Tuesday, January 22, 2008
News N Economics presents lots of data pertaining to current events, politics, and finance more globally. My background has become progressively market focused. After receiving my Doctorate in Economics, I was an assistant professor for two years but then left academics for a career in finance. I have worn many hats in finance, mostly being promoted up the hierarchy in research but my focus has always been global.
I use this blog as a way to stay current. I started this blog in 2007 when I was a tenure track professor here on the East Coast in order to keep up with economics and policy that was changing or being challenged by the day. At the end of 2007, I joined the economic research team at a large bank in Boston. I remember covering the US financial crisis quite well, where investment management was looking at me to call the peak of US unemployment - I got that wrong. Living through two crises (the US financial and then European debt), I now see the then policy reactions and now economic ramifications of said crises quite intellectually humbling. Seriously, economic policy is being made up each and every day well into the current year, 2016! So many of the old models - the crowding out theory, for example - simply are not valid. We need to remember that.
This blog is my humble contribution to finding the economic truth. If you have a topic for discussion, wish to be added to my blogroll, or want to contact me, please email me at: Click here for E-mail.
Tuesday, January 8, 2008
The article, “The Debate Over How and How Long,” was published in the New York Times on
Quote: “On Monday, Mr. Bush devoted much of his speech to warning that Congress should make his tax cuts permanent. But that change would do little to forestall a recession, because the tax cuts do not need to be extended for another two years.”
My Opinion: If Congress agreed today to make the Bush tax cuts permanent, it would affect current consumer spending.
Martin Feldstein, an esteemed macroeconomist, predicts the odds of an actual recession are greater than 50-50. In that light, Democrats should be drooling over stimulating the economy with big government spending. On the flip side, lower taxes would also stimulate the economy. But lowering taxes permanently, would stimulate the economy even further.
Economic theory posits that permanent income-tax breaks have a larger effect on consumer spending than do temporary income-tax breaks. Back in 2001, Bush lowered taxes – a move set to expire in 2010. At the time, 9 years seemed like a long time – now, 2 years of further tax cuts seems much more transitory. The housing slump and credit crisis not withstanding, tax breaks that may expire, with the possibility of a democratic president stepping in, create nervous consumers.
Extending the tax break now past 2010 will have effects on consumer spending now. What we need is a little good news! November unemployment was 5%, retail sales in December were low, the price of crude oil hit $100/barrel, and our tax break is set to expire in 2010. Now, change that list to: November unemployment was 5%, retail sales in December were low, the price of crude oil hit $100/barrel, and our tax break is extended indefinitely. The last bit of good news will boost consumer spending now amid all of the poor economic news that is rolling in – the news that is part of Martin Feldstein’s odds-of-recession calculation.
So, extend the tax breaks!
Thursday, January 3, 2008
The article, “Squeeze’s Effect is Amplified on the Less Affluent,” was published in the Wall Street Journal on January 3, 2008.
My Opinion: This article should be entitled: “The Real Costs of Rising Gas Prices.”
This article is a great representation of the economic costs of rising prices. As I argued in a related article, “U.S. Inflation Numbers and the Mortgage Market,” rising prices is not an economic cost. If prices rise quickly, and incomes are slow to adjust, purchasing power may fall for a time. However, as incomes adjust upward with prices, purchasing power (how much you are able to buy) remains unchanged – all is status quo. In the same respect, rising fuel prices will not be a significant long-run issue. Eventually, incomes will adjust upward’ paying for gas or running your business will not affect your decision-making process.
The problem is when rising prices, or in this case rising energy prices, cause consumers and firms to use resources in order to accommodate the rising prices. Let’s see what the article says:
1. Monique Blasko “just doesn’t feel as free to go.” She does not make the 50-mile trip to the museum. She exerts resources away from income-producing activities (paying for a service at the museum) for non-income producing activities (staying at home).
2. Paula Hall says, “There is plastic on every single window. A blanket on the back door and front door. And one to block the drafts.” She spends her money on plastic and extra blankets, instead on alternative goods (like groceries and clothing) in order to accommodate high energy prices.
3. Marsh Ponkey says, “Its crunch time.” This is in reference to her being laid off in November from her job at the Chrysler LLC plant in
4. Adam Robinson says, “Commodities are just so real and touch so many people all the time," He plans in a few years -- when he's 25, perhaps -- to become a "dealmaker in the energy space.” This is in reference him being jealous of classmate who took an internship doing research in the beverages and tobacco sector. He was forced to take an internship in the natural gas industry – an industry that is bursting right now. Due to the high oil prices, certain sectors (perhaps tourism and auto manufacturing) are suffering greatly, while other sectors (commodities) are thriving. If one gains much more than the other looses, this is an arbitrary distribution of wealth.
5. Joseph Reggiannini says, “When a customer runs out of oil in the middle of the night, I’ve got to be there. That is how you’ll keep your customers at these prices.” He says this in reference to working many extra hours fighting for the loyalty of his customers in the heating oil delivery service. He exerts much more energy when prices are high than when prices are low.
In cases 1.-5., all workers are suffering real economic costs to rising prices. The costs are:
Economic Cost 1: Cash-constrained individuals (those with little or no saving) are forced to lower consumption during times of high gas prices. These individuals live paycheck to paycheck and have to lower consumption of other goods in order to pay the high electricity bills. Those who are not cash-constrained keep consumption the same by taking money out of saving in order to pay for the high energy costs. Monique and Paula suffer from this cost.
Economic Cost 2: Rising unemployment benefit payments take away from other expenditures. In this case, resources are used to pay for non-production goods like unemployment insurance. Marsh illustrates this cost.
Economic Cost 3: Arbitrary redistribution of wealth. Certain industries suffer (tourism or auto manufacturing), while certain industries gain (petroleum drilling). As long as the value of the suffering is greater than the value of the gain, then an economic cost arises. Adam illustrates this cost.
Economic Cost 4: Over-utilization of resources to accommodate the price increase. Joseph works extra hours when he could be doing other activities better suited during that time – this is an economic cost. On an aggregate scale, allocating resources to accommodating the price increases and away from production (let’s say going to the museum) is an economic cost. Monique and Joseph illustrate this cost.Do you have any comments? I welcome your feedback. Nontruths