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    The Impact of an Asteroid

    Mar 6 • Thinking Economically • 240 Views

    From our “Economics is Everywhere” file:  Reviewing 20 years of research, a panel of 41 experts concluded that the asteroid that struck Mexico (at Chicxulub–chick-shoo-loob), 65 million years ago, extinguished the dinosaur population.  The impact would have been so colossal that it resulted in a global winter because of the debris catapulted into the atmosphere.
    Not convinced?  You could look at What Bugged the Dinosaurs: Insects, Disease, and Death in the Cretaceous from Princeton University Press for an alternative theory.

    Reading about asteroids soon took me to our the FY2011 federal budget to see what we are doing now.  And sure enough, I discovered that asteroid research funds increased under NASA’s budget.  Among the multiple asteroid programs is one that NASA has established with Saudi Arabia.

    The Economic Life
    Our federal budget is dominated by defense and entitlements which include social security, Medicare, and Medicaid spending.  Receiving $19 billion from a budget totaling close to $4 trillion, NASA spending is relatively small.  Anyone worried about the burgeoning deficit would see that austerity for asteroid research would have little impact as would cuts in most discretionary spending.

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    Liking the Robber Barons

    Mar 5 • Thinking Economically • 254 Views

    A confession:  I have never disliked the “robber barons.”   Written by Matthew Josephson (1899-1978), The Robber Barons told us how the great nineteenth industrial empires were built.  Emphasizing the misdeeds of Rockefeller, Carnegie, Frick, and their contemporaries, the author helped readers to perceive a cast of villains. 

    In an opinion article in yesterday’s Wall Street Journal, Daniel Henninger says we need more “robber barons” to reinvigorate our economy.  He recommends a book by Burton W. Folsom in which the “robber barons” are categorized as market entrepreneurs or political entrepreneurs.  People like Rockefeller (oil), Carnegie (steel) and J.J. Hill (railroads) who build businesses, create jobs, and compete fiercely are market entrepreneurs.  By contrast, Robert Fulton who was given a monopoly on Hudson River steamship traffic for thirty years, was a political entrepreneur.

    You can predict who Henninger prefers.  Saying market entrepreneurs are the most productive, he asks our President and our Congress to ignore conspicuous consumption and instead establish a regulatory environment that nurtures them.  

    The Economic Life

    We could say that the infrastructures that were built during the nineteenth century created a strong foundation from which our economy soared.  Starting with the Erie Canal (1825) and culminating (perhaps) with the transcontinental railroad (1869), we built a transportation infrastructure that let us form a national market and regionally specialize.  A bit later in the century, we built our financial infrastructure.  With money moving across the land as the New York Stock Exchange and an investment banking world emerged, we could finance businesses and support entrepreneurial vigor.  Market entrepreneurs were the people who built our transportation and financial infrastructures.  

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    The Banking Pendulum

    Mar 4 • Thinking Economically • 207 Views

    As George Bailey in “It’s a Wonderful Life,” Jimmy Stewart faces a bank run.  On his wedding day, hoping to save his bank, George first gives out the bank’s cash and then his honeymoon money to a long, agitated line of panicked depositors.

    During the bank run, in two sentences, George Bailey summarizes the basics of banking. “You’re thinking of this place all wrong, as if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house … and a hundred others,” George Bailey is referring to a fractional reserve system in which banks keep part (a fraction) of a deposit in reserve and then loan and invest the balance. 

    Through loans and investments, just as the heart pumps nutrients around the body, banks and other financial institutions pump money around the economy. And, just like we need a healthy heart, we need healthy financial institutions for economic growth.  How to maintain healthy financial institutions is a question our Congress has repeatedly had to ask. 

    I keep thinking of a pendulum swinging back and forth between more and less government regulation.  During the 1930s, government regulation increased.  In 1980, regulation diminished somewhat as banks needed more freedom to compete in a changing financial environment.  In 1999, with the repeal of the Glass-Steagall Act, the pendulum continued its swing toward less government.

    Now, where should it go?


    The Economic Life

    Between the Civil War and the First World War, we had banking panics in 1873, 1884, 1890, 1893, 1896, 1907, and 1914.  “It’s a Wonderful Life” looked at the banking panic of the early 1930s. Many banking crises led to reform legislation.  Initially celebrated, the reforms eventually failed. 

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    Tipping Points

    Mar 3 • Thinking Economically • 264 Views

    When tipping, we all have a tipping point.  It might sound reasonable to leave a dollar tip.  But, if a Tall Vanilla Latte costs $3.37, is a thirty percent tip too much?  Yes, says one NY Times blogger. On the other side, Starbucks baristas say that they earn more from tips than hourly pay.  After a California court decided that Starbucks’ shift supervisors could not share the tips pool, an appeals court reversed the decision.

    Another way in which customers are asking themselves, “How much extra?” involves calories.  With New York City the first in 2008, municipalities around the nation are requiring that calorie information be posted.  Has it made a difference?  According to a Stanford Business school study, yes. 

    The Economic Life

    Starbucks’ customers and employees both are wearing their economic lenses. Whenever they consider the cost and benefit of something extra, they are thinking at the margin.  Thinking at the margin is thinking economically.



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    More Health Care Thoughts

    Mar 2 • Thinking Economically • 234 Views

    Looking at yesterday’s Wall Street Journal editorial article on Indiana’s health care approach, I wondered why no one refers to incentive when assessing alternative legislation.

    Indiana offers a Health Savings Account (HSA) option to state employees.  Here is how it works:  In an account overseen by the employee, the state deposits $2750 for health care bills and pays the premium for the account.  Any money not used for health care belongs to the HSA participant.  If the entire account is used for health expenses, then the state will share additional health costs.  Maximum out-of-pocket is $8,000.  Increasingly popular, the HSA had a 70 percent sign-up this year.

    Indiana’s incentives had these results:
    1. People were more likely to use generic drugs.
    2. People visited physicians and emergency rooms 67 percent less frequently than those with traditional health care plans.
    3. Overall, it appeared that while participants sought necessary procedures and doctor visits, they also thought more about cost.
    4. Unused funds averaged $2,000 per employee.
    5. There is no evidence that appropriate health care is being sacrificed.

    Looking at Congressional proposals, I hope that someone will identify the incentives. By recognizing the impact of incentives, we can all decide whether we approve of how new legislation encourages us to act.

    The Economic Life
    At the heart of economics, incentives shape our behavior.  On the demand side of markets, buyers have the incentive to spend less.  On the supply side, producers have the incentive to charge more.  New laws will shape the behavior of buyers and sellers through the incentives they create.

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