• 16520_7.29_000016963282XSmall

    An Excellent Budget Plan

    Jul 29 • Behavioral Economics, Economic Debates, Government, Households, Macroeconomic Measurement • 658 Views

    A debt reduction suggestion.

    Let’s use what the President’s budget commission suggests. Proposing legislation that will mandate restraint and discourage political opportunism, they are bipartisan. And, they get people on the right and the left agitated which means that everyone is sacrificing something.

    Called “The Moment of Truth,” The National Committee on Fiscal Responsibility and Reform has a 65 page blueprint for our fiscal future. They deal with reducing annual spending. They have suggestions for preserving Social Security, Medicare and Medicaid. They would stabilize debt by 2014. And, citing important incentives and legislative restraints, they understand how to make the Congress and each of us work toward fiscal responsibility. (They even suggest a 3-year pay freeze for members of Congress!)

    Specifically, they deal with 6 categories:

    1. Discretionary spending cuts
    2. Comprehensive tax reform
    3. Health care cost containment
    4. Mandatory savings (like cutting agricultural subsidies)
    5. Social Security
    6. Process changes (like measuring inflation more accurately)

    The plan is excellent.

    The Economic Lesson

    Discussing the budget, people always seem to refer to the GDP. Here is why. Because the GDP is the total dollar value of the goods and services we produce during one year, it reflects our affluence. So, just like you look at your income from what you produce when you decide what you can spend, the government can look at the value of what it produces.

    The President’s budget commission believes we can afford to spend 21% of our GDP. It also says that the deficit, the amount by which annual spending exceeds annual revenue, should be close to 2.3% of GDP. (p. 16)

    An Economic Question: Using this NY Times interactive graphic, specifically, how would you cut discretionary spending?

    No Comments on An Excellent Budget Plan

    Read More
  • 16518_2.21_000006135757XSmall

    The Power of the Market: Part 2

    Jul 28 • Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Environment, Government, Households, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically • 532 Views

    World oil demand has hit a new high. But not from everyone.

    Called the “New World” and “Old World” by economist Ed Yardeni, you can see through his graphs, the divide in world oil demand. China, India, Brazil and other emerging economies want increasingly more while the U.S., Japan and Western Europe do not.

    Still though, with total demand moving upward, so too is the price per barrel. Well beyond its recent June 24 low of $105.52, you can see here, that the price of North Sea Brent is close to $118. Interesting that on June 23, the International Energy Agency (IEA) announced its member nations would begin releasing 60 million barrels from their strategic petroleum reserves (SPR) to offset potential price increases from a Libyan disruption.

    Are 2 million barrels a day for 30 days making a difference? Or, is the market too powerful? You can decide.

    The Economic Lesson

    The SPR release shifts the supply curve. Emerging economies have moved the demand curve. When demand moves further to the right than supply, price rises.

    You can read more about oil here and here.

    An Economic Question: Dr. Yardeni suggests that when world oil demand is up 2.5%, world GDP will rise by 5%. Why might he have connected the 2 numbers?

    No Comments on The Power of the Market: Part 2

    Read More
  • 16516_11.11_000012487089XSmall

    The Power of the Market: Part 1

    Jul 27 • Businesses, Demand, Supply, and Markets, Developing Economies, Government, Macroeconomic Measurement, Regulation, Thinking Economically • 856 Views

    Maybe the market is more powerful than the Congress.

    First, some history

    Hoping that farmers would earn a living wage, in 1933, the U.S. government decided to subsidize crop prices. The goal was “parity,” a level of purchasing power that equaled what farmers could buy during their golden age, 1909-1914. To achieve parity farmers could receive a check that elevated market price to a target price.

    Fast forward to 2011.

    Farm income is soaring. Consequently, for many commodities, target prices are way below the market price. The target price of corn is $2.63 while its market price is near $7. For soybeans, $6 is the target and $13 the market. Translated into federal spending, farm subsidy totals are down by one half, from $22 billion to $11 billion.

    Why? The power of the market. 

    The Economic Lesson

    Involving demand and supply, a market is a process that determines price and quantity.  For corn, you have ethanol, emerging economies, and China on the demand side. They are shoving corn’s demand curve to the right. No one person or government is making the decision. It is all about the interaction of many consumers and many producers.

    So, when the Congress says it wants to cut spending, maybe the market can help.

    An Economic Question: How would crop subsidies affect the quantity that the market supplies and demands?

    No Comments on The Power of the Market: Part 1

    Read More
  • An Upward Dow Helps an Incumbent President

    Interesting Debt Facts

    Jul 26 • Behavioral Economics, Economic Debates, Economic History, Government, Macroeconomic Measurement, Thinking Economically • 574 Views

    1. China and the Social Security Trust Funds have more in common than you would expect.

    • The public has purchased $9 trillion of U.S. debt. China holds $1.1 trillion of the publicly held total.
    • The U.S. government bought $4.6 trillion of its own debt. The Social Security Trust Funds hold $2.6 trillion (57%) of that amount.

    2. During wartime, the debt has increased.

    On this graph, a line representing the debt soars during the:

    • 1790s (American Revolution)
    • 1860s (Civil War)
    • 1940s (WW II)
    • 1980s and now.

    It is highest during WW II.

    3. Calling it our “fiscal exposure,” we can picture future spending:

    • “Explicit Liabilities” that include “debt held by the public {interest payments}, military and civilian pension and post-retirement health benefits, environmental and disposal liabilities.”
    • “Contingencies” aka federal insurance.
    • “Implicit Exposures” which are “future Social Security and Medicare benefits, Federal disaster relief.”

    All data is for 2010 from an excellent GAO debt primer.

    The Economic Lesson

    An MIT professor calls it BATNA (Best Alternative To a Negotiated Agreement). Economists call it opportunity cost (the best alternative that was sacrificed).

    Using one opportunity cost chart for President Obama and another one for Speaker of the House Boehner is a handy way to gain insight about the debt ceiling talks. At the top of each chart we would have “agreement” and the alternative, “no agreement.”  Professor Tom Kochan believes that the Republican Caucus in the House is in a much better negotiating position because their constituency approves of the opportunity cost (their BATNA) of having an agreement. By contrast, the “no agreement” BATNA is less attractive to President Obama.

    An Economic Question: For President Obama and Speaker Boehner, in an opportunity cost chart, list the benefits of having an agreement and the benefits of not having an agreement. Then decide whether those benefits are worth sacrificing.

    No Comments on Interesting Debt Facts

    Read More
  • 16512_6.26_000008803278XSmall

    Can the USPS Deliver?

    Jul 25 • Businesses, Economic History, Government, Labor, Macroeconomic Measurement, Thinking Economically • 673 Views

    You’ve got mail? Maybe not on Saturday. As explained in a Teaching Company lecture (#28), the U.S. Postal Service (USPS) faces competition from UPS and FedEx, from email, faxes, and texts. Their salaries average 30% higher than the private sector, they have massive pension and retirement obligations, and their productivity lags behind national averages. Hemorrhaging money, they have to cut back.

    Recently, Bloomberg Businessweek explained the plight of the USPS. Providing amazing service, the USPS delivers mail by pack mule to the Havasupai Indian Reservation in the Grand Canyon and by snow mobile in parts of Alaska. During 2010, its revenues were $67 billion. But it spent much more.

    What to do?

    Close post offices for economic reasons? Prohibited by federal regulation. Fire employees? Union contracts say no. Eliminate Saturday mail delivery? Congress has to say yes. Union concessions? A new contract with 250,000 postal workers includes a no-layoff provision, a 3.5% raise during 4 1/2 years, and 7 uncapped cost-of-living increases. Soon, 3 other postal unions will be negotiating. Innovate like Sweden (letting customers use mobile phones to create individualized postcards) and Germany and other foreign services? The USPS has resisted digital creativity.

    And finally, have any public postal systems solved the same problems? Yes, Sweden, Finland, Germany, Switzerland.

    The Economic Lesson

    While we have had postal services since the 1600s, Ben Franklin transformed the system. Appointed Deputy Postmaster for the Colonies by the British, he established our first home mail delivery system, diminished to a single day the letter delivery time between New York and Philadelphia, and to 6 days between Philadelphia and Boston. When the British fired Franklin for his rebellious political activity, the postal system was making a profit.

    An Economic Question: How might incentives for government agency leaders and private business CEOs differ?

    No Comments on Can the USPS Deliver?

    Read More