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.


Ask a Question

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.


E.g., Saturday, January 20, 2018
E.g., Saturday, January 20, 2018
Question:
Is the oil surplus caused by the economic slowdown in China?
Answer:

No. The world consumes about 100 million barrels of oil per day. US consumes 20 million, while China consumes 10 million barrels per day. Thus, whether China is in a recession or not, its economy will not have a significant effect on the world...

Question:
What are the best reasons one should buy a new car instead of a used one with low mileage and an in tact warranty. I ask, because my wife wants to purchase a new car, while I would prefer to purchase a slightly used car at a lower price. (letting someone else take the depreciation hit)
Answer:

There are many things to consider in making the choice between purchasing a new or used car, including a comparison of sticker prices.  As you suggest, new car values depreciate significantly in the first few months of ownership, often...

Question:
I am trying to get an estimate for 2014 arc-co corn and soybean payments for Monona and Harrison counties.
Answer:

ISU Extension has created tools to explore the potential benefits/payments from the programs in the 2014 Farm Bill. These tools are available from www.extension.iastate.edu/agdm/...

Question:
I have read a few recent articles in the Wall Street Journal recently regarding farmers going out of business, prices for fertilizer inputs, and how well farmers have been doing producing crops. They were titled "The Next American Farm Bust Is Upon Us", "Here’s One Industry Where the U.S. Is Already Catching China—Fertilizers".

Regarding the first article, why are American farmers still incurring such high costs for production inputs and why do they really have no where to sell their grain and product to make any money? Secondly why are fertilizer inputs in particular so expensive when the second article talks about how our supply is expanding and we are producing more fertilizer than any other country? Shouldn't these input costs go down or be down because of such a high supply?

Lastly it seems that farm production has been peaking and they are doing extremely well in regards of yield and product output, consequently having no place to sell their grain. My question is where do Ag Economists forecast job growth will be greatest in the Agriculture Sector in the next five years? Which particular majors in certain sectors of the Ag industry will do the best and be in high demand?

Thank you for your time
Answer:

While it is true that, in general, farmers are still facing high production costs.  They have also seen some of those costs fall over the past couple of years.  And it is not true that they have nowhere to sell their products. ...

Question:
I would like to get your educated opinion on Right to Work, specifically, what will happen if all 50 states in our country become RTW states.

Right now, it is attractive for a corporation to set up or move their business to a RTW state due to lower wages and not having to deal with strong unions. I understand this. But how will a RTW state entice a company to move FROM a RTW state?

Cut corporate taxes? Suppress wages? Reduce services to the tax payers so more money can be given to the corporation? How will states entice business to set up shop once this is a Right to Work country? Thanks for your time.
Answer:

Your question requires that I explain some of the background for Right-to-Work laws, and I took the liberty of adding a more general answer on the effect of Right-to-Work on the economic outcomes for firms and workers.

Union strength in...

Question:
How can there be inflation at different rates within the same currency zone? For example, how can there be higher inflation in Greece than in Germany, despite having the same currency?
Answer:

Effectively, you are asking: how can there be different prices across countries within the same currency zone? This may sound surprising because within the Euro common currency, for example, we label regions as countries and there is a price...

Question:
With the debate on whether or not to raise the minimum wage to $15, I think there is another question looming. I previously worked at a large parcel carrier, who paid their new couriers around $15 an hour. The work included:

Lifting boxes up to 150 lbs.
Loading and unloading trucks in a warehouse that can be freezing or sweltering,
Driving a large truck anywhere from 10-150 miles a day,
Customer interaction,
Route planning.

Now if the minimum wage was raised to $15, what would make me choose to work at this parcel company when I could work at a grocery store as a cashier? Wouldn't the new minimum wage increase cascade into other jobs in order to entice people to fill those more difficult positions?

I can see such a large jump in the minimum wage having unforeseen consequences. I would love someone's opinion on this. Thank you for your time!
Answer:

The current federal minimum wage for workers in covered sectors is $7.25 an hour. As you suggest, raising the minimum wage to $15 an hour would motivate many workers who were already being paid $15 in the old regime to seek employment in less...

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:
Many markets in third-world countries have small stores selling exactly the same goods located side-by-side. In the Mid-East you can go to the gold souk, or the carpet souk. In the Far East you will see an entire street of hat shops, or bamboo-pole shops. My favorite street in Hanoi is full of shops that only sell gaffer-tape and scotch-tape. What is the economic mechanism that drives this clustering? Surely the pressure would be to price your goods lower than the next guy, thus driving down prices overall, to all of the shop-owners disbenefit?
Answer:

Souks and bazaars are in appearance competitive market places. The close proximity of shops selling virtually identical goods should drive price down. So, why do shops locate close to each other instead of locations where they would have less...

Question:
What is your opinion on the potential impact of the proposed Nicaragua Canal, a trade route that would connect the Pacific Ocean to the Caribbean via Lake Nicaragua, on the Nicaragua economy?
Answer:

I will focus on the benefits of the Canal when it becomes operational, because a project of this magnitude is very likely to create numerous temporary jobs and plenty of opportunities for local companies in the construction sector during the...

Question:
Burkina Faso has an employment rate of about 15%, give or take. Approximately 85% of the population is subsistence farmers. Does this mean the country's economy is supported by the 15% of the population who are receiving a wage (not including foreign aid)?
Answer:

The answer is no. It is not correct to conclude that Bukina Faso’s economy is supported by only 15% of the population. It is a common challenge in developing countries to appropriately account for employment and the economic contributions of a...

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:
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:
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:
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...

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