• Everyday Economics: The Contents of Refrigerators, Supply and Demand, and Global Markets

    What Refrigerators Can Tell Us About Global Markets

    Aug 12 • Demand, Supply, and Markets, Developing Economies, Economic Growth, Households, Innovation, International Trade and Finance, Labor, Lifestyle, Macroeconomic Measurement • 233 Views

    After a look inside a refrigerator, you might be able to form some economic conclusions. In emerging markets, the contents of refrigerators provide clues about affluence.

    Climbing up the development spending ladder, households can afford a refrigerator starting with the $3,000 GDP rung. As we saw last week, refrigerator ownership in China is soaring with the household total now close to 88%. A second BRIC, Brazil, is higher with numbers above 90% while India remains at 27%.

    You can see (below) how refrigerator ownership has risen in Brazil with China close behind.

    Supply and demand in developing countries

    From: AllianceBernstein

     

    Based on one investment analyst’s peek at 70 refrigerators in 12 emerging market countries, we could decide whether a refrigerator belongs in India, China or Brazil. An Indian working class family’s refrigerator would have mostly “efficiency items” such as eggs, fruits, vegetables and some pre-cooked food. Several steps higher, middle class households in China are starting to add some “indulgences” like alcohol, chocolate and ice cream. Then, at the top, perhaps in Brazil, the difference is the addition of health foods.

    Supply and demand shown by refrigerators in developing countries

    From: AllianceBernstein

     

    Where are we going? To use chocolate as an example of how the items in developing countries’ refrigerators will affect us.

    According to a confection industry website, chocolate consumption in developing countries is indeed growing. Not close to Switzerland where the average person downed an average of 240 candy bars in 2012, Russia is the only developing nation in the world’s top 20 chocolate eaters. But, with China’s growing affluence, its current level of 2 chocolate bars per person per year is expected to soar. Similarly, the number of refrigerators stocked with chocolate in Brazil and India will rise.

    And that takes us to our own refrigerators. Because increasing chocolate demand from developing nations is helping to elevate cocoa costs, Hershey’s announced a price hike. As a result, we might have less chocolate in our refrigerators.

    Our bottom line: In addition to chocolate, as people in developing nations eat more meat and dairy products and need more energy for their refrigerators, changes in supply and demand will affect global markets.

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  • In 2033, the Social Security program will be unable to pay all promised benefits to recipients.

    Will You Get Your Social Security Benefits?

    Aug 11 • Behavioral Economics, Economic Debates, Economic Growth, Economic History, Government, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 235 Views

    According to the annual Social Security Trustees Report that was submitted to the Congress on July 28th, we have some big problems. Let’s look back to 1940 and then ahead to 2088 to get a better idea of what is happening.

    At 65, in 1940, Ida May Fuller got the first US monthly Social Security retirement check for $22.54. In 1941, she got $22.54 each month. In 1942, 1943, and 1944 she still got her $22.54. Until 1950, she received $22.54 a month.

    You can see Ida May Fuller’s predicament. Each year, her check bought less. In 1949, she needed a monthly check for $38.32 to have the same buying power.

    Realizing that beneficiaries’ purchasing power was plunging, in 1950 Congress gave Social Security its first taste of a COLA, a Cost-Of-Living-Adjustment. Since then, at first through special legislation and then automatically based on the CPI, Social Security check amounts have increased. Imagine though what happens when inflation soars as it did during the 1970s. Check totals bumped up by so much that, in 1983, a special commission recommended higher payroll taxes to fund the system and a gradual increase in the age people could receive full benefits.

    So where are we now?

    We have a pay-as-you-go program that just means current workers pay current beneficiaries. Those beneficiaries include:

    • retired workers,
    • dependents of retired workers,
    • survivors of deceased workers,
    • disabled workers,
    • dependents of disabled workers.

    In addition to the revenue from current workers’ payroll taxes, the system has several trust funds. The trust funds get more money whenever revenue exceeds spending while money is withdrawn if revenue is inadequate. As you might expect, the cash that enters the Social Security Trust Funds is invested in US government securities. Because government securities represent loans to the federal government, they pay interest and have to be sold if a Social Security Trust Fund needs more cash.

    And very soon, the system will need more cash. Here are several key dates from the Trustees Report:

    • 2010-2013: The Social Security program exceeded its tax and non-interest income.
    • 2020: We start to deplete trust fund reserves.
    • 2033 (maybe 2034 or 2035): The trust fund is empty.
    • 2033-2088: Recipients get 3/4 of all promised benefits.

    The reasons for the program’s financial difficulties include too many baby boomers receiving benefits, an insufficient number of workers to fund those benefits and longer life expectancy. We also have disability benefits that have skyrocketed and a disability trust fund that will be depleted during the end of 2016.

    Perhaps though, these 2 graphs from the Trustees Report best summarize its problems:

    Funding:

    Social Security Funding Problems

    From: 2014 Social Security Trustees Report

    Beneficiary Worker Ratios:

    Social Security Beneficiary Worker problems

    From: 2014 Social Security Trustees Report

     

    Our bottom line: Unless we are saved by an increase in economic growth that spikes payroll tax revenue, Social Security funding challenges will involve lowering benefits, raising taxes, increasing the eligibility age and rethinking the current incentives for the disability system (that we will look at specifically during the next several weeks).

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  • Everyday Economics — Sunday Chart of the Week

    The Message From NFL Ticket Prices

    Aug 10 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Entertainment, Sports, Thinking Economically • 242 Views

    Our Sunday Chart

    Imagine someone tells you a t-shirt is $5.00. During class, my students figured out a seemingly endless list of messages that $5.00 conveys. Some said the price indicated poor quality. Others spoke of affordability. Status came up also.

    The message that a price conveys came to mind when I read about NFL secondary-market ticket prices. In the following graph, I showed the teams with the highest percent increase in secondary-market ticket prices.

    Through the price system, NFL ticket prices convery information about teams.

    Data from: Barron’s

     

    According to Barron’s, a substantial increase in secondary-market NFL ticket prices tells us which team is more likely to have a winning season. Looking at the past 2 seasons, they point out that 4 of the 5 teams with the biggest jumps in secondary-market ticket prices were Super Bowl champs and/or made the playoffs.

    Our bottom line: When consumers’ prices and businesses’ costs fluctuate because of supply and demand, we have the price system. Reflecting what New Yorker financial writer James Surowiecki called The Wisdom of Crowds, the price system is a group phenomenon in which many individuals and businesses make buying and selling decisions for the same good or service. The result? Price conveys a message.

    By contrast, when government establishes a price or prevents price from moving too high (a ceiling) or too low (a floor), then price gives consumers, sellers and producers little if any useful information.

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  • This week's everyday economics included vodka to tax dodgers

    Our Weekly Roundup: From Milk to Tobacco

    Aug 9 • Businesses, Demand, Supply, and Markets, Economic Debates, Government, Households, Innovation, Labor, Lifestyle, Regulation, Tech, Thinking Economically, Uncategorized • 167 Views

    Our Econlife roundup for the week

     

    The spread of refrigeration in China will create positive and negative externalities that relate to productivity, diet, health and the environment.  8.04.14 Why refrigerators do much more for us than keeping food cold…more

     

    Instead of more traditional foreign aid giving programs, cash grants are a valid alternative.  8.05.14 Cash gifts to poor people might help diminish poverty more than you expect…more

     

    Everyday economics A more accurate picture of African Development emerges when we combine statistics and stories.  8.06.14 How stories from Americanah create a picture of economic development…more

     

    8.07.14 Everyday economics  Because market structure shapes a firm's behavior, a supermarket's product placement relates to the monopolistic competition that characterizes its market.The reason you have to go to the back of your supermarket…more

     

    8.08.14 Why cost-benefit analysis sounds logical until you try to do it…moreConsumer surplus is over estimated for cost-benefit analysis of new tobacco regulation

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  • Consumer surplus is over estimated for cost-benefit analysis of new tobacco regulation

    Can We Use Happiness to Evaluate Tobacco Legislation?

    Aug 8 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Economic Debates, Economic Thinkers, Environment, Government, Labor, Regulation, Thinking Economically • 224 Views

    When I read in yesterday’s NY Times that the FDA has to decide whether its rules for regulating tobacco pass the “cost-benefit test,” it sounded like a wise procedure. Now though, I have some doubts.

    This is the story:

    In 1981, Ronald Reagan issued an executive order that mandated cost-benefit analysis of government regulation. No rule, he said, should remain on the books unless its potential benefits “exceed the potential costs to society.” Concerned, Democrats said that safety and health rules would be threatened. People also complained about “paralysis by analysis” because of the time and cost required to gather the facts.

    During the past 3 decades, George H.W. and George W. Bush, Bill Clinton and Barack Obama have given their approval to cost-benefit analysis of government regulations. Still though, the approach remains controversial because some costs and benefits are tough to quantify. After all, can we really determine the cost of the hours we spend standing in airport security lines or the benefit of 1000 lives that are saved 20 years from now because of environmental regulation?

    …Or the pleasure of smoking cigarettes?

    In the current cost-benefit analysis of new federal tobacco regulation, the pleasure of smoking has been quantified as a benefit. The problem though, according to a group of economists, is that the FDA miscalculated. The reason? When quantifying benefit through a happiness quotient, the FDA insufficiently recognized that smokers are marginalized and “suffer the disutility of wanting but being unable to quit…” As a result, the happiness quotient they are using for cost-benefit analysis is higher than it should be. Unless it is reduced, federal regulatory attempts to get us to smoke less could be jeopardized.

    Our bottom line: When costs or benefits defy quantification, can government regulators adequately identify the cost-benefit balance that a Presidential executive order mandates?

    A Post Script:

    I wanted to share how the concept of consumer surplus displays the benefits of smoking. Measured by the difference between consumers’ willingness to pay for cigarettes and the actual price they pay, consumer surplus conveys “the ‘pleasure’ that smokers receive from cigarettes.” Consequently, consumer surplus should be smaller in the following green triangle (below).

    Specifically, the green consumer surplus triangle (below) is formed by identifying the segment of the demand line that is above the equilibrium price where demand and supply meet. The part of the demand line above equilibrium is composed of all consumers willing and able to pay a higher price than what the market determined. As a result, they are “happy” that the price is lower.

    The second graph (below), shows the impact of tobacco regulation. By diminishing the number of smokers, cigarette package warning labels decrease demand and it shifts to the left. That shift results in a smaller green triangle, less happiness from smoking and less consumer surplus.

    Consumer surplus is over estimated for cost benefit analysis of new tobacco regulation

    From: “An Evaluation of FDA’a Analysis of the Costs and Benefits of the Graphic Warning Label”

     

     

     

     

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