• Money..16624_4.26_000006278830XSmall

    “Deficit Bias”

    Sep 17 • Behavioral Economics, Economic Debates, Economic History, Government, Households, International Trade and Finance, Thinking Economically • 850 Views

    If anyone asks you about the “fiscal woes” facing the U.S., Japan and the EU, just say, “deficit bias.”

    The 13th Geneva Report on the World Economy explains “deficit bias.” In the U.S., think about voting constituencies and how the political system has been unable to deal with an inefficient health care system and inadequate revenue. In Japan, an aging, less affluent, rural segment of the population has a disproportionate amount of voting power. And, as for Europe, you have a tradition of government spending and of bailouts that created moral hazard.

    You can see where this is going. There is a tension between democracy and financial discipline. Although the political dynamic is varied, still, the results have been similar.

    Here is the full report or you might want to read a summary in this article. In addition to “deficit bias,” the report extensively discusses solutions that they believe have to be nation-specific.

    The Economic Lesson

    Thinking economically about “fiscal woes” takes us to the margin. The problem is that one group enjoys the marginal benefit of spending while another experiences its cost. In the long run, though, all lose as society pays the cost through less growth and more unemployment.

    An Economic Question: Select a specific group and then, using cost/benefit analysis, explain the impact of more government spending.

    No Comments on “Deficit Bias”

    Read More
  • 16622_3.1_000005787159XSmall

    More Health Care Jobs

    Sep 16 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Government, Labor, Macroeconomic Measurement, Thinking Economically • 561 Views

    The health care industry has added 300,000 jobs to the U.S. economy during the past 12 months. New jobs, new construction, new technology, more care. Should we be pleased?

    This Dr. Seuss-like animated short from marketplace.org presents the downside of health care job growth. Discussing the issue further in a report on suburban Detroit, they explain that a new medical center can indeed help one community. However, a proliferation of medical facilities means higher health insurance premiums and soaring Medicare and Medicaid expenses. Consequently, although one community might benefit, overexpansion means the entire nation will suffer.

    Here are additional statistics on the health care jobs boom. And here is another perspective in a previous econlife post.

    The Economic Lesson

    Sometimes what is good for one person becomes bad when everyone does it. If there is a fire at a public event, one person can rush to the exit but everyone simultaneously cannot. Enjoying higher prices, one farmer can decide to plant more and earn more. However, when all farmers together produce a bumper crop, price dips. Called the fallacy of composition, sometimes what is good for the individual is bad when everyone does the same thing.

    An Economic Question: How does building too many medical centers result in the fallacy of composition?

    No Comments on More Health Care Jobs

    Read More
  • 16620_4.20_000004413409XSmall

    Placing the Poverty Line

    Sep 15 • Economic Debates, Government, Households, Labor, Macroeconomic Measurement, Thinking Economically • 619 Views

    Any family that earns less than 3 times the annual cost of a nutritionally adequate diet is below the poverty line.

    But should we agree with the placement of the line?

    If we say that poverty is “relative deprivation, ” then a definition could take us to those who have less than the average household. In 2010, the U.S. average household had 2.3 cell phone subscriptions and 2.9 TVs.

    Other considerations could raise or lower household income totals. Maybe we should include in the annual income total such lower income entitlements as housing subsidies, tax credits, and food stamps. Or, we could subtract childcare. In addition, how do we recognize income mobility and the temporary character of poverty for most households? According to a measure from the late 1990s, 2% of the population was poor for 2 years or more.

    The Economic Lesson

    The highest since the early 1990s, according to the US Census Bureau, during 2010, 46.2 million people lived in poverty. A family of 4 earning less than $22,314 was below the poverty line while for a family with 3 children under 18, the number was $26,023. Looking at someone over 65 living alone in 2010, the poverty line was $10,458.

    Slicing the US income pie, the bottom 40% earned 11.8% of all pretax income. By contrast, the top 20% had a 50.2% share of the nation’s pretax income. Is income inequality good or bad? You might look at this article.

    An Economic Question: Why is it important for the United States to identify a poverty line?

    No Comments on Placing the Poverty Line

    Read More
  • 16618_3.9_000008354384XSmall

    A Tale of Two Euro Zone Countries

    Sep 14 • Economic Debates, Economic History, International Trade and Finance, Money and Monetary Policy, Thinking Economically • 696 Views

    Saying, “It is a small step for the euro zone and a big step for Estonia…” the Estonian prime minister celebrated his country’s formal entry into the Western economic world. On January 1, 2011, Estonia switched from the kroon to the euro (and many bought new wallets because the size of their currency had changed). Looking forward to more trade and greater national security, Estonia very much wanted euro zone membership.

    The lowest in the euro zone, Estonia’s debt to GDP ratio during 2010 was 6.6%–far below the euro zone rule that national debt could not exceed 60% of GDP. According to this NPR Planet Money podcast, when Estonia experienced a severe recession during 2009, even the president, who grew up in New Jersey, took a 10% salary cut.

    And then we have Greece. Switching from the drachma to the euro in 2001, Greece knew, according to this BBC article, that she would have to display more fiscal discipline as a euro zone member. You know what happened. Her 2010 debt to GDP ratio was 142.8%. The story of Greece’s response since 2009 is here.

    The Economic Lesson

    Monetary policy involves the supply of money and credit. A country’s fiscal policy relates to taxes, spending and borrowing. Estonia and Greece share the same monetary policy while each has its own fiscal policy. And therein lies the problem.

    When countries borrow, they are implementing fiscal policy. But who buys their debt? Banks–the same banks that participate in monetary policy. So, because banks link fiscal and monetary policy, if one goes awry, the other is affected.

    An Economic Question: How might Estonia experience the impact of Greece’s fiscal policy?

    No Comments on A Tale of Two Euro Zone Countries

    Read More
  • 16613_8.26_000005651286XSmall

    Too Safe?

    Sep 13 • Behavioral Economics, Economic Debates, Government, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 739 Views

    Assume for a moment that you have to decide whether to install body scanners at every airport in the U.S. Knowing a decision to proceed will make everyone safer, you say, “Yes.”

    But, what if you first were told that there was a 1 in 3.5 million chance that an act of terrorism will kill you or someone you know? However, installing the scanners will make everyone safer by reducing that probability. Your decision?

    Here, here, and here, a thought-provoking 3-part series in Slate discusses why we need more cost/benefit analysis when we decide how much to spend on homeland security.

    Perhaps this Daily Beast article displays how some municipalities are inadvertently engaging in their own cost/benefit risk assessment.

    The Economic Lesson

    When you are very hungry, the first chocolate chip cookie you eat is delicious. After that, though, each additional cookie provides less and less extra pleasure. Getting less extra satisfaction from each additional unit is called diminishing marginal utility.

    Similarly, initially implementing a security infrastructure at airports would have provided a considerable increase in safety. The question, though, is where diminishing marginal utility sets in.

    An Economic Question: Slate tells us that homeland security is a $690 billion federal budget item. Citing opportunity cost, what is the additional expense?

    No Comments on Too Safe?

    Read More