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    The Right Stuff

    Feb 10 • Government, Households, Innovation, Labor, Macroeconomic Measurement • 486 Views

    Giving a grade of “One Pinocchio,” the Washington Post assessed the accuracy of President Obama’s February 7, 2011 speech to the U.S. Chamber of Commerce.

    Most interesting, though, were the topics on which he focused. Yes, President Obama said the U.S. has the most labor productivity when, according to the Bureau of Labor Statistics (BLS), Norway does. And, for education, he said we had the best universities although actually U.S. News ranks the U.K.’s University of Cambridge first. And finally, he said we had the freest markets but according to the Index of Economic Freedom we are #9.

    Still though, statistics are complicated. I am sure that we could find other numbers to support his conclusions. The key is that he looked at the right stuff.

    The Economic Lesson

    Focusing on productivity, education, and the market, President Obama took us to the basics of economic growth. Of course, in order to grow, we need to produce more per worker hour. And how can we grow? We need to develop our human capital. Only then can we innovate. And finally, through the market, individuals have the freedom to pursue their self-interest and start businesses with the new ideas they create.

    In The Wealth and Poverty of Nations, Harvard professor David Landes tells us that physical capital that includes tools and machines, and human capital which involves education, entrepreneurship, and health, are most crucial for economic growth. Physical and human capital provide the highest return on investment (ROI).

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    Who Needs a License?

    Feb 9 • Businesses, Demand, Supply, and Markets, Economic Debates, Innovation, Labor, Regulation • 502 Views

    What does a hair salon “shampoo specialist” have in common with a private detective? In certain states, each needs a license to do business.

    But what might licensing involve? For a Texas shampooer, it includes 150 hours of classes while a locksmith in Oklahoma has to pay a fee, take a test, and undergo a background check.

    A type of occupational regulation, economists have studied licensing because of its impact on the jobs market. Licensed occupations can have greater prestige, protect consumers, pay higher wages, charge higher prices, preserve the status quo, raise money for the state, and constrain employment growth.

    So, should we support it?

    More specifically, for each of the following, who should need a license? Acupuncturists? Tattoo artists? Tree-trimmers? Glass installers? Florists? Massage therapists? If yes, requirements?

    To make a decision, you might want to read this.

    The Economic Lesson

    We could say occupational licensing is a market vs. the government issue. Opponents of more licensing say the market would weed out incompetence. Proponents say the consumer needs protection. It could also take us to unemployment. Studies have shown more licensing, less employment growth. Yet another possibility is innovation because licensing tends to preserve the status quo. 

    During the past 50 years, licensed occupations have multiplied from 5% of U.S. workers to 23%.

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    Happy Rice Farmers

    Feb 8 • Demand, Supply, and Markets, Developing Economies • 648 Views

    With a typical Egyptian household spending 38.3% of its budget on food in 2008, you can see why soaring food prices could fuel turmoil. But what about the other side?

    For Senegal farmer and trader, Ndeye Sarr Diop, rising rice prices were an opportunity. The world price is the key. Why grow rice if you can import it more cheaply? Moreover, why export it if no one will buy it? In 2008, with prices soaring, expensive West African rice became desirable. Responding to the incentive, Senegalese farmers started planting. As Ms. Dopp said, “I hope rice will make me rich.”

    The Economic Lesson

    Hoping to encourage production and support farm income, countries subsidize certain crops. As a result, the selling price remains artificially low. Developing world farmers who receive no subsidy cannot compete. President Clinton is quoted here, concerned that Haiti has to import rice because U.S. subsidies make U.S. rice cheaper than theirs.

    Saying that free trade was the answer, 19th century British economic thinker, David Ricardo (1772-1823) would have reminded us of comparative advantage and how subsidies distort world markets.

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    A Race Between Supply and Demand

    Feb 7 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment • 536 Views

    In a wonderful Chip Bok cartoon, a child starts by asking, “Why are gas prices so high?” and is told, “Turmoil in the Mid East.” Then, asking about the turmoil, he is told the source is “High Food Prices.” The reason for high food prices? The cartoon concludes with, “Because we use our corn for gas.”

    The cartoon summarized what economist Timothy Taylor says is a race between supply and demand. If supply lags (Mid East oil), then price rises. Also though, when demand pulls ahead (corn and biofuels), prices go up. You can see then, for lower prices, we need demand to pull back and supply to surge ahead. 

    The Economic Lesson

    On the supply side, we could consider the impact of Egyptian turmoil on Suez Canal oil tanker traffic and of drought in Russia on wheat prices. Meanwhile though, new technology could increase yield.

    As for demand, in the U.S., a biofuel initiative has led to rising demand for corn. In addition, more affluence in China, India and other developing nations has meant more consumers who eat more meat which means animals who eat more grain. Factor in world population growth and demand could surge.

    Whenever supply accelerates and increases productivity, then the upward sloping supply curve moves to the right and crosses the demand curve at a lower price. However, if demand takes the lead in the race, the downward sloping demand curve shifts to the right and price rises.

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    Unemployment Questions

    Feb 6 • Households, Labor, Macroeconomic Measurement • 442 Views

    Friday’s employment report had good news and bad news. There was considerably less unemployment and considerably less job creation. Moving from 9.4% to 9%, the unemployment rate decreased more than most people expected. However, the job creation number, 36,000, was a disappointment.

    Do we have a contradiction? We just do not know. The fuzziness has many reasons. Here are a few:

    1) The unemployment rate is based on the Household Survey, a canvas of 60,000 households. The job creation numbers come from the Payroll Survey, collected from approximately 440,000 business and government establishments. You can look here to see how the 2 surveys differ.

    2) Furthermore, the Household Survey data might have been skewed because it is collected during one week. What if that week was snowy? What if no one was home?

    3) Previous job creation numbers from the Payroll Survey are revised each month as more data is collected. As a result, the Payroll Survey data becomes more accurate over time.

    4) However, the unemployment rate is never revised.

    Where are we? At the NY Times, Floyd Norris and David Leonhardt tried to work their way through the confusion. Their conclusions? The job market is definitely better than it was during October 2009 and the happier news comes from the Household Survey. 

    The Economic Lesson

    To complicate matters further, the unemployment rate looks only at those who are in the labor force (16 or older, have a job, looking for a job). For that reason, some suggest considering the U-6 rate, which includes the traditional numbers plus “marginally attached” workers and those who are not in the labor force. These workers have either stopped looking for a job or cannot find full time employment. The U-6 rate is a whopping 17.3%.

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