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    China’s Market

    Oct 13 • Developing Economies, Economic Debates, International Trade and Finance • 438 Views

    Sort of like jumbo shrimp and a working vacation, we could say that an authoritarian market is an oxymoron.The chief economist of the World Bank, Justin Yifu Lin, would disagree.

    As described in a recent New Yorker Magazine profile, Dr. Lin has an unusual background. Born in Taiwan, he defected to the mainland, studied economics at the University of Chicago, and ran a think tank at Peking University. As chief economist at the World Bank, he occupies a position once held by Nobel Laureat Joseph Stiglitz and former Treasury Secretary, Harvard president, and Obama economic advisor Laurence Summers. 

    The profile was so very fascinating because of its inherent contradictions. Dr. Lin, attended the University of Chicago, the center of free market studies, in order to become an expert on China’s authoritarian capitalism.  Discussing China, he says that government is necessary for the success of its market. At the World Bank, he suggests that China’s successes can serve as a prototype for other developing nations.

    Recent headlines about Chinese currency manipulation, about Chinese acquisitions of western firms, about the Chinese economy becoming #2 in the world all return us to authoritarian capitalism. Is it working?

    I suspect Adam Smith would say “No”. Your opinion?

    The Economic Lesson

    When he described an 18th century market economy, Adam Smith cited several basic characteristics. 1) Self-interest propels economic activity. 2) Competition controls self-interest. 3) Division of labor facilitates efficiency, invention, and mass production. 4) Except for justice, money, and defense, government should adhere to a laissez-faire policy.

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    Aging Trends

    Oct 12 • Economic Debates, Economic History, Government, Households, Innovation, Labor, Macroeconomic Measurement, Thinking Economically • 472 Views

    Baseball’s MVPs are typically younger than 30 and rarely over 35. Office workers and salespeople tend to be most productive in their early to mid-40s. Most Nobel prize winners in physics and chemistry did their innovative work before they were 50. Academic studies even imply that businesses with younger workers have a higher return on their assets.

    In an excellent course on “Modern Economic Issues” from the Teaching Company, when Dr. Robert Whaples discusses aging in Lecture 13, he suggests that we have more to worry about than soaring health care spending and Social Security programs. An aging population could diminish productivity and innovation.

    By 2050, close to 27% of the U.S. population will probably be older than 65 and the median age will be 41. Older than we are, Europe and Japan will have a median age that is close to 50 in 2050.

    Should we be concerned? One researcher suggests that we might “coax more output from the workers we already have, through more physical capital, improved technology, or better resource management.”

    Your ideas?

    The Economic Lesson

    All of this returns us to economic growth. To sustain and better our standard of living, we need economic growth. Our yardstick for measuring economic growth is the Gross Domestic Product (GDP). The GDP is equal to the value of the goods and services that we produce in the U.S. each year.  Its four components are 1) gross investment (primarily business spending), 2) consumer spending, 3) government spending, 4) exports minus imports. 

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    More On Unemployment

    Oct 11 • Labor, Macroeconomic Measurement • 418 Views

    These are great graphs! In just a minute or 2, through a series from The Washington Post, you can understand our employment problems.

    Our starting point is potential output during the past decade. We see how much we could have produced if our land, labor, and capital had been optimally used. Then by comparing our potential to our actual output, the next three graphs illustrate when we reached our potential and when we were below it. During 2009, with the recession over, we see actual output rise. The problem though, is that the actual output line is still lower than our potential. The result? We have an “output gap”.

    Eliminating the output gap with enough jobs is tough because increasingly efficient producers need fewer workers. In addition, our population keeps growing. So, the line representing actual output needs to ascend steeply toward potential output for enough workers to have jobs. As you can see in the last 2 graphs, 3% annual growth is not enough. What do we need?  You might want to look at graphs 8 and 9.

    The Economic Lesson

    There are four kinds of unemployment. 1) Cyclical unemployment that is caused by a dip in the business cycle. 2) Structural unemployment that results from fundamental changes in production such as new technology. 3) Seasonal unemployment that reflects the impact of holidays and the time of the year. 4) Frictional unemployment that will be here always because people are constantly leaving jobs for a variety of personal and professional reasons.

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    Innovative Thoughts

    Oct 10 • Businesses, Government, Innovation, Labor, Macroeconomic Measurement • 608 Views

    Saying we need “More (Steve) Jobs, Jobs, Jobs” journalist Tom Friedman reminded us that economic “stimulation” is more important than economic stimulus. Using the creative, successful, and competitive co-founder and current CEO of Apple as his example, Friedman says innovation has always been the source of U.S. success.

    This took me to a recent NPR Planet Money podcast on dying and thriving manufacturers. Pointing out that the U.S.A. remains the world’s leading manufacturing nation, they focus on 2 businesses. A button making business that had once supplied Ralph Lauren with thousands of buttons now is barely functioning because they cannot compete against Chinese factories that have cheap labor and up-to-date technology. By contrast, a firm that creates and constantly updates tiny metal parts for electronic devices is flourishing. Its founder says that its source of growth is constant innovation.

    Knowing where we need to go, how can we get there? Economist Mike Mandel tells us that recent reports indicate that only 9% of all firms do product or process innovation. You might want to look at the details he presents to see who does what.

    The Economic Lesson

    A very simple model that displays economic growth and resource utilization is a production possibilities frontier. To visualize it, you just need to imagine a line that is bowed out to the right on your graph. The bowed out line is important because it represents the best we can do. It illustrates the most that existing land, labor, and capital can produce.

    If we want our incomes to keep growing and our standard of living to rise, then we want the “bowed out line” to shift to the right. It will shift only if existing land, or labor or capital (defined as tools, equipment, buildings, and inventory) changes. Typically, through technological innovation, new capital has been the reason the curve has shifted to the right.

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    Cyclical or Structural?

    Oct 9 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Government, Macroeconomic Measurement, Money and Monetary Policy • 505 Views

    Economists still cannot agree. With the new unemployment rate, at 9.6%, the same as the old unemployment rate, one question remains the same. Is it a jobs mismatch, contractionary lay-offs, or a third economic ailment? The diagnosis you choose will determine the policy you support.

    On the structural side are those who say that the high unemployment rate is the result of too many unemployed workers who cannot fit the jobs that are available. As expressed by the President of the Federal Reserve Bank of Minneapolis,  the s ources of the mismatch are probably a combination of geography, demography, and skills. The policy implication: the Federal Reserve cannot do very much. While this gentleman suggests more unemployment insurance, others have a more laissez-faire inclination.

    Cyclical advocates say that high unemployment is the result of inadequate demand from consumers, businesses, and government. With sluggish economic growth and tepid business confidence, we have moved from the trough of this business cycle to an anemic expansion. As expressed by the former Chair of the Council of Economic Advisers, Christine Romer:

    In short, in my view the overwhelming weight of the evidence is that the current very high — and very disturbing — levels of overall and long-term unemployment are not a separate, structural problem, but largely a cyclical one.  It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis.  Indeed, at one point I had tentatively titled my talk “It’s Aggregate Demand, Stupid”; but my chief of staff suggested that I find something a tad more dignified.

    The policy implication? More stimulus and “QE2″ (quantitative easing).

    Yet another group of economists rejects the structural diagnosis and then moves onward to other problems such as a “balance sheet” recession. You might want to go here to see what other economists have suggested in an online Economist debate.

    The Economic Lesson

    Structural unemployment takes us to buggy whips and typewriters. When the former was replaced by the Model T and the latter became obsolete because of computers, workers with traditional skills lost their jobs while those who could make the new goods and services were in greater demand. What happened? The structure of the economy changed as old industries died.

    Cyclical unemployment is about the business cycle. Like death and taxes, we will always have a business cycle. 1) First, production grows. 2) Then it hits a peak. 3) Reversing, it stagnates and declines. 4) It reaches a trough. A lagging economic phenomenom, cyclical unemployment is most evident when the economy is at its lowest and also as it begins its expansion.

    Then, a new cycle begins, it reaches a new and higher peak, and you know what happens next.


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