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    Virginia and Germany

    Dec 1 • Demand, Supply, and Markets, Economic Debates, Financial Markets, Government, International Trade and Finance, Macroeconomic Measurement, Money and Monetary Policy • 328 Views

    “Where…is the justice of compelling a State which has taxed her citizens for the sinking of her debt, to pay…the debts of other states, which have made no exertions whatever?”

    This quote, from John Steele Gordon’s, Hamilton’s Blessing (p. 29) reflects the debate between James Madison and Alexander Hamilton about whether the newly formed U.S. federal government should assume all of the states’ Revolutionary War debts. Virginia, having paid back most of her debt said no while Massachusetts, a debtor state, disagreed.

    Caring little about individual states, Alexander Hamilton sought to create a strong central government. He cared more about the “whole” than the “parts.”

    Now, more than 200 years later, euro zone countries are having a similar debate. How should the economically stronger nations respond to those that are weaker? A NY Times article explained the three part split: 1) The stronger nations include Germany and Austria. 2) Heavily indebted, Ireland and Greece are among the weakest. 3) France and Italy represent the third group that did not decline very much from the recession but now is minimally rebounding. 

    The Economic Lesson

    As wonderfully described by Professor Timothy Taylor in Lecture 6 of American and the New Global Economy, there is a fundamental tension between the whole and its parts in the structure of the European Central Bank (ECB). Responsible for overseeing monetary policy, the ECB board is dominated by the central bankers of the countries that compose the euro zone.

    By contrast, the board of the U.S. Federal Reserve is numerically dominated by members nominated by the President and approved by the Senate. They have more loyalty to the “whole” than to any of its parts.




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    Maybe Money Makes A Nation

    Nov 30 • Developing Economies, Economic History, Financial Markets • 344 Views

    In “Thinking About Capitalism,” economic historian Jerry Z. Muller tells us that 16th and 17th century wars were “decided by whichever government was the first to run out of money.” Astoundingly, the American colonies did not run out of money.

    George Washington’s military leadership, Thomas Jefferson and the Declaration of Independence, Ben Franklin, and John Adams (and Abigail) all come to mind when we think about winning the American Revolution. But whom are we forgetting?

    Robert Morris.

    We had to pay for the war. A new book, Robert Morris: Financier of the American Revolution by Charles Rappleye has just been published. In the review by John Steele Gordon it sounds wonderful. Robert Morris was the man who “corralled stores of blankets, gunpowder, lead and muskets…” for Washington’s Delaware River crossing. When Washington needed money to pay for spies, he went to Morris.

    To fund the war, Morris primarily depended on loans at home and abroad. By 1790, the U.S owed $50 million. And yet, we were able to fund it all.

    The Economic Lesson

    Following Morris’s advice, George Washington appointed Hamilton as his first Secretary of the Treasury. Hamilton’s proposals for the debt, a banking system, and manufacturing formed the foundation for our economic growth.

    Alexander Hamilton reminds us that debt can be good if paid back promptly. A nation with good credit can repeatedly borrow and then fund necessities with other people’s money.

    Hamilton then and Europe today are interesting contrasts for pondering sovereign debt.



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    Giving and Getting Gifts

    Nov 29 • Behavioral Economics, Demand, Supply, and Markets, Economic Thinkers, Households, Thinking Economically • 451 Views

    With the holiday season beginning, we should consider the economics of gift giving. Let’s start with University of Pennsylvania Professor Joel Waldfogel who focused on receiving gifts. Then, through Duke’s Dan Ariely, we can look at how to give the best gifts.

    Dr. Waldfogel’s research could make us decide not to buy any gifts. His basic conclusion was that when people express a value for a gift, the amount is usually less than the actual cost. By contrast, when they buy something for themselves the value soars. Empirically, he says that our own purchases generate on average 18% more value than purchases from others. You might enjoy looking at the survey (p. 17 of his paper) that he gave to 202 students.

    Dan Ariely solves the dilemma by suggesting that we give gifts that people would feel guilty buying for themselves. As economists doing cost benefit analysis, we would say that guilt increases the cost side. By contrast, when the same item comes from someone else, because the recipient’s guilt disappears, cost diminishes. The result? Benefit exceeds cost.

    The Economic Lesson

    The loss in value to the gift giver and getter is called deadweight loss. Economists can draw deadweight loss on a demand and supply graph. For us now, though, just think of a loss in value as a cost.

    Because value decreases for a gift, cost rises and everyone’s “pleasure” diminishes. The amount by which “pleasure” falls is the deadweight loss.

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  • Packaging can shape a buying decision.

    A Chinese Coach

    Nov 28 • Demand, Supply, and Markets, Developing Economies, Households, International Trade and Finance • 417 Views

    Coach has 41 handbag stores in China and will soon have 8 more. Coach and China though, are about a lot more than handbags. According to NY Times Magazine columnist David Leonhardt, the Chinese consumer can fuel the world economy with “the urge to splurge.”

    Currently though, annual consumer spending in China is not very high. At $2500 per person, it is less than the U.S. ($30,000) and Brazil ($7,000). What could create that “urge to splurge”? Leonhardt says that China has to move from sweatshops to innovation which means extending free education beyond the 9th grade and making the right decisions about resource allocation, wages and a transportation infrastructure.

    If they are successful, the demand for Coach and other consumer goods and services will come from a larger middle class with more to spend.

    The Economic Lesson

    Between 1790 and now, the U.S. has progressed though 5 stages of economic development. 1) Starting as an agrarian economy, barter was dominant. 2) Then, through road, canal, and railroad building, regional specialization developed. 3) Having a transportation infrastructure enabled us to create a capital goods sector that produced steel and other manufacturing basics. 4) From there came the 1920s with the auto and the consumer taking over economic leadership. 5) Now, a services sector is dominant.

    China is moving through its own development stages.


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    Dietary Incentives

    Nov 27 • Behavioral Economics, Demand, Supply, and Markets, Government, Households, Thinking Economically • 465 Views

    Which would you choose?

    2000 calories from 10 donuts that would cost you $5?


    2000 calories from Greek yogurt, organic raspberries, a turkey avocado wrap, Alaskan King Salmon, green beans, a whole wheat roll, strawberries and heavy cream for $25.86?

    Marketplace.org presented the $5/$25.86 comparison to show us that healthy food is expensive. Predictable? Yes. Then though, they told us something we would not have expected. This takes us to a recent academic study.

    University of Buffalo researchers discovered that when healthy food became cheaper, consumers used their savings to buy less expensive less healthy food. As a result, the overall nutritional value of their diet remained the same. However, when Ritz Bits Peanut Butter Sandwich Crackers, for example, became more expensive by 12.5% to 25%, consumers stopped buying them. Then, with their savings, they purchased healthier alternatives, like bananas.

    The implications for public policy? Tax junk food if you want people’s diets to improve.

    The Economic lesson

    But isn’t it even more complicated? Aren’t we talking about targeting the elastic region of many different consumers’ demand curves? The elastic region is where price rises and total expenditures (TE) drop.

    You might want to look back at the soda tax debate.


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