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    A Budget Cut Mirage

    Feb 12 • Economic Debates, Government, Macroeconomic Measurement • 455 Views

    Reacting to concern about the federal deficit, the Republican leadership seems to be targeting $100 billion in discretionary spending cuts. Similarly, for his fiscal 2012 budget, President Obama recommends a 5-year freeze on non-security discretionary spending. Both proposals sound like a lot.


    According to NY Times columnist David Brooks it is a “mirage.” Defined as an imaginary vision, a mirage is a fantasy. Targeting non-security discretionary spending creates a fantasy because, as Brooks says, it is a mere sliver of federal spending. A discretionary spending goal enables the Congress and the President to focus on small crucial programs such as Teach for America, R & D, and foreign aid. And even then, they will not have dented a projected $1.5 trillion deficit.

    This Pew survey is one reason why.

    The Economic Lesson

    Imagine a pie. Take out 5 slices.  One slice for Health (primarily Medicare and Medicaid), one for Defense, and 3 more for Social Security, Income Security, and Interest on the existing debt. Having consumed more than 3/4 of the pie, we have not even touched the discretionary slices. And, it is those discretionary slivers of the pie that are being targeted for cuts rather than the five big slices.

    Here is a great interactive visual displaying the 2012 budget proposal.


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    Who Owns Deutsche Borse?

    Feb 11 • Demand, Supply, and Markets, Economic History, Financial Markets, International Trade and Finance • 444 Views

    Hearing that Deutsche Borse will probably purchase the New York Stock Exchange, commentary focused on a German firm acquiring the symbol of U.S. capitalism. But who owns the German firm? According to the WSJ, Americans are major shareholders with 41% of Deutsche Borse while Germans have 18%.

    Seemingly unrelated, the iPhone and a typical t-shirt are similar to Deutsche Borse. The iPhone supply chain winds up in China for assembly but the parts come from Germany and Korea and other countries where contract manufacturers are located. Comparably global, before a t-shirt lands in our drawer, it could have started as a cotton plant in Texas, become thread and a shirt in China, and then traveled to Florida for silk-screening.

    So, the next time you see a “made in China” label, remember that other countries should probably have been listed. And, when you hear that a German firm is buying another business, do ask, “Who owns that German firm?”

    The Economic Lesson

    A process rather than a place, a market determines prices and quantities when it brings together buyers and sellers. For the original New York Stock Exchange, in 1791, brokers met under a buttonwood tree on Wall Street. People who wanted to buy or sell shares of the First Bank of the United States knew that they could get information under that buttonwood tree.

    Now, with a global information infrastructure, markets for securities, iPhones and t-shirts can extend around the world.

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    The Right Stuff

    Feb 10 • Government, Households, Innovation, Labor, Macroeconomic Measurement • 448 Views

    Giving a grade of “One Pinocchio,” the Washington Post assessed the accuracy of President Obama’s February 7, 2011 speech to the U.S. Chamber of Commerce.

    Most interesting, though, were the topics on which he focused. Yes, President Obama said the U.S. has the most labor productivity when, according to the Bureau of Labor Statistics (BLS), Norway does. And, for education, he said we had the best universities although actually U.S. News ranks the U.K.’s University of Cambridge first. And finally, he said we had the freest markets but according to the Index of Economic Freedom we are #9.

    Still though, statistics are complicated. I am sure that we could find other numbers to support his conclusions. The key is that he looked at the right stuff.

    The Economic Lesson

    Focusing on productivity, education, and the market, President Obama took us to the basics of economic growth. Of course, in order to grow, we need to produce more per worker hour. And how can we grow? We need to develop our human capital. Only then can we innovate. And finally, through the market, individuals have the freedom to pursue their self-interest and start businesses with the new ideas they create.

    In The Wealth and Poverty of Nations, Harvard professor David Landes tells us that physical capital that 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 return on investment (ROI).

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    Who Needs a License?

    Feb 9 • Businesses, Demand, Supply, and Markets, Economic Debates, Innovation, Labor, Regulation • 465 Views

    What does a hair salon “shampoo specialist” have in common with a private detective? In certain states, each needs a license to do business.

    But what might licensing involve? For a Texas shampooer, it includes 150 hours of classes while a locksmith in Oklahoma has to pay a fee, take a test, and undergo a background check.

    A type of occupational regulation, economists have studied licensing because of its impact on the jobs market. Licensed occupations can have greater prestige, protect consumers, pay higher wages, charge higher prices, preserve the status quo, raise money for the state, and constrain employment growth.

    So, should we support it?

    More specifically, for each of the following, who should need a license? Acupuncturists? Tattoo artists? Tree-trimmers? Glass installers? Florists? Massage therapists? If yes, requirements?

    To make a decision, you might want to read this.

    The Economic Lesson

    We could say occupational licensing is a market vs. the government issue. Opponents of more licensing say the market would weed out incompetence. Proponents say the consumer needs protection. It could also take us to unemployment. Studies have shown more licensing, less employment growth. Yet another possibility is innovation because licensing tends to preserve the status quo. 

    During the past 50 years, licensed occupations have multiplied from 5% of U.S. workers to 23%.

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    Happy Rice Farmers

    Feb 8 • Demand, Supply, and Markets, Developing Economies • 600 Views

    With a typical Egyptian household spending 38.3% of its budget on food in 2008, you can see why soaring food prices could fuel turmoil. But what about the other side?

    For Senegal farmer and trader, Ndeye Sarr Diop, rising rice prices were an opportunity. The world price is the key. Why grow rice if you can import it more cheaply? Moreover, why export it if no one will buy it? In 2008, with prices soaring, expensive West African rice became desirable. Responding to the incentive, Senegalese farmers started planting. As Ms. Dopp said, “I hope rice will make me rich.”

    The Economic Lesson

    Hoping to encourage production and support farm income, countries subsidize certain crops. As a result, the selling price remains artificially low. Developing world farmers who receive no subsidy cannot compete. President Clinton is quoted here, concerned that Haiti has to import rice because U.S. subsidies make U.S. rice cheaper than theirs.

    Saying that free trade was the answer, 19th century British economic thinker, David Ricardo (1772-1823) would have reminded us of comparative advantage and how subsidies distort world markets.

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