• 15824_8.4_000009109495XSmall

    Social Insecurity: Part 3

    Aug 15 • Government • 381 Views

    Do you prefer adjusting COLAs or the full retirement age (FRA) to ensure the survival of the U.S. Social Security program? To decide, you might want to know how different solutions will affect high and low income earners.  

    One way to solve Social Security insolvency is to decrease COLAs. COLAs (Cost of Living Adjustments) typically increase the amount that Social Security recipients receive each year. For example, if a person got a $100 check during year 1 and the inflation rate was 3%, then a COLA would mean a $103 check during year 2. If COLAs are diminished then lower income and older beneficiaries will be hit hardest.

    Another solution is to increase the retirement age when people start to collect Social Security. A decade ago, the full retirement age was 65. While now it will be 66 for people who are currently 62, starting with individuals born during 1960, the retirement age will be 67. If the retirement age is the solution, then higher earners will feel it more than others.

    COLAs and FRA solutions take us to the benefits received side of the problem. Revenue increasing solutions such as higher taxes are also possibilities.

    The Economic Lesson

    Social Security is a progressive program with low earners collecting more than they paid in taxes and high earners getting much less. According to the August 2010 report from the Trustees of the Social Security Trust Fund, during 2014 deficits will begin because of the baby boomers. During 2037, when the trust fund will be depleted, benefits will decrease.

     

    No Comments on Social Insecurity: Part 3

    Read More
  • 15822_5.4a_000002321349XSmall

    Netflix and Buggy Whips

    Aug 14 • Businesses, Economic Thinkers, Innovation, Tech • 594 Views

    After reading this NY Times article about Netflix, you might begin to think about buggy whips. I know it sounds distant but here is the connection.

    Entrepreneurs make an existing product or process obsolete. Netflix and Blockbuster. Amazon and Barnes & Noble. The Model-T Ford and buggy whips.

    Aware that someone else’s innovation could lead to their own demise, Netflix is creating its own DVD obsolescence by encouraging us to stream movies from them. Also though, through innovation, they have guaranteed their survival.

    Any other examples of this type of “creative destruction”?

    The Economic Lesson

    According to Joseph Schumpeter, economists should focus more on entrepreneurs and less on demand and supply.To Schumpeter, the entrepreneur, as an innovator, is the source of progress, change, and creative destruction. But also, by upsetting the status quo, entrepreneurs create conflict between the new and the old.

    1 Comment on Netflix and Buggy Whips

    Read More
  • 15820_5.1_000002830513XSmall

    More About Lines

    Aug 13 • Businesses, Thinking Economically • 651 Views

    Next time you are in Starbucks, check how long you stood in line. They care. To save 14 seconds, for example, Starbucks designed a larger ice scoop which baristas could use for one dip instead of 2. Still though, in a “mystery shopper” survey of “limited service restaurant brands,” Starbucks was #6 in wait time, behind Dunkin’ Donuts (4 minutes 3 seconds) during 2008. Also concerned about line time, the NYC Columbus Circle Whole Foods uses a line manager, a single line system, and an unusually high number of check-out registers.

    The science of line movement is called queue management. One researcher says that we respond favorably to a wait time of up to 3 minutes. Then, though it starts to feel longer than the actual time. Also, our response can depend on what we are waiting for. People might not want to wait at a gas station but will accept long lines for new iPhones and concert tickets.

    The Economic Lesson

    Firms that compete in a market with many consumers and many firms are in a monopolistically competitive market. The characteristics of monopolistic competition include many sellers with a similar product, sellers creating an individual, unique identity, and sellers having some control over price. With Starbucks and Dunkin Donuts in a monopolistically competitive market, they can use their coffee, their product assortment, their image, and their wait time to compete.

     

    3 Comments on More About Lines

    Read More
  • queue..line...bank run...15818_8.12_000009783048XSmall

    Waiting In Line

    Aug 12 • Businesses, Developing Economies, Households, Thinking Economically • 455 Views

    During August evenings in Nantucket, the lines are long at the Juice Bar. Outside each of two doors is a line stretching along the sidewalk. Once you enter the doors into the shop, you can select among (sort of) 6 lines to get to the counter and order your ice cream.

    Analyzing the experience, journalist Anand Giridharas says that forming orderly lines had been equated with “middle class behavior”. In India, traditional lines looked like trees with branches as mini lines sprouted next to the trunk and others cut in. Then, though, with the emergence of a middle class, the acceptance of branches and those who cut in was replaced with orderly single file lines. Similarly, when McDonald’s arrived in Hong Kong, they “introduced queue monitors” to replace the traditional chaos around registers.

    Perhaps we can view lines as reflections of democracy and the market. Democracy dictates that we are all equal with the same opportunity cost for our time. The market, instead, implies that those who can pay deserve to go first. I guess whenever we fly, we are choosing between a democratic experience (coach) and the market (first class).  

    The Economic Lesson

    A line represents a transaction cost. Defined economically, cost means sacrifice. Standing in line, we are sacrificing what we otherwise might have been doing. During the business day, the transaction cost of a line can be high. During a summer vacation, the cost of standing in line at Nantucket’s Juice Bar is minimal.

    With lines reflecting the dysfunction of the former Soviet Union, the huge transaction costs helped to speed its demise.

    No Comments on Waiting In Line

    Read More
  • 15816_8.11_000010118282XSmall

    How Are We Spending Our Money?

    Aug 11 • Businesses, Demand, Supply, and Markets, Economic Thinkers, Households, Macroeconomic Measurement • 375 Views

    Has the recession changed how we spend? Here are the numbers that give some answers according to a summary from Michael Mandel, former BusinessWeek chief economist.:

    Since the 4th quarter of 2007, we have spent more on: 1) telephone equipment/up by 16.6% 2) pets/up by 14.4% 3) education/up by 13.4% 4) childcare/up by 12.8% 4) healthcare (including drugs/up by 10.8% 5) housing (owner-occupoed and rental/up by 6.4% 6) food and drink for off-premises consumption/up by 5.3% (Please note that the percent change can indicate very different dollar amounts. For #1 16.6% refers to $1.5 billion while for #5, 6.4% represents $95.4 billion.)

    During the same 2 1/2 (or so) years we have spent less on: 1) Moving, storage and freight services/down by 19.6% 2) Motor vehicles and parts/down by 16.0% 3) gasoline and other energy sources/down by 15.3% 4) sports and recreational vehicles/down by 12.8% 5) video and audio equipment/down by 8.4%

    What does all of this mean? It appears actually that we are not spending very much more because the healthcare increase, by far the largest in billions of dollars, is from government. Also the housing total is what owners would have spent n rental if they had rented–an “imputed” number. So, accelerating this sluggish U.S. recovery will ultimately mean more private sector spending from you and me or from businesses. This returns us to the importance of stimulating innovation and entrepreneurs.

    The Economic Lesson

    Called National Income Accounting, a system for knowing the value of what we produce, how much we pay ourselves, and what we spend was developed by Simon Kuznets during the 1930s. Knowing the value of production, incomes, and spending enabled economists to recommend government economic policy more knowledgeably. 

     

    No Comments on How Are We Spending Our Money?

    Read More