Ask an Economist

E.g., Saturday, July 4, 2020
E.g., Saturday, July 4, 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:
Where did the money come from, what kind of economies, why did they run out of money?
Thank you
Answer:

Projects like temples and pyramids, as with public monuments today, represent a choice about how labor effort in a society is directed. Some labor is required to produce food, shelter and clothing that are necessities for sustaining life. Beyond...

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:
Since the U.S. has "Fiat" currency, why does the Treasury sell securities?
Answer:

The sale of Treasury securities is the government's way of borrowing funds from the public. When the government sells bills, notes, and bonds, the public, the investors, become the government's creditors. The Treasury...

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:
Can you tell me a price range (per acre) that Central Iowa farmland sales have fallen within the last 6 months or so and is that price generally trending up or down? I am specifically interested in Webster County.
Answer:

Thank you for your question. Yes, we have recently developed a new Iowa Land Value web-portal which allows you to visualize the trends in Iowa land values at the county, district and state level. It is available at...

Question:
I just saw this quote in Seeking Alpha by "Goldmoney": "Entire AAA-rated bond yield curves are likely to be forced into negative territory, following the Swiss government bond market, which is already there. The denial of time-value will mean a government bond with no final redemption date priced at less than infinity will be technically a bargain. That is the measure of distortion." My background is statistics. I'm trying to teach myself economics. Thanks in advance.
Answer:

The unusually shaped yield curve was in the news the other day. But it was attributed to the Fed buying 10-year T-notes, which temporarily lowered their yields relative to notes/bonds with shorter maturity. It sounds to me the quote cited by...

Question:
Please disregard the implausibility of this question, I am curious on a purely hypothetical level. What would happen if all of the illegal immigrants and legal Muslim refugees were both deported and/or kicked out at approximately the same time. (As Donald Trump has sometimes suggested we should do) I would imagine that there would be significant negative impacts to the economy and specifically the housing market. But, I'm wondering how catastrophic those would be and if there would be any... Less obvious results?

Answer:

A 2012 United States Department of Agriculture Economic Research Service study used a simulation analysis to estimate the impact a 5.8-million-person reduction in the number of unauthorized workers—agricultural and nonagricultural. This was...

Question:
Is it true that large banks can borrow funds at close to 0% interest rates from the Fed and turn around and buy US bonds paying higher interest rates with the borrowed funds?
Answer:

Yes, large banks can in principle borrow funds at close to 0% from the FED and turn around and invest them on higher paying US bonds. But, when large banks do this, they push up the market price of these US bonds (being large players in the...

Question:
Why would the stock market react negatively to the increased supply and lower price of oil? Isn’t cheaper energy good for all including oil producers who created the supply shift?
Answer:

While it is true that lower prices at the pump benefit consumers, stock markets also infer that low oil prices signal weak demand for oil, in this case from travel-related fears due to the corona virus. And weak demand for oil often indicates...

Question:
With the Trump administration intent on fiscal spending, there is opinion from bank economists that this shall cause weakness in the USD. If we assume the spending will be serviced by domestic bonds, is this really a credible argument in today's climate and why? Thanks
Answer:

An increase in government spending will increase the domestic interest rate. A lot depends on how analysts perceive future price levels and inflation. If the government spending is not expected to cause future inflation, an increase in interest...

Question:
I would like to ask you a basic question of not understanding quantitative easing. I understand the mechanics but I don't understand why this is considered pumping in "fresh" money, since the FED is just buying up Bonds that were purchased before. They are NOT just giving away absolutely free to BANKS. I know it's wordy but the below elaboration details my confusion. Hope you can help. Thank you!

In quantitative easing, the process of US Fed Bank buying bonds from Banks in order to increase money supply is pretty straight forward but no one seems to be able to explain my particular question or I guess confusion. I even posted on the US Fed open market website but they just gave me the typical answer I already knew.

Again, I'm aware that the FED can pretty much "print money" out of thin air and "inject" it into system but when I look closer at the details of what is happening, I still have trouble describing the process of injecting "fresh" money into an economic system because it looks as though they are limited by putting back the money that was spent to buy the bonds in the first place by banks.

So, to elaborate what I'm trying to say is that if you have a situation of the FED just giving away cash or call it a credit on their ledger for various banks out of the blue. Now that is exactly what I would call injecting fresh money because the banks didn't have to do anything or exchange anything in order to receive that money, just like if I were walking down the street and a complete stranger just came up to me and handed me cash. Now that scenario is what I would understand as injecting fresh money on top of a system.

But what is really happening is that under open market operation for quantitative easing, the US FED is buying up all the bonds that banks are holding at a given moment. Those bonds were purchased at an earlier time by various banks by giving money to the FED or other government agencies, so it looks at best to be putting all the money back into a system in which those monies were extracted from the system before, therefore it's not a "fresh" injection of new money. So it's just putting equal money back into system that was taken out at earlier time? Isn't it?

In other words, let's just say for simplicity that all US Banks spent $1 Trillion to buy bonds 5 years ago (so 5 years ago, $1 Trillion was taken out of an economic system) And now, 5 years later the FED is buying up those bonds from the banks(putting $1 Trillion back into system) The net effect is no new fresh money.

Put it another way, if you add up all the bonds that banks are holding, let's say it comes to $1 Trillion, the FED even though they want to inject $2 Trillion into system over time, they can not do that because all the bonds that are out there doesn't equal $2Trillion; they can only purchase back up to $1Trillion. So the saying, the FED can "print" money as much as they want into a system is not possible, at least in this example of how they do it now in the real world.

I'm sorry for such wordiness but you won't believe how much misdirected answers I get even from professionals. I'm really hoping you can shed some light on my confusion.
Answer:

Let me try to answer your question by breaking it down.

“In other words, let's just say for simplicity that all US Banks spent $1 Trillion to buy bonds 5 years ago (so 5 years ago, $1 Trillion was taken out of an economic system)”.

...

Question:
What could cause live cattle prices, that is the price paid for cattle on the hoof, to plummet, suddenly, when numbers have not increased substantially, (we were in a herd building mode following a drought), but boxed prices are at an all time high. Packers are receiving huge net profits, ($1300 per head)while ranchers are losing money. ($350 per head). Cattle-Fax and other statistics gathering reporting and marketing services predicted that cattle prices would remain high throughout the herd rebuilding phase of the cattle cycle, about 3 years. But, suddenly, and without warning, cattle prices crashed, August 2015, There was not a crash in the general economy. Live cattle are traded on the futures market, Chicago Board of Exchange. The U.S. does engage in exporting and importing of beef. Secondly, because of a fire in a processing plant, and the COVID19 pandemic, the problems in the cattle industry have come to the attention of the federal govt. because of food security issues.

What measures can be taken to keep the cattle industry in the U.S. from imploding? What can prevent vertical integration from further occurring? How can the American farmers and ranchers be kept from bankruptcy, (without gov’t subsidies or handouts) making sure that private ownership of land persists? What kind of market manipulation could cause all this?
Answer:

Here are several resources that begin to address many of your questions.

Beef Marketing Margins - http://jaysonlusk.com/blog/2020/5/4/beef-marketing-margins

...

Question:
Hello, I'm a 42 year old woman from Los Angeles CA. Due to personal reasons I left the state for about 10 years. Now that I'm back, I noticed that things have changed a lot! For example: when I was a young adult, I used to work as a waitress. I remember that most of my co-workers were about the same age and most of us were attending Junior College. However, now I'm 42 years old, I noticed a completely new group of people. Most are mature, in their mid 30s to mid 40s. A lot of them made careers out of working as servers. How does it affect the economy to have more people pursue careers in minimum wage jobs?
Answer:

First, the characterization of foodservice and restaurant workers as a career track is inaccurate. The median age of restaurant workers is 28.4 years, the second youngest sector of our economy (next to retail shoe stores at 24 years). As shown in...

Question:
I was watching a documentary about microfinance in developing countries. Many of the loans were 20-100 dollars. What would happen if people living in poverty were just given the money, and not expected to pay it back? How would that effect the economy?
Answer:

The need to pay it back would discipline the actions of the borrower, make them choose more worthwhile projects. This would raise efficiency. 

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:
Dear Economists,

I recently had an argument in my fantasy football group that I believe an economist can answer. I need to define some terms and give some background before I get to the question.

I am in a 12 team league and we conduct a snake style draft every year to pick our players. A snake style draft is one in which teams are assigned a draft position and the draft is conducted 1-12 in the odd numbered rounds and 12-1 in even numbered rounds. Our rosters consist of 16 players. Every year your roster completely resets and we redraft in reverse order of standings (meaning that the team that finished last picks first and the team that finishes first picks last) with the following exception. You are allowed to keep up to 2 players, one player that you drafted (class B) and one player that went undrafted the previous year (class C). Provided that they are on your roster on Thanksgiving.

Players can be divided as follows:

Class A1 players cannot be kept by definition, and cannot be dropped from your roster.

Class A2 players cannot be kept, but can be dropped from your roster.

Class B players can be kept by giving up a draft pick that is 3 rounds earlier than where they were selected the year prior. i.e. If they were selected in the 5th round you would have to give up a 2nd round pick.

Class C players can be kept by giving up a draft pick that is three rounds later then where they are projected to be picked that year. i.e. If they are projected to be picked in the 5th round you have to give up an 8th round pick to keep them.

Generally speaking, Class A1 players are more talented than Class A2 players, who are more talented than Class B players, who are more talented than Class C players. Also, it is impossible to know how good a player will perform in future years, or what their projected draft position will be because those projections are not released until July of the following year.

As a result of these rules I adopted the following strategy after I was eliminated from this year's playoffs. I dropped all Class A2 and B players from my roster and picked up 16 Class C players using the following logic. Class A players are worthless for future years because I will lose them for nothing when the rosters reset. Class B players require me to pay a premium to keep them, and because they would need to vastly overperform expectations they are not worth the investment. Class C players are the least talented of the bunch, but I will have 16 chances to pick one that is in a good position to perform well, and I will get that player at a discount because I will be able to draft them later than when the market says they should be drafted. The other teams do not acknowledge this as a legitimate strategy. I believe that this illustrates relative value (valuable players that have no value considering my circumstance), opportunity costs (roster spaces that have worthless players but could have players with some value), and expected value (players who are worth very little now, but may have value later and can be drafted at a discount).

What do the economists think of my strategy?

As a post script, I tried to trade Class A players for Class C players before dropping them, but no team would trade with me because they thought I was giving up too much value for nothing.
Answer:

Thanks for your ‘Ask an Economist’ question.  I will provide some thoughts, but may not be able to answer it completely to your satisfaction given I do not fully understand how your fantasy league operates.  For example, you do not...

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 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:
I think the treatment of blacks in the south, by restricting blacks jobs, low pay, restrictions of where to spend their money, and other negative economic measures, had to negatively affect the southern economy by -30 percent or more during the 100 years after the civil war. What would economists say?
Answer:

Economists and economic historians in particular have been quite interested in the economic impacts of slavery and its aftermath, including the effects of race-based discrimination.  There is by now an extremely large and extensive...

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 was reading a paper on authoritarianism in Brazil, and was puzzled by some things the authors had to say regarding the country's fiscal/monetary policy. According to the paper, the policies of the ruling PT party were largely neoliberal throughout the growth of the 2000s, and high interest rates were a component of such policies. Generally, the paper describes Brazil's neoliberal policies as "contractionary."

This is very confusing to me, as coming of age in a post-GFC United States I've always associated neoliberalism with things such as low interest rates. Any help on this would be greatly appreciated.
Answer:

Thank you for your question! These ideological "definitions" and distinctions can be quite confusing and arbitrary. In the Latin American context, usually neoliberal is associated with policies that are orthodox, that is, based on notions of free...

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