• Everyday economics and fiscal policy and the debt ceiling

    The Problem With Hitting the Debt Ceiling Again

    Mar 16 • Economic Debates, Economic History, Financial Markets, Government, Macroeconomic Measurement, Money and Monetary Policy • 136 Views

    Today, we’ve hit the debt ceiling for the 44th time since 1980.

    Illustrating debt ceiling history from 1980 to February 11, 2013, this graphic predates #43.

    Debt ceiling history since 1980.

    From: The Washington Post

    An Explanation

    Discussing the debt ceiling, we should first take a look at the debt. Whenever the U.S. borrows, someone, somewhere buys a Treasury security such as a bond. The U.S. gets the money. The lender gets the bond–an IOU– and the promise that it will be repaid with interest (for most types of securities).

    So who has close to $18 trillion in government securities?

    Actually, we do. We owe approximately two-thirds of the debt to ourselves. The U.S. government lends to itself, for example, when the Social Security trust fund swaps its cash for bonds. In addition, individuals, businesses, state governments, local governments, pension funds–the list is long–buy U.S. Treasury securities.

    The rest of the U.S. debt is held by foreign governments, businesses and citizens, with China and then Japan at the top of the list. Next is Belgium (surprising), Caribbean Banking Centers, Oil Exporters, Brazil and then a long list with Uruguay at the bottom for December 2014.

    History

    We have a debt ceiling because of a 1917 law. At the time, the Congress decided it was losing control of the volume of borrowing. To regain power over the federal purse and fiscal policy, they said, “We will decide the maximum amount the U.S. can borrow.” And, from that day onward, whenever necessary, they voted to raise the debt ceiling.

    It sounds rather simple. But the politics have been unbelievable (actually believable). Repeatedly, different law makers have tried to attach conditions to debt ceiling legislation such as Social Security changes, bombing Cambodia, voluntary school prayer and even a nuclear freeze.

    What Happens Now?

    And that takes us to February 2014. Having hit the debt ceiling, lawmakers decided on a new approach. Rather than selecting an amount, they avoided a political showdown by creating what they called an “extension.” Actually a sliding ceiling that would move upward, the extension stopped its ascent yesterday, March 15, 2015. The new debt ceiling is whatever we owe this morning.

    For that reason, Secretary of the Treasury Jack Lew sent a letter to House Speaker Boehner saying, “I respectfully ask the Congress to raise the debt limit as soon as possible.” Awaiting their action, he has temporarily stopped issuing some bonds. The Congressional Budget Office said that without a new debt ceiling we could run out of cash next fall.

    Our Bottom Line: The Debt and the GDP

    If you are concerned with the size of the debt, it is helpful to compare it to the GDP–sort of like deciding whether your mortgage is too big by comparing it to your income. When the debt and the GDP are equal, many people become concerned.

    Debt ceiling equals GDP

    So, the problem with hitting the debt ceiling again is that this time our debt (+/-$18.2 trillion) has surpassed the 4th quarter 2014 GDP ($17.7 trillion).

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  • Everyday economics and airline flight decisions

    3 Myths About Flight Cancellations

    Mar 15 • Businesses, Demand, Supply, and Markets, Economic History, Labor, Regulation, Thinking Economically • 140 Views

    Have you ever arrived at the airport, looked for your flight on the overhead board and seen Canceled? Like me, do you assume the reason was a half empty plane?  We were probably wrong.

    It is actually about tradeoffs.

    The Swap

    According the WSJ’s “The Middle Seat,” you might have been canceled because of a swap. If a plane loaded with business travelers had mechanical troubles and your flight was occupied primarily by low-fare leisure traffic, the airline will switch the business travelers to your plane. Not only are business refunds more expensive than the deals discretionary fliers get but the business traveler is more likely to cancel if she cannot get to her destination on time.

    The Cost

    Because cost also determines whether or not your flight gets canceled, flights on larger planes are canceled less frequently. There is more food on widebodies that would be discarded (worth more than $12,000 on an international run), they have crews that would be paid unless they moved to another flight, and remaining stationary, planes require a parking fee.

    Below you can see the cancellation cost difference between widebodies and small regional jets. Uncontrollable events are cheaper because there is less the airlines are required to give passengers in return for the cancellation.

    A higher opportunity cost means more expensive flights will not be canceled.

    From: airwaysnews.com

     

    Rebooking

    Rebooking can be costly for the airline. The passengers that are moved to another flight take the seats of last minute fliers who would have paid the highest fares. The alternative of using another airline could be equally unattractive since they have to pay for that seat.

    So here we have our three myths:

    • Myth #1 Unfilled planes are the primary reason for a cancellation. (No, it relates to keeping the flights that generate the most revenue in the air.)
    • Myth #2 Canceling saves money. (No, And, the higher the cost of canceling, the more likely the people on that flight will take off.)
    • Myth #3 Rebooking is not a problem. (It is. The revenue sacrifice can be high.)

    And here we have a recent history of cancellations:

    Tradeoffs determine flight cancellations

    From: masflight.com

     

    Our Bottom Line: Tradeoffs

    Thinking economically, flight cancellations are all about tradeoffs. Deciding which flights go and which stay, airlines have to consider crew, maintenance, catering, airport and handling fees, passenger accommodation obligations and passenger cancellation implications. Cost and benefit depend on the airplane size, the route, the passenger mix.

    Even when the cause is uncontrollable, much more than the number of filled seats determines who gets canceled.

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  • The econlife.com Weekly Roundup

    Weekly Roundup: From Buying Mail Trucks to Selling Beanie Babies

    Mar 14 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Humor, Economic Thinkers, Financial Markets, Government, Labor, Macroeconomic Measurement, Regulation, Tech, Thinking Economically • 120 Views

    Our Posts Roundup

    everyday economics and daylight saving time Sunday 3.08.15

    What we don’t know about Daylight Saving…more

    everyday economics and apple and the Dow Monday 3.09.15

    Why Apple is like the old AT&T…more

    everyday economics and mail truck productivity Tuesday 3.10.15

    What we can learn from a mail truck…more

    Everyday Economics and Debating the accuracy of seasonally adjusted jobs numbers. Wednesday 3.11.15

    How to find out the real jobs numbers…more

    everyday economics and bubbles Thursday 3.12.15

    Why the Beanie Baby bubble burst…more

     

    ignorance survey Friday 3.13.15

    Getting smarter from an ignorance test…more

     

    Ideas Roundup

    • regulation
    • standardization
    • creative destruction
    • innovation
    • stock markets
    • Dow
    • productivity
    • information infrastructure
    • seasonal adjustment
    • unemployment rate
    • jobs
    • bubbles
    • supply and demand
    • global issues
    • extreme poverty

     

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  • everyday economics survey

    How an Ignorance Survey Will Make Us Smarter

    Mar 13 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Growth, Economic History, Economic Thinkers, Education, Environment, Financial Markets, Gender Issues, Government, Health Care, Labor, Macroeconomic Measurement, Thinking Economically • 158 Views

    Conducted in the U.S., Sweden, Norway and the U.K., the Ignorance Survey is supposed to make us smarter.

    Swedish researcher Hans Rosling’s Gapminder created the test to identify where our knowledge is so inaccurate that it affects our public and private decisions. He focuses on global issues that include world health, population, education, energy use and poverty.

    Sample Questions

    Here are several of his questions (answers are at the bottom of this page):

    1. In the last 20 years the percent of people living in extreme poverty has…

    • a. Almost doubled
    • b. Remained the same
    • c. Almost halved

    (5% of the people who took the survey in the USA got it right.)

    2. Women aged 30 spent how many years in school? (Men of same age spent 8 years)

    • a. 7 years
    • b. 5 years
    • c. 3 years

    (24% of the people who took the survey in the USA got it right.)

    3. What percentage of the world’s one year old children are vaccinated against measles?

    • a. 20 percent
    • b. 50 percent
    • c. 80 percent

    (17% of the people who took the survey in the USA got this one right.)

    Receiving this tweet, Rosling decided to test the media.

    Media knowledge of global issues tweet

    From: Rosling TED talk

    Only 17 percent of the media representatives knew that vaccination programs throughout the world have achieved considerable success.

    Global issues and lack of media knowledge

    From Rosling TED talk

     

    But, as the Roslings explain in their TED talk (below), it is not solely the media’s fault. Also, we have a personal bias that skews our perspective as well as outdated facts that we learn in school. Believing that “we need to know about the present to think about the future,” the Roslings hope to spread the word and offer their test to all of us.

    To those taking the test, they offer three assumptions that will lead to the correct answers.

    1. Over time most things improve.

    2. Countries need not be affluent  to better the health and literacy of their youth. Sometime “social” can precede wealth.

    3. The attention getting answer is usually not the correct one.

    Here is their TED talk on the Ignorance Project:

    Domestic Issues

    Further reflecting our knowledge inadequacies, market research from a private firm (done for the British government) focused on what people knew about domestic issues. Their topics included immigration, pregnancies, crime and life expectancy.

    Domestic issue ignorance

    From: Ipsos MORI

    Our Bottom Line: Making Decisions

    To make successful product development and marketing decisions in the private sector and to debate fiscal and foreign policy wisely, we need to improve our knowledge of key global and domestic issues.

    Answers: cac

     

     

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  • everyday economics and bubbles

    Why We Can’t Avoid Bubbles

    Mar 12 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic History, Economic Humor, Economic Thinkers, Financial Markets, Innovation, Tech • 147 Views

    Whether looking at 1637 or 1997, markets and bubbles always seem to find each other.

    A Tulip Bulb Calamity

    The wealthy merchant had only wanted to say, “Thank you.” He appreciated the information that the seaman had shared and, in return, gave him a juicy red herring to enjoy for breakfast. Thinking that the “onion” bulb resting on the counter would complement the herring perfectly, the seaman popped it into his pocket and left.

    Horror is the only word that comes close to describing the merchant’s response to his missing bulb. Rather than an onion, the seaman had consumed a tulip bulb for which the merchant had paid 3,000 florins–a huge sum of money in seventeenth century Holland. At that time, a suit would have cost 80 florins and one thousand pounds of cheese, 120 florins.

    The tulip had first been introduced to Europe in 1559 or so—approximately when Elizabeth ascended to the British throne. Gathering popularity, especially in Holland, tulips had been displayed for their beauty. Eventually though, the quantity that was demanded exceeded the amount available. Unwilling to wait for a blossom, the rich and the poor started to trade the bulbs in markets that sprouted where buyers and sellers met. With buyers far outnumbering sellers, bulb prices skyrocketed.

    In February 1637, tulip bulb prices plunged. All who had dabbled in the tulip market suffered. Even if the sailor had never appeared, the merchant would have seen his investment evaporate.

    The Beanie Baby Bubble

    Fast forwarding to 1997, we could have read the following CNN reports.

    • “Meet Hippity the Bunny, Inch the Worm and Wrinkles the Dog. These lovable creatures are among the 77 Beanie Babies taking the country by storm. Yet just in time for Easter weekend, the Beanie Babies are disappearing from the stores.”
    • Or, as one woman explained, “I’ve gone to Zany Brainy’s, Hello Kitty, two Hallmarks and Enchanted Treasures. I have like 45 of them. I call every morning at 10 o’clock.”

    Like the price of 17th century tulip bulbs, Beanie Baby prices had reached the stratosphere. Having sold for $5.00 in stores, they were going for an average of $30 on eBay with a select few attracting more than $5,000. At the height of the mania, in 1998, a Beanie Baby sold for $10,000.

    Humphrey the Camel, Patti the Platypus and Spot (below) were among the first and most expensive Beanie Babies:

    Beanie Baby bubble

    From: the fiscaltimes

    Meanwhile, by retiring a Beanie Baby design, by having relatively small runs, by publicizing a production problem as a limited edition, Ty, the manufacturer, fed the frenzy. Through less supply, it buoyed the resale market.

    Add to all of that the Beanie Baby magazines with pages of price lists, the families who were accumulating hundreds to pay for college educations and individuals who were doing arbitrage. It was a classic bubble that burst soon after 1998.

    Our Bottom Line: Bubbles

    Bubbles start with something new that captivates the market. As euphoria builds, so too do demand driven price increases. Then, with speculative purchases escalating, prices move even higher. But always, the euphoria switches to panic, sellers multiply and the market crashes. On the way up, participants like to say “This time it’s different.”

    But, for tulip bulbs and Beanie Babies…and cupcakes…and houses…and tech…it never is.

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