Ask an Economist

E.g., Saturday, February 17, 2018
E.g., Saturday, February 17, 2018
Question:
Regarding the great minimum wage debate, I found a quote attributed to John Boehner that goes something like this: “Employment is like everything else: the more expensive it is, the less you get.” What would be a bumper stickerable argument to counter that? I think Boehner’s point works because it is short, simple, and has economic cred. For my students’ benefit I'd like to find as effective a point to make in support of a higher minimum wage.
Answer:

Are your students economists? If so, it will be difficult to fashion a legitimate bumper sticker in support of the minimum wage. Boehner’s quote is called the “Law of Demand” in economics. You might use:

“Because employers can pay...

Question:
Iowa’s 2016 current gubernatorial race is starting to heat up. Democratic challengers, as are all politicians, citing "job creation" as a major platform focus of their political campaign. In his 2010 campaign, Terry Branstad set a "job creation" goal for his 5th term as Iowa's governor at 200,000 new jobs. The Governor now claims to have created 130,000 Iowa jobs to date. How many "new" jobs has the Governor actually created and how many "net" jobs have been created in Iowa since January 2011?
Answer:

Governors really do not create jobs. Their departments of economic development, as well as other departments, may provide assistance, subsidies, and other types of aid to industries, but they do not create the jobs. The industries create the jobs...

Question:
Is there an economic theory that describes the relative value of money amongst different strata of the population? For example, $100 might seem like a lot to an Economics professor, seem like almost nothing to a pro baller and might seem unimaginable to someone in true poverty. Thanks!
Answer:

I am guessing, by money, you mean income. Yes, the notion that $100 means something very different to people with varying incomes is a basic tenet of economics. The question is, what do people do with that $100. If they consume (buy stuff) it,...

Question:
I have a question about utilities; specifically: How to compare them among competing options for funding.

There is a wonderful new technology that is able to vaporize garbage (also known as "Municipal Solid Waste", or MSW). The output of this process consists of only three things: Synthetic gas, a metal alloy, and a glass-like slag. All three have commercial value. No pollution is created in the course of this transformation.

As you may know, markets for energy and metals are in the doldrums. The falling prices indicate a reduced utility for these commodities, and that creates a headwind for the sale of this new technology.

On the other hand, citizens hate landfills more than ever. No one wants to live near a garbage dump, so doing away with landfills has high utility.

My question, therefore, is this: How do I compare the falling utility of process outputs (the syngas, metal, and slag) with the increasing utility of eliminating landfills altogether? The physical outputs can be priced in the open market, but civic satisfaction is hard to measure.

Many thanks for any guidance you might have.
Answer:

When trying to quantify "civic satisfaction," we need to determine what a community is willing to pay, in dollar terms, to remove the landfill. Typically this is done with randomized surveys, but unfortunately it appears that economists have not...

Question:
I work for a local government in Kansas and recently discovered FDIC deposit data by county, zip code, institution. I was wondering what an increase or decrease in deposits might indicate about a community? I couldn't find discussion on-line regarding how to interpret this FDIC data. Thanks for you help. -Mike
Answer:

Information on changes in deposits at commercial banks can be useful in gaining a better understanding of a local economy. However, determining whether an increase in deposits is positive, negative, or neutral can be difficult if the reason for...

Question:
I gave an economic presentation the other day and we were talking about how the Chinese devalued their currency to make their exports cheaper to the world, and essentially position themselves better to the American consumer. Someone asked me then why doesn't the U.S. simply follow suit. I answered that every country could not do this because it would end up being a zero sum game and that everybody would eventually lose and that it would not be sustainable. Furthermore, with the U.S. dollar the reserve currency of the world, the amount of volatility in the market place would skyrocket if the U.S. did the same thing. What else could I have said or is there another angle to tackle the question?
Answer:

China’s total trade (exports+imports) as percentage of GDP is about twice that of the US. In this sense, the US is a relatively closed economy and therefore its monetary policy is (and ought to be) more domestically oriented. Second, Chinese...

Question:
A few of my friends believe that the cure for cancer already exists, but the pharmaceutical companies won't release it because they make more money treating the disease rather than curing it. In my head, the company that had the cure would end up making the most because they would have a better product. My questions is which model would be the most profitable?
Answer:

You have put your finger on an important topic that economists have been arguing about since Kenneth Arrow’s analysis of the incentives to innovate in “Economic Welfare and the Allocation of Resources for Inventions” in _The Rate and...

Question:
I do not fully understand how Open Market Operations of US Treasury Bonds by the Fed increases the money supply, i.e. reserves. Treasury issues a $1000 bond which is given to a primary dealer to auction off. The NY Fed buys that particular bond by crediting the dealer's bank account with $1,000 the Fed just created. But doesn't the dealer now have to remit that $1,000 to Treasury? The dealer is at net $0.00 (ignoring commissions or other minor amounts). So when the Fed buys bonds, the new money actually ends up at Treasury. That doesn't seem to agree at all with my reading that the new money is held as reserves at commercial banks. Can you please clarify?
Answer:

Money supply increases when the FED (say NY FED) buys T-bonds from other banks (say Wells Fargo) or non-bank public (say a household or a dealer) in a secondary market, NOT a primary market. The Treasury does not get anything if its assets are...

Question:
I've worked with, or had my kids, in many organizations that rely on (and demand) contributions. They claim that 100% participation (even a single dollar) is important because other donors look at the participation levels when making their decisions. It seems plausible, but is there any ACTUAL evidence that (a) that is a wide-spread practice, and (b) that such institutions actually raise more money?
Answer:

This question is in two parts: 1) How prevalent is the requirement for 100% giving of any amount; and 2) Do organizations raise more money if there is a 100% giving expectation?

Let me begin by stating that I’m not aware of any research...

Question:
How many families would be helped by raising the minimum wage?

This week the Congressional Budget Office analyzed the effects of raising the minimum wage to $10.10. They say (Table 4) that it will raise the average income for families in poverty by $300, but also (Table 1) that it will raise the total income for families in poverty by $5 bn.

These two numbers would make sense if there were 17 million families in poverty, but the census says there are only 9.5 million families in poverty. The numbers about families at other income levels have the same issue. Somewhere a number or an interpretation is wrong -- but where?

CBO link: www.cbo.gov/publication/44995

Census link: www.census.gov/hhes/www/cpstables/032013/pov/pov04_000.htm
Answer:

That’s an astute observation. As you say, $5 billion divided by $300 per family in poverty suggests there are about 17 million families in poverty. But the Census data cited in the CBO report indicate far fewer families in poverty. Updating your...

Question:
Why aren't citizens who have given up looking for work not included in the unemployment numbers?
Answer:

Various measures of the U.S. labor market are prepared and published by the Bureau of Labor Statistics (BLS), U.S. Department of Labor. The (civilian) labor force (L) is defined to be the summation of those in the non-institutionalized and non-...

Question:
I don't understand why deflation, or even the zero-bound liquidity trap are not easily escaped by printing money.

I understand why deflation is debilitating, and why the zero-bound inhibits monetary policy. Why can't central banks just print money, and turn it over to their national governments to generate inflation? As a bonus, those governments would then have more money to spend - presumably to the benefit of their populations.

I do understand that high inflation carries its own problems (I remember the 1970s) but could a central bank facing perennially low interest rates not just run the presses until inflation began to approach its target level?
Answer:

In the US at least, financing Govt expenditure/budget deficit by using more Federal Reserve notes is not an “usual” option (the way it is in India for example) is primarily because the central bank’s independence from the Treasury and the Govt’s...

Question:
From 1934 to 2015 the mean difference between the national debt and commercial bank assets has been as follows: National Debt = 0.94 x Commercial Bank Assets. There is a simplistic narrative of the national debt that goes as follows. The government spends into the economy and then removes some of the spent money and then spends more, etc and the amount the government does not take from the economy is equal to the debt. This simplistic narrative does not include the complexities of a central bank, an endogenous money supply system, etc. Is it possible that the narrative is true but the system enables commercial banks to "capture" the money as their assets?
Answer:

A fundamental principle of accounting is that the liabilities of one party are the assets of another. National debt is simply the amount owed by the federal government – that is, its liabilities. Some other party must hold these as assets, but it...

Question:
If you have a large amount (lets say 50%) of your wealth tied up in a single foreign currency and your home currency depreciated what would be the effects? Would you be better off or worse off than someone with all their wealth in their home currency? What are the variables that would determine if you are better or worse off?
Answer:

Your wealth in terms of home currency will increase whereas in terms of foreign currency it will decrease. If your home country prices remain the same, it means your real wealth has also increased. So, broadly, it depends on when and where, home...

Question:
Hi. I studied economics at undergraduate level and have encountered the profit maximising rule of MR = MC; with the standard premise for such calculations involving the production of goods with a fixed price per unit. I currently work in the construction sector (demolition) where each of our projects have a different cost and revenue from other projects. As such, I would like to know if/how the above measure could be applied to the service sector? My current thinking is that the data must be manipulated to achieve the cost per square foot of a site. However, this will involve significant data manipulation just to run the calculations. Could you tell me if I am on the right track with this direction or whether there is an alternative way that I could calculate the profit-maximising output? My goal in answering this question is to determine the appropriate mark-up for our business when submitting a quote to a client. At present, we are charging a 10% mark-up which I currently believe to be too low to be sustainable. Any assistance on this would be greatly appreciated.
Answer:

Hello:

 

Suppose you have N projects, each of them with possibly different but constant marginal costs (MC). Since the marginal cost for each project is constant, the average variable cost is also constant, and your profits can...

Question:
When health care spending (or military spending or education) is tallied as a "percentage of GDP," doesn't that GDP figure include that same health spending? If you remove all that double-dipping, what would those percentages look like?
Answer:

Thank you for your question. Indeed, part of the expenditure in health expenditure and defense will count towards total GDP. The reason why the total GDP (including health expenditure or defense expenditure themselves) is used as a denominator to...

Question:
I was just thinking about the massive economic dislocations resulting from World War I and their impact on Weimar Germany. But the dislocations spread well beyond there. The War had bankrupted England and France (though not so much the U.S.), to the extent that they forced Germany to pay such enormous reparations that Germany was a basket economic case in the 1920s. The U.S. economy boomed during that period, but it then crashed ten years later. After World War II, somewhat contrariwise, we had an unprecedented and never repeated period of growth and prosperity. After Vietnam, we had galloping inflation, followed (I think) by a recession. After seven years of a ruinous war in Afghanistan and Iraq, we had a Great Recession. Now I'm a political scientist, not an economist, but from the standpoint of political economy, it would seem that there must be correlations between massive military expenditures and economic cycles. The economy, that is to say, does not exist in a vacuum. So, Dr. Economist, is it possible that the famous "economic cycles" are not merely cycles that happen all by themselves, but rather sine waves that correspond with other fluctuations in military expenditures and war? As a political historian, I know that it has always been wars that have bankrupted nations and caused political upheavals. This is not new. Why not in our age? Why do we teach our students that there are recurring economic cycles without, in traditional economics, relating them to the military adventures of our own government, And that of others?
Answer:

There are really two questions here: (1) what are the causes of economic fluctuations, generally? And (2) what role do wars and military spending play in these fluctuations? 

 

Answering the first question is beyond the...

Question:
What percent of hog firms use forward contracting or options? Why do hog producers not use futures or options?
Answer:

Unfortunately data are not readily available on the percent of hog firms using forward contracting or options. What is readily available through Mandatory Price Reporting (MPR) data provided by USDA’s Agricultural Marketing Service is the volume...

Question:
Given the increasing population migration to more urban centers - and maybe the possible validation of Richard Florida's 'creative cities' theory - what viable economic models are we seeing for smaller, rural Iowa communities, most of which are really struggling to maintain population and economic viability? In other words, is there any hope for these once thriving rural towns and, if so, what does that look like?
Answer:

It is useful to begin by noting that Nebraska has a higher proportion of its population living in urban areas (73%) than Iowa (64%). The reason is that Nebraska has only 4 metropolitan areas (Lincoln, Grand Island, Sioux City, Omaha), all of...

Question:
If banks create credit from thin air, when they issue loans, and make astonishing interest in doing so, why would it not be beneficial to have their government create the credit? Then the interest collected on those loans could be used to fund goodies for the people, instead of super-yachts for crooks! Cheap loans for the poorest, expensive loans for the richest. Narrow the wealth gap a smidge. I cannot see a down side. Was this not how it once was, to our great prosperity? Is access to credit not the true essence of opportunity. Only people create value, thus, credit can only be created by the people. When did private banks capture our credit? And whom is responsible?
Answer:

There are government owned corporations or government backed corporations that directly lend to households or foster lending to households in other ways, for specific purposes. For example in the US, GNMA (Ginnie Mae), FNMA (Fannie Mae) and FHLMC...

Question:
Hi, quick question: can a tariff be counted as a fiscal policy measure? Currently studying the great depression and curious to know if the Smoot-Hawley act which raised US tariff on 20,000 imports counts as a contractionary Policy fiscal policy. My thinking behind this is it did involve the raising of taxes on imported goods,and increasing taxes are usually considered a contractionary fiscal policy measure. Please help. Thanks.
Answer:

In discussing the impact of economic policy on aggregate demand and the balance of trade in open economies, international economists often talk about two types of (non-monetary) policies: “expenditure reduction policies” and “expenditure...

Question:
What are the fringe benefits of being an economist?
Answer:

Taken literally, fringe benefits are extra, non-monetary compensation, such as health insurance, etc. provided you by your employer.  I suspect, however, that the person who submitted this question is not interested in the package of...

Question:
What is the impact of production being directed towards what appears to be endless product differentiation, for example multiple flavours of toothpaste or shampoo variations which ultimately do nothing to improve individual well being? Does this form of market operation generate employment or is it a waste of productive capacity that might be better directed towards activity that genuinely increases well being. For example, creating products that delivers a real benefit.
Answer:

Does the market provide too many or too few products, relative to some social optimum benchmark? It turns out that this question does not have a simple answer. It depends on whether or not consumers are well (perfectly) informed about products'...

Question:
I’m a student at Centennial High School in Pueblo, Colorado. I had a few questions about being an economist. What is it like being an economist? What do you do on a day-to-day basis? What benefits do you get from being an economist?
Answer:

Economics is a science, and the goal of all sciences is to better understand phenomena that we observe in the real world. In social sciences, like economics, the focus is on phenomena related to human behavior; and for economists, the...

Question:
I have noticed that Trillions of dollars of building during the Middle Ages went on in Europe from an agrarian/trading society. How did taxation of millions for farm labor become the basis of trade in Europe? It seems not rational that the food grown during the period 300 AD to 1780 was the basis of wealth. Therefore we know that mining silver, gold, copper allowed for coins but since there was no technology of the era that converts to the Trillions in Building out Paris, London, Prague, Austria, Russia. So, how was farm labor converted to the structures we see still standing today.....which architecturally are still the world standard for greatness.
Answer:

Medieval cathedrals and other structures are indeed impressive works of construction, and to look at them is to marvel at human ingenuity.  Medieval societies were in fact technological quite progressive, a fact documented for example in...

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