When will they learn?

                The idea of the Treasury Secretary controlling all the wages of the workers in the companies the government contributes to just sounds like a bad idea.  The problem with this article is that they avoid the economic impacts.  It’s like minimum wage, except it’s maximum wage?  I understand that all these companies messed up and the government wants to watch their money, but it might be better to have someone act more like a supervisor than someone simply controlling it all.

                If the government begins to put a maximum level on their wages, what’s the incentive to work harder?  They’re saying that they will be fair wages and such, but really?  When people lose that incentive to work harder then companies don’t improve themselves as quickly.  The workers don’t work harder and faster, they just work. 

                It also takes away from the workers market.  The higher the skill the higher the pay, so the company can chose between the more skilled workers who can get things done faster, or two workers who aren’t as skilled and together get as much done in the same period of time as the one worker.  If the more skilled workers think that they can make more by working for a company not controlled by the government they will.  Those that don’t and are getting these likely lesser wages are distorting the market saying that a company can get more highly skilled workers for less than they’re actually worth.  When those wages change the input prices change so it my (eventually) look like those companies are making a positive economic profit inviting firms to enter the market and if the government backs out at the wrong time and the workers demand the pay they actually deserve, then input prices will quickly rise, and we will be back to the point where some of these companies will be failing.  On top of that, what’s the point in being skilled if you can make the same money if you’re not a highly skilled worker?  So there will be less skilled workers in the workforce all together. 

Oh the government should just stay out of these things.  Distorting markets is not the way to fix them.

Housing: Wealth

This article says that the value of housing has been decreasing rapidly for quite some time, but is now becoming more desirable as the price has decreased, and the housing market, therefore, is near the end of its slump. This is a study taking place over 20 major U.S. cities.

As housing is typically the largest asset ownable by a person, the cost of that housing also represents the ability of the owner to pay it and therefore the average housing cost is a good indicator for the average American's wealth and the strength of the economy. This assumes that lendees are not sub-prime and that people will upgrade their housing as they are able to do so.

The proposed reason for the fall in housing prices is that people stopped buying new houses as they were unable to afford the change from their current house to a new and presumably better one. This is most carefully attached to demand loss according to foreclosures. This represents a decrease in demand, which, in this case, was compounded over 4 consecutive years of near-constant decreases.

This article proposes that the last two months of this year saw increased selling and buying of new and old houses, and that this means that the housing slump that grew over the last 4 years is supposed to be getting near its end.

Along with the falling price of housing, the cost of loans decreased. This is an increase in demand as it becomes easier to take out a loan to buy a house that costs less. This agrees with the evidence that housing sales have begun to increase again, and will do so until the prices are back up on both loans and houses.

Yay!

“Our recent engagement with the union has been conducted in a constructive and open atmosphere, and I look forward to this continuing”- Henry Ford

While a bit misleading-Henry Ford adamantly opposed unions stating the UAW would organize “Over my dead body,” I bet Ford never imagined that unions would contribute so profoundly in the deteriorating and dismal state of his beloved company today. In an article by the AP and recently updated on MSNBC, President Obama’s pledged to aid the ailing Big Three automobile companies (Ford, Chrysler, GM) given a viable plan. Previously, former President Bush provided the Big Three with a loan of some $40 billion dollars (distributed for the most part between GM and Chrysler). “Obama, responding to a question… said the current was unsustainable and the Big Three would need to change their ways.” Restructuring to cut costs in order “preserve” the “symbol” of what is supposed to be Americana. In many Americans eyes this symbol represents an inability to compete, and a reliance on welfare to avoid Chapter 11. In accordance with the terms of the Bush loan the UAW (United Auto Workers) has adopted “work rule changes and reducing total hourly labor costs to be comparable to those at Japanese automakers with U.S. factories.” Well that’s a start , but it fails to address the fundamental problem and doesn‘t factor the comfortable retirement and benefits of UAW employees. While the Obama administration may suggest restructuring these companies it de-emphasizes one of the biggest proponents on why these companies are failing to compete-- the UAW. The article states that Obama “stressed the large number of jobs connected to the companies and suppliers.” Inevitably this argument is incessantly brought up somehow validating why the government should throw the lifeline to these companies, that their presence fuels X amount of secondary jobs. Arguments, include: are these jobs worth the $40+ billion dollars were loaning these companies, should we reward these incompetent, myopic firms? If people aren’t buying the cars to remain profitable then why should we, as the proverbial saying goes- catch the falling knife? (Recall the 1979 bailout of Chrysler, they sold a large part of their business, Chrysler Defense, to repay the government loan but still resulted in wide spread job loss) Researching the topic further the seemingly straightforward problem evolved in complexity and while I will not assess the history of business/union relations in America or pass judgment I will state the numbers. An explanation for the current domestic automobile situation and the pitfalls of simply eliminating the union is needed. In terms of competition , the once dominant Big Three held a vice grip around the US automobile market and could be characterized as an oligopoly. With an increase in domestic competition, the market changed to one of monopolistic competition. It is here, where the problem to remain profitable castrated the Big Three. Like many unions, industrial unions primary objective is to try to unite all workers in the same industry, to create enough leverage to be taken seriously in their demands (wage increases, benefits, etc.). This market environment while not the most efficient, still provided the U.S. automobile companies to be profitable till an influx of foreign rivals (which possessed the luxury of a non union workforce). With the U.S. governments implementation of VER (voluntary export restraints) on Japanese automobiles, foreign companies started producing cars in the U.S. While I can’t measure the qualitative nature of U.S. cars to Japanese cars during the same period I can tell you since late 2007 foreign automakers held over 50% of U.S. automobile market and is still growing. Assumptions could indicate a change in consumer preference due in part to the lack of quality amongst the Big Three. The once nationalistic cry to “buy American” has been replaced by buying quality (to be perfectly honest I’ve always had a fondness for Ford’s F-series trucks). Even that slogan has been diluted some since those same foreign automobile companies are in fact produced in factories in America (for the most part). Some facts gathered off the internet highlighting the impact of UAW compared to non-unionized Toyota.

• Increased costs due to UAW benefits-$1,600 every vehicle of GM
• Average GM worker-$70 an hour in wages and benefits
• Average Toyota worker- $35 per hour (still making $100,000 in wages, benefits)

(James Sherk of The Heritage Foundation)

From this information we can safely conclude that the increased labor cost has negatively effected the business model of all three companies. Money that could be allocated efficiently for perhaps research and development has been siphoned to provide the demands of the union. The Big Three are at such a disadvantage concerning their labor force that their products are not cost effective in comparison to Toyota or Honda. The large dichotomy, means larger revenue streams for non unionized firms towards the betterment of their companies. The Big Three have little leeway in the matter of eliminating the UAW, the UAW could threaten to strike, rendering the companies futile in a competitive marketplace. Currently, the UAW has placed itself in a position where the companies can not act without it. While the UAW is not the sole reason for the failure of the Big Three it is becoming increasingly apparent that it is a large contributor. Perhaps, the lack of adapting to consumer preferences is amongst the reasons why the Big Three have found themselves in this situation, but we can not ignore the effect of the UAW. With a consumer base increasingly geared towards more fuel efficient cars the Big Three have been slow to react in a competitive manner. While unions protect workers, the unintended consequence is that they could be responsible for the loss of the thousands of jobs they sought to protect. GM, Ford and Chrysler are expected to heed Obama’s advice and cut thousands of jobs.

AIG Reaction

In this article Douglas McIntyre discusses the ramifications of the AIG bailout. The bailout was meant to help AIG help the middle class citizens, which could have potentially stimulated our suffering economy. Essentially, the government was trying to help out our banks so they could help our middle class. However, the bailout money was not used for what it was intended. It was used for bonuses given to the head honchos of the company when it should have been used to cover the increasing costs AIG was experiencing. Now, the government wants to take some of that money back by taxing the payouts at a rate of 90% because they felt the money was misappropriated. McIntyre explains that even though the ‘goal’ of ‘big government’ is to bring a sense of calm during a time of crisis it did not take peoples survival instincts into consideration. During stressful times, like a recession, playing into a persons worry can cause them to take advantage of the help for their own benefit. They are going to put themselves ahead of all others.
So, AIG took advantage of the bailout. There is no point in dwelling on the past or in placing blame. The focus should be on either fixing the problem or on enacting plan B. The government thinks they have the problem solved by taxing the payouts at a high rate. I’m not entirely convinced this is a good idea. The whole point of the bailout was to stimulate the economy. Taking the money back does not stimulate a thing. Even though the money was used differently then expected, it is still in circulation and it will still be spent, thus aiding the economy. Look at it this way. The people who received bonuses increased their budgets, which makes them more likely to spend money on things they would not have before. This increases their utility while putting money back into the economy. If you tax that excess money their budget and utility both decrease and they spend less money. Yes, the money was supposed to directly help the middle class citizen, but stimulating the economy helps them too. It is just a more indirect approach.

A gasoline tax to.... reduce prices???

These days everyone wants to be an economist. With the U.S. economy "falling off a cliff" it seems that more and more people know just what to do to fix all our problems. CNN is on this list of so-called economic experts. Their specialty today: Gasoline prices. The CNN article, by Steve Hargreaves, states that there is some evidence (although he does not cite or reference any of these findings) that shows people are not using the decline in gas prices to buy food or health care, but in fact, to drive more. This in turn will force demand up and increase the price of gas all over again. Wow, this must be shocking to many Americans who had no idea they affected the market in such a negative way. Good thing Steve is here to tell us what to do... Impose a gasoline tax to decrease demand and stabilize the price. It seems only obvious!

Goodness. Does CNN actually require its economy journalists to actually have taken an economics class? Apparently not. Although there may be evidence to support the basic claim that people are driving more due to a decrease in gas prices, there is another reason why Steve here wants to impose a tax on gasoline; Global warming. Where global warming issues may see this tax as a big win, American's wallets will not. This article shamelessly tries to bring about an economic reason in which it would be "smart" economically to impose a tax, in a horrible attempt to sway public opinion. Steve explains that "While it [a gasoline tax] is likely to raise prices immediately, the tax would also simultaneously act to reduce consumption, so the market price for gas would likely fall. That would mean less money for OPEC or Exxon Mobil." Can you hear the public cheering yet?

But let us look at what a gasoline tax would actually do, although it pains me to be so obvious. In the short run supply will decrease, and yes OPEC and Exxon Mobil will produce less and profit will decrease, however at a higher price to the consumer. This will knock the market off equilibrium and people who cannot afford the tax (the poor) will not be able to buy it. If they loose their jobs because they cannot get to work... oh well. Ride the bus. In the mean time the rich, who can afford to drive more, still will. Global warming? Well, maybe there emissions will be offset by the poor who can no longer drive. Gosh Steve, this plan is really working out! The first part of this analysis checks out. Gas prices will rise, and consumption will fall. Let us look at the second part: due to the fall in consumption market prices will 'likely' fall as well and we will all be happy.

In the short run, part of this tax will be shifted to the consumer and the other part to the sellers. However, the multi-billion dollar oil industry is likely to adapt faster than average citizen. Thus, we move into the long run. If we assume a constant cost industry, in the long run, long run average costs and marginal costs will have shifted up by the amount of the tax. Will this increase lead to a fall in prices as Steve has predicted??? No. In fact, it will lead to the full amount of the tax being shifted to the consumer, aka an increase in price. Mmmmmmm. So when exactly will the consumer be better off? Well you might just have to ask Steve.

Hospital Oligopoly

In a NY Times article, How do Hospitals get Paid?, author, Princeton Professor, Reinhardt, speaks candidly about the different associated fees that hospitals charge.

1st fee- Is that of Medicare where the government pays based on the condition of the elderly under a flat fee- which can change through levels of persuasion from hospital administration about how much of a percentage of risky (expensive hip replacements) patients that come in with Medicare(especially if based on govt. payments per dollars a day).

2ND fee- Fees that accrue from private insurers which Reinhardt assures readers that "On average these payments exceed the hospital’s cost of providing the underlying services and that these profits cover the losses hospitals book on serving Medicare and Medicaid patients, who are billed high prices but often do not pay their bills in full".

Through these different fees each hospital has a different range of fees and therefore each has its own unique charge master. Strangely, the author points out three discoveries: that these varying cost of medical services have nothing to do with the quality that one receives at their hospital, Medicare is considered a price setter and that charge masters are not visable for the public.

Why are medical services so expensive? Well according to those that believe in free market rather than government help, who do you think?

Correct me if I'm wrong...
Hospitals aren't really a monopoly in this case, but are being given monopoly power through funding of medicare & medicaid fees. The ammount of funding comes from the approach of persuasion that the hospital has when government & hospital staff negotiate. The thing is negotiation power for govt. funding may be considered a weak argument f hospitals incur more costs with these elderly programs and assistance to lower income than they would without them. Perhaps its the regulations that government puts toward private insurers such as the required ammounts that insurers must pay to certain hospitals. So it may still be negotiation power, but from this article that suggests higher profits from private insurers perhaps the most profitable negotiation is cohersion of a third party.To clarify( hopefully), I just mean that insurers are the ones that fund more money towards hospitals because hospital negiators lobby for more government regulations to increase their profit margin and that because ( I wonder if price discrimination applies here) government is using force in this situation rather than finding funds through taxpayer revenues private insurers are increasing their costs as well to transfer some of their revenues to hospitals at inflated prices.

The last point that Reinhardt introduces in this article is that the charge masters are not visable to the public. This I would say would be more speculative than my own take on this situation b/c its so generalized but what is a blog for I guess. Perhaps because if people did see the prices perhaps there would be government blame for medicare and medicaid than what exists presently since prices seem to change much more rapidly or perhaps the fear of removing this oligopoly power for the various hospitals' sake.

http://economix.blogs.nytimes.com/2009/01/23/how-do-hospitals-get-paid-a-primer/?scp=2&sq=hospital%20monopoly&st=cse

Nationalizing Our Banks?

Nationalizing our banking system is a scary thought. The key to nationalization is that the government actually owns and runs the banking institution, but so far that is not what they are doing, getting close but not quite yet. Our government has pumped billions of dollars into banks that are “too big to fail” in a plan they call TARP. This Troubled Asset Relief Program (TARP) is designed by the government to insure the bank’s most toxic assets, but has been extremely unregulated and left large banks with no accountability or decree for the usage of the funds. The government truly does not want to own the banks; the original goal of TARP was to protect the common shareholders giving the company incentive to raise the necessary capital through the market. First of all why have we allowed banks to get too big to fail, leaving a gigantic burden on taxpayers? Maybe we should limit the size of banks so they can be more manageable and not as risky. Smaller banks that have failed have been taken over by the FDIC and no depositors within the monetary limit have lost their funds. There was a great report on 60 Minutes that revealed that exact process, it was extremely enlightening and interesting. http://www.cbsnews.com/stories/2009/03/06/60minutes/main4848047.shtml
So why, as taxpayers, are we accountable for the intense risk of these “government-guaranteed securities” for big banks, when smaller banks simply get bought out or closed down? Does this behavior not send a message that taking unhealthy large risks towards rapid growth is a good thing simply because the hardworking people of this country will back you if you fail? We have a huge mess and no uncomplicated way to clean it up. Nationalizing banks is not a cleanup tactic I condone.

Political Stress on Economics

In a NY Times article, Obama Offers Broad Plan to Revamp Health Care, writes about the cut in federal payments to hospital and insurance companies, while funding those that do not have health insurance.



Even though this initiative, as the title states, is a vague plan for altering health care, the uninformed reasoning is still there. Obama may be more concerned about those in congress and the public in creating actions rather than the actual economic effects.



Some of these problems that Obama seems to dismiss is the breakdown of his suggestions in improving health care that this news article has presented. First, the article mentions Obama's theory of raising Medicare beneficiaries premiums. With the assumption that these Medicare beneficiaries are the middle class ,is contradictory to supporting the existence of the middle class. Obama seems to be transferring costs with those that cannot afford health insurance and those that can. The main flaw in this intiative is that instead of leaving those that have the ability to afford health insurance alone, Obama's goal will restrict those that can afford health insurance. Second, Obama is requiring that drug companies should supply generic drugs at a lower price for people to afford these cheaper alternatives. The problem yet again with this change is the idea of demand and supply. How will drug companies afford to lower their prices without being in the red? If a firm's goal is to maximize profits with increased costs because of the government wouldn't the firm increase the cost of drugs that aren't generic and choose to eliminate the avaliability of generic drugs so that it wouldn't have these regulations?

Beijing Reserves Could Fuel Natural Resources Deals

I am in awe every time I think about China’s market structure. In a country teeming with human life (over 1 billion more than the third largest country in the world) and not nearly as much developed infrastructure, not to mention a government-operated market system….well, the sheer logistics must be staggering.
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.

Scrap Logic

The car scrap premium proposal of Frank-Walter Steinmeier, Germany’s foreign minister, was approved by the Federal Government, but yet the question is, does it make sense?
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.

http://www.dw-world.de/dw/article/0,,3996710,00.html
http://www.tagesschau.de/wirtschaft/konjunkturfoerderung100.html

Uganda's food scramble

According to reporter Sylvia Juuko, rising prices of food in Uganda are causing consumers to eithr cut their habits of eating lunch out entirely, or significantly reduce them. She's entirely right in her analysis, giving decent logical reasons for consumer's radical change in eating habits in response to a dry season for growing foods eaten regurlarly in their diets. However, Sylvia's article could benefit from a whole plenty of information contained behind the scenes.

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.

(Untitled)

We’ve all heard about the current state of the U.S. economy—unemployment is way up, businesses are shutting down, the government is bailing out companies left and right, consumer spending has plummeted, the sky is falling, the sky is falling… This article discusses how Saks, a retailer that sells luxury clothing and accessories, is dealing with it all.

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.

Mr. Market

Given the U.S. financial markets volatility and somewhat slow regression the last couple of months, I found it appropriate to briefly and simplistically analyze speculative trading and its effects on the investment of commodities in the last year or so. To start, I remember a time when Goldman Sachs analysts predicted that oil could reach $200 and while wrong, the prediction highlighted the amount of fear in the market when the logistics never warranted it. The only explanation for the behavior of investors was trade speculation into oil, hedging against a supply shock that never occurred. Hard commodities like oil, have been subject to rampant fluctuations in market price, often resulting in extreme devaluation and economic instability. Some background. In case you’ve been in a hole the last one and a half years and haven’t received the news, the worlds financial markets experienced tremendous highs and devastating lows. While the S&P 500 has dropped roughly 50% Russia’s RTSI has dropped 80% since its highs in the middle of 2008. An explanation: roughly 8o% of Russia’s exports (U.S.- 30% commodities) are natural resources (oil, natural gas, timber) and the RTSI’s businesses are reflective of this. Interpreted in dollars, we are talking about losses in trillions of dollars worldwide.

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.

Legalizing Marijuana: The end of all our economic problems?

California is trying desperately to push through a bill that would allow people age 21 and up the legal right to smoke marijuana. The Board of Equalization estimates that it will bring in 1.3 billion dollars every year and help California out of a huge pile of debt. If only our government could learn how to spend our money more wisely, then maybe they would not need to continue taxing everything they can get their hands on… even illegal substances.

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.

California's Bailout

This article from the San Francisco Chronicle looks at the bill introduced by Tom Ammiano in order for California to become the first state to legalize marijuana. As the state of California’s economy declines, Ammiano proposes the idea that taxing marijuana in ways that alcohol and cigarettes are, the state can generate the extra revenue to be put back in to the state. Aside from taxes, Ammiano also reveals that the street value can be dropped by over 50 percent, with increase users of 40 percent, generating more profit for the state. With police making countless arrests each day for possession of marijuana, the legalization of this drug would enable law enforcement to focus on more dangerous issues. He also stresses the strong regulations and expensive licenses people would have to abide by.

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.

The Death of an Era

Note: For some reason Blogger doesn't like the URL to the article, so click here to view it.

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.

Nationalizing Industries

This article attempts to verify through a case study that government controlled financing (or other industry) is inherently inconsistent with effective and benevolent business practices.

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.

Colorado needs a new drug (to raise taxes on)

This editorial from The Denver Post looks at the increased consumption of smoking despite the increased tobacco taxes and discusses the option of increasing taxes on other “nervous habits” to give the government the extra revenue they’ve been trying to get. These tough economic times have driven “rattled” Coloradans to smoke more even though taxes have increased. Collections on cigarette taxes were twenty percent above the governor’s office forecasts in January alone. The editorial opts to tax another supply in high demand during this stressful time to further aid the government revenue.

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.

Oh goodness.

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?

Tax cuts are a smart move for our tanking economy.

I am behind Barack Obama's tax cut portion of the new stimulus package 100%. During a recession there are two major expectations of the government; tax cuts and government spending. Obama has made large plans for government spending to create jobs. He has also incorporated 40% of the $675 to 775 million dollar stimulus package to be in the form of tax cuts. These tax cuts can be used as a way to create jobs. Utilizing a tax credit for each new job created and also providing incentive to save existing jobs. I believe cutting taxes is a more efficient way to stimulate the economy than handing out checks.

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.