February 28, 2009
The Chinese in recent years, have been rising up to the challenge, though. Partly through a mercantilist mindset, they have been hoarding up—and, incidentally, investing in US treasury bonds—in order to lower prices and remain competitive on the world market.
As China’s population begins aging, however, they have started running into the same issue that we here in the US face: how to pay for social security and medical care for the elderly? A big part of the answer in the past has been to trust in US t-bills, and still is, to some degree. However, a recent article in the Wall Street journals seems to indicate a change in policy.
With the turmoil in many world industries, the Chinese seem to realize that this would be an excellent time to invest while prices are temporarily lowered. Mr. Fang (a top Chinese official in the Chinese investment corp.) is quoted as saying, “China’s reserves are largely invested in safe government bonds like U.S Treasurys [sic], but they can be used to pay for imports or for foreign investment.” As Chinese foreign exchange reserves near $2 trillion, they have the potential to tip the scales in their favor all across the world.
Incidentally, these investments, so far have been in the arena of natural resources: Oil and steel being the biggest. I won’t pretend to understand why their focus has shifted to natural resources, but I could, in one word, take a guess: production. In a modern economy, though, the major factors of production are labor (which they have in spades) and capital (which they are working on feverishly), as opposed to “the bounties of the Earth” (especially if one is not overly concerned about pollution and the squandering of resources). I wonder if there might be another, ulterior motive there as well. Could China be hoarding more than simply wealth in anticipation of some crisis? Only time will tell, I suppose.
The car scrap premium proposal of Frank-Walter Steinmeier,
To stimulate the automotive industry by increasing sales of new cars, people receive a $3.000 payment to scrap their car, that is 9 years or older, in order to buy a new car (that fulfils the new emission standard Euro-4).
John Maynard Keynes ironically stated, that in times of recession, the government should “fill old bottles with bank notes, bury them at suitable depths in disused coal mines which are then filled up with town rubbish, and leave them to private enterprise on the well-tried principles of laissez faire to dig them up again.” This could have the same effect as the new scrap premium.
In order to be effective, it has to encourage enough people to make an impact.
It is questionable, if the premium actually encourages people, to destroy their car and buy a new one.
On the one hand, it would help the decision of car drivers who have already thought about purchasing a new car. I would consider this number of people as relatively low.
On the other hand, in times of the financial crisis, it is unlikely that a car owner is willing to buy a new one. Other reasons could be that he cannot afford a new car, does not want to buy one because of its relatively high opportunity costs, or still likes his car that is 9 years or older. An additional $3.000 increases the budget of the individual, but the purchase of a new car might still be beyond this new budget line.
A new car has a fast depreciation in value, especially in its first year. This is why there is a tendency to buy used cars. Buying a new car also faces higher opportunity costs because it binds the capital and fewer interest can be realized.
Therefore the base of new car consumers may be smaller than needed and the scrap premium would only have little impact for the automotive industry.
Another aspect of a policy’s intension should be the generation of value, while the car scrap premium reflects a destruction of value.
In my opinion, it is a shame to destroy cars, just because they are nine years or older, in order to get the premium, even though they are still in proper running condition.
The premium causes an economic damage of the rest value of the car plus the costs of search to find a new one.
Would it not be the same to blast houses in order to stimulate the building industry?
The reduction of CO2-emission represents another argument for the scrap premium.
By replacing old cars for newer, more fuel efficient ones, the premium is supposed to contribute to the reduction of CO2-emission and therefore to the protection of the environment.
However, I do not consider the solution using a premium as very effective and do not think it could result in a multiplier effect.
To achieve an ongoing effect, it is necessary to put incentives on the people’s behavior. By charging car drivers with a CO2-emission price that is integrated in the petroleum tax, the individual can choose how much he is willing to pay more for the additional pollution.
Without negotiating with all other continents, I do not see a significant effect of reducing the CO2-emission with the premium. There is no local solution for a global problem like this.
Maybe this is not quite the area of responsibility for a foreign minister, and the government should consider theories of specialists of a more effective investment to stimulate the automotive industry and to protect the environment.
Sylvia begins her article by telling readers about how the dry season in Uganda led to a rise in the price of food. Mostly covering all of her bases, she resons that this rise in the cost of food caused restaraunts, specfically popular spots for lunch out during a typical work day, to either increase the cost of their meals or decrease the amount of food they serve to customers. In response, she says, business men and women have radically economized on eating out- packing lunches or going to the supermarket down the street. Basically, Sylvia does a great job of telling readers about how supply and demand interacted in the market for lunch out, but she doesn't give any premises or reasons to justify her logic. Deeper economic analysis, or a look at an economic model would've provided her with just the reasons she needed to support her arguments.
In the article, Sylvia justifies her reasoning with quotes from Ugandan business men and women who were forced to economize on eating lunch out during a busy day at work, and those restaraunt and grocery story owners who feel like they've gotten a raw deal from both the rising costs of food and a huge drop off in business. These words of course, logically perfectly justify what happened; obviously if someone testifies to it, that must be great evidence for it happening, right? But, little does the writer know, the words from Ugandans actually points us in the direction of microeconomics at work. In effect, Sylvia has failed to tell us why Ugandans responded the way they did to the market.
The dry season would've indeed caused the price for food to restaruant owers to increase. Food distrubuters, to make up for their losses from the season must increase the price they charge for food to restaruants. In response to being charged more for food, restaruants, to make up for the lost profit, carry that price over to their customers. None of this should seem terribly surprising, and worked in exactly the way Sylvia described, mostly. Models tell economists that the dry season caused supply to decrease, shifting the supply curves in the market for prep food and restaruant food upwards. What this says that Sylvia doesn't tell us is that resturaunt owers must also have decreased the amount of food they prepare- the increase in costs of production reflects this. Things get interesting when we examine more closely the radical response consumers held to an increase in the price of eating out. Sylvia gives quotes from extremely disenchanted Ugandan consumers. They complain that they've had to economize enormously on eating out. Some decided to bring lunches to work and stop eating out entirely. Others went to the supermarket to find cheaper prices. Some consumers traded eating out on some days and bringing lunch on others. What does all of this tell us about consumer's preferences? Their demand for lunch out must've been extremely elastic, with an elasticity far below -1, maybe even far enough to halt consumption completely. Those consumers that did halt completely probably had perfectly elastic curves. An easy accsess to cheaper substitutes also caused them to find cheaper food. The increase in cost of eating out was just perfecltly too much for businessmen and women, with their heavy schedules, high dollar value for time and the existence of cheap super markets down the street. What Sylvia didn't capture in her analysis was this detail- income and substitution effects working in the same, negative direction to have a huge impact on consumption. Consumers ate out less and made their own food more. Plus, their budgets just couldn't handle a price change of that degree; consumption of luch out decreased even more. The author's analysis could've been enriched with this look behind the scenes.
Lastly, what Slyvia didn't focus on was the postive impact that had to have occured on supermarkets and other marginal food sellers from the increase in price. Since consumers substituted so much of their own food for food ate out, supermarkets and cheap fast food would had to have experienced an increase in profits, even with the higher cost of prep food. In the end, its the marginal foodsellers who truely get the good deal.
Although Sylvia's logic was sound and her examples supported it well, we can see that so much more happened behind the scenes in Uganda. Radical changes in individual preferences and higher food prices all worked to explain the events she describes.
February 27, 2009
Saks has taken the obvious avenue of reducing prices in their attempt to stay alive in a market that has been experiencing drastically decreasing demand. This measure is in total compliance with the Law of Demand; however, Saks faces an unusual problem.
Many Saks’ fashion-forward customers are not your typical consumers—they defy some of the basic characteristics on which economic consumer theory is based. Such consumers receive more utility from relatively expensive goods because they assume a lower price means lower quality (not to mention their lowered egos when they wear lower-priced merchandise). Since they are put off by lower prices, those consumers may turn to other high-end retailers like Nordstrom or Neiman Marcus to quell their expensive taste. Saks risks losing an important part of their target market, and their image along with it.
The discounted prices on merchandise have helped Saks sell their inventory (at a loss) to consumers who perhaps otherwise would not have shopped there at all. In reference to the steep discounts taken, the article quotes Stephen Sadove, the company’s CEO: “Some actions were taken that you’ll probably never see again.” Maybe that will appease Saks’ traditional epicurean customers. In an effort to keep their new, more price-sensitive customers coming back, the article also mentioned that Saks plans to start carrying lines of “exclusive but more affordable merchandise.”
Saks is doing their best to carry goods that will provide a greater amount of utility to consumers with a wider range of budget constraints than they have in the past. If their plan is successful and more consumers start to spend their money there, the effect could be similar to that of an increase in income—an increase in demand. Best of luck to them.
The topic of the effects of trade speculation was brought to my attention by the recent article in the Financial Times “Chinese copper entrepreneurs flee.” China’s government has spearheaded an effort to support private investments in Africa to secure natural resources. A result of the growth seen from China and other emerging markets gave credence to the belief that the hard commodities needed for the rapid expansion of infrastructure and essentially modernization would equate to greater demand in these goods. Well, the consensus now is that slow global growth outweighs the demand. The article brought in light the abandonment of Chinese smelters in the Katanga region of the Congo. With the cost of copper soaring to $9000 a ton the cost provided enough incentive for Chinese miners to move into the Katanga province and mine at a lucrative $5500 dollar profit. But as the cliché goes, good things never last and investors sold off their positions in commodities, marking the end of the commodity boom. As a result forty Chinese smelters left Katanga and as the author states “luxury house building projects and freshly imported Jeeps vanished and replaced with crime and unemployment.” The reason? Copper plummeted to nearly $3200 a ton and the incentive to mine in Katanga was not lucrative enough given the operating costs. We can deduce that speculation in copper created an unstable and inefficient market. In the case of Katanga, the investment brought in from the Chinese provided an economic expansion and influx of wealth. Speculation in copper (increasing prices) over the years created enough of a catalyst for the expansion of supply and investment but after the deflated price it left it no better than before. With a conditioned reluctance for foreign institutions the future is uncertain for Katanga. Adding the cherry to the top of the “screw you” sundae the Chinese owners failed to pay taxes and compensate workers. Moise Katumbi, was asked if copper price were to rebound would he allow the Chinese to come back, saying “No. no no. Not as long as I am governor.”
An argument for the recession attributing to the price of copper is valid and obvious, while some state that the value of copper is pragmatic, since its wide use in homes, pennies, etc. and consequently not subject to speculation. In my mind it ceases to explain the 320% increase in copper from March 2004 to February of 2006, and its subsequent drop to 2004 March price levels in December 2008, in a matter of months. I am in no way denouncing speculation in the commodity market, I realize that in order for markets to work, individuals willing to risk their capital for a high reward is a cornerstone of any market, but some (politicians) wish to control speculation on the basis of possible collusion, my humble opinion is that Mr. Market is just being Mr. Market.
However, this is very unlikely, so we are stuck analyzing the economical implications/rewards of legalizing pot. First of all, an increase in tax revenue will most likely not bring the state out of debt, no matter how much revenue is made. A basic concept in economics lies behind the demand of a market. When people have more money they tend to demand more goods and services, thus maximizing their utlilty. This is proven true also by our government’s reckless spending that only increases with tax hikes. For instance, part of the revenue brought in my legalizing marijuana will be spent on rehabilitating the drug addicts that it is predicted to create. Whereas, the people might benefit from the government injecting these tax dollars into the economy, in all actuality, California will likely remain in debt.
Still, people in many ways will be better off, which is after all the underlying point of economics. Potentially, many jobs will be created, prisons and the courts will be less crowded, and the government will be able to inject money back into the economy. Health risks are, for the most part, pointless to debate, since hundreds of thousands will smoke marijuana whether it is legal or not. Violent crimes could possibly be lowered due to a fall in dangerous black market dealings as well. Although the argument will probably made that this is the ruin of moral society as we know it, I see it as just one more thing the government can no longer tell the people not to do, which is ironic, since people are smoking without their consent anyways.
There is one other point made on the new legislation that needs examining. The bill puts a $50.00 fee on the sale of marijuana per ounce. Where this arbitrary number came from is not clear, but the negative implications could be endless. Since it is ridiculous to believe that all the drug dealers operating on the black market will shut down shop and instead allow the family owned gas station down the street to take all their business, there is still going to be a black market for weed. Especially if the $50.00 imposed fee turns out to be a price ceiling or a price floor. My guess is that this price is going to be a floor, since the government is interested in maximizing profits, they will set this as the minimum amount allowed to be charged to buyers. Selling below this price will be illegal. This will allow the black market to continue selling cheaper marijuana, undermining the government’s prices. If the $50.00 price is above the equilibrium price of the market for marijuana, then there will be a surplus of the quantity supplied by the government. If people can get cheaper marijuana illegally they probably will since they have been all this time anyway. This will reinforce the black market instead of weakening it. Either way, an imposed legal price disrupts the rationing ability of the free market. If the government really wants to maximize their profits, they should stay out of the markets way.
I believe the legalization of Marijuana can benefit California’s economy in many ways. The taxation of alcohol and cigarettes has already proven to generate mass amounts of revenue for the government. Adding another regulated substance such as marijuana will only increase this revenue. As for the street value dropping by nearing 50 percent I believe that with the legalization of marijuana and the decreased price would strongly influence more consumers. The more consumers, the higher the demand, the more demand the more revenue California can produce. With lower prices, more consumers, and the government collecting on the tax to better the state, it’s a no brainer.
After publishing news for almost 150 years, the Rocky Mountain News had to close its doors today, the most recent in a long parade of newspaper closings across the country. While most articles reporting on the matter tend to focus on how tragic it is for more people to be losing their jobs, I was finally able to find an article that offered a modicum of positive economic analysis.
Market Watch, sponsored by the Wall Street Journal, reported that “newspapers were already struggling to cope with a transition to online-news consumption that had siphoned off classifieds and other advertising revenue.” Essentially, the article is alluding to our basic supply and demand models.
In this model, online newsreels and sites such as Craigslist act as direct substitutes for physical newspapers. As such sites become increasingly prominent, with, more often than not, free-to-view content, the quantity demanded of newspapers has decreased significantly. Also, a cultural shift towards “being green” by reducing consumption has further lowered the demand for newspapers. Companies would be forced to consider reducing prices in order to keep up with these constant reductions in demand, but are unable to reduce prices beyond a certain point without cutting deeply into their total profit.
When a company is faced with a negative profit, it has a couple options: it can reduce costs, or it can leave the market. For a while, E.W. Scripps Co., the parent company of the Rocky Mountain News, tried reducing costs by closing other newspapers under its control. However, the company is unable to sell newspapers for free like its substitutes online, and was forced eventually to close up shop.
It should be noted that since a decrease in the price of newspapers did not lead to a significant increase in their consumption, it can be safely assumed that newspapers are currently an inferior good.
February 26, 2009
Human beings, according to assumptions typically held by economists, and by myself, ultimately make choices according to the impact on themselves (and their family) before they consider the affect they will have on anything else.
Our economic models show us relative results of particular changes within a market without regard to scale or quantity and are effective nonetheless.
This article suggests that this previous case of 'The House Bank', which was a bank controlled directly by the House of Representatives, is an accurate analogue of the case today where a government bail-out results in a business with controlling share owned by the goverment. In the case of The House Bank, the House abused their ability to control their own bank in an extreme way to provide themselves with the most benefits, since they did not need to bear the full costs of their own exploitations. Naturally, the bank was exhausted in short order, which is consistent with our economic predictions that people will do what they can for themselves and their family.
There is much fear that a large industry controlled by the government will follow a similar path, even with the dilution of power resulting from the high-visibility nature of the enterprise. It is inevitable that the controlling power in the business will attempt to gain the most benefits for itself through any means accessible to it.
This is to say that the case of The House Bank is nothing but a smale scale of a government operated industry, which follows the same rules and can be predicted in the same way by our economic models. The real difference would perhaps be that this larger system will cease to function after a longer time and decay more slowly.
February 23, 2009
I think this theory holds a grain of truth, but the explanation and rationale need to be explored economically. The price of cigarettes has increased, which, for a normal good, would decrease the consumption of cigarettes. However, cigarette consumption has increased with the increasing price. This would make it a Giffen good. Consumers still prefer cigarettes over other goods. They are willing to give up other things to either compensate for the increased price or to simply get more. This would suggest that not just any other good would suffice. It would have to be another Giffen good. The Government could tax a good that, despite the price increase, consumers would still prefer over other goods and consume more of during stressful times.
The editorial suggests chocolate as a possibility. This could work because a lot of people turn to food as a stress reliever and chocolate is most often number one. However, consumers would have to prefer chocolate to other habitual stress relievers. If chocolate turned out to be a Giffen good the extra spending and higher price would generate the government’s much needed revenue. However, this stance assumes that the government is not over spending the revenue they already have. This is a possible solution, but only as a last resort. After all, who wants the very luxuries of life taxed more than they already are? I sure don’t.
February 22, 2009
So much has happened economically in the past few months it's almost hard to keep up. And now after the Republicans are upset that they didn't get to read the stimulus bill, some are thinking about refusing some of the stimulus plans money allocated to them. Some Democratic governors think they are crazy and maybe they are, but it seems like this is all going to come back and bite us in the ass. Or rather bite our children in the ass. Also, Obama is talking about taxing the wealthy more. Hmm this sounds like a relatively bad idea. On the surface it sounds good, except when you get to the part oh who is considered wealthy? On top of that how much are the wealthy already paying? I mean to really break it down, my mom was laid off a few weeks ago, and she is considered of the 'wealthy' being unemployed and she didn’t even make that much aka nobody wants to give me a dime to help pay for college, and I was told to get anything ever she would have to go completely broke first (where’s my stimulus?). So my mom with no income, will still get taxed those higher rates. On top of that how much are the wealthy paying already? To put it in personal terms again, my best friend’s dad makes a lot of money. And so does his son working in Aspen and taking extravagant vacations all over the world, and my best friend's day pays as much in taxes (with all of the nice tax breaks he gets) as his son made in a year. If we continue to tax the wealthy with greater and greater rates, they're not going to be the wealthy any more, and there will be less incentive for people to work more, to go to college to get those higher paying jobs, to not be on unemployment or welfare. Welfare is something people are proud of now, proud that they didn't have to work for their money, and they get to 'screw the government' as one man put it to me like 'the government is screwing us.' Tax increases will work because people won't be willing to work more hours, and more people will need to be hired, which is good except you lower the incentive to work, along with work ethic, and the idea that people will probably be under paid on top of higher taxes. The higher amount of unemployment assistance causing business taxes to rise? Well we can kiss entrepreneurship goodbye. Raise taxes on businesses, and a lot of them will go out of business. I recently heard a speech on how in the Springs, small businesses can't pay the sales tax, so we're missing somewhere around 17 million dollars from their sales taxes (if I remember correctly). Raise the business tax by 3% as an example, and if they still can't pay it you are merely increasing debt, not solving a problem.
Ending the war in Iraq is also discussed as helping to get the bills paid, but lets face it, we'll be bringing all those soldiers home, and now those that were reserve units, what if their jobs are gone? I mean it's illegal to fire someone for serving their country but the jobs just aren't there anymore. There's more unemployment for you, on top of all the aid that those men and women need to cope with coming back. And the wars aren’t over yet, we may being pulling out of Iraq, but Afghanistan is the big hot spot now, so anything that we will be saving Iraq we'll be spending on Afghanistan, and maybe even Iran too from some rumors (again I say rumors) that I have heard.
McConnell is right towards the end of this article, the companies aren't doing what they need to do to remain stable, but neither is the government. Let's create more and more debt? I know it's supposed to stimulate the economy but in all seriousness, the little money that goes to the people is either paying off debt or being saved, while the money going to save these companies probably won't help because people can't buy their products nor do they have the confidence to do so.
Arnold Schwarzenegger is also right, we need to work together on this, it seems as though it has been a little unfair from the start with the Republicans complaints about not being about to read the stimulus package. Now there are Republicans out there talking about having Tea Parties? I don't know exactly how that would affect our economy but I can tell you it would not be good. People assume that stimulus plans are good, but if you can't get agreement on it, and you can't back it with logic? Then it means nothing but debt.
For the people things seem to be going downhill, we’re saving people from foreclosure, but what if that means foreclosure for other people? The people who made good choices but now that they have to pay higher taxes and such can’t afford it? What about the businesses who are going to go out of business because we need more unemployment assistance? Why are we screwing the little guys and the people to save big companies?
February 17, 2009
The extra cash money from a stimulus check helps people, but is designed to be spent. When the cash money from a stimulus check is spent it utilizes the multiplier effect and ripples through the economy creating positive economic growth. At least that is how it is designed. At the present moment I believe most people would pay off some debt and put the money in the bank. People, especially if unemployed, are just not spending like the U.S. consumers of 2006, they are scared. Obama is purposing a "Making Work Pay credit" tying stimulus payments to Americans earning less then $200,000, rather than passing out checks. This plan would add money to individuals paychecks, but only about $13. (http://news.yahoo.com/s/ap/20090211/ap_on_bi_ge/meltdown101_stimulus_plan_2)
In the attempt of a short run economic recovery plan i tend to agree with Senator Mitch McConnell, who stated in this article, "if the money were lent rather than just granted, states would I think spend it wisely, and the states that didn’t need it at all wouldn’t take any.” That is a fantastic way of thinking, it gives states incentive to be prudent, but also provides some relief where actually needed. Government spending in a recession is a good thing, but simply passing out cash money with no regard could prove costly in the long run.