 30 • Demand, Supply, and Markets, Developing Economies, Economic History, International Trade and Finance • 598 Views

    Can you convince a Lubbock, Texas cotton farmer (or his Congressman) to forgo his (maybe $150,000) cotton subsidy? Probably not. After all, these U.S. government payments let him profitably compete in world markets.

    Correspondingly, would China say yes to a tariff free supply chain for the iPhone? Doubtful. After all, multinationals are providing a steady government revenue stream.

    Through the Doha (Qatar) Round of talks, 153 countries are negotiating hundreds of trade-related issues. The sponsor, the World Trade Organization (WTO), is concerned that the Doha Round could fail.

    So, instead of trying to get the US to eliminate payments to US farmers or to ask China to agree to lower tariffs, Plan B has been proposed. The new focus involves a basic trade infrastructure that includes road building in developing nations and sanitary standards.

    The Economic Lesson

    As Professor Timothy Taylor tells us, the World Trade Organization (previously known as GATT), has been immensely successful in lowering trade barriers. Since 1948, through 8 rounds of trade talks, they gradually achieved their goals.

    Now though, the Doha Round of talks has met resistance. Scheduled to conclude no later than January 1, 2005 and still continuing, the Doha goal of reducing agricultural tariffs and subsidies has been unsuccessful.

    What to do when you no longer have “low hanging fruit?” Look for different trees.

    An Economic Question: With “encourage comparative advantage and world trade” located at one side of a scale and “protect home industry” as the other end, what do you prefer?


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