Ask an Economist

E.g., Saturday, October 24, 2020
E.g., Saturday, October 24, 2020
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 this late in life to switch careers from mathematics to economics given that the two share a common bond in mathematical economics and are theoretical in microeconomics?

Would the transition be better if I pursued 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:
A commodity (let's say a vegetable like squash or tomato) that is grown in Mexico and transported to the US and is being sold at 1.29/lb.
After about a month when the commodity has less than 2 weeks of shelf life it may be sold at .69/lb and then discarded after another week.

1) Why would the store not further discount these items at let's say .30/lb to clear the complete stock? ( I understand it is so as not to let the global/US prices of the commodity go down.)
2) Is wasting better for the store than to sell it at a discount?
3) Even if customers stop buying fresh commodity and start to wait until the price goes down to .30/lb. Isn't it economically profitable to the store to actually sell it than waste it ?

Thanks
Answer:

Food waste arises from preferences, incentives, and constraints. Retailers have time and other resource constraints which implies that it simply will not be worth it to sell every last item of food in every instance. It can be said that there is...

Question:
Hi there,

Okay, so this is going to be a really stupid question but I need to know the answer to this. There is a message board about collecting video games and we got into a argument about the definition of the word "rarity." With these games, we all know the exact amount of copies printed for each title. Say Game A has 2000 copies printed and Game B has 5000 copies printed. Assuming that no copies are lost or destroyed, Game A will always be rarer, correct? Someone else is arguing that the availability of copies on the secondary market changes this.

If Game A has 20 copies available on the marketplace right now and Game B only has 2 copies, would Game B be considered to be rarer overall? At that moment in time, sure, but overall, I would say no. Is either of us correct? Would the monetary value of the game on the secondary market change the definition of rarity? Thanks for your time!
Answer:

In the strictest (or standard) sense of the word, you would be correct that game A is “rarer,” given that there are fewer of these in existence than game B. However, the other person is not totally wrong because, in the words of economists, the “...

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:
This question may not be as clear cut as it sounds in my head, because people have different personal finance strategies based on their income and circumstance. However, the heart of it is that many people base their views on how the economy should work by how their personal budgets/finance strategies work. Can you explain in simple terms why personal finance strategies are not (or are) beneficial on a larger economic scale?
Answer:

Take a simple textbook example due to Keynes. If you are spending beyond your means, a financial advisor may recommend some austerity on your behalf: ask you t cut spending, pay off your debt, and stay within your means. At the level of a country...

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:
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:
I've read articles recently which conclude that--adjusted for inflation--paychecks have roughly the same purchasing power that they had 40 years ago. As a layman, this suggests to me that although the average American standard of living hasn't improved in several decades, it hasn't worsened either. I am trying to reconcile this statistic with the "shrinking middle class" and the need for people to work multiple jobs to get by, trends which have emerged gradually over the same 40-year period. I suspect that the answer lies in the rising costs of housing, education, and healthcare, but aren't these variables included in the inflation adjustment calculation?
Answer:

The challenge in describing a large economy with more than 300 million people in it is in finding helpful ways to simplify the data.  Economists often measure economic performance by using one very simple statistic: income per capita, which...

Question:
There has been a lot of talk about how millennial college graduates have had difficulty finding work. As a millennial I find this topic very interesting. I have heard explanations such as the lack of job growth in the 21st century, or the fact that most kids do not graduate college with practical skills. Although the second reason makes sense, statistically college graduates used to have a much easier time finding jobs. That being said, what kind of jobs did people with liberal arts degrees get 20 years ago?
Answer:

In a recent study of U.S. Census data on individual earnings for those with a wide range of degrees for 2010-2011, liberal arts majors who have completed a baccalaureate degree (only) have the lowest median salaries early after graduation ($22,...

Question:
In corporate finance, operating expenses and capital expenses are tracked separately. Total opex within a fiscal calendar goes against revenues to net at EBITDA. Capex is recorded as fixed assets and amortized over x years to net at net earnings. (I know I'm simplifying things.) Importantly, the company's treasury function provides funding for Capex through a mix of cash flow and issuing debt. This seems clean.

My confusion is how this is reported (at least in public spheres) with governments. When we talk about a government's deficit, we seem to be including operating shortfalls (Opex or where existing programs spending is greater than revenues) plus Capex.

Say my government is running a $10B deficit and no change occurs in revenues and in program spending in the next fiscal year. If they propose a new infrastructure project (say railway) that will cost $$20B starting that year, what would be the deficit? I expect the $20B (assuming it actually stays at that level) would eventually be added to the accumulated debt but only the amortized allocation of it would be recorded as a part of the deficit.

Is that how it's supposed to be? Is that what they actually do? It seems the press never makes a distinction between these, which only confuses the public and obfuscates debate about spending.
Answer:

In your example, the infrastructure investment of $20B will be included in the next fiscal year expenditures in the full amount. Thus, the deficit during the next fiscal year will be $10B + $20B = $30B. Also, the debt level at the end of the next...

Question:
Hello, I am a Clemson student in Biosystems Engineering of all subjects and I was working on a side project that had me consider how inefficient ubran development is. I suppose this has two parts: Why are there no private toll roads being constructed by the developers who are turning places like Greenville, Columbia and Charleston SC into parking lots? Is there a legal restriction on the use of toll roads considering South Carolina has two of the only private toll roads I know of?

A shorter way to ask this would be is if there is a true economic incentive to build roads when the government says that they will pay for it anyway.

Answer when you can. Thank you!
Answer:

Private developers will identify profitable opportunities from constructing toll roads; the current road system may be too congested or outdated, or an undeveloped route may have potential to be lucrative. Typically, proposals made by individual...

Question:
I'm writing a story about the impacts of incrementally raising the minimum wage each year, until it reaches $13/hour. Washington just passed the law and it goes into effect Jan. 1.

In my research I was surprised not to discover that not a single economic impact study had been done. Sure the state Office of Financial Management did theirs, and the restaurant/lodging lobbies did theirs. But there is no INDEPENDENT THIRD PARTY study out there ... that I could find.

The question is: Is that a kind of breach of sound fiscal management? Meaning, Washington citizens are sitting back and saying, "Well, let's just vote for it and see what happens?"
Answer:

Alas, your concern about lack of sound fiscal management is not only justified in this case but is justified far more broadly. Many policy changes are initiated without third party studies to back them up. One assumes the government agencies do a...

Question:
Hi.. I am a writer. I am from India.. I need some help on a story I am writing based on economics.. India is a poor as well as a wealthy country. Therefore, it seems to me that money has a dual purpose - Basic Survival and Human Ambition. The poor I see are busting their asses off just to reach basic survival, while the rich are making millions by the strength of their ambition, intelligence, and passion.. I have always heard the argument that printing money to get rid of poverty will in turn lead to inflation thus in turn leading to even bigger poverty. But one day, I had a different idea... What if, anyone is allowed access to print money.. Every money that is printed can only be accepted by government bodies providing basic necessities like food, basic clothing, water, and modest shelter. These government bodies can later exchange that money for anything they want. But the initial printer cannot exchange the first printed money for anything but only for basic public services. All the money in the market will therefore come from a government source providing one of basic services to people. If people want to then improve, meaning if they want to go to a fancy restaurant rather than a public mess,, they will have to earn that money.. Therefore earning money will be associated with human ambition and passion while money itself will be associated with public basic needs.. With survival out of question,, all people can focus on doing a personal business, taking better jobs, etc. in order to improve their lifestyle; economy will bloom... What I need to know, is, for the sake for my story,, what things can go wrong in this model?? Why is this kind of a system practically impossible because I assume if it was possible it would have been already there.. What are the flaws of this model?? Why does this sound too good to be practical?? I thank you for your time and your patience.. I hope to hear from you soon..
Answer:

I think you don't want everyone to have access to the money-printing press or if you do, then let there be a fixed limit (say, they can print no more than a thousand "basics", the name of this currency). If anyone can print as much basics as they...

Question:
My name is Tracy Bergmann, I am the Chief Examiner for the Iowa Division of Banking. We supervise Iowa state chartered banks in Iowa. We continue to monitor the impact of COVID-19 on the institutions we regulate, their customers, and the customers they serve. Agriculture has been on our radar for sometime now, but we are trying to get more detailed data on how much agricultural debt is in Iowa, specifically what is the breakdown between Ag Operating, Livestock debt, Term debt, and Real Estate debt.

We traditionally get our data from two sources: 1) call report filed by banks quarterly which does not go into enough detail to get the information that we want; and 2) the banks themselves when we conduct an examination. Banks generally have concentration reports that will break down debt on many different levels; however, this doesn't give us aggregated point in time data.

I have been looking at the ISU, Ohio State University, and USDA websites in an attempt to get the data we are looking for, but cannot find it. I find news reports or research that mentions these sources, but I can't get to the raw data we are looking for. When I do find data that is close to what we want, it is a couple years old.

Do you have any suggestions on where we can find this data? We appreciate any assistance you are able to give, as we monitor the impact of COVID-19, particularly in the ag sector. Thank you!

Tracy Bergmann
Answer:

The most relevant reports to track the evolution of the financial situation of well-managed mid-size commercial farms in Iowa are:

  1. “Financial Performance Measures for Iowa Farms” Dec 2019....
Question:
Can you see the number GDP per capita increase in the next year and subsequently cause an increase in commercial boat ownership within the United States?
Answer:

Let me start by saying that I have expertise in the economics of commercial fishing. I cannot speak to whether GDP will increase next year. If GDP does rise, there may be channels by which commercial boat building and therefore boat ownership...

Question:
Why are economists and retailers surprised at the 11 percent lower Black Friday sales given the slight rise in the economy? Seems like just because gas is a bit less expensive and overall unemployment, people have still taken a financial hit that cannot be recovered in bank accounts simply by saving a few dollars at the gas pump. Is there an economic theory behind this surprise? I know I save more than most people but the outcome doesn't surprise me. Thanks for any thoughts and for this service!
Answer:

Black Friday is mostly a marketing gimmick to stimulate shopping during an extended weekend of wide-spread idleness, and the weekend’s performance is not a reliable predictor of total holiday spending or the health of the economy. To understand...

Question:
With regard to diversification, if two investments are correlated in their response to economic conditions, then they are not providing diversification. So, for diversification purposes, the less correlated two investments are, the better. Is it therefore also the case that anticorrelation is to be avoided to achieve diversification? For example, it seems pointless to invest in both a strengthening dollar fund and a weakening dollar fund. So, for diversification, is it ideal to avoid both correlation and anticorrelation, and to seek zero correlation between two investments? If so, what about owning both equities and bonds? Are they not anticorrelated? I would like to understand diversification better.
Answer:

The idea underlying diversification is to achieve a desired expected rate of return at the smallest possible risk. If there are two investments that are perfectly negatively correlated, then by investing in both you could achieve a rate of return...

Question:
Why do we need inflation? Could market prices just fluctuate according to supply and demand? It seems to me that the only real argument for inflation is that it is means for making the masses work just that little bit harder. By this I mean that companies and governments ensure that inflation rises a little bit more than wages when they want people to work a little bit harder, or to strive for that higher-paying job. In this situation, big businesses (as well as the progression of humanity's wealth) seem to be the only winners (eg. they can increase profits massively if they leave their workers' wages alone, while increasing the cost of their good/service in relation to inflation). Do we need inflation for anything other than this?
Answer:

Inflation is the natural outcome of price changes brought about by market forces and governmental forces. It is the rate of change in the price level that, in a country like the U.S., is entirely determined by market forces and the actions of the...

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:
At the risk of sounding like a socialist, I wanted to ask about potential economic potential of a maximum wage. Sweden tried it with a 12:1 ratio, failed sadly, but I wondered if a less extreme idea would be viable. Say 100 times the minimum wage is the most anyone could earn in gross taxable wages. I'd probably say it would be fair to exclude athletes and entertainment industries. It would be a hard sell for congress so this is purely a theoretical question. Short of how the CEOs would feel, what is the viability and potential impact on the economy?
Answer:

I am not sure there is any deep reason why a government would want to set a cap on wages. What purpose would it serve, other than to curb income inequality by lopping off the top rungs of the ladder? If that is desirable, then there may be other...

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:
The way the economy is today, would it be bad if rich countries (US, EU and Japan) print money and instead of doing the QE (top bottom) inserted the money on a bottom up approach? And I know about the risk of inflation, but isn't it what we want right now? A little bit?

1) I'm talking here about rich countries with deflation or very little inflation, so a bit more of extra money in the market wouldn't be bad (it would be up to them to calculate this amount)

2) The money could be give to the poorest in the society. This money would go straight back to the economy since lower classes save very little (usually they spend the extra money or pay debts). So instead of the trickle down economics (which usually doesn't work) we would have a trickle up economics. Australia did it just after the 2008 GFC and it was one of the only developed countries that didn't go into recession. (although it took the money from its budget).

3) The QE amounted in trillions of dollars and not much of this money went to the real economy in terms of investment and the creation of jobs. A lot of it created an inflation of assets such as the growth of the stock market in US, a housing price hike in world cities such as NY, London, Sydney, LA and so on and even Art prices exploded...but not much to the real economy.

4) Corporations don't need more money in the form of tax breaks and cheap loans (they are swimming in cash). They need consumers to consume! So they know they have a market and be confident to invest in new projects. And with the squeeze of the middle class in rich countries, we are not consuming as much as we need to keep the economy growing.

5) I don't know how much money would be enough to kick start (or improve) the economy of Japan, Europe and US without a dangerous inflation but it could be done in 4 installments along the year to the poorest families. Image something like 4 x 200 USD in one year. This money would make a big difference for low-income families and would flood directly to the economy...and companies would know that the money would come and they could prepare themselves.

6) The dollar is pretty strong now and it's becoming a problem for the US and the rest of the world. So printing a bit might not hurt much.

7) A few years ago negative interest rates were seen as something out of this world. But now Japan, Switzerland and Sweden have it. We just need to think out of the box to improve this economy in a more inclusive way....no middle class, no economy and no democracy!

8) Obviously, this wouldn't work with developing countries with weak currencies and inflation...but for US, EU and Japan...why not?
Answer:

There are several issues here. First, the US central bank, the Fed, is an independent monetary authority and does what it thinks best to keep inflation and unemployment low. They cannot be "asked" to print more money or change interest rates....

Question:
Dose any branch of the field of economics have a term for when producers cease to compete at the production level, but continue to compete fiercely in marketing. The example I have in mind for this is the sports shoe industry (Rebok, Nike, Adidas, etc.), where production has been subcontracted to East Asian companies that specialize in finding the lowest cost producers in China, Vietnam, Indonesia, etc., where the same manufacturer can be in the business of making shoes in the same factory for several companies (Rebok, Nike) at the same. And what precisely are the theoretic conditions that enable this to happen? Are production costs that their absolute lowest so that no production competition is possible?
Answer:

The term you are looking for is product differentiation. This is the name we give to a class of models (most prominently, the Hotelling linear city and Salop circular city models) where firms may have identical production costs and competition is...

Question:
Has the advent of the 401K retirement plan impacted the stock market? It seems to me that the massive flow of cash that must be invested immediately would drive up prices. I understand that prior to 401Ks, retirement plans tended to invest in the host company's stock rather than the general market.
Answer:

In principle, if most companies offering retirement plans switched to 401(k)'s simultaneously and no new stocks were issued (i.e., no change on the supply side of the stock market), I would expect a substantial increase in the stock prices, as...

Question:
In the recent Canadian federal election, the winning Liberal party's platform included running a "small" fiscal deficit of about C$10B each year for 3 years to invest in infrastructure. The commentary about this that most surprised me was this would not increase the accumulated debt, and in fact would still contribute to reducing the debt, albeit more slowly.

Does that make sense? My understanding is that any fiscal year you end up with a deficit means you're borrowing more to make up the shortfall, and thus adding to the accumulated debt. Or are there technical aspects during the year that do otherwise?
Answer:

Given that the standard definition of government spending does not include the repayment of maturing debt, your understanding is correct. In particular, during the three years of running the deficit as planned, the Canadian federal government...

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