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    A New Drachma?

    Jun 23 • Economic Debates, Economic History, Financial Markets, Government, International Trade and Finance, Money and Monetary Policy, Thinking Economically • 756 Views

    According to a 2002 BBC report, Greece was the least prepared to make the switch to the euro in 2002. During the transition only 1/6 of all businesses in Greece had received their euros.

    Now, Greece remains a dysfunctional euro nation. Can it leave? Not easily. (This NBER paper details the issues.

    If Greece were to leave the euro zone, it would have to…

    • create and print “new” drachmas.
    • switch all contracts from euros to new drachmas. Loans, mortgages, wages, bank deposits, taxes, bonds, all would need to change.
    • restock and reprogram all computers, vending machines, and ATMs.

    Also though, having power over its own monetary and fiscal policy, it could…

    • stimulate tourism and exports by depreciating its currency.
    • have more flexibility when spending and taxing.
    • unilaterally restructure its sovereign debt.

    But then…

    • French and German banks would have to “mark to market” the value of the Greek bonds that they own.
    • Other weaker euro zone nations might decide to copy Greece.

    Would the ripple lead to the demise of the euro zone?

    The Economic Lesson

    Countries typically use monetary and fiscal policy to affect domestic economic conditions. Monetary policy involves the supply of money and credit. Fiscal policy relates to spending, taxing and borrowing.

    Recession? Borrow and spend more. But euro zone nations are not supposed to let deficits exceed 3% of GDP. Lower interest rates? The euro zone makes the monetary decisions.

    An Economic Question: You can see the problem. Countries with different economic conditions lack the flexibility to respond to their own special needs. For example, how would fiscal policy differ for a nation with low unemployment and one with considerable joblessness? (Here, you can check unemployment statistics for the euro zone.)

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    Where Did Your Tuna Fish Come From?

    Jun 22 • Businesses, Demand, Supply, and Markets, Developing Economies, International Trade and Finance, Labor • 515 Views

    The tuna you had for lunch might have been caught in the Pacific, processed and canned in Thailand, and flown to a Wal-Mart warehouse in the U.S.

    Concerned about monitoring quality, a recent report from the Food and Drug Administration (FDA) tells us that almost 2/3 of the fruits and vegetables we eat, 80% of the key ingredients in our medication, 80% of our seafood, and 1/2 of our medical devices are made abroad.

    Also looking at the worldwide supply chain, a report from the International Labour Organization (ILO) focused on the income share that labor receives. For Kenyan fruit exports to the U.K., the producer receives 14% of the income. Meanwhile, the supermarket gets to keep 46%, airfreight and handling, 21%, packaging, 13%, and the importer, 6% (p.11).

    The Economic Lesson

    As economists, we should ask about cost. David Ricardo (1772-1823) stated the classic defense of free trade when he expressed the principle of comparative advantage. Trade, trade, trade, he said because each nation then can do what it does best and the whole world benefits through lower cost and greater efficiency.

    The FDA paper expressed concern that the quest for lower health care cost in the U.S. would lead to further globalization of the pharmaceutical supply chain. One result? More difficulty monitoring quality. On the other hand, more efficient resource use can fuel worldwide economic growth.

    An Economic Question: How does efficient resource use fuel economic growth?

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    Israeli Cottage Cheese Boycott

    Jun 21 • Demand, Supply, and Markets, Households, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically • 714 Views

    News articles say that the Israelis are “cheesed off” and “curdled.” Angered by the soaring price of cottage cheese, a Facebook consumer group of 70,000 friends has agreed to stop buying it on July 1. The headline on the boycott page said, “Let it stay in the stores and spoil until the price comes down.”

    This “tempest in a tub” began when cottage cheese price caps were removed. You can guess the result. The price of a 250 gram (9 ounce) container soared from 4.82 to 8 shekels ($2.30).  A national breakfast staple, Israeli cottage cheese (just like Coca-Cola) has a secret small curd formula.

    The Israeli Facebook group appears to want a cottage cheese price cap.

    The Economics Lesson

    During the early 1970s, to control inflation, U.S. President Richard Nixon implemented wage and price controls. Like taking the cover off a pressure cooker, when the controls were lifted, prices immediately jumped.

    As economists, we can explain why with a demand and supply graph. With the demand curve sloping downward, the supply curve sloping upward, the Y-axis price and the X-axis quantity, the curves meet at an equilibrium price and quantity. The market pushes toward equilibrium. Above equilibrium? There is a surplus. Below equilibrium? There is a shortage.

    An Economic Question: Why are price controls called a ceiling?

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    A Social Security Collision

    Jun 20 • Economic Debates, Economic History, Government, Households, Macroeconomic Measurement, Thinking Economically • 744 Views

    Ask a 56-year old and a 26-year old about Social Security and you will probably get very different answers. 

    In the NY Times, an unemployed 56 year old woman said: “My investments took a bath, then being out of work for a few years–I’m sorry but there’s not that much left. I’m going to need Social Security and Medicare.” However, in order to get the amount of Social Security she expects, a 26 year old could expect to pay a higher payroll tax.

    When? In 2030, she will be 75 and the 26 year old will be 45.

    Almost doubling since 1990, the number of retirees is surging. However, the number of taxpayers is up by much less. As a result, by 2036, Social Security will be unable to fulfill its promised obligations. The “old” worry about their benefits. Because Social Security is “pay-as-you-go,” the “young” are concerned about paying for them. The NY Times called it “Between Young and Old, a Political Collision.”

    The Economic Lesson

    Cut benefits? These are several approaches:

    • Reduce what upper income earners would receive.
    • Increase the retirement age.
    • Reduce cost-of-living increases in benefits.

    Increase Taxes? These are possibilities:

    • Tax all that people earn instead of the cap on taxable income that now exists.
    • Select a much higher cap on taxable income than now exists.
    • Increase the payroll tax rate from 12.4% to 14.4%.

    Or, just wait and see if economic growth solves the problem?

    Using this interactive WSJ graphic, you can see the impact of different policy alternatives.

    An Economic Question: If Republicans reject tax increases and Democrats refuse to cut benefits, how would you get the Congress to act?

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    Preschool Education Matters

    Jun 19 • Behavioral Economics, Economic Debates, Government, Thinking Economically • 563 Views

    Did you have to care for a hamster in your preschool class? Line-up? Clean up? Share?

    According to this NPR Planet Money podcast preschool probably provides irreplaceable job training.  Taking place during a developmental window that does not reappear, the “soft learning” we get as 3 and 4-year olds shapes our success as adults. This academic study provides the specifics.

    And yet, here and here, you can see the budget cuts for government funded pre-school programs.

    The Economic Lesson

    It is all about cost. The cost of any decision is the alternative you rejected. Choosing is refusing.

    An Economic Question: Why might cutting a preschool program have a lower cost for a politician than for society? 



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