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    Regulatory “Pay-Go”

    Dec 28 • Behavioral Economics, Regulation, Thinking Economically • 519 Views

    Too much regulation? Senator Mark Warner’s proposed legislation is an interesting approach.

    Concerned that regulation is “stifling fresh investment and discouraging innovation,” Senator Mark Warner says the incentives have to change. Currently, when federal agencies create new rules, their power expands, their budget grows, and their work force balloons. Burgeoning regulation, he says, pushed us down from #4 to #5 on the World Bank’s “Ease of Doing Business” rankings.

    Instead, Warner suggests that agencies create “a credible, quantifiable estimate of the economic impact” for every regulation. Calling it “regulatory pay-go,” his proposed legislation would require eliminating old rules when new ones are added. The net result? The regulatory impact remains constant.

    It sounds good to me. Your opinion?

    The Economic Lesson

    Pay-go refers to pay-as-you-go, a legislative approach that involves budgetary neutrality. New legislation is characterized as pay-as-you-go when it replaces existing spending instead of adding to the federal budget. Social Security is called a pay-as-you-go program because the money collected from current workers is paid to current Social Security recipients.

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    Grade Bubbles

    Dec 27 • Economic Debates, Economic History, Macroeconomic Measurement, Thinking Economically • 671 Views

    At the University of North Carolina (UNC), the average G.P.A. was 2.49 in 1967 and 3.21 in 2008. Are we 25% smarter?

    In a 2003 Washington Post article, one of the nation’s grade inflation experts, Stuart Rojstaczer, then a Duke professor, explained his grading considerations. Realizing if he gave “the C’s some students deserve, my class will suffer from declining enrollments…low enrollments are taken as a sign of poor-quality instruction. I don’t have any interest in being known as a failure.” Consequently, his grades ranged from A to B-. They reflected the trend toward everyone getting A’s “except for the occasional self-destructive student who doesn’t hand in assignments or take exams–if exams are given.”

    At UNC, concern has developed about recognizing outstanding scholarship. If everyone gets an A, then who is outstanding? The UNC solution, currently being considered by a committee, is to publish additional information such as median grades in specific courses. A controversial policy at Princeton has been to limit A’s to 35% of the student population.

    At certain law schools, though, the opposite is unfolding. At Loyola Law School in L.A., all averages have moved up by .333. Starting with their fall, 2008 classes, NYU implemented a new (higher) grading curve that included an A+. “We believe that the new curve will more accurately represent the achievements of our students to the outside world.”

    The Economic Lesson

    As economists, the price system first comes to mind. Prices are signals that convey information. If we compare grade inflation to price inflation, we can say that high grades, when given to everyone, convey increasingly less information about student achievement. When prices convey no information, as in Zimbabwe, people turn to alternative currencies.

    And yet, again, as economists, if we think of incentives, a teacher does not want to be the only one giving lower grades because of diminished enrollment. A school does not want to be the only institution giving lower grades because it might harm students’ employment opportunities.

    So, as was true during pre Sherman Anti-trust Act era for corporations, should schools together agree to lower grades? But then, will we see the results of corporate collusion collapsing when firms deviate from the “rules’ that cartels try to establish?

    Your opinion?

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    Made in China?

    Dec 26 • Businesses, Developing Economies, International Trade and Finance, Labor, Macroeconomic Measurement • 864 Views

    True or false? Is Apple’s iPhone made in China? The answer is true and false.


    According to U.S. trade statistics, the iPhone is made in China. Consequently, the iPhone is recorded as a minus for us and a plus for China. It added to our trade deficit and China’s trade surplus with the U.S. by a whopping $1.9 billion during 2009.


    According to recent research, trade statistics can be misleading. Yes, the phones are assembled in China and then they are shipped to the U.S. However, researchers say that the value added by the Chinese is only $6.50 out of a wholesale price of $178.96. Instead, we should consider the value of parts that are sent to China but made by firms in 9 countries including Japan, Germany, South Korea and the U.S. In fact, using a value-added approach, the iPhone would add $48 million to U.S. balance of trade totals.

    The Economic Lesson

    Called net exports, a nation’s trade balance is the value of exports minus the value of imports. Simply defined, exports are goods produced in the U.S. and sold abroad. Imports are goods produced abroad and sold in the U.S. When the U.S. sells domestically produced goods that are worth more than those it imports, it has a trade surplus. It runs a trade deficit when the opposite is true. So, if a country imports a car for $20,000 and exports a tractor for $100,000, it has a trade surplus of $80,000.

    However, based on the iPhone, you can see that calculating our trade statistics is much more complicated than seeing what enters and what leaves. According to the director-general of the World Trade Organization, “The concept of country of origin for manufactured goods has gradually become obsolete.”

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    Sounds Like Pistachios

    Dec 25 • Demand, Supply, and Markets, Economic Debates, Environment, Financial Markets, Thinking Economically • 465 Views

    “Remember the pistachios,” is a memorable line from a novel by economist Russ Roberts. In the first several pages of The Invisible Heart: An Economic Romance, a teacher says you have been given a room filled 5 feet high with pistachio nuts. The nuts are free, you are a nut lover, and you have only one rule to follow. The empty shells have to remain in the room. At first, you dive in. Eventually though, you are searching for uneaten nuts through mounds of empty shells. Finally, you stop looking. Why? It costs you too much time, energy, effort. It is “cheaper” to buy them.

    Reading “New Interest in Turning Gas to Diesel” reminded me of the pistachio nut story. With the price of oil climbing and natural gas still cheap, suppliers are developing the technology to turn natural gas into liquid fuel. As one commentator said, if oil climbs to $100 a barrel, “the conversion technology could be a ‘money- maker for whoever is a first mover in that space.'”

    Similarly, this Bloomberg article suggests that OPEC countries are concerned about $100 oil. Instead, they prefer a price that is closer to $80. Why? Sounds like pistachios.

    The Economic Lesson

    The price of a barrel of (light sweet) crude (for future delivery) varies on the supply side primarily because of production decisions from the Organization of the Petroleum Exporting Countries (OPEC). On the demand side, we have the world’s hunger for oil. In addition, some suggest that speculators investing in oil futures can have a significant impact on price.

    Responding to demand and supply determinants, the price of oil has changed considerably. On July 4, 2008, at $145.29, a barrel of light sweet crude futures touched a recent high. And yet, only 6 1/2 months later, on January 16, 2009, the price was down to $36.51.

    If the pistachio story is accurate, we will neither run out of oil nor have to worry about its price remaining high for too long. If supply is too low or demand is too high, price soars. Then, with so high an opportunity cost, we develop and use alternative fuels.

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    The Christmas Price Index

    Dec 24 • Demand, Supply, and Markets, Economic History, Macroeconomic Measurement • 517 Views

    You might want to check the CPI…the Christmas Price Index. Calculated by PNC for the last 27 years, it tells us the value of the items in “The 12 Days of Christmas.”

    This year, the PNC CPI totaled $23,439.38 for anyone purchasing one of each item. Repeating each item as the song suggests brings spending to $96,824. At the PNC CPI site, you can see a whimsical animation of the index here and check out how the index has fluctuated since it began.

    The Economic Lesson

    As economists, we should ask why the annual increase for the song’s gifts was 9.2% when the inflation rate has been closer to 1%.

    Looking specifically at the Christmas Index, we would see that most items were more expensive. The golden rings, for example, were up by 30%. We confirmed the increase here; the price of a troy ounce of gold, since January 2010, skyrocketed by 30% or so, moving from close to $1100 to approximately $1400. The biggest percent price jump, though, was the 3 French hens that, at $150, were 233% more than last year.

    By contrast, for the CPI, there was much more variety. Looking specifically, the contents of the CPI market basket appeared to offset each other. Fresh fruit, for example was cheaper while fresh vegetables were more expensive. The prices of new cars tended to decrease while used cars cost more.

    Using the rule of 70, a 1.1% annual inflation rate implies that prices will double (and currency value will halve) in 63 years. By contrast, an inflation rate of 5% means prices will double in 14 years. You can see why economists target an inflation rate that is closer to 2%.


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