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    Threatening the Life of a T-Shirt

    May 31 • Economic Thinkers, International Trade and Finance • 352 Views

    A typical t-shirt starts as cotton in Texas. Traveling by truck or train to California, it continues moving westward until it reaches China. In China, the cotton becomes yarn which is made into cloth which is made into  a t-shirt. With a “made in China” label, the t-shirt leaves China, headed for a screen printing plant in Florida. Perhaps months later, after the t-shirt has been sold and worn, it winds up in a used clothing bin, destined once again to travel thousands of miles to a clothing bazaar in Tanzania where it is sold.

    This abbreviated tale of a t-shirt’s life is told in detail in The Travels of a T-Shirt in the Global Economy by Pietra Rivoli. Seemingly simple, its journey meets opposition everywhere. When the opposition is successful, trade is burdened by tariffs, quotas, licensing restrictions and other laws that limit entry and thereby preserve domestic textile jobs.. For Rivoli’s t-shirt, tariffs increase production costs by $.24.

    At the end of a 2002 report from the Dallas Federal Reserve Bank called “The Fruits of Free Trade,” is a chart that conveys the cost of policies that save domestic jobs. For apparel and textiles, 168,786 jobs are saved. The cost though, is $33,629,000,000 or $199,241 per job. Why is the cost so high? Because consumers are paying more when there is no competition. 

    More tomorrow on the Dallas Fed’s report and a Teaching Company lecture from Timothy Taylor on globalization.

    The Economic Lesson

    David Ricardo’s principle of comparative advantage says that worldwide productivity increases when nations specialize and export the good or service for which they sacrifice the least to make.

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    Unexpected Economic Indicators

    May 30 • Demand, Supply, and Markets, Macroeconomic Measurement • 409 Views

    Instead of the G.D.P., CPI, and assorted leading and lagging indicators, economists also look at an entirely different set of data. Sometimes hemlines, movie star preferences, and everyday purchases provide business cycle evidence.

    During a plunge in economic activity, people’s tastes have reflected a sober outlook. Since the hemline index was created in 1926, a parallel between recessions and longer lengths has been apparent. Other research has shown that during hard times, people prefer “songs that are longer, slower, with more meaningful themes” and actresses with more mature features. Also, laxative, deodorant, rice, and beans sales tend to rise as do lipstick and make-up foundation purchases. By contrast, people buy less tobacco and carbonated drinks.

    The Economic Lesson

    Buying behavior takes us to the economic topic of elasticity. If we are looking at how much our quantity demanded changes (stretches) in response to a change in price or income, then elasticity is involved. For example, if we buy lots more (or lots less) rice when our income minimally changes, then our buying behavior is elastic. If buying remains relatively constant, as with chocolate during good times and bad, then our behavior is inelastic.

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    Economic Freedom

    May 29 • Developing Economies, Regulation, Thinking Economically • 456 Views

    Composed of 179 countries, the Index of Economic Freedom ranks France 64 and the United States 8. At the top of the list, with the more free economies and the lowest numbers, are Hong Kong, Singapore, and Australia while North Korea, Zimbabwe, and Cuba are listed at the other end. On the United States pages, the authors indicate that the index number is destined to increase because of the response to the financial crisis. Citing massive government spending, they say that economic freedom has diminished.

    A Washington Post column by Michael Gerson actually started me thinking about government economic intervention. He pointed out that support for health care reform has recently diminished to 14% of the U.S. population expressing ‘”very favorable” views’. Taking us to an historical perspective, he says that the social safety net initially targeted the elderly through Social Security and Medicare, and the poor and disabled with Medicaid and Aid to Families With Dependent Children. Looking at waning enthusiasm for health care reform, he suggests that the U.S. population prefers a safety net reserved for those who need it rather than everyone. He is also saying that U.S. public opinion prefers a lower Index of Economic Freedom number.

    The Economic Lesson

    To determine the extent of government economic intervention, researchers look at such variables as the ease of starting a business, the degree to which trade is free, and the level of government spending and taxation. The list also includes the amount of corruption that permeates the business world, such labor regulations as how easy it is to dismiss an employee, and the dependability of property rights.

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    Costly Legislation

    May 28 • Government, Labor, Macroeconomic Measurement, Thinking Economically • 372 Views

    Looking at a recent NY Times article, whose title was, “Cost of Jobs Bill Leaves Some Democrats Leery,” I wondered whether the author realized just how many costs his discussion involved. If passed, the bill would extend jobless pay, provide health insurance subsidies for the unemployed, a summer jobs program, and a tax hike for affluent investors. As economists, we can see its costs as sacrifice.

    The immediate cost of the bill is its expense; money spent on it could be used elsewhere or saved. Other costs (sacrifices) include a lower federal deficit, more economic growth, and the economic efficiency that freedom can spawn. Thinking of the unemployed, generous benefits could lead to more joblessness as they have in Europe. And yet, will the jobless experience too high a cost if government does not offer more of a lifeline?

    Yes, it is complicated. Which cost are we willing to pay?

    The Economic Lesson

    Economist Milton Friedman will always be remembered for emphasizing that there is never a free lunch. Even if someone else pays the bill, still, in some way, at some time, the recipient will have experienced a cost. Considering the trade offs surrounding a social safety net, we are sacrificing efficiency for equality.

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    The Ant or the Grasshopper?

    May 27 • Government, International Trade and Finance, Thinking Economically • 445 Views

    “What a silly little ant you are,” said the grasshopper in The Ant and the Grasshopper. “Forget about work…Enjoy the summer!” But all day, everyday, grain by grain, the ant continued to gather and store her wheat. When the harsh winter arrived and the ant’s larder was full, a starving grasshopper begs for some food but Aesop has the ant refusing. By contrast, in a Walt Disney version the ants feed the grasshopper while when the Muppets retold the story  the grasshopper squishes the ant and the grasshopper drives to warm, balmy Florida in his sports car. 

    In a recent column, Financial Times columnist Martin Wolf provides a more modern slant. Equating the ant with the Japanese, the Chinese, other Asian nations, and Germany, and the grasshopper with the United States, Greece, the U.K., the Irish, and Spain, he has the ants lending money to the grasshoppers. His moral is: “If you want to create enduring wealth, don’t lend to grasshoppers.”

    Is there a chance that we will see an ending that echoes what Walt Disney or the Muppets presented?

    The Economic Lesson

    Production possibilities curves illustrate the maximum production capability of a country when land, labor, and capital are fully utilized. Because the hardworking ant fully used her land, labor, and capital, the grain she harvested would be represented by dots on the curve. By contrast, the grasshopper was underutilizing resources. His productive capability would be shown by a dot to the left of the curve, closer to the Y and X axes. We can use production possibilities graphs to represent the impact of sovereign debt and the financial crisis on each nation’s production of goods and services.

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