Ask an Economist

Welcome to Ask an Economist, a public service of the Department of Economics at Iowa State University, designed to answer your economic questions.

Our talented faculty and alumni can answer questions on a variety of economic topics to help you make more informed choices about your day-to-day decisions--or to just add a more reasoned voice when talk of the economy comes up around the dinner table.

If we answer your question, we'll post it along with the answer here. (Questions may be edited or adapted from their original form.)

Note: We do not do homework, give financial advice, or provide research support.

Ask an Economist

Question:
Please advise my going to become an Economist. I was an average mathematics major as an undergraduate with a G.P.A. of 3.19 overall with a bachelor's degree in Applied Mathematics. I have about the average IQ for economists, but I know nothing about economics now that I am 41 this year, I am thinking of starting anew in a brand new area of applied mathematics; is this advisable at this late of a life to switch career from Mathematics to Economics given that the two shared a common bond in Mathematical Economics and are theoretical in Microeconomics?

Would the transition be better than if I had pursue Pure Mathematics instead, because my experiences has been lately in proof making? What can I look forward to? How and what should I be looking into, to start off, if Economics is a good choice? I am a highly curious person. Plus, I have worked hard, I have been doing pure mathematics on my own since 2004 until presently; but, it has been slow going; so, I thought that by going into something that has a better return in investments of my intellectual energy, I should try Microeconomics?
Answer:

The prospect of a mid-life career change would be daunting for anyone.  In the end, you’ll have to make that difficult decision on your own.  But I can give you a few tips on how you might begin to explore whether a career in economics...

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:
News commentators appear to universally deride Donald Trump's suggestion that the National Debt be renegotiated, whatever that means. What would really happen if the US decided to cancel its outstanding debt, or at least selective portions based on who's holding it, e.g. hostile governments, unfair trading partners, etc. Assume that the Washington will enact whatever legislation to avoid or minimize the economic and political shocks, at least in the US, e.g. issue new currency, start massive infrastructure spending program.
Answer:

US government debt is considered the safest asset in the world. The US borrows at a low interest rate while it lends at a higher interest rate, an “exorbitant privilege” sometimes resented by the foreigners. Over the past two decades, a higher...

Question:
Is bitcoin meet the definition of money? if so How?
Answer:

Money refers to any asset that is widely used and accepted as a form of payment. It must be a medium of exchange, a unit of account, and a store of value (assets like stocks, bonds are all stores of value meaning they can be traded for goods at a...

Question:
If a business owner employs workers in a third world country, is it better (for the workers) to pay them in strong American dollars vs paying them with the local currency? Considering the American dollar will likely be stronger than that of a third world country, the workers will have more economic power with greenbacks than their own national currency.
Answer:

If the third world country has low and stable inflation, then it should not matter much; after all, there is a market exchange rate between say $1 and Indian rupees (these days, $1 = Rs. 60) and whether you pay an Indian worker $1 or Rs 60 should...

Question:
What are the major pieces of literature on Agricultural economics as well as the household names when it comes to Agricultural economic research?

I am mathematics major student with an MA in Economics, I am developing an insatiable interest in Agricultural economics and would like to read more on research in this area. I would like to be guided on the body of literature making names in this field.

I will particularly be interested in works that apply econometric techniques using time series econometrics and forecasting, panel data.
Answer:

Handbook of Agricultural Economics

Editors: Bruce L. Gardner and Gordon C. Rausser

Volume 1, Part A, Pages 3-741 (2001)

Agricultural Production

Volume 1, Part B, Pages 745-1209 (2001)

Marketing, Distribution and...

Question:
I have been thinking about open market operations that the federal reserve performs to control the money supply and I have a question that I do not fully understand and it is bothering me. An answer to this question will be really appreciated.

Question: Let’s say that if the central bank is keeping the base money at 6% of the GDP then as the GDP expands then the central bank will also have to increase the money supply to keep it at 6% of the GDP. In that case the central bank will perform open market operations to pump extra money in the economy by buying treasury bills. Some of those treasury bills that central bank has on its balance sheet will mature and the central bank will have to replenish those by buying new treasury bills to keep the money supply constant at 6% GDP. So as the economy grows larger and larger, the central bank will be holding more and more treasury bills on its balance sheet and will have to conduct more and more open market operations to replenish the maturing treasury bills? Does that also imply that in an ideal world with no recession and constant GDP growth the central bank will always increase its balance sheet and the balance sheet of the central bank will not go down? Also, if the federal debt is paid off somehow then the central bank cannot use the treasury bill for open market operations so will they use some other type of instruments such as etfs to conduct open market operations? Thank you very much.
Answer:

The money supply and the size of the central bank’s balance sheet are closely connected. Currently and historically, the sum of currency and bank reserves (a narrow definition of the money supply) account for almost all of the Fed’s liabilities....

Question:
I stumbled across a link regarding a Financial Settlement Tax (not FTT) from Scott Smith who is running a presidential campaign. The idea is to tax financial payments estimated to be $4515 trillion per annum in the US:

“The Bank for International Settlements in Basel, Switzerland, known as the BIS, publishes an annual report known as the Red Book, which reports on the volume of payments for most of the major nations in the world. The Federal Reserve keeps track of payments in the United States and provides the data to the BIS for publication in the Red Book. The Committee on Payments and Market Infrastructures at the BIS oversees the publication of the Red Book. International Financial Settlement payments are recorded and published and 1/10 of 1% could be deducted and transparently reported on the Internet.”

My questions are below:
1) Roughly what percentage of settlements would disappear with a 0.1% tax? My guess is there’s a significant percentage of very low margin trades that would end with such a tax.

2) Since you can’t take nearly 30% from the economy without someone noticing, what distortion(s) would be introduced in the market?
Answer:

1) There is no way to tell even approximately without a well calibrated model. As you suggested, very small profit margin trades will no longer be conducted. However, there are other, potentially much more important routes. First, many small...

Question:
Should Internet companies like Uber and Airbnb be regulated?
Answer:

Should Uber and Airbnb be regulated? As a matter of fact, these companies, like any other in the United States, need to comply with a large number of regulations that cover for example workers compensation and health care. But should Uber and...

Question:
What are the signs of a bubble about to burst, such as the housing market in San Francisco or tech bubble?
Answer:

It’s logically impossible to predict the bursting of a bubble. If it were possible, everyone would sell before the bubble burst. The selling would cause the bubble to burst earlier. But then people would anticipate the earlier bursting and sell...

Question:
If I run a manufacturing company and I pay people to do work, presumably those hours are in the manufacturing sector when it comes to measuring the nations's productivity. If I also pay consultants [who's hours belong in the service sector] to help with that manufacturing volume, are those hours counted as service or as manufacturing?
Answer:

The output determines which sector a particular activity falls under. If the output is a good (product), then it falls under the manufacturing sector. If the output is a service, then it falls under the service sector.

In your particular...

Question:
What would be the economic impact of eliminating the federal income tax system and replacing it with a national consumption tax such as the FairTax?
Answer:

This policy change would redistribute income from lower to higher income households because the current income tax is progressive while the flat tax would not be as progressive, if at all.

The change would also lead to the double taxation...

Question:
When I attended ISU and graduated with an M.S. in economics in 1967, I was taught that government debt was largely a good thing, as it was (then) mostly money owed to ourselves. It also provided a useful tool for the Fed. to use for controlling the money supply by buying or selling bonds. Has general economic thought changed with the large amount of debt being taken on by government spending, quantitative easing, and a larger percentage of our debt being owned by foreign powers (China, etc.). Do we now believe that our national debt is not such a "good" thing?
Answer:

Your understanding is correct that government debt is “good” in the sense that it serves as a useful tool for conducting both monetary and fiscal policy. By allowing federal, state, and municipal governments to borrow, it lets these entities...

Question:
In his answer to my previous question, Dr. Orazem states that 'Iowa's small towns are surviving' (compared to Nebraska). Are they? A vast majority of Iowa school districts have seen declining enrollments for years/decades, many/most of the small rural main streets that I see appear to be in serious decline, and the towns in general seem to be losing both population and vitality. I travel a lot through rural Iowa and it sure doesn't feel like most of these small towns are surviving. Am I incorrect? If my eyeball test and what I think are accurate demographic data aren't sufficient, how do we determine if rural towns are surviving? Thanks much. Just trying to wrap my head around issues related to small Iowa town vitality and the accompanying implications for schools.
Answer:

I think it is important in establishing policy to work from facts and not perceptions. While rural towns are getting smaller on average, not all are. While schools are consolidating in rural areas, they are also consolidating in cities as like...

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:
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:
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:
I am student and recently have come across 2 equations which explain basically the same thing. It's about the real interest rate. One equation tells us: real interest = nominal interest - inflation The other one says: 1+real interest = ((1+inflation) / (1+nominal interest)) Which one is correct? Which one should we use? Thank you!
Answer:

The nominal interest rate associated with an asset (for example, a deposit in an interest-bearing savings account) is the rate at which the dollar value of the asset increases over time. The corresponding real interest rate is the rate at which...

Question:
I took an undergrad macro economics class at Drake University a few years back and I had a hard time understanding the professor on several issues. (I want to say that I'm not politically motivated here, or trying to make a political point). One issue was regarding national debt and deficit spending. In class we discussed how historically the USA general public and government hadn't looked favorably on holding debt until the 1930's. During this time through borrowing and spending on domestic projects the federal government helped pull the nation out of the grips of the depression. Since then it's been an accepted part of life that deficit spending by the federal government has more good than ill effects. Sometimes I think this works, but too often it's just assumed it works and we've worked ourselves into a massive financial hole by this unchallenged assumption. The rational he used was the debt was being bought by citizens and thus the interest on this debt was owed to ourselves, and when the gov repaid the debt and interest there was a gain somewhere in the US economy for purchase or investment in something else. I could buy this point of view if the Treasury sales were restricted to US citizens, but the fact is there are many international purchasers of our debt so we are actually paying out interest to England, Canada, Japan, China, etc. So the beneficiaries are not ourselves, but foreigners. I'm not sure if the professor was getting his point of view from a textbook or his own judgement, but I'm curious why these viewpoints are not scrutinized more in academia. Any insight would be helpful, thanks!
Answer:

Your understanding is correct that government debt allows governments to handle economic recessions better. When the private sector employment and therefore consumption demand is shrinking, the government can increase its public sector spending (...

Question:
How high can our national debt get (as a % of GDP) before it will be a threat to our financial stability? ie: dollar loses its status as the reserve currency.
Answer:

The national debt of the US is the amount owed by the US federal government and is the value of the Treasury securities that have been issued primarily by the Treasury and which are outstanding at that point of time. By far, the largest component...

Question:
What would happen if the minimum wage laws were repealed? Would businesses pay their employees a penny an hour?

If raising the minimum wage to $10.10 would be good for the economy, wouldn't raising it to $20 be better? If not, at what point are the good economic effects of a minimum wage outweighed by the bad?
Answer:

If minimum wage laws were repealed, the vast majority of U.S. workers would not have their wages impacted. Through supply and demand, competitive market forces drive up the wage rates of most workers to levels considerably above the current...

Question:
Can a market failure occur when there is a high amount of risk within the market leading producers and consumers to avoid the market?
Answer:

To answer this question, it is critical to agree on the definition of "market failure." In what follows, by "market failure" we will mean a situation where a free market fails to provide an efficient allocation of goods and services (i.e., risk...

Question:
Some goods and services are provided by the government (e.g., mail delivery and schools) while others are provided by private business firms (e.g., grocery stores and dry cleaning). Economically, what goods and services would be best provided by the public sector and which are best provided by the private sector?
Answer:

Economists distinguish broadly among three types of goods along the private to public continuum. Purely private goods are purchased and used by individuals and families. Another way of explaining a private good is to say that my use (or...

Question:
What would be the costs and benefits of returning to the gold standard?
Answer:

Under the gold system, either gold circulates as money, or there is a fixed relationship between the amount of currency in circulation and the amount of gold, given the dollar price of gold. In either case, it means that a valuable resource which...

Question:
Why is the growth of GDP so important? I understand that we want living standards to go up in the aggregate, but if the economy produced the same amount of goods/services per year for, say, three years, would that be catastrophic in itself (i.e., aside from policymakers and economists freaking out about it)?
Answer:

The event that you are referring to is what economists call recessions. During recessions, GDP drops or grows significantly below normal times for a period of usually less than two years. Recessions are dreaded by many but not all economists....

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