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    The Tip of the Iceberg?

    Mar 26 • Government, Macroeconomic Measurement, Thinking Economically • 226 Views

    Growth or a safety net? Thinking at the margin, an increasing number of European policy makers are debating a change.

    The result is a classic economic dilemma. Unemployment and medical insurance, pensions, licensing protections, and job guarantees can each tug GDP downward if they are government mandated. Between 2000 and 2007, eurozone economic growth averaged a sluggish 1.7%. By contrast, though, millions of individuals lead better lives because of government support. Thinking at the margin, the tradeoff is more growth or a bigger safety net. Because of scarcity, we cannot have everything.

    Greece’s fiscal problems are a consequence of enlarging the safety net. One Chinese official is quoted as saying the Greek fiscal crisis is only “the tip of the iceberg.”  Implying that the choice has to be a smaller safety net, he believes that the spending problem extends far beyond Greece to the entire eurozone.  

    Interesting facts:  According the OEDC, average number of actual working hours in 2008:  US: 1792, Netherlands: 1389, France: 1542;  But why is Greece 2120? Korea exceeds all and has the least vacation time.

    The Economic Lesson

    Economically speaking, the definition of scarcity is limited quantities. Because there are limited quantities of the factors of production (land, labor, capital), whenever we allocate resources for one good or service, we have less to use elsewhere.  The only remedy is economic growth.

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    A New Fed?

    Mar 25 • Financial Markets, Money and Monetary Policy • 238 Views

    “Independent” is the first word that comes to mind when I think about the Federal Reserve. Overseeing the supply of money and credit, the Fed is supposed to be an independent Federal agency.

    I wonder how the following basics of the Dodd committee’s financial reform proposals will affect the Fed’s efficacy and structure.

    1. A financial consumer watchdog agency would become a unit of the Fed. Having some independence, its head would be appointed by the president and confirmed by the Senate. (Organizationally, how would a new independent agency function within the Fed?)

    2. The Fed would regulate the larger banks.  The FDIC and the OCC (Office of the Comptroller of the Currency) would regulate the smaller ones. (As a result, certain regional Fed banks could lose authority over most of the banks they now regulate.)

    3. The Fed (with the FDIC and the Treasury) would be involved in a liquidation process for large banks.

    4.  A new council to assess systemic risk would place high-risk non-bank firms under the Fed’s oversight.

    5.  The Fed would implement the policy of an inter-agency financial council chaired by the Treasury. (Is independent, non-partisan action feasible here.) 

    An interesting note: Dr. Bernanke hopes that the concept of a living will, written by each large financial institution, would be considered.

    The Economic Lesson

    Rather similar to the human circulatory system, healthy banks are a fundamental necessity because they pump the money and credit around our economy that we need to produce goods and services.

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    Costly Behavior

    Mar 24 • Economic Thinkers, Environment, Government • 285 Views

    Do you approve of Pigovian taxes?  These are taxes levied on seemingly undesirable behavior in order to compensate for their negative impact on society.

    soda tax: Among other municipalities, New York State and Philadelphia are proposing soda taxes.

    bag tax:  Implemented in Washington D.C. as of January 1, a five cents tax on plastic bags. 

    911 tax:  In Tracy, CA, if you call 911, it will cost you.  Some people are deciding that a cab is cheaper.

    elevated library late fees: In San Jose, CA  an overdue library book could cost you 50 cents a day.

    The Economic Lesson

    Pigovian taxes, named after economist Arthur Pigou (1877-1959), are based on the idea that undesirable behavior creates a cost for society. Therefore, a tax is essentially a “payback”  that offsets the cost and/or minimizes the behavior because it becomes more expensive.  The negative result is also called a negative externality.

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    Random Recession Notes

    Mar 23 • Businesses, Demand, Supply, and Markets, Macroeconomic Measurement • 217 Views

    The impact of a recession might not be entirely what we expect.

    A recent study from the University of Ottawa suggests that we sleep more during a recession. Canadians slept two hours and 34 minutes more per week.

    Hypothesizing that it makes people happier, a U.K. hairdresser saw a 67% “surge” in blond hair dye sales. 

    Daniel Gross believes that Americans, in what he quotes a sociologist as calling the “great reset”, want to be healthier.  As a result, they are buying more vitamins. 

    Rather interestingly, perhaps contradicting the healthy theory, Daniel Gross also points out in the same Slate article that McDonald’s sales rose during the recession.

    Finally, I heard during a podcast that because we vacation less during a recession, shark attacks have diminished.

    The Economic Lesson

    Does all of this take us back to demand, supply, and prices?  During a recession demand and supply shift, mostly downward, but not for everything. 

     

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    Hamburger Economics

    Mar 22 • Financial Markets, International Trade and Finance • 513 Views

    When U.S. senators consider whether to respond to an undervalued Yuan, they can check the most recent Big Mac Index.  Big Macs are 49% cheaper in China than in the U.S. According to The Economist, we would pay $3.58 for a Big Mac here and the equivalent of $1.83 in China.  An easy way to see the relative value of the dollar, the Big Mac Index lists prices in countries that include Japan ($3.54), Norway ($6.87), and Saudi Arabia ($2.67).

    The Maharaja Mac, sold in India, is not included in the Big Mac Index because it has a chicken patty instead of beef. In Israel, at kosher McDonald’s, Big Macs are also not listed in the index because the cheese is excluded.  

    The Economic Lesson

    The Big Mac Index is all about purchasing power parity (PPP). Saying that the Big Mac Index provides “food for thought,” a paper from the St. Louis Fed describes purchasing power parity as a foundation of international economics. Usually based on a “market basket” of goods and services, PPP helps us to compare currencies and predict how their value will change if their purchasing power is not equal. As I mention in a 1/07/10 post, Timothy Taylor presents an excellent PPP discussion in “America and the New Global Economy,” Part 1.    

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