April 30, 2009

Kenya: Price Controls are in!

Zeddy Sambu, a business journalist in Kenya reports on their government's efforts to save consumers from starvation in the face of a draught. According to her, their Catholic Church leader, and many different leaders in the agricultural branches of Kenyan government are outraged over failure of tarrifs on foreign wheat to protect starving consumers from high prices. Zeddy reports that they are eager to staunchly domestic wheat production and save the country from starvation. Instead of simply stating the facts as Zeddy did, to tell readers about the government's plans, her article would've benefited enormously from economic models of monopoly and perfect competition. She may have been able to highlight that aside from the Kenyan Government's proposed solutions to high prices, insight from microeconomics would provide them with a whole range healthier and quote possibly more effective solutions.

Zeddy reports that a draught in Kenya recently has made it more difficult for wheat growers to produce and sell their product to local millers. The draught has prompted them to raise their prices, as an economist's model of a firm in perfect competition would certainly tell us. She takes quotes from the leaders of their argricultural sectors to verify this. In turn, her article says that millers, facing this price, have resorted to buying wheat for flour through imports at much lower prices than local growers in draught season charge. Economically, not alot is missing from this report. It says that because import prices for wheat were much much lower than local wheat, millers resorted to the lower cost capital input. What her report does miss is that the millers must have a certain degree of monopoly power (can hold price well above it's cost of production) to be able to purchase wheat at a lower price yet still charge a dangerously high price for flour. These high prices, according to the report were the reason for government action in the first place. With this monopoly power, the millers can take adavantage of starving consumers who want to make bread to feed their famalies. There is the real reason for the people to complain.

To solve this, according to Zeddy, the Kenyan government has tried a number of things. The first attempt to regulate the milling industry was a 35% tarrif on imported wheat. Their hopes were to discourage millers from buying at a low price and selling and high and buy more domestically-produced wheat. To further propogate the effort, the government required all wheat growers to bring their harvest to market to be sold to the millers in government stores. It wouldn't be surprising to an economist that these measures did more harm than help.

Had Zeddy asked an economist what he thought of the Kenyan government's decisions, she may have been able to provide the article with a description of their problem's solution. The first place they went wrong was to impose an import tarrif on wheat. Removing it would have the effect they desire. If there tarrif did not exist, this would mean very large economic profits for those firms importing to Kenya, because of the large demand for bread and wheat. If these firms were encouraged to import, or even move to produce domestically, as models would tell us, the market for wheat would become more competitive and help keep the prices consumers want. Furthermore, if a more competitive wheat market caused prices to drop, it may encourage more milling firms to enter the industry (domestically or in imports) and drive down the price for flour. The government's movement to make millers buy domestically, also, would simply, as a quote in the article indicates, force millers to charge even higher prices for flour. Removing the tarrif, or even imposing a price ceiling on the millers where price equals the amount millers would be sell a given output and consumers would be willing to buy it.

Such analysis of perfect competition and monopoly would've provided Zeddy with a proper economic solution to Kenya's price problems.

Economic Challenges of Electrical Cars

This article addresses the difficulties associated with bearing the economic burden of an electrical car for a supplier.

The costs of developing and producing an electrical car combined with the cost of electrical power and battery maintenance, electrical cars are much more expensive than the current class of internal combustion engines, and the hybrids available.

While electrical power is cheaper than gas power, it is largely because electrical power comes from a combination of gas power along with many others, if primarily coal. On top of that, the cost associated with replacing a large-power battery like those required for electrical cars can be thousands of dollars that the consumer must absorb.

Another problem with to building a large market for gasoline-effecient vehicles, is that the reduced demand in gasoline drives its price down and makes gasoline-based vehicles more attractive as electrical-based cars get nearer to it in cost.

When all is said and done, the fixes available are: government subsidization to drastically reduce electric-car cost bourne by consumers, or else artificially high oil taxation, or a dramatic increase in the technologies available for producing/maintaining/running electrical cars, relative to gasoline cars.

Caution: Minimum wage regulations may have serious side effects

Minimum wage regulations are usually put into effect to ensure the working poor do not fall victim to greedy corporations and unbearable debt. Politicians often boost their success in passing such laws and credit themselves as the rescuer of the average Joe. What may not appear to them is the significant relationship between minimum wage rates and unemployment. Such a relationship has been a part of economic theory for quite some time now, yet most political figures brush it under the table. CNN is often there to ensure they can get away with such nonsense.
In an article published this week titled “Unemployment: 109 cities at 10% or higher” news reporter Julianne Pepitone gives a prime example at how little the media knows about what is going on in today’s economic world. This article looks at cities with unemployment rates over 10 percent. Pepitone does not bother giving much of a reason as to why unemployment is sky rocketing in these cities, which she probably would just blame it on Mexico or President Bush anyway. Instead she rambles on about how horrible the economy is compared to a year ago and repeats the same things every other news reported so brilliantly has already said. I think the real story in this article has yet to be discovered.
Nine out of ten of the highest unemployment rates listen in the article are in cities that also have the highest minimum wage regulations in the country (California and Oregon). Doing more research, it became apparent that Michigan, Rode Island, and California have the highest overall unemployment and all three have minimum wage rates over the federal rates. Wyoming, North Dakota, and South Dakota hold the lowest unemployment rates in the country (all below 3.5 percent) and all have minimum wage rates lower or the same as the federal standard. Of course, many factors could be hidden behind these statistics such as, population and industry, but it does appear that a connection does exist.
When it becomes too expensive to keep hired help, firms lay them off. If firms could instead offer a lower salary people could keep their jobs. And in times like these, less money is better than no money. The government has tampered long enough with concepts they know little about. Passing minimum wage rates could to be to blame for the increasingly high unemployment rates in these cities. While other states keep unemployment at bay, high paying states are reaching rates that were last seen in the great depression (25%). Perhaps government should stop trying to save the day with their ridiculous bail out plans and instead just abolish the laws that are holding back capitalism from correcting itself.

April 28, 2009

Houston We Have A Problem: They Do Not Want Our Help!

In the article " Feeling More Secure, Some Banks Want to Be Left Alone", Banks are addressing concerns with government intervention because the growth of the government in the banking industry and how that plays a part in additional banking restrictions. Banks like Bank of America and Citigroup are being disruptive to the process because agencies swooping in are acting like authorities. These authorities which I could not find in the NY Times article, have already existed before this banking situation.

Anyone can access their bank information depending on the level of depth that you want to research and pay for. Not sure, however, if the one company I am aware of, Bankrate.com is a private enterprise (even though they may be a monopoly) or not. But this company's objective has been a auditor of banks before these government authorities came in establishing stress tests that examine strength and longevity because of the supposed irresponsibility of the execs.Are there more companies that showcase knowledge of these banks assets and ratios publicly?
Not really sure, I just know of the one company that is internet based. But wouldn't it be better to let banks publicize information on their own?- What causes information to be limited for consumers?- The zoning of banks? Wasn't there a standard about how close banks or credit unions can be in approximation of each other? Tax breaks for some institutions (non profit)?
( Sounds like restrictions to me) These restrictions seem to be separating markets further than just geographic boundaries.

So, why is there protection in knowing that experts outside of the field especially in banking is a safe bet? What did we just go through with banks? Playing good cop- bad cop takes time, effort and for some reason more cost to those banks that are surviving. By interfering you are punishing many rather than separating those who took on more risk than what they could handle.
Strangely the government still wants to give funds to those banks that have had many losses with credit cards, commercial loaning, and mortgages. Why?

Banks that want to be secure on their own grounds:

"Many banks are reluctant to sell their nonperforming loans because they could suffer big losses, forcing them to raise more capital. Others want to avoid the stigma of latching on to another federal program."

“Never mind the price,” James E. Rohr, PNC’s chief, said in a recent interview. “I would’t want to be the first person and be perceived as a weak bank.”

D. Bryan Jordan, the chief executive of First Horizon, a big lender based in Tennessee, said the likelihood that his bank would participate was somewhat low. “We think we can get a lot more value out of them by working them out ourselves,” he said earlier this month in a conference call about first-quarter results.

There are still banks accepting the idea of government funding..
Funding comes with a price tag- whether the cost comes from an attorney checking out the package and not missing details that creates more risk to the firm; the future restraints that government can place on the industry b/c of its share in the market;time to make changes independently; and the reduction of economic growth.

The crystal ball tells me your future holds...

It is interesting to me that Chrysler would turn over so much of their company to the Union.  It has kind of a mixed feel to it.  On the one hand, as we have learned, when unions get more and more power they tend to advocate for more money, more benefits, etc.  So in that context, them giving the union more power, is going to cost them money.  However this is a very unique situation.  If the workers don’t take pay cuts, and less specialized jobs, and the lower benefits, it is likely they won’t have a job. 

                As I see it, for now giving the union that power and allowing the people to control somewhat what happens with their jobs may be beneficial.  Since it is their job on the line they should be much more understanding, take the pay cuts, and just be thankful that they have jobs.  So this could potentially work.  So long as the labor union isn’t dumb about it.

                However, once Chrysler starts getting back up on its feet (assuming it ever does), they may be in quite a bit of trouble.  The government is going to own part of their company, and set lots of controls on them, and then the union is going to own another part, and be trying to fight the government regulations. Granted, that won’t happen for quite some time, but they’re not looking ahead at the trouble this will cause.  They’re going to get out of this recession, start becoming strong, and then it’s going to hit them like a brick wall.  However, that mostly depends on how understanding both the government regulations, and the labor union is.  

April 26, 2009

Revenue in a Recession


Under the condition of a recession, it’s not surprising that magazine firms are seeing a decrease in revenue. Money in the magazine business comes almost exclusively from advertising, and businesses that typically advertise in magazines have less money to do so as a result of their own recession-related financial problems. So, magazine firms are looking for new ways to increase revenue to maximize profits. This is the topic of the article I chose.

The question is, if magazines increase subscription prices, will subscribers continue reading and allow firms to bring in more revenue? The writer leads readers to make the assumption, consistent with economic analysis, that firms are profit maximizers and consumers are utility maximizers. The article doesn’t offer a solution explicitly, but rather bats back and forth the idea of raising subscription prices.

If subscription prices were raised, readers could react by not renewing their subscriptions or they could ignore the increase and fork over the few extra dollars. It seems that a magazine firm would fall under the category of monopolistic competition—readers have some loyalty to the magazines they read, thus firms have some price searching power. Realistically, the added cost would be negligible to consumers and most would continue their loyalty. The result would be an extra lump of cash for the firm.

April 9, 2009

spend money to make money

Going green is also getting green, not only helping the environment but the economy as well. This form of tax credit gives the average homeowner/ consumer incentive to spend money on environmentally friendly products and get a hefty tax credit in return, some are 30% of the original purchase price. An underling hope, I see, is that this tax credit will stimulate the economy a little on its own.
Since in a recession/ depression consumers normally put off buying durable goods, goods that last more then 3-5 years, these tax credits offer more incentive to not delay with that new purchase. Besides the federal government, the local utility companies also offer a cash rebate for similar energy efficient purchases. In fact Colorado Springs Utilities offers an entire list of cash rebates for Eco friendly home upgrades. http://www.csu.org/residential/rebates/index.html
The rebate money and the tax refund money back in the pockets of consumers may also aid in stimulating more consumer spending, helping the economy eventually turn around. Every little bit helps whether the subject is the economy or the environment or both.