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    A Contagious Disease

    May 6 • Economic Thinkers, Financial Markets, Government • 348 Views

    Seeing the Bloomberg Businessweek headline, “Greek Contagion Spurs Surge in Portugal, Spanish Debt Swaps,” I started thinking about diagnosing fiscal illness, treating it, and contagion.

    How can we diagnose the illness? The illness seems to be the Greek spending disease. Just like you can identify a risky mortgage by looking at someone’s income, you can identify too much national (sovereign) debt by comparing it to the GDP of that country. As we noted on February 9th, for 2009, Portugal (75%), Italy (116%), Ireland (61%), Greece (108%), and Spain (57%) have debt that is too high a proportion of their national income.  

    How do you treat a fiscal disease? Greece has moved to cut the wages and pensions of public employees and to increase sales taxes. In addition, articles abound about a tax system that needs to diminish fraud. Also, afraid of catching related illnesses, investors are inoculating themselves with credit default swaps. A credit default swap is insurance that relates to risky sovereign debt. In addition, could we say that healthier European nations and the IMF might give Greece a money IV? 

    What is contagious? The contagion sounds rather similar to bank runs during the 1930s before the FDIC was created. Once one person became worried about a bank’s health, the concern spread with many rushing to withdraw their money. In today’s fiscal world, nations need to borrow. The contagion here is refusing to buy a nation’s debt.

    Do you agree? Would you suggest another way to define the contagion? Other medical analogies?

    The Economic Lesson

    In his General Theory on Employment, Interest, and Money, British economist John Maynard Keynes said that nation should borrow during a recession. Then, by using the money to “prime the pump”, fiscal activism stimulates business expansion, the recession ends, government revenue surges, and the debt is repaid.

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    A Closer Look At Consumer Spending

    May 5 • Households, Macroeconomic Measurement • 435 Views

    We always hear reporters saying that, “Consumer spending makes up more than 70% of the economy…” Mike Mandel, former chief economist at Newsweek, believes the reporters are misleading us. Yes, the consumer component of GDP is 70% of all spending. But, the consumer is not necessarily doing the spending and the impact might not be jobs and growth.

    According to Mandel…

    1. Because a lot of what we buy is made elsewhere, more consumer spending will not necessarily result in more jobs at home. 
    2. Government’s Medicare spending is counted in the consumer component of GDP.
    3. “Imputed services” which include, for example, the rent we never pay on a house we own, are a part of the consumer component of GDP.
    4. Spending by religious groups is included in the consumer GDP category.
    5. As a result, Mandel concludes that consumer spending on domestically produced goods and services is actually close to 40% of GDP.

    The Economic Lesson

    GDP includes consumption expenditures, gross investment (primarily business spending but also residential housing), government purchases, and exports minus imports (usually a negative number). Alternatively, we can define GDP as the value of goods and services produced domestically during one year. If we assume that actual consumer spending on domestically produced goods and services is a lower number than reported, maybe the consumer is not quite as important as reporters say.  




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    Entrepreneur Incubators

    May 4 • Businesses, Economic History, Innovation, Thinking Economically • 427 Views

    Which words do you associate with “entrepreneur”? Risk taker? Ambitious?Creative? Smart? Energized? Henry Ford? Steve Jobs? Clarence Birdseye? The words and names convey a recipe for success. And yet, according to a recent FT article from Tim Harford, the ingredients are not quite what you would have expected.

    1. Is there an entrepreneurial spirit? The researchers did not discover it. However, they did say that intelligence and patience were more prevalent among those who started businesses. 

    2. Is there a common key to success? The most important resource is the ability to fund the project. An inheritance, for example, facilitates business creation as would available venture capital money.

    3. Family counts. Children of the self-employed tend to start their own businesses.

    4.  Where you live counts. Countries with lower taxes and less red tape tend to have more entrepreneurs.

    You might enjoy this article from yesterday’s NY Times about a “tech incubator” for entrepreneurs.

    The Economic Lesson

    New businesses propel economic growth if they create new technology and ideas or employ underutilized resources. Economists can use production possibilities graphs to illustrate economic growth. On production possibilities graphs, a bowed out curve is drawn which illustrates that country’s maximum production capability. Then, when an entrepreneur like Henry Ford invents the Model T, the production possibilities curve shifts to the right. 


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    Change in India

    May 3 • Developing Economies, Financial Markets • 364 Views

    Hey Everyone

    My name is Ilya Sabnani. I am currently a sophomore at Princeton majoring in Economics with certificates in Environmental Studies and South Asia Studies. I’m guest blogging about social and economic change in India. This past fall, I had the opportunity to spend 3 months in Hyderabad working for a microfinance institution, BASIX. I ended up doing research on improving the livelihoods of handloom weavers living in a rural area not far from the city. During my time abroad, I was exposed to both the cosmopolitan and developing aspects of Indian culture. From this, I’m going to provide an outsider’s view on change happening in India. I hope my experiences abroad can help you understand the problems facing many people around the world. Hope you like what I have to say and will post a comment or question.

    Is India’s Change Really Happening?

    Apparently, it is. As soon as I stepped out of Rajeev Gandhi Airport in Hyderabad, I thought I was at a country club. The lawns were perfectly manicured, the cars were neatly lined up in a large parking lot, and more importantly, there was NO SMOG. I could breathe! The last time I was in India in 2003, I was grasping for whatever oxygen was left in the air because there was so much pollution. With plenty of autorickshaws and cars that still run on diesel, urbanized areas of India are prone to heavy pollution. As i soon discovered, driving around Hyderabad ended up becoming one pf the most time consuming activities during my stay. The more I saw the city, the more I realized how much change had seemingly occurred. Practically everyone had a cell phone and there were wireless internet cafes that made technology accessible to those who could afford it.

    However, the deeper I thought about it, the more I realized how difficult life is for people who are at the bottom of the social and economic pyramid. In India, urban life can be especially taxing for the poor. For some, their main livelihood is begging at traffic intersections. For others, it’s working at hotels as dishwashers and sending money back to their families in villages nearby. At the end of the day, these people are struggling to make ends meet and are trapped in a cycle of the rich getting richer and the poor getting poorer.

    Delhi is hosting the Commonwealth Games in November. Even though this is a huge honor, the city is faced with what to do about the slums in the city. Instead of creating temporary housing, they are covering up the slums with bamboo walls. This temporary solution proves how governments simply don’t know what to do with the massive influx of people living in slums. How do you think this problem should be best addressed in the long run? Are more social services for Indian citizens necessary for substantial change to occur?

    This is a part of a series on Change in India. More to come.

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    How Are We Doing?

    May 2 • Developing Economies, Macroeconomic Measurement • 409 Views

    Hearing that U.S. real GDP growth for the first quarter was 3.2%, I wondered how well we were doing.

    We can look at past recessions to assess 3.2%. Looking back to the early 1980s, some economists say they were hoping for better. Like a “V”, when a recession is pretty steep, usually, so too is the recovery. For 2nd quarter 1983, after the 1980 and 1982 “double dip”, we jumped to 9.7% real GDP growth. By contrast 2010 projections are for 3.1%.

    We can also look at other countries. According to a recent IMF report, compared to developing nations and the emerging economies, our 3.1% projected recovery is “tepid”. China’s projected growth rate for 2010 is 10%; India’s is 8.8%; Brazil’s is 5.5%. However, when we look at the EU, we are doing okay. Their projected real growth rate is 1.0%.

    Finally, we can consider unemployment rates. Projections for 2010 are: U.S.: 9.4%; Germany: 8.6%; Greece: 12%; Spain: 19.4%; Japan: 5.1%.

    The Economic Life

    GDP is a measure of the money value of new goods and services produced in a country during one year. The unemployment rate is the number of unemployed in a labor force divided by the size of the entire labor force.

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