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:
During a discussion with some friends on the whole "free college tuition" debate, along with the trillions of dollars currently owed on student loans, I began to wonder about a solution that would be somewhat liberal, but not so far to the left that it would be completely dismissed.

My question is: would it be economically feasible if the United States changed its tax code to allow all citizens to deduct 100% of all monies paid towards student loan lenders (interest AND principle)?

Responsible tax payers could see a lower tax bill (something we all know conservatives AND most liberals love), or most likely a refund (even better!, and the American public would have a greater incentive to pay down the trillions in student loan debt we currently owe.

I am what people are calling a millennial. I am a liberal. However, I do believe that nothing is free. But after graduating in 2008, my loans quickly rent into repayment long before I earned the chance to pay them off. Almost a decade later, my wife and I have a combined student loan debt of just about $100,000. And that WITH going to a cheaper public in-state school!

Anyways, I digress. I just had this notion, and since my education is more in marketing, I felt I could let the economists tell me if I'm flat out crazy, or if it was a viable plan.
Answer:

This is a great question. Currently interest (but not principal) on student loans is deductible within certain limits. The maximum deduction is $2,500 and the amount of the deduction begins to diminish once your Modified Adjusted Gross Income...

Question:
Generally speaking, an efficient allocation of ‘ownership’ or ‘control’ of a business is one that matches contribution to capital or input. For example, if I commit 60% of the resources a business requires (human or other capital), then I would expect approximately 60% control (ownership). It seems that both Partner 1 and Partner 2 contributed the same amount of cash equity (each secured “the same” loan to fund Business 2). Therefore, a starting point is that each Partner has equal ownership (on grounds of invested risk capital). One might also consider that Business 1 is a ‘partner’ because of the subsidization of land (rent) and Partner B’s salary. Business 1’s contribution is an amortized amount of rent and salary over the years in which Business 1 will subsidize Business 2. In this case, Business 1’s ownership is not trivial and should be recognized as risk capital to be repaid by Business 2 or purchased by either Partner A or Partner B at some point, giving the purchasing Partner a greater share of the remaining control.
Answer:

Partner A secures a loan for startup through a business (business 1) he owns 90% of. Partner A will have significant input in business decisions but little to do with day to day operations. The new business (business 2) is in a different industry...

Question:
If growth rate is measured as % of GDP, and inflation is also measured as % of GDP, wouldn't a growth rate of 2% be completely offset by a 2% inflation rate for the same period? That is, the GDP would experience 0% effective increase?
Answer:

Hello, and thank you for sending us a question! The GDP growth rate is measured relative to last year’s GDP. Usually the Growth numbers that make headlines on the news are of what economists usually call “Real GDP,” meaning that it is already...

Question:
In a recent article in the New York Times about free trade, the author talks about the negative impact on the US of low cost Chinese goods entering the market not being experienced by Germany and other European countries. The article goes on to explain that part of the reason is low US interest rates caused in part by a low American savings rate.

Why would a low savings rate put downward pressure on rates? If savings is capital available to be borrowed, and less savings means less capital available, shouldn't that put upward pressure on rates (everything else being equal)? Isn't that a fundamental economic principle? Restricted supply in the face of fixed demand = increasing price (interest rates)?

http://www.nytimes.com/2016/03/16/business/economy/on-trade-angry-voters...

"Mr. Autor suggests that Americans’ low savings rate was a big part of the story, coupled with foreigners’ appetite for accumulating dollar assets, which helped keep American interest rates low and the dollar strong, in that way fueling a persistent trade deficit."
Answer:

To a certain extent, the quoted sentence is tautological.

As an accounting identity, from the GNP accounts, the Balance of Trade (positive is a surplus) = (Savings – Investment) + (Taxes – Government Spending)

Hence, a balance of...

Question:
I would like to understand how the National Negotiated barrow and gilt price relate to Peoria and interior Missouri live hogs price, futures hog contracts and profit for the farmer, and if possible have a margin profit table from 2013 up to date.
Answer:

To explore the relationship between the Peoria live hog price, Interior Missouri live hog price, National negotiated prior day purchase base price, National negotiated slaughter base price, CME lean hog futures price, and farrow to finish profit...

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