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    Well-Being Yardsticks

    Nov 17 • Developing Economies, Economic Debates, Gender Issues, Macroeconomic Measurement • 341 Views

    Having just looked at the “Human Development Report 2010” from the UN, I thought of a former mayor of NYC, Ed Koch. Mayor Koch used to ask, “How am I doing?” Let’s assume that an economy can ask the same question. What yardstick would you use for an answer?

    The GDP is a possibility. It tells us the value of goods and services that we produce. If we make more cars and grow more wheat and examine more teeth, then our economy has grown. Can we say that we are doing well if the U.S. is #1 in the world?

    The “Human Development Report” (HDR) has per capita income as one variable but also looks at education, and life expectancy. Using the HDR yardstick, Norway is #1. Separately, the authors of the report look at other variables including sustainability, gender inequality, security, and “decent work.”

    Yet another possibility takes us to the “Index of Economic Freedom.” Using variables that assess the extent that government influences an economy such as trade freedom and property rights, the “Index of Economic Freedom” places Hong Kong at the top.

    The Economic Lesson

    Yardsticks influence economic policy.  Just because we measure something, we tend to want to influence it. So, if we focus on GDP (and whatever components that includes), then we will try to improve it. If employment numbers stand out, then they become most important. Correspondingly, if decide that HDR is our key yardstick, most likely, we will keep a spotlight on its variables.

    Sometimes, the Federal Reserve has a dilemma because it has to decide which yardstick it values most: the inflation yardstick or the one that looks at unemployment.

    Which yardstick do you believe we should use to answer, “How are we doing?”

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    Deficit Denial

    Nov 16 • Economic Debates, Government, Macroeconomic Measurement, Thinking Economically • 433 Views

    According to 96% of the participants in a CBS News poll on the deficit, “We really don’t care.” Jobs were #1 and health care #2 with the deficit far behind.

    According to Washington Post reporter Ezra Klein, that is why “the elite” and policy wonks are talking about the deficit commission’s initial report but politicians are sidestepping it. He suggests that even tax talk is not about the budget but instead about “class resentments.” He does comment that voters would like to see the deficit decrease “But at the expense of other people, not themselves.”

    The Economic Lesson

    If you are a “policy wonk” you will enjoy this NY Times interactive budget exercise. Try it and see if you can reduce the deficit enough by 2015


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    Demand, Supply, and Knee Replacement

    Nov 15 • Demand, Supply, and Markets, Government, Households, Innovation, Macroeconomic Measurement, Thinking Economically • 462 Views

    Hearing about knee replacement surgery from a friend, I soon realized it is about much more than an operation. It involves demand, supply, innovation, and the quality and cost of national medical care.

    First the facts: For knee replacement surgery, patients can select a traditional approach or one that is minimally invasive. The vast majority of surgeons have been trained to perform traditional knee replacement surgery. The minimally invasive approach is newer and requires relatively extensive training. A recent study indicated that with the newer approach, not only do patients heal faster but also there were cost-savings “to the health care provider and the health care system.” 

    The question: If current evidence indicates that patients heal faster and the health care system has lower costs, why do most surgeons recommend traditional total knee replacement surgery?

    The Economic Lesson

    Thinking economically about total knee replacement surgery, our goals are well-being, efficiency, and innovation. For the demand side, well-being comes from more success and less dollar cost. On the supply side also, well-being and cost effectiveness are important. Here, though, we have a divergence. It is more (opportunity) cost effective for most surgeons to perform the traditional approach that they already know. Learning a new procedure is time consuming and upsets an established practice.

    What does all of this mean? What might be best for the demand side, for controlling government spending, and for perpetuating the innovation that spurs economic growth is not best for the supply side.

    If we figure out how to change supply side incentives, perhaps we can slow down escalating health care expenses.



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    A Big VAT

    Nov 14 • Government, Households, Macroeconomic Measurement • 468 Views

    Dating back to the 18th century, the Chinese vase that a brother and sister found “in a dusty attic” sold for $69.5 million at a London auction. The NY Times called it a “treasure-in-the-attic” story. For us economists, it is a VAT story.

    According to the OECD (Organization for Economic Cooperation and Development) the U.K.’s value-added tax rate is 17.5%. Typically, taxing “value added” means a tax is added to each stage of production. But, for this 16 inch, mostly yellow and sky-blue vase that was probably fired near Shanghai, the only value-added stage was the auction. With the VAT, the price of $69.5 million became $81.7 million. (I am not sure why the NY Times says that with the VAT and a 20% buyer’s premium, the final price was $85.9 million.)

    If the same vase had been sold in NYC to a local resident, maybe an 8.875% sales tax would have applied. On the sell side, perhaps the IRS personal income tax obligation would soar.

    You can see where this is going. Depending on where you are, because tax systems vary, so too do incentives. A VAT, as a consumption tax, is supposed to encourage saving. With the deficit commission proposing a vastly simplified tax system, we might see incentives change in the U.S.

    The Economic Lesson

    The OECD tells us that VAT revenue for close to 150 countries is approximately 20% of their total receipts. The United States is the exception. In the U.S., for FY 2009, the personal income tax generated 44% of all tax revenue while social insurance taxes accounted for 42%. Corporate income taxes were a distant third at 7%.

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    What Should Government Pay For?

    Nov 13 • Economic Debates, Economic History, Government, Macroeconomic Measurement • 324 Views

    Topping its front page with “CUT, RAISE, RAISE, LOWER, REPEAL, SCRAP, CUT, CUT,” The Wall Street Journal told readers some of the new deficit commission’s proposals. 1) For defense spending, the cut would be $100 billion. 2) The Social Security age would rise to 69 by 2075. 3) The gas tax would go up 15 cents. 4) The corporate tax rate would go down to 26%. 5) The alternative minimum tax would be repealed. 6) There would no longer be deductions for mortgages over 500k. 7) The federal work force would be cut by 10%. 8) Farm subsidies would drop by $3 billion.

    For each proposal, already, a mountain of pro and con opinions is building. For example, just for changing the Social Security retirement age, the list of arguments on both sides is long because affluence, health, job history, and gender all relate to how Social Security impacts you. Supporters point out that when Social Security was passed in 1935, the average life span was, at 61.7, 3.3 years less than the retirement age. In 2035, 20% of the U.S. population is projected to be 65 or older. Responding, economist Paul Krugman says, “working until you’re 69…is a lot harder…for…Americans who still do physical labor.” Also, he says that high earners live longer.

    The Economic Lesson

    Defined on Planet Money, a public good is “something that we all need that will make our lives better, but the market will not and cannot provide.”  Podcast examples included lighthouses and autopsies.

    Should government pay only for “public goods?” We would not have a deficit problem.

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